What Small Businesses Starters Should Be Aware of When Considering Debts, Leases and Rents

Starting a small business can be an exciting endeavor. However, it can also be overwhelming, particularly when it comes to finances. One of the biggest financial challenges that small businesses face is managing debt, leases, and rent payments. In this blog post, we will explore how small businesses can bury themselves before they even start working by not managing their debts, leases, and rent effectively.

Debts

Many small businesses rely on debt financing to get their businesses off the ground. However, taking on too much debt can be detrimental to the long-term success of the business. Small businesses should be cautious when taking on debt and ensure that they have a plan in place for paying it back. Failing to make payments on time can lead to high-interest rates, penalties, and damage to the business’s credit score.

Leases

Leasing space for a small business is often a more affordable option than purchasing property. However, leasing comes with its own set of challenges. Small business owners should carefully review the terms of the lease agreement before signing. They should pay attention to details such as rent increases, maintenance responsibilities, and early termination fees. Failing to understand the terms of the lease can result in unexpected expenses that can put a strain on the business’s finances.

Rent

Rent is one of the most significant expenses for small businesses, particularly for those in high-cost areas. Small business owners should consider their budget when choosing a location for their business. They should look for areas with lower rent costs or consider sharing space with other businesses. Paying too much for rent can put a significant strain on a business’s finances, making it difficult to cover other essential expenses such as inventory, equipment, and salaries.

Managing Debts, Leases, and Rent

Small businesses can avoid burying themselves in debt, leases, and rent by taking a proactive approach to financial management. They should have a clear understanding of their financial situation and create a budget to help them manage their expenses. It is essential to prioritize debt payments and make them on time to avoid incurring additional fees and penalties. Small business owners should also negotiate the terms of their lease agreements to ensure that they are fair and affordable. It is important to review the lease agreement regularly to ensure that the terms are being followed and that there are no unexpected expenses.

When it comes to renting, small business owners should be strategic in choosing a location and negotiating the rent. They should look for areas with lower rent costs or consider sharing space with other businesses. They should also negotiate the rent and ensure that it is fair and affordable.

In conclusion, small businesses can bury themselves in debt, leases, and rent if they do not manage their finances effectively. Small business owners should take a proactive approach to financial management, prioritize debt payments, negotiate lease agreements, and be strategic when choosing a location and negotiating rent. By managing their finances effectively, small businesses can increase their chances of long-term success.

Disclaimer: The information provided above is not meant to
be legal or tax advise. You should consult your CPA and attorney to
determine the best course of action for your situation.

Mitzi E. Sullivan, CPA is a cloud based professional services provider
specializing in cloud accounting.

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What is Bonus Depreciation and Section 179 Depreciation?

As a business owner, you are likely familiar with the concept of depreciation. Depreciation is a tax-deductible expense that allows businesses to spread out the cost of purchasing and owning an asset over its useful life. This helps businesses save money on their taxes and manage cash flow. To further assist businesses in recouping the costs of large capital purchases, the IRS has introduced two powerful depreciation methods: bonus depreciation and Section 179 depreciation.

Bonus depreciation is a tax incentive that allows businesses to deduct a larger portion of the cost of qualifying assets in the year of purchase. It was introduced in the Tax Cuts and Jobs Act of 2017 and is set to expire in 2026. The current bonus depreciation rate is 100%, meaning a business can deduct the full cost of eligible assets in the year of purchase.

Section 179 depreciation is another powerful tax incentive that allows businesses to deduct the cost of certain property and equipment purchases in the year of purchase. The current Section 179 deduction limit is $1 million, with a phase-out threshold of $2.5 million. This means that businesses can deduct up to $1 million of qualifying assets in one year.

Bonus depreciation and Section 179 depreciation are great ways for businesses to save money on taxes and manage cash flow. They can be used in tandem to maximize the tax benefits of large capital purchases. However, it’s important to note that each has its own set of rules and requirements. Be sure to speak with a tax professional to determine which depreciation method is best for your business.

Disclaimer: The information provided above is not meant to
be legal or tax advise. You should consult your CPA and attorney to
determine the best course of action for your situation.

Mitzi E. Sullivan, CPA is a cloud based professional services provider
specializing in cloud accounting.

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Pros and Cons of Using QuickBooks Online Payroll

QuickBooks Online (QBO) Payroll is a cloud-based payroll processing software designed for small businesses.

