Author: Leon Clinton

Financial Planning

Paying off Debt the Smart Way

Between mortgages, car loans, credit cards, and student loans, most people are in debt. While being debt-free is a worthwhile goal, most people need to focus on managing their debt first since it’s likely to be there for most of their life.

Handled wisely, however, that debt won’t be an albatross around your neck. You don’t need to shell out your hard-earned money because of exorbitant interest rates or always feel like you’re on the verge of bankruptcy. You can pay off debt the smart way, while at the same time, saving money to pay it off even faster.

Assess the Situation

First, assess the depth of your debt. Write it down using pencil and paper or use a spreadsheet like Microsoft Excel. You can also use a bookkeeping program such as Quicken. Include every instance you can think of where a company has given you something in advance of payment, including your mortgage, car payment(s), credit cards, tax liens, student loans, and payments on electronics or other household items through a store.

Record the day the debt began and when it will end (if possible), the interest rate you’re paying, and what your payments typically are. Next, add it all up–as painful as that might be. Try not to be discouraged! Remember, you’re going to break this down into manageable chunks while finding extra money to help pay it down.

Identify High-Cost Debt

Yes, some debts are more expensive than others. Unless you’re getting payday loans (which you shouldn’t be), the worst offenders are probably your credit cards. Here’s how to deal with them.

  • Don’t use them. Don’t cut them up, but put them in a drawer and only access them in an emergency.
  • Identify the card with the highest interest and pay off as much as you can every month. Pay minimums on the others. When that one’s paid off, work on the card with the next highest rate.
  • Don’t close existing cards or open any new ones. It won’t help your credit rating, and in fact, will only hurt it.
  • Pay on time, absolutely every time. One late payment these days can lower your FICO score.
  • Go over your credit-card statements with a fine-tooth comb. Are you still being charged for that travel club you’ve never used? Look for line items you don’t need.
  • Call your credit card companies and ask them nicely if they would lower your interest rates. It does work sometimes!

Save, Save, Save

Do whatever you can to retire debt. Consider taking a second job and using that income only for higher payments on your financial obligations. Substitute free family activities for high-cost ones. Sell high-value items that you can live without.

Do Away with Unnecessary Items to Reduce Debt Load

Do you really need the 200-channel cable option or that satellite dish on your roof? You’ll be surprised at what you don’t miss. How about magazine subscriptions? They’re not terribly expensive, but every penny counts. It’s nice to have a library of books, but consider visiting the public library or half-price bookstores until your debt is under control.

Never, Ever Miss a Payment

Not only are you retiring debt, but you’re also building a stellar credit rating. If you ever move or buy another car, you’ll want to get the lowest rate possible. A blemish-free payment record will help with that. Besides, credit card companies can be quick to raise interest rates because of one late payment. A completely missed one is even more serious.

Pay with Cash

To avoid increasing debt load, make it a habit to pay for everything you purchase with cash. If you don’t have the cash for it, you probably don’t need it. You’ll feel better about what you do have if you know it’s owned free and clear.

Shop wisely, and Use the Savings to Pay down Your Debt

If your family is large enough to warrant it, invest $30 or $40 and join a store like Sam’s or Costco–and use it. Shop there first, then at the grocery store. Change brands if you have to and swallow your pride. If you’re concerned about buying organic, rest assured that even at places like Costco you will have many options. Use coupons religiously. Calculate the money you’re saving and slap it on your debt.

Each of these steps, taken alone, probably doesn’t seem like much, but if you adopt as many as you can, you’ll watch your debt decrease every month. If you need help managing debt, please call for assistance.

Tax

Tax Compliance Issues for Non-Profits

Whether you’ve just started a nonprofit, recently submitted your organization’s first Form 990, or are the executive director, it’s important not to lose sight of your obligations under federal and state tax laws. From annual filing and reporting requirements to taxes on business income and payroll compliance, here’s a quick look at what nonprofits need to know about tax compliance.

Annual Filing and Reporting Requirements: Form 990

Once you’ve applied for and received tax-exempt status under (Section 501(c)(3) and filed Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, your organization is officially a nonprofit, and is exempt from federal income tax under section 501(c)(3). Tax exempt status refers to exemption from federal income tax on income related to the organization’s mission, as well as the ability to receive tax-deductible contributions from donors.

The next step is to comply with annual filing and reporting requirements, specifically, Form 990, Return of Organization Exempt from Income Tax.

Generally, tax-exempt organizations are required to file annual returns. If an organization does not file a required return or files late, the IRS may assess penalties. In addition, if an organization does not file as required for three consecutive years, it automatically loses its tax-exempt status.

There are four different Forms 990; which form an organization must file generally depends on its gross receipts. Forms 990-EZ or 990 are used for organizations with gross receipts of less than $200,000 and with total assets of less than $500,000. Form 990 is used for nonprofits with gross receipts of less than $200,000, and with total assets less than $500,000.

Certain small organizations may file an annual electronic notice, the Form 990-N (e-Postcard). Private foundations file Form 990-PF regardless of financial status.

Form 990 is submitted to the IRS five and a half months after the end of an organization’s calendar year. For example, for nonprofits whose calendar year ends on December 31st, the initial return due date for Form 990 is May 15. If a due date falls on a Saturday, Sunday, or legal holiday, the due date is delayed until the next business day.

