Reprinted with permission from Trilibrium tax and wealth management advisors
Tax Tip: Give It Away Now!
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, 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.
If it’s a federal income tax deduction you’re after, however, your gifts will need to go to a qualified charity instead. Consider donating appreciated stocks or mutual fund shares owned for more than a year instead of donating cash. You will save on capital gains tax (which will be higher for many taxpayers in 2013) and receive a deduction equal to the market value of the security on the date of transfer.
Gifts of other types of assets, such as real estate, jewelry, and artwork, can also score a deduction this year. Be aware that if the gift is valued over $5,000, a qualified appraisal will be required. And no matter the type of gift, if its value is $250 or more, a tax receipt from the charity is required before you can write it off.
Business or hobby? 9 factors help the IRS decide
The dividing line between a business and a hobby may be thin, but it can look like a canyon if 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.
2. Expand your expertise. The key here is to increase your knowledge of the economic aspects of your business. Seek relevant advice from experts on an ongoing basis.
3. Expend time and effort. Focus your energy on the business to show profit intention. Hiring competent managers also indicates your intention to operate as a business.
4. Invest in appreciating assets. A reasonable expectation that property you purchase will increase in value and help create an overall gain can show profit motive.
5. Create a record of success. Have you run other businesses successfully, whether or not related to the present activity?
6. Establish a history of income. No need to be nervous if your startup loses money the first year or two, or if losses in later years are the result of events that are out of your control, such as natural disasters. The general rule for proving your intention to operate a business is to make a profit in three of the last five years.
7. Show a profit. No set amount of profit establishes business intent. Instead, compare the profit you have the opportunity to earn to the losses you may incur and the amount of your investment.
8. Check financing. How are you financing the business? Do you have substantial income from other sources? Does the activity generate losses that provide tax benefits you might not otherwise enjoy?
9. Limit the fun factor. Liking what you do does not necessarily turn a business into a hobby. However, substantial “recreational” aspects can lend weight to classification of your activity as a hobby.
Remember, no one factor is controlling. Instead, you need a pattern that establishes your intention to make a profit.
Business Tax Tips & IRS Guidance from James M. Hillas
Jim Hillas is a local business attorney that can help you navigate the complex process of starting a business in Oregon or Washington— including helpful small business tax tips!
Avoid missteps with the help of a legal professional, ask James Hillas for a free consultation today!
The Oregon Department of Justice has received numerous complaints about a phone scam targeting Oregon businesses.
Learning how to spot and avoid phone scams like these can help protect your business.
The Oregon DOJ Released the Following Details on the Scam
Based on the complaints received to date, the scam telemarketers are calling from 1-800-247-4047.
The fake telemarketers pose as state employees calling from Business Oregon, the Oregon Business Development Department, or similar name variations of the state’s lead economic development agency.
The callers inquire whether the business has moved recently and the size of their workforce.
Oregon Attorney General John Kroger and Business Oregon warn businesses not to respond to these fake phone calls.
What Happens if You Receive a Suspicious Call?
If your business receives a call from 1-800-247-4047, do not answer and inquire with your phone company about how to block calls from this number.
Oregon businesses are not the sole target of this telemarketing scam. Similar calls have been made to Washington, Minnesota, California, Colorado, and Canadian businesses.
In each instance, the fake telemarketers tell businesses they are with the state economic development office and ask for moving and employee information. In several cases, when a business has responded to the questions asked, new monthly charges appeared on the business’s phone bill.
What Can Be Done About This Type of Phone Scam?
Oregon Department of Justice investigators are looking into this scam right now.
One theory is that the callers are trying to “cram” new services onto the business’s phone bill.
“Cramming” has been around since the deregulation of the telephone industry and happens when a company adds a charge to a phone bill for a service that was never requested, agreed to, or used.
Stay Cautious and Informed
If your business received a call from the fake telemarketers and if your business answered any questions both Attorney General Kroger and Business Oregon recommend contacting your phone service provider immediately to prevent erroneous charges from being added to your phone bill.
If you are in need of any advice on how to protect your business or the help of an attorney, reach out to see how James M. Hillas, P.C. can help with your situation.
Here are a few business housekeeping items you’ll want to address this year if you haven’t already.
- 1) Protect Your Intellectual Property
Small business owners often fail to plan to protect their company’s intellectual property (IP). IP includes brand identity, which can be protected through trademarks, and also includes unique ideas or inventions that can be protected by patents. Regardless of the specific IP needs, companies often don’t take the time to allocate financial resources for this protection. Instead, they just have a lump sum for the legal budget. Intellectual property attorneys often can provide cost estimates, and can help map out a plan based on reasonable assumptions and available resources for protecting the company’s innovation.
- 2) Update Employee Benefit Plans
Small business owners also may not know about changes to employee benefit plans that require plan amendments. For example, health flexible spending account plans now can be amended to add a $500 carryover. This is a major change from the traditional ‘use-it-or-lose it’ rule. The carryover feature can be effective for the 2013 year, but only if plans are amended by December 31, 2014.
Another change relates to same-sex spouse benefits. The United States Supreme Court has ruled that the Defense of Marriage Act’s (DOMA) definition of spouse as only applying to a marriage between a man and woman is unconstitutional. That means that any existing plan documents defining ‘spouse’ with reference to DOMA must be amended to include a new spouse definition.
