Anderson ZurMuehlen Blog

Estimate start-up costs for your new business

Building a business from scratch involves hard work, long hours, and, statistically speaking, a high probability of failure. Yet as researchers Stanley and Danko noted in their landmark book, The Millionaire Next Door, “self-employed people make up less than 20% of the workers in America but account for two-thirds of the millionaires.” For those businesses that survive, the rewards can be substantial.

Unfortunately, many businesses die before they get started. That’s because entrepreneurs often fail to estimate start-up costs with reasonable accuracy. As a result, the company cash account dwindles to zero before sales catch up.

If you’re preparing to launch a new business, take a hard look at the following:

  • Assets. Your company’s requirements will vary depending on the industry and market for your goods and services. But you should be able to construct a list of assets necessary to keep the business up and running for at least a year. If you’re establishing a company in a brick-and-mortar location, you’ll need to factor in equipment, furniture, point-of-sale cash registers, incorporation fees, licenses, signage, rental and utility deposits, and remodeling costs. A service-oriented firm may not carry substantial inventory, but a product-based company should estimate initial inventory costs as well. Equipment and furniture vendors should be able to provide reasonable cost estimates for such items.
  • Expenses. Costs to launch a company will also include items not found on the balance sheet — outlays to keep the company running from day to day. These might include legal fees, website development costs, expenditures for office supplies, marketing materials, and rent and utility deposits. If you hire folks to help get the company off the ground, their salaries should be included in the expense estimate as well.
  • Cash. Once you know how much your company will need for assets and expenses, it’s time to develop a budget. Estimate revenue and collections for at least three months. Be conservative. Add up the cost of assets and expected expenses, then deduct cash in the bank and projected revenue. The difference will be your cash shortfall. This is the amount you’ll need to garner from other sources, including bank and personal funds.

The more accurately you estimate the above items, the more likely your company will survive long enough to become profitable.

© MC 2014

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Home Office Deduction 101

If your use of a home office is for your employer’s benefit or because you’re self-employed, you may be able to deduct a portion of your mortgage interest, property taxes, insurance, utilities and certain other expenses, as well as the depreciation allocable to the office space. Or you may be able to take the new, simpler, “safe harbor” deduction.

Beginning with 2013 tax returns, taxpayers can use the safe harbor deduction in lieu of calculating, allocating and substantiating actual expenses. Other rules — such as the requirement that the office be used regularly and exclusively for business — still apply. The safe harbor deduction is capped at $1,500 per year, based on $5 per square foot up to a maximum of 300 square feet.

Also be aware that, for employees, home office expenses are a miscellaneous itemized deduction. This means you’ll enjoy a tax benefit only if these expenses plus your other miscellaneous itemized expenses exceed 2% of your adjusted gross income (AGI). If, however, you’re self-employed, you can deduct eligible home office expenses against your self-employment income.

Questions about deducting home office expenses? Contact us; we’d be pleased to answer them.

© 2014 Thomson Reuters

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Tax Tip of the Week

You’ll see higher standard deduction and exemption amounts on your 2013 tax return

You’ve probably heard of the consumer price index, or CPI, a government statistic that measures the change in the price of certain items over a specified time period. But you may not realize the CPI affects your tax return.

That’s because the CPI is used as a measure of inflation, and the tax code calls for mandatory inflation adjustments to many numbers, including the standard deduction and exemptions.

Here are the inflation-adjusted figures for your 2013 federal income tax return.

  • Standard deduction. The standard deduction is the flat dollar amount you can use to reduce your taxable income when you do not itemize. For 2013, when you’re single or married filing separately, your standard deduction is $6,100, an increase of $150 from 2012. If you’re married and file a joint return, or are filing as a surviving spouse, the 2013 standard deduction went up $300 from 2012, to $12,200.
  • Exemptions. Two types of exemptions are available. You can claim the personal exemption for yourself and your spouse. The dependency exemption is for qualifying children or relatives.For 2013, each exemption will reduce your taxable income by $3,900, an increase of $100 from the 2012 amount.

Inflation adjustments also increased the upper limits of tax brackets for 2013, as well as other exclusions, deductions, and phase-outs.

