Two financing options for your business: equity and debt

Start-up businesses and long-established firms share common ground in at least one respect: the need for financing. Managers of fledgling companies often debate the best way to obtain funds for buying inventory, heavy equipment, and buildings for making widgets. In the break rooms and suites of Fortune 500 firms, executives also discuss the best ways to cover cash shortfalls and meet capital needs.

Business financing generally comes in two flavors: equity and debt. For small businesses, equity financing often takes the form of contributions by family members, friends, business associates, and investors. For business owners, the biggest drawback to equity financing is loss of control. If Uncle John pumps his savings into your newly formed company, he may want a substantial voice in its day-to-day operations, whether or not he understands your industry or business model. On the plus side, equity contributions may be easier to procure than bank loans or other forms of financing. [Read more…]

FSA rule is modified again

Flexible spending accounts (FSAs) allow taxpayers to set aside pre-tax dollars to pay for out-of-pocket medical expenses.

The drawback has been the fact that unused amounts each year are forfeited. Plans could provide a 2½ month grace period to use up unspent set-asides.

Now a change announced by the IRS adds more flexibility to these accounts. Plans can be modified by employers to allow up to $500 of unused amounts to be carried over into the following year. Health FSAs cannot have both the old 2½ month grace period and the $500 carryover; they can have one or the other (or neither).

IRS sends notices about “possible income underreporting”

Form 1099-K is a new information return sent to businesses by “payment settlement entities” reporting the amount of credit card and other electronic receipts that were processed for the business.

The IRS also receives a copy of Form 1099-K and cross checks the reported amounts with the business’s total income reported on its tax return. Where the numbers don’t seem to make sense, the IRS sends notices to businesses telling them they “may have underreported gross receipts.” Notices go on to say “This is based on your tax return and Form(s) 1099-K, Payment/Merchant Cards and Third Party Network Transactions that show an unusually high portion of receipts from card payments.” [Read more…]

Note these tax dates on your 2014 calendar

It’s tax return filing season once again. Among the tax deadlines you may be required to meet in the next few months are the following:

  • January 15 – Due date for the fourth quarterly installment of 2013 estimated taxes for individuals, unless you file your tax return and pay any taxes due by January 31.
  • January 31 – Employers must furnish 2013 W-2 statements to employees. Payers must furnish payees with Form 1099s for various payments made. (The deadline for providing Form 1099-B and consolidated statements to customers is February 18.)
  • January 31 – Employers must generally file annual federal unemployment tax returns. [Read more…]

Have life insurance you don’t need? Consider donating to charity

If you have a whole-life or universal-life insurance policy that you don’t need, you might want to consider donating it to charity rather than cashing it in.

There are two ways to make such a donation, each of which has its advantages:

(1) Name the charity as the policy’s beneficiary. The key advantage to this method is that you retain control of the policy. Thus, you can always change your mind if you decide that your heirs need the money or if your feelings about the charity change. You’ll also get an estate tax deduction when the charity receives the money. [Read more…]

Trust could force beneficiaries to arbitrate rather than go to court

Andrew Reitz set up a trust to benefit his sons, with an independent trustee. The trust document said that if there was a dispute between his sons and the trustee, it would be decided by a private arbitrator rather than a court.

When John Reitz, one of the sons, became unhappy with the trustee, he sued to have the trustee removed. The trustee argued that the suit should be thrown out of court, and decided by an arbitrator.

The dispute over who should decide the dispute went all the way to the Texas Supreme Court.

That court said the issue should go to an arbitrator. The judges ruled that (1) the trust should be handled according to Andrew’s clear intentions, and (2) it would be unfair to let John receive all the benefits of the trust, but ignore the one part of the trust he didn’t like. [Read more…]

Divorced couples need to update beneficiary designations

One of the most important things people can do after a divorce is to update their beneficiary designations, and indicate who should get the assets in various accounts if they should unexpectedly pass away.

