Business Tax

Launching a new business takes hard work — and money. Costs for market surveys, travel to line up potential distributors and suppliers, advertising, hiring employees, training, and other expenses incurred before a business is officially launched can add up to a substantial amount.

The tax law places certain limitations on tax deductions for start-up expenses.

• No deduction is available until the business becomes active.
• Up to $5,000 of accumulated start-up expenses may be deducted in the tax year in which the active business begins. This $5,000 limit is reduced (but not below zero) by the excess of total start-up costs over $50,000.
• Any remaining start-up expenses may be deducted ratably over the 180-month period beginning with the month in which the active business begins.

Example: Gina spent $20,000 on start-up costs before her new business began on July 1, 2020. In the 2020 tax year, she may deduct $5,000 and the portion of the remaining $15,000 allocable to July through December of 2020 ($15,000/180 × 6 = $500), a total of $5,500. The remaining $14,500 may be deducted ratably over the remaining 174 months.

Instead of deducting start-up costs, a business may elect to capitalize them (treat them as an asset on the balance sheet). Deductions for “organization expenses” — such as legal and accounting fees for services related to forming a corporation or partnership — are subject to similar rules.

Our Albuquerque, NM CPA firm provides accounting services  for all types of small businesses. Call us at 505-200-0094 now and tell us about your business or request a complimentary consultation online.

Created by the TCJA in 2017, opportunity zones are designed to help economically distressed areas by encouraging investments. This article contains an introduction to the complex details of how these zones work.

The IRS describes an opportunity zone as “an economically-distressed community where new investments, under certain conditions, may be eligible for preferential tax treatment.” How does a community become an opportunity zone? Localities qualify as opportunity zones when they’ve been nominated by their states. Then, the Secretary of the U.S. Treasury certifies the nomination. The Treasury Secretary delegates authority to the IRS.

The Tax Cuts and Jobs Act added opportunity zones to the tax code. The IRS says opportunity zones are new, although there have been other provisions in the past to help communities in need with tax incentives to spur business.

The new wrinkle is how opportunity zones are designed to stimulate economic development via tax benefits for investors.

• A Qualified Opportunity Fund is an investment vehicle set up as a partnership or corporation for investing in eligible property located in a qualified opportunity zone. A limited liability company that chooses to be treated either as a partnership or corporation for federal tax purposes can organize as a QOF.
• Investors can defer taxes on any prior gains invested in a QOF until whichever is earlier: the date the QOF investment is sold or exchanged or Dec. 31, 2026.
• If the QOF investment is held longer than five years, there is a 10 percent exclusion of the deferred gain.
• If the QOF investment is held for more than seven years, there is a 15 percent exclusion of the deferred gain.
• If the QOF investment is held for at least 10 years, the investor is eligible for an increase in basis on the investment equal to its fair market value on the date that the QOF investment is sold or exchanged.
• You don’t have to live, work or have a business in an opportunity zone to get the tax benefits. But you do need to invest a recognized gain in a QOF and elect to defer the tax on that gain.
• To become a QOF, an eligible corporation or partnership self-certifies by filing Form 8996, Qualified Opportunity Fund, with its federal income tax return.

The first set of opportunity zones covers parts of 18 states and was designated on April 9, 2018. Since then, there have been opportunity zones added to parts of all 50 states, the District of Columbia and five U.S. territories. More details are available on the U.S. Treasury website. Or see the IRS website for more information

Our Albuquerque, NM CPA firm provides accounting services  for all types of small businesses. Call us at 505-200-0094 now and tell us about your business or request a complimentary consultation online.

The Social Security Administration has released new numbers for those paying Social Security and those collecting it. Check out the new maximum taxable earnings amount as well as COLA and other key adjustments.

Every year, the Social Security Administration takes a fresh look at its numbers and typically makes adjustments. Here are the basics for 2020 — what has changed, and what hasn’t.

First, the basic percentages have not changed:

• Employees and employers continue to pay 7.65% each, with the self-employed paying both halves.
• The Medicare portion remains 1.45% on all earnings, with high earners continuing to pay an additional 0.9% in Medicare taxes.
• The Social Security portion (OASDI) remains 6.20% on earnings up to the applicable taxable maximum amount — and that’s what’s changing:

Starting in 2020, the maximum taxable amount is $137,700, up from the 2019 maximum of $132,900. This actually affects relatively few workers; the Society for Human Resource Management notes in an article that only about 6% of employees earn more than the current taxable maximum.

Also changing is the retirement earnings test exempt amount. Those who have not yet reached normal retirement age but are collecting benefits will find the SSA withholding $1 in benefits for every $2 in earnings above a certain limit. That limit is $17,640 per year for 2019 and will be $18,240 for 2020. (See the SSA for additional information on how this works.)

Cost-of-living adjustments

Those collecting Social Security will see a slight increase in their checks: Social Security and Supplemental Security Income beneficiaries will receive a 1.6% COLA for 2020. This is based on the increase in the consumer price index from the third quarter of 2018 through the third quarter of 2019, according to the SSA.

A detailed fact sheet about the changes is available on the SSA site.