If you are just now starting to run payroll or are considering switching from another 3rd party payroll provider, here are some of the pros and cons of using QBO Payroll:

Pros

1. Easy to use: QBO Payroll has an intuitive and user-friendly interface that makes it easy for business owners and managers to process payroll.
2. Affordable: QBO Payroll offers affordable pricing plans that include all payroll and tax services.
3. Automated payroll processing: QBO Payroll automates many of the payroll processing tasks, such as calculating employee pay and taxes, generating pay stubs, and sending direct deposit payments.
4. Time-saving: QBO Payroll automates many payroll tasks such as calculating and filing taxes, issuing paychecks, and managing employee data, which saves time and reduces the chance of errors.
5. Tax compliance: QBO Payroll stays up-to-date with the latest tax laws and regulations, making it easier for businesses to stay compliant. In addition, you can utilize the auto payroll payments and filings feature so that QBO automatically makes all your payments and files all payroll forms on time.
6. Integrations: QBO Payroll integrates seamlessly with other QuickBooks products, as well as with a variety of other business software and tools.
7. Customer support: QBO Payroll offers customer support through phone, chat, and by appointment, which is available Monday through Friday, 6 a.m. to 6 p.m. Arguably, the most helpful feature they offer is the callback feature, you put in your information and typically get a call within 5-10 minutes so that you aren’t waiting on hold. This ensures that businesses can get help in a timely fashion.

CONS

1. Potential for errors: While QBO Payroll automates many payroll tasks, there is still the potential for errors, especially if data is entered incorrectly.
2. Internet access required: Since QBO Payroll is a cloud-based software, users need a reliable internet connection to use it effectively, which can be a drawback for businesses in areas with poor connectivity.

Depending on the nature and size of the client, a lot of times we advise our clients to get their company set up in QBO so that they can keep track of everything in an efficient and timely matter. The Online version of QuickBooks is especially helpful for collaboration with different parties. Get with your accountant in order to determine which QuickBooks subscription is suited best to your business needs.

Disclaimer: The information provided above is not meant to be legal or tax advise. You should consult your CPA and attorney to determine the best course of action for your situation.

Mitzi E. Sullivan CPA, PLLC is a cloud based professional services provider specializing in cloud accounting.

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How To Budget Under Uncertainty

• How to create a budget during time of uncertainty.

It’s no secret that the current economic and financial situation is far from stable. With so much uncertainty, it can be difficult to know how to budget and plan for the future. However, by following a few simple steps, you can create a budget that will help you manage your finances during this time of uncertainty.

The first step to budgeting under uncertainty is to create an emergency fund. Having an emergency fund will help you cover unexpected expenses and can help you avoid costly debt. Ideally, you should aim to have at least three to six months of living expenses saved in an accessible account.

The next step is to create a budget that will help you manage your finances in the short and long term. Start by creating a budget that includes all of your income sources, fixed and variable expenses, and any savings goals you may have. Make sure to include any additional expenses that may crop up due to the current economic situation, such as increased costs for health care, food, or housing. Once you have a budget in place, review it regularly to ensure you’re staying within your means and that it still meets your needs.

Finally, prioritize your spending to ensure you’re getting the most out of your money. Focus on the essential expenses first, such as food, housing, transportation, and health care, and then prioritize any discretionary expenses that are important to you. This will help you stay on top of your budget and make sure you’re not overspending.

By following these steps, you can create a budget that will help you manage your finances during this time of uncertainty. While the current economic situation may be challenging, having a budget in place can help you stay on track and ensure you’re making the most of your money. By setting up a budget and sticking to it, you can save more money and reduce your debt, ultimately leading to financial stability.

Disclaimer: The information provided above is not meant to be legal or tax advise. You should consult your CPA and attorney to determine the best course of action for your situation.

Mitzi E. Sullivan CPA, PLLC is a cloud based professional services provider specializing in cloud accounting.

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Advantages of Outsourced Accounting: Why It’s a Smart Business Move

For many business owners, managing accounting tasks can be a significant source of stress. Whether it’s managing payroll, bookkeeping, or tax filings, there are many tasks that can be time-consuming and require specialized knowledge. One solution to this problem is to outsource accounting tasks to a third-party provider. In this blog post, we’ll discuss the advantages of outsourced accounting and why it’s a smart business move.

Expertise

Outsourced accounting firms have a team of professionals with a wealth of experience in accounting and finance. They are up-to-date with the latest tax laws and regulations, ensuring that your business is compliant with all legal requirements. This can be especially helpful if you don’t have an in-house accountant or if your current accountant doesn’t specialize in a particular area.

Cost Savings

Outsourcing accounting tasks can be a cost-effective solution for many businesses. Instead of hiring a full-time accountant or accounting team, you can pay for services as you need them. This can result in significant cost savings, especially for small businesses that may not have the budget to hire a full-time accountant.