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File early to reduce your risk of tax return fraud

With the well-publicized security breach at major retailer Target recently, identity theft is likely on your mind. And stolen credit isn’t your only risk.In an increasingly common scam, identity thieves use victims’ personal information to file fraudulent tax returns electronically and claim bogus refunds. When the real taxpayers file their returns, they’re notified that they’re attempting to file duplicate returns. It can take months to straighten things out, causing all sorts of headaches and delaying legitimate refunds.You can reduce your likelihood of becoming a victim by filing your return as soon as possible after you receive your W-2 and 1099s. If you file first, it will be the thief who’s filing the duplicate return, not you.

Also, if you did shop at Target during the security breach, be sure to check your bank and credit card accounts frequently, and consider signing up for the free year of credit monitoring the retailer is offering potential victims.

If you’d like to file your tax return early this year, please contact Erin Stockwell, Senior Manager, at 406. 727. 0888. We’d be happy to help. Also let us know if you have questions about protecting yourself from tax return fraud and identity theft.

© 2014 Thomson Reuters

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Regaining Tax-Exempt Status After Automatic Revocation

By Kendra Freeck, CPA, Manager

If your organization received an automatic revocation of its tax-exempt status for failure to file Form 990, Form 990-EZ (Short Form Return of Organization Exempt from Income Tax) or Form 990-N (e-Postcard) for three consecutive years, there is a way to reinstate your tax-exempt status.  Effective January 2, 2014, Rev. Proc. 2014-11 provides three pathways for reclaiming your tax-exempt status.  Here are your choices:

Forms 990-EZ and 990-N

  1. A streamlined retroactive reinstatement of exempt status is available to organizations that received an automatic revocation and have not had their tax-exempt status revoked automatically before.  The process involves submitting an application for reinstatement (IRS Form 1023 or Form 1024) along with appropriate fees.  The application must be submitted no later than 15 months after the date of the IRS revocation letter.

Forms 990-EZ, 990 and 990-PF

  1. Organizations that don’t meet the qualifications for a streamlined retroactive reinstatement may still be able to regain their tax-exempt status.  An application for reinstatement (accompanied by the appropriate fees) must be submitted no later than 15 months after the date of the IRS revocation letter.  In addition to the application, the organization must file annual returns for all tax years in the consecutive three-year period that it was required to file, a statement confirming that it has paper filed the proper returns, and a Reasonable Cause Statement.  The Reasonable Cause Statement must explain why the organization failed to file at least one of the three consecutive year’s returns.
  2. The final method for reinstatement is for those organizations that are beyond 15 months from the date of the IRS revocation letter.  The procedure is the same as described in item B above, except the organization must include a separate Reasonable Cause Statement for failing to file required returns for all three years that it failed to file.

For all three procedures, the IRS will not assess any failure to file penalty if the organization is successfully reinstated.  If you think your organization may have had its tax-exempt status automatically revoked and you want to seek reinstatement, please call one of the professionals at Anderson ZurMuehlen and we can help you evaluate whether your organization qualifies for reinstatement under the new rules.

To search a listing of automatically revoked entities please see http://apps.irs.gov/app/eos/.  For more information contact Kendra Freeck, CPA, Manager, at 406.245.5136.

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Are you meeting the ACA’s additional Medicare tax withholding requirements?

Under the Affordable Care Act (ACA), beginning in 2013, taxpayers with FICA wages over $200,000 per year ($250,000 for joint filers and $125,000 for married filing separately) had to pay an additional 0.9% Medicare tax on the excess earnings.

Unlike regular Medicare taxes, the additional Medicare tax doesn’t include a corresponding employer portion. But employers are obligated to withhold the additional tax to the extent that an employee’s wages exceed $200,000 in a calendar year. The $200,000 amount doesn’t include the employee’s income from any other sources or take into account his or her tax filing status.

In November 2013, the IRS released final regulations regarding the additional Medicare tax and the employer withholding requirements. The only substantial change from the proposed regulations is that employers no longer have access to relief from payment liability for any additional Medicare tax that was required to be withheld but that they didn’t withhold — unless the employer can provide evidence that the employee in question has paid the tax.