Most married people name their spouse as the beneficiary of their accounts, but in the stress following a divorce, they often forget to update these designations.

And even when people make an effort, they might not remember every account. Pensions, 401(k) plans, life insurance policies, brokerage accounts, bank accounts, and more may all have listed beneficiaries.

Remember that if you die, who gets the money in these accounts usually depends on who is the listed beneficiary – not who is named in your will. Even if your will says that “everything” will go to a new spouse or a child or other relative, the will doesn’t govern a separate account such as a 401(k) or an insurance policy. [Read more…]

Business owners: Be careful when making loans to a company

If you own a business and you plan to loan money to the company, be sure to consult an attorney about the paperwork. Otherwise, the IRS could claim the money wasn’t a loan after all, and come after you for additional taxes.

Fred Blodgett found this out the hard way. Blodgett owned a small company (an S corporation) that sold architectural glass blocks. When the real estate downturn hit, he supported the company by transferring money to it from a family trust. He called this a loan. In subsequent years, the company paid him about $60,000, which he called a loan repayment.

Not so fast, the IRS said. According to the IRS, the “loan” wasn’t a loan at all, but a simple contribution of capital. And the “repayment” was actually just ordinary wages for the manager of the business. Therefore, the IRS claimed, the company owed more than $13,000 in employment taxes and penalties. [Read more…]

Estate planning is still important even if you’re not super-wealthy

A year ago, Congress dramatically raised the federal estate tax exemption, which for 2013 was $5.25 million (or $10.5 million for a married couple). And that caused some people to mistakenly believe that they no longer need to think about estate planning if their assets are less than $5 or $10 million.

However, nothing could be further from the truth. And people who don’t keep their estate plan up-to-date are making a big mistake that could still be very costly to them and their families.

There are a multitude of reasons for this, but here are just a few:

Protecting your heirs. Many of the techniques that people have used in the past to avoid estate taxes – such as trusts – have lots of other purposes in addition to saving taxes. [Read more…]

Business or hobby? Nine factors help the IRS decide

The dividing line between a business and a hobby may be thin, but it can look like a canyon when you are on one side and your tax deductions are on the other. The gap is a function of differing treatment of expenses. For example, when you incur ordinary and necessary expenses in the operation of your business, those costs reduce the taxable income of the business. In addition, business losses can generally be used to offset income from other sources, such as wages.

When your activity is considered a hobby, expenses can only be claimed to the extent of income from the activity, and are generally deductible as a miscellaneous itemized deduction on your personal return.

Here are nine ways to help convince the IRS that you have a business rather than a hobby.

1. Act like a business. Keep accurate books, adopt new techniques, and adjust your operating methods to improve profitability. Other good moves: advertising, purchasing insurance, and maintaining a bank account used only for the activity. [Read more…]

Time is running out for making tax-smart gifts and donations in 2013

You’ve worked hard to accumulate and protect your wealth this year. Now might be the time to consider tax-savvy ways to give some of it away.

To begin with, you might consider using the annual gift tax exclusion to give money to your family and friends in a tax-favored manner. Up to $14,000 can be given to any number of individuals per year without tapping into your lifetime federal estate tax exemption. The current lifetime exemption is a lofty $5,250,000, but making $14,000 gifts each year could help lower your taxes if your estate is eventually valued above the exemption amount.

Another way to provide for your family is investing in a student’s 529 college savings plan. Such contributions can provide for tax-free appreciation and withdrawals when used for qualified college expenses. [Read more…]

Note these December tax deadlines

  • December 16 – Due date for calendar-year corporations to pay the last installment of 2013 estimated income tax.
  • December 31 – Deadline to complete 2013 tax-free gifts of up to $14,000 per recipient.
  • December 31 – Deadline for paying expenses you want to be able to deduct on your 2013 income tax return.
  • December 31 – Deadline for taking 2013 required minimum distributions (RMDs).