When two companies join together, whether it’s a merger between equals or the purchase of a smaller entity, it’s not just about the money. Click through for some insights into the softer side of M&A.

All mergers are different, and at times the end goal of setting up a new company that results from the merger is front and center in one’s mind. Joy and pure excitement come at closing the deal, but if this is a family business, a mixed bag of emotions follows fast.

You may have grown up in the family business, and it was probably understood that the next generation would eventually take over. But there are many factors that can get in the way of this happening: Internal family dynamics or external economic factors that result in a family business entering into a merger.

That’s when a host of emotions rises to the surface. The thought of someone else running your business, the company you worked so hard to build, seems wrong. “No one can run it like me,” “They will ruin my name,” “What will I do once I don’t have this business?” “Do I define my business or does my business define me?”

These are among the thoughts that begin to run through an owner’s mind, and if it’s a multigenerational company, the older folks may feel nostalgic while the younger generation is apprehensive. When the company is sold to an outsider, feelings of failure can creep up. The nagging questions from one’s subconscious: “What could I have done differently?” “Am I failing my children (my parents)?” “What will my role be in the new company?” “Will the new owners need me at all?”

This is when harsh reality hits like a cold shower. Two companies are joined together, cost savings are sought. People are going to be laid off. This hurts because some of them will have worked with you for years, making such decisions tough and painful.

One story of a father/son firm was recounted: The company was sold more than two years ago. The son remembers that when he had to tell the employees, it was the hardest and saddest day of his life. “Some of them had been with my dad for almost 40 years and I had known them since I was a young child. They were hardworking men and women who had become more like family. We knew that what we were doing was the right thing for the company and for us, but that didn’t make it any easier. Facing those people and letting them know that the home they had for the past few decades was closing was heartbreaking. It was a day that many tears were shed.”

From denial to anger to sadness and finally acceptance — the range of emotions that one experiences is sometimes like a period of mourning. Here is some advice:

• Accept the emotions. Give yourself permission to feel them and accept the fact that they are normal. This is one of the hardest things to do.
• Find your new path, whether that’s going to college or getting a job for a couple of years outside your business. It’s scary, but exciting at the same time.
• Get married and have kids, take a breather, and then face the future.

Sadness is inevitable. You’ve lost something that has been dear to you. Embrace this opportunity to discover new dreams, new paths, new adventures.

So you’re past the period of low morale and decreased productivity among the rank and file, which, of course, is a byproduct of many mergers that attempt to slam together two diverse corporate cultures. The employees who lose their jobs and those left behind — so-called survivors — now have to deal with the loss of institutional knowledge, increased workloads and a sense of uncertainty about their futures.

For some this can be devastating psychologically and can lead to stress-based illnesses. Yes, mergers can be messy. That is why paying attention to the human factor is a wise move.

You can count on us to count for you! Call All Business CPA now at 505-200-0094 to learn more about our accounting services for small businesses. You can also request a request a complimentary consultation online.

Do you drive your car for business purposes? The costs of operating and maintaining your vehicle are potentially deductible. Here are some guidelines.

Two Methods

The IRS provides two basic methods for computing deductions for the business use of an automobile.

Actual expense method. With the actual expense method, you deduct the actual costs of operation, including licenses, registration fees, garage rent, repairs, gas, oil, tolls, and insurance. Additionally, you may claim depreciation deductions (and/or elect expensing under Section 179). If the car is leased, you deduct your lease payments rather than depreciation. (Certain limits apply.)

Standard mileage rate. Alternatively, you may choose to use an IRS-provided standard mileage rate. With this method, you multiply the number of business miles you drive during the year by the applicable rate (58¢ per mile for 2019). When you use the standard mileage rate, you don’t separately deduct expenses such as gasoline, oil, insurance, repairs and maintenance, depreciation, or lease payments. However, business-related parking fees and tolls are separately deductible.

Which Should You Use?

Generally, you will want to use the method that produces the largest deduction. If your vehicle is costly to own and operate, the actual expense method may be more advantageous. Conversely, if your vehicle is fuel efficient and/or inexpensive, the simpler standard mileage rate method may be a better choice.

With either method, the IRS requires that you keep records that substantiate your business use of the car: the date, place, business purpose, and number of miles you travel. When you use the actual expense method, you’ll also need records substantiating the amount and date of car-related expenditures. You can avoid having to retain receipts by using the standard mileage rate.

If you decide to use the standard mileage rate for a car you own, you may switch to the actual expense method in a later year. However, you won’t be able to claim accelerated depreciation deductions for the car. With a leased car, you have less flexibility. If you choose the standard mileage rate the first year, you must use it for the entire lease period.

Personal and Business Use

If you use your car for both personal and business purposes, you must keep track of your mileage for each purpose. To figure the percentage of qualified business use, you divide the business mileage by the total mileage driven. Then multiply that percentage by your total expenses.

Don’t sweat tax season! When we prepare your tax return you can be confident that and your taxes will be prepared accurately and filed on time, every time. Call us now at 505-200-0094 or request your complimentary consultation online to get started.