Please let us know if you have questions about the requirements. We’d be happy to answer them and help you ensure you’re in compliance with these as well as other ACA requirements. Contact Kyla Stafford, Shareholder, at 406.556.6160 for more information.

© 2014 Thomson Reuters

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Learning World 2014

Staff from across the firm participate in Learning World, internal training courses held three times a year. Here is a picture from the January 9th class. During this training, staff learn about business transactions, networking, preparing tax returns, audit services and much more.

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Should you increase your retirement plan contributions in 2014?

With the new year upon us, it’s time to start thinking about 2014 retirement plan contributions. Contributing the maximum you’re allowed to an employer-sponsored defined contribution plan is likely a smart move:

  • Contributions are typically pretax.
  • Plan assets can grow tax-deferred — meaning you pay no income tax until you take distributions.
  • Your employer may match some or all of your contributions pretax.

Also consider contributing to a traditional IRA. If you participate in an employer-sponsored plan, your IRA deduction may be reduced or eliminated, depending on your income. But you can still benefit from tax-deferred growth. Consider your Roth options as well. Contributions aren’t pretax, but qualified distributions are tax-free.

Retirement plan contribution limits generally aren’t going up in 2014, but consider contributing more this year if you’re not already making the maximum contribution. And if you are already maxing out your contributions but you’ll turn age 50 in 2014, you can put away more this year by making “catch-up” contributions.

Type of contribution 2014 limit

Elective deferrals to 401(k), 403(b), 457(b)(2) and 457(c)(1) plans $17,500

Contributions to SIMPLEs $12,000

Contributions to IRAs $5,500

Catch-up contributions to 401(k), 403(b), 457(b)(2) and 457(c)(1) plans $5,500

Catch-up contributions to SIMPLEs $2,500

Catch-up contributions to IRAs $1,000

For more ideas on making the most of tax-advantaged retirement-savings options in 2014, please contact Bill Hughes, Shareholder, 406.782.0451.

© Thomson Reuters

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Year-end Tax Planning for Your Investments

While tax consequences should never drive investment decisions, it’s critical that they be considered — especially this year: Higher-income taxpayers may face more taxes on their investment income in the form of the returning 39.6% top short-term capital gains rate and 20% top long-term capital gains rate and a new 3.8% net investment income tax (NIIT).

Holding on to an investment until you’ve owned it more than one year so the gains qualify for long-term treatment may help substantially cut tax on any gain. Here are some other tax-saving strategies:

  • Use unrealized losses to absorb gains.
  • Avoid wash sales.
  • See if a loved one qualifies for the 0% rate.

Many of the strategies that can help you save or defer income tax on your investments can also help you avoid or defer NIIT liability. And because the threshold for the NIIT is based on modified adjusted gross income (MAGI), strategies that reduce your MAGI — such as making retirement plan contributions — can also help you avoid or reduce NIIT liability.

Questions about year-end tax planning for your investments? Contact Dan Miller, Shareholder, at 406.245.5136.

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Smart timing of business income and expenses can save tax — or at least defer it

By projecting your business’s income and expenses for 2013 and 2014, you can determine how to time them to save — or at least defer — tax. If you’ll be in the same or lower tax bracket in 2014, consider:

Deferring income to 2014. If your business uses the cash method of accounting, you can defer billing for your products or services. Or, if you use the accrual method, you can delay shipping products or delivering services.

Accelerating deductible expenses into 2013. If you’re a cash-basis taxpayer, you may make a state estimated tax payment before Dec. 31, so you can deduct it this year rather than next. Both cash- and accrual-basis taxpayers can charge expenses on a credit card and deduct them in the year charged, regardless of when the credit card bill is paid.

But if it looks like you’ll be in a higher tax bracket in 2014, accelerating income and deferring deductible expenses may save you more tax.

Accurately projecting income and expenses can be challenging. For help, please contact Erin Stockwell, Senior Manager, at 406.727.0888. We can also provide additional ideas for timing business income and expenses to your tax advantage.

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