1. The truth about Tax Refunds - A refund signifies a yearly interest-free loan to the IRS. Conversely, if a taxpayer owes the IRS, the IRS charges interest on the amount owed not paid by the due date. (Although the IRS recently started paying interest if a refund is owed and not released to the taxpayer by April 15th or the due date.)
The optimal situation is to break even, meaning only a minimal amount should be owed or refunded - between $30 to $100. If a taxpayer receives a refund they must wait, depending on when they file their taxes over a year for the use of their money. Instead change your withholding with your employer (Form W-4), have less money deducted from your paychecks.
I understand some taxpayers use their refund as a type of savings account to use for vacation or to buy a car. A better use would be to open a 3, 6, 12 -month Certificate of Deposit and earn interest. With today's automation, bank accounts can be set to automatically deposit a preset amount of money from each paycheck to an interest earning account. Compounding interest is the ideal savings account (see Passive Income).
2. Credit Unions - I prefer credit unions over other banks. Credit Unions have very low fees. They offer a variety of compound interest savings accounts, low interest auto loans and mortgages, business and personal loans, and lines of credit. Establishing a relationship with someone at your bank also works as they will be familiar with the needs and trends of your business.
3. Credit - Use it like cash. I never had a credit card until I started my own business. I have two. One card is for the business to automatically track my monthly expenses by linking to my QuickBooks Online account thus eliminating manual record-keeping. I hold the other credit card for emergencies or personal travel expenses. I kept both in good standing to boost my credit score. Ideally, I never want to pay interest, only earn interest so I usually pay my business credit card off each month or pay four times the minimum payment. For personal expenses, if I do not have the cash to pay for something outright, I do not buy it. (okay, I concede I have changed my tune regarding the benefits of credit cards. I now use my personal credit card only (unless I have to use cash for a transaction) to earn Cashback Rewards. I still use it like cash though and pay it off at months end.
4. Line of Credit to quickly pay off a mortgage or car loan - Scenario: You have a business or a source of recurring income (e.g., W-2, 1099). Open a personal line of credit for say $10,000. Use the line of credit for expenses but also to make monthly mortgage payments. For example, if your mortgage payment is $1300 a month. Use your regular bank account to make this payment and the line of credit to make additional payments monthly. Make sure you specify that these payments are for the principal amount, not the mortgage interest. Use your income/revenue to pay down the line of credit monthly. Rinse, repeat. Several clients have used this method to pay off their mortgages in five to ten years.
5. Interest- avoid paying it. Earn It.
*Note - although I do not like to pay interest, most credit cards come with extensive perks,such as fraud protection (quite useful when visiting another country and purchasing items online), price protection, and extended warranties.
"Credit cards with travel benefits often include such perks as rental car insurance, roadside assistance, and lost or delayed baggage insurance, among many others." Keep in mind, when you use a credit card you are not using your money, you are using the credit cards money that is FDIC insured any fraud or loss is covered by the credit card company. This shields your personal money from loss or fraud. Just pay off the balance or most of it every month thus improving your credit score and be sure to always leave an uncharged balance for emergencies.
6. Stop listening to advice from nonaccountants about situations affecting your financial health. Statements clients have said to me:
"I heard on FB I should not have a QuickBooks account until my business makes $100,000".
QBs is ideal for small to midsized firms with small inventories.
"My mortgage lender said we would receive a huge tax deduction if we buy a house now so we rushed to close before the year ended."
Mortgage interest is deductible and was beneficial before the 2018 Tax Cuts & Jobs Act this is no longer true as the itemized deduction total usually does not exceed the Standard Deduction threshold.
2022 Standard Deduction
MFJ or QW $25,900
"I went to a seminar held by three lawyers who told me to form my business as a C-Corporation for asset protection."
One, C-Corporations are better suited for businesses with large amounts of capital e.g., $100,000, $250,000.
Two, you must pay yourself as a W-2 employee meaning you must pay on time, quarterly payroll taxes, or risk being assessed a $10,000 penalty.
Three, you must hold an annual meeting of the Board of Directors and record the monthly/annual meeting.
Four, if your business is a start-up, record-keeping, tax preparation, and a variety of other issues are simpler if your business is formed as a Limited Liability Company (LLC). An LLC shields your personal assets from liability.
Five, until recently many CPAs have little experience with C-corporation tax preparation, and many are unfamiliar with the correct way to prepare the tax return (e.g., shareholder loan interest expense -AFR rate, Section 1244 losses).
"I went to a real estate (flipping houses) seminar with my daughter. They prepare all the paperwork needed to open a business. They formed a Partnership and two S-corporations for us. The company had me write a promissory note to myself so the business would pay back my initial $50,000 investment as soon as I file my business' first tax return. "
So many things are wrong here:
The exorbitant amount charged for information that can probably be found for free on the internet, or a book, or from an hour consultation with an accountant.
There is no need for a start-up business to form three separate organizations- too complex, states fees, payroll obligations, bookkeeping, among other things multiplied by three.
The initial investment in a S-corporation is considered a Shareholder Loan. An interest earning account must be set-up by the business to ensure repayment of this loan (promissory note).
Small corporations or S-corporations function similarly to C-corporations except the income or loss flows through to the personal tax return (1040) as does partnership income. Thus, raising your income and moving it to a higher tax bracket if the business is profitable or lowering your income if the businesses has a loss for the year. Again, a shareholder must pay themselves a reasonable salary as a W-2 employee.
S-corps and Partnerships are flow-through entities meaning a shareholder/owner cannot file their personal tax return until the business return is filed first.
There is no need to pay anyone an exorbitant amount of money to start a business.