Extended due dates of three and six months are available for Forms 990; however, for Form 990-N the due date is the “initial return due date,” e.g. May 15 and extended due dates do not apply.

NOTE: Unlike individual tax returns filed with the IRS, which may be postmarked on April 15, Forms 990 must be received (not postmarked) by the IRS before the May 15 due date.

Unrelated Business Income Taxes (UBIT)

Unrelated business income is defined as income from a trade or business which is regularly carried on and is not substantially related to the charitable, educational, or other purpose that is the basis of the organization’s exemption.

While it may come as a surprise to some, nearly all tax-exempt organizations are required to pay taxes on unrelated business income, which might include proceeds from an annual holiday card sale or souvenirs related to an educational exhibit in support of the nonprofit’s mission.

If the IRS determines that a nonprofit is significantly underreporting income from unrelated business activities, it may lose its tax-exempt status.

Employment and Payroll Compliance

Similar to for-profit companies, nonprofit organizations must comply with both federal and state payroll reporting requirements. Federal tax withholding, social security taxes, and Medicare taxes must be deposited through the Electronic Federal Tax Payment System (“EFTPS”), and the organization must file Form 941 on a quarterly basis. Nonprofits are also required to report reimbursements to employees for out-of-pocket expenses; however, nonprofits that create an accountable reimbursement plan or ARP that meets IRS guidelines are able to avoid these reporting requirements.

Stay Informed

These are just a few of the tax-compliance issues facing nonprofit organizations. If you have any questions, would like more information, or need help setting up an accountable reimbursement plan that meets IRS requirements, please call.

Business

Selling your Business

There are many reasons to sell a business. Maybe you’re in ill health or ready to retire. Or you’re tired of working all the time and now that the business is profitable you’re ready to cash in. Whatever the reason, selling a small to medium sized business is a complex venture and many business owners are not aware of the tax consequences.

If you’re thinking about selling your business the first step is to consult a competent tax professional. You will need to make sure your financials in order, obtain an accurate business valuation to determine how much your business is worth (and what the listing price might be), and develop a tax planning strategy to minimizes capital gains and other taxes in order to maximize your profits from the sale.

Accurate Financial Statements

The importance of preparing your business financials before listing your business for sale cannot be overstated. Whether you use a business broker or word of mouth, rest assured that potential buyers will scrutinize every aspect of your business. Not being able to quickly produce financial statements, current and prior years’ balance sheets, profit and loss statements, tax returns, equipment lists, product inventories, and property appraisals and lease agreements may lead to loss of the sale.

Business Valuation

Many business owners have no idea what their business is worth; some may underestimate whereas others overestimate–sometimes significantly. Obtaining a third party business valuation allows business owners to set a price that is realistic for potential buyers, while achieving maximum value.

Tax Consequences of Selling

As a business owner you probably think of your business as a single entity sold as a lump sum. The IRS however, views a business as a collection of assets. Profit from the sale of these assets (i.e. your business) may be subject to short and long-term capital gains tax, depreciation recapture of Section 1245 and Section 1250 real property, and federal and state income taxes.

For IRS purposes each asset sold must be classified as capital assets, depreciable property used in the business, real property used in the business, goodwill, or property held for sale to customers, such as inventory or stock in trade. Assets are considered tangible (real estate, machinery, and inventory) or intangible (goodwill or trade name).

The gain (or loss) on each asset sold is figured separately. For instance, the sale of capital assets results in capital gain or loss whereas the sale of inventory results in ordinary income or loss, with each taxed accordingly.

Depreciable property

Section 1231 gains and losses are the taxable gains and losses from Section 1231 transactions such as sales or exchanges of real property or depreciable personal property held longer than one year. Their treatment as ordinary or capital depends on whether you have a net gain or a net loss from all your Section 1231 transactions.

When you dispose of depreciable property (Section 1245 property or Section 1250 property) at a gain, you may have to recognize all or part of the gain as ordinary income under the depreciation recapture rules. Any remaining gain is a Section 1231 gain.

Business structure

Your business structure (i.e. business entity) also affects the way your business is taxed when it is sold. Sole proprietorships, partnerships, and LLCs (Limited Liability Companies) are considered “pass-through” entities and each asset is sold separately. As such there is more flexibility when structuring a sale to benefit both the buyer and seller in terms of tax consequences.

C-corporations and S-corporations have different entity structures and sale of assets and stock are subject to more complex regulations.

For example, when assets of a C-corporation are sold, the seller is taxed twice. The corporation pays tax on any gains realized when the assets are sold, and shareholders pay capital gains tax when the corporation is dissolved. However, when a C-corporation sells stock the seller only pays capital gains tax on the profit from the sale, which is generally at the long-term capital gains tax rate. S-corporations are taxed similarly to partnerships in that there is no double taxation when assets are sold. Income (or loss) flows through shareholders, who report it on their individual tax returns.

Need help?

As you can see, selling a business involves complicated federal and state tax rules and regulations. If you’re thinking of selling your business in the near future don’t hesitate to call the office and schedule a consultation with a tax and accounting professional.

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