- 3) Long-Term Strategic Planning
Small business owners often get stuck working in their business when they should be working on it. Running a successful business certainly requires close attention to fundamentals. However, successful businesses also develop and follow a long-term strategic plan that includes annual goals and how to reach them. The beginning of a new year is a great time to develop or revise that vision. And as business coach Sherry Jordan notes, creating a plan but leaving it on the shelf doesn’t help. It’s important for business owners and management teams to review the plan regularly–at least once a quarter–to stay on track and measure success.
- 4) Review Your Buy-Sell Agreement
Every multi-owner business needs a buy-sell agreement to establish a value for the company and determine how owners can transfer their ownership interests. Often, buy-sell agreements call for an annual updated valuation of the business. Unfortunately, this task is often neglected and the oversight isn’t discovered until after a triggering event, such as the death of an owner. If the buy-sell agreement hasn’t been updated recently, it’s likely that the pre-determined value of the business will be too high or too low. To avoid this unhappy situation, business owners should review their buy-sell agreement annually to confirm that the pre-determined buy-sell valuation or formula is appropriate.
As the year draws to a close, there are a few steps that can help wrap up the bookkeeping side of your business. My friend Barb Fisher of Fisher Business Management has published a helpful tip sheet which I have borrowed from liberally.
Audit vendors for W-9 forms. Run a report showing every vender that you paid more than $600 during the year. Check each qualifying vendor for a W-9 on file.
Collect, enter, and file all mileage information. Be sure to enter the mileage in the month incurred so the monthly profit and loss report is accurate.
3. HR Records
Audit employee records. Print each employee record and have them verify the SSN, mailing address, and all W-4 information.
Reconcile the following:
• Vendor accounts
• Checking accounts
• Credit card statements
• Credit lines
• Employee loans
• Payroll advances, etc.
Clean up as needed, and don’t forget about cash receipts.
Is there cash to spend down before year-end? Do a careful cash flow projection for year-end. Remember that cash and profit are different but still linked together. If you made a profit, make sure you know where that cash went.
6. Prepare information for taxes
Find out what your accountant or tax preparer needs to complete your business taxes. Being organized for year-end will save time and money come tax time.
(Used with permission from Barb Fisher, of Fisher Business Management)
Do you have a Section 125 cafeteria plan? Request a report from the administrator to inform employees about remaining money. Are there vacation or personal days that will expire? Print out a report so that employees know where they stand.
Disclaimer: this checklist is a reminder about accounting steps that can help keep business operations running smoothly. It’s not intended to be a comprehensive approach to accounting needs. Your mileage may vary. If you have questions or would like help with year-end tasks, contact Fisher Business Management for a consultation.
Fraud can have a tremendous negative impact on the value of a business. Not only does the immediate loss reduce the ability of a business to pay current obligations, but the diminished revenue can significantly lower the net income figure that is often used in a multiplier formula to estimate current market value of a business.
Strategies for Reducing Fraud
According to research by the Association of Certified Fraud Examiners, an anti-fraud hotline to gather tips and information is the single most effective measure, resulting in a 54.5 percent reduction in fraud losses. The next most effective were employee support programs, surprise audits, fraud training for managers and executives, job rotation/mandatory vacation, and fraud training for employees. Each of these strategies was associated with at least a 45 percent reduction in fraud losses according to the study performed by ACFE.
Utilize Existing Strategies
Interestingly, the strategies that were most effective were also the ones least likely to be implemented by the businesses that participated in the survey. Thus, it would seem that the most effective anti-fraud measures are underutilized. While any organization is potentially vulnerable to fraud, the risk can be mitigated to some extent by setting up appropriate anti-fraud measures before a loss occurs.
For a more detailed analysis of the AFCE findings, click here.
According to the Association of Certified Fraud Examiners (ACFE), U.S. organizations lose up to
seven percent of their annual revenues to fraud. And the most likely profile of a financial fraud
perpetrator is a male aged 41-50 who works in an accounting department, according to a report
prepared by AFCE. In most cases, offenders are a trusted part of a team who take advantage of
their situation to get their hands on company assets. For a fuller account, click here. Or see the
short version below.
Men v. women
According to the report, males are more than twice as likely to commit fraud as their female
colleagues. Significantly, the median loss of fraud by men is more than twice as great as frauds
perpetrated by women, according to the study.
Middle age v. millenials
The highest percentage of fraudsters in the study were between the ages of 41-50 (in more than
half of all cases, the perpetrator was over 40). Generally speaking, older professionals often
occupy positions with authority and more access to company resources. Median losses from
fraud rose as the age of the fraudster increased.
Solo v. team effort
In nearly two-thirds of the fraud schemes covered by the study, the perpetrator acted alone.
Yet when the scheme did involve collusion of two or more parties, the results were much more
costly. Cases of collusion resulted in a median loss over four times higher than the amount lost
to fraudsters acting alone.
Education and position
Most perpetrators have attended or graduated from college. About 11 percent have obtained
a post-graduate degree. In general, the higher the education level, the more costly the fraud.
Furthermore, the highest percentage of fraudsters worked in the accounting department when
they executed their scheme. Executives and upper management made up the second-most
common category of fraudsters. The least common perpetrators? Internal auditors.
Living the fraud life
Several behaviors are red flags for fraud. The two most common traits are a tendency to live
beyond one’s means, and a struggle with financial difficulties. Other red flags might include
irritability or defensiveness, addiction problems, past legal problems, and complaining about inadequate pay.