"You can have your business purchase 100% of the cost for a new Mercedes truck."
I keep seeing videos from non-accountants on Instagram about how to start a business with partially true information. The primary focus of a start-up should be financing and advertising to attract customers.
According to the IRS, The Tax Cuts and Jobs Act (TCJA) allows unlimited 100% first-year bonus depreciation for qualifying new and used assets (including eligible vehicles) that are acquired and placed in service between September 28, 2017, and December 31, 2022.
However, for a used asset to be eligible for 100% first-year bonus depreciation, it must be new to the taxpayer (you or your business entity).
Heavy SUVs, pickups, and vans are treated for tax purposes as transportation equipment. So, they qualify for 100% first-year bonus depreciation and Sec. 179 expensing if used more than 50% for business. This can provide a huge tax break for buying new and used heavy vehicles.
However, if a heavy vehicle is used 50% or less for business purposes, you must depreciate the business-use percentage of the vehicle’s cost over a six-year period.
Some Qualifying Questions:
Do you also have personal vehicle?
If not the percentage of business use is calculated using business mileage versus nonbusiness. This calculation is used for the depreciation percentage also. The IRS requires a written record as proof.
Is this vehicle strictly for business?
Is there a logo painted on the side?
Is it parked at the end of each business day and a personal vehicle is used?
You are a plumber, landscaper, delivery service (e.g. Amazon, UPS, florist), mobile mechanic, pool cleaner and have a need for a company vehicle for you and your employees.
2022 Standard Mileage Rate
Business $0.585 (Jan -June) $0.625 (July-Dec)
According to the IRS, a business expense is something ordinary and necessary – expenses that are commonplace in your trade or profession and which are helpful for your business.
7. Hire a bookkeeper - Scenario: you just started a business. You took an accounting class in college. You want to save money. You have a QuickBooks account. There are negative numbers on the financial statements. "Being cheap is very expensive" the less organized your books the more time it takes an accountant to prepare the financial statements thus charging more (seeThings Your CPA Will Not Tell You). Even if it is just once a year hire a bookkeeper (certified) to clean up your books before filing taxes and most importantly make sure to reconcile the end-of-year account balances to match the tax return. (I will write another post on how to find a competent bookkeeper. Beware there are many posers).
8. End of year contributions - If you have a traditional IRA or Health Savings Account (HSA) and have not contributed before filing your taxes, contribute the maximum amount. Traditional IRA and HSA contributions are deductible.
2022 IRA Contribution Limits
< Age 50 $6,000
>= Age 50 $7,000
Health Savings Account (HSA) or High Deductible Health Plan Contribution Limits
For 2022, if you have self-only HDHP coverage, you can contribute up to $3,650. If you have family HDHP coverage, you can contribute up to $7,300
9. Simplified Employer Pension (SEP) IRA - if you are a sole-proprietor or entrepreneur and receive at least $650 of compensation from your business, open a SEP IRA before filing your taxes to reduce taxable income.
10. Cancellation of Debt (COD) - " My credit card company forgave my $3,500 debt and gave me this Form (1099-C) I do not know what it is." The IRS considers COD income that must be reported when filing taxes.
11. IRA withdrawals - " I quit my job and cashed in my IRA. I am younger than 59 1/2 but I already paid the taxes." The IRS will assess a 10% penalty when the taxes are filed.
12. One strategy to consider if you make large contributions to charity consider donating appreciated long-term held securities (i.e., stocks, bonds, options, futures). You would get a charitable deduction for the fair market value of the securities and not have to report the capital gain/loss income.
13. Another strategy to consider with a low mortgage and minimal medical expensesand $10,000 in charitable contributions consider using the standard deduction going forward and loading up this year's contributions with the next few years or put into a donor-advised fund (or if over 70 1/2 to use as part of your RMD for charity).
14. It is only a raise if the amount is above the yearly inflation percentage. If inflation is 2% a year, a 2% raise is not a raise but a Cost-of-Living Adjustment. Negotiate wisely.
15. Another misconception is the need for a DUNS (Duns & Bradstreet) Number. I have prepared over 2,500 business tax returns in all fields. I have prepared one business return that had a DUNS number. When I asked the owner why he had it, he could not explain why he needed it. The second year of his business I was preparing the dissolution paperwork. The client spent $30,000 in expenses the first year only to close the business the second year. To me, a DUNS number is an unnecessary expense to a new business unless the business is doing business with the federal government. "The federal government uses the DUNS number to track how federal money is allocated."
Regular cash inflow to a business bank account will establish positive business credit. Using a business credit card to pay expenses and paying off the balance monthly is more cost-effective than a Net 30 account or a DUNS number in establishing credit for a start-up business with little capital.
16. Donation Guidelines - People are always shocked by the difference between their valuation of a donated item and the IRS'.
You spent all this money to set up your LLC to protect your personal assets from liability or creditors should the business be unable to pay its debts or be sued, yet you do not have separate bank accounts.
You use your business bookkeeping system to also track your personal expenses or have your personal bank account or credit card linked thus invalidating the separation or your personal assets from your business assets.
I understand that Start-ups may need to use personal money to fund their business. The best method is to transfer the funds from a personal account to a business account (categorized as Owner's Investment, Partner's Contribution, or Shareholder Loan)
If you do not have a business credit card yet, get a second personal credit card and use that for only business expenses.
If you do not have a business bank account, open a debit card account. Use this account for business expenses only.
Also, if you are commingling expenes, it will take your bookkeeper, tax preparer, or accountant longer to clean-up your books or prepare your tax return thus costing you more in bookkeeping or tax preparation fees.