Increased Efficiency

By outsourcing accounting tasks, you can free up time and resources to focus on other important areas of your business. This can lead to increased efficiency and productivity, as you’ll have more time to devote to core business activities. Additionally, outsourcing firms typically use advanced technology and software, which can further streamline the accounting process.

Scalability

Outsourced accounting services can be scaled up or down as your business needs change. For example, if you experience a sudden increase in accounting tasks during tax season, you can increase the level of service you receive from the outsourcing firm. This flexibility can be invaluable for businesses that are growing or experiencing fluctuations in demand.

Peace of Mind

Outsourcing accounting tasks can provide peace of mind, knowing that your financial records are in the hands of professionals. This can be especially important if you’re not familiar with accounting or don’t have the time or resources to manage it effectively.

Outsourced accounting services can provide a wide range of benefits for businesses, from increased efficiency to cost savings and peace of mind. If you’re considering outsourcing your accounting tasks, be sure to research your options and choose a reputable provider that can meet your specific needs.

Disclaimer: The information provided above is not meant to be legal or tax advise. You should consult your CPA and attorney to determine the best course of action for your situation.

Mitzi E. Sullivan CPA, PLLC is a cloud based professional services provider specializing in cloud accounting.

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Pros and Cons of an S Corporation

What is an S Corporation?

An S Corporation is a type of business structure that combines the benefits of a corporation and a partnership. S Corporations have become popular among small business owners due to the tax and liability advantages they offer. In this blog, we will explore the pros and cons of forming an S Corporation.

An S Corporation is a type of business structure that combines the benefits of a corporation and a partnership. S Corporations have become popular among small business owners due to the tax and liability advantages they offer. In this blog, we will explore the pros and cons of forming an S Corporation.

Pros of an S Corporation:

1. Pass-Through Taxation: One of the biggest advantages of an S Corporation is its pass-through taxation. This means that the company’s income, deductions, and credits are passed through to the shareholders, who then report it on their individual tax returns. This avoids the double taxation that shareholders in C Corporations experience.
2. Limited Liability Protection: Like a corporation, an S Corporation provides limited liability protection to its shareholders, meaning their personal assets are protected in the event of a lawsuit or bankruptcy.
3. Saving SE Taxes: S Corporation tax structure allows an active shareholder to pay themselves a salary for the work they provide. The remainder of the net income from the S Corp allocated to the shareholder avoids self-employment taxes.
4. Cost-Effective: Forming an S Corporation is relatively cost-effective compared to forming a traditional corporation.

Cons of an S Corporation:

1. Complexity: Forming an S Corporation can be complex and time-consuming, requiring legal and tax compliance paperwork. Each year, an 1120S tax return is required to be filed to the IRS which is an additional accounting expense.
2. Restrictions on Shareholders: S Corporations have strict restrictions on shareholders, including a limit on the number of shareholders and the types of shareholders allowed.
3. Limited Deductible Losses: Shareholders of an S Corporation may only deduct losses to the extent of their basis in the company.

In conclusion, an S Corporation offers several benefits, including pass-through taxation, limited liability protection, and saving on self-employment taxes. However, it also has its drawbacks, such as complexity, restrictions on shareholders, and limited deductible losses. Before deciding to form an S Corporation, it’s important to carefully weigh the pros and cons and seek the advice of a tax professional.

Disclaimer: The information provided above is not meant to be legal or tax advise. You should consult your CPA and attorney to determine the best course of action for your situation.

Mitzi E. Sullivan, CPA is a cloud based professional services provider specializing in cloud accounting.

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The Inflation Reduction Act

In August 2022, congress added new tax provisions to the Inflation Reduction Act, that are designed to address health care, fight climate change, and reduce the country’s deficit. These new provisions may affect your personal finances; here is a brief explanation of some of those added provisions:

 

Negotiation of prescription drug prices for Medicare Beneficiaries

The cost for prescription drugs will decrease at the beginning of 2023 due to the tax provision allowing Medicare beneficiaries to negotiate the price of their prescription drugs. It will also include a cap of $2,000 per year in prescription drug costs for beneficiaries each year at the pharmacy and will allow free vaccinations for seniors beginning in 2023.

 

A 15% corporate minimum tax

This provision applies for all large corporations exceeding $1 billion in profits, with some exceptions to private equity firms. The provision will require a new minimum of 15% tax and will apply based on the annual income in the corporation’s financial statement rather than their taxable income. This provision was added due to large corporations paying little to no tax in the previous years.

 

Expansion of IRS agents

The IRS received $80 billion in funding and is expected to hire 87,000 new IRS agents to increase tax collections and tax compliance through more audits.   

 

Clean Energy Credit

This credit incentivizes taxpayers to install solar energy equipment to earn a non-refundable credit equal to 30% of eligible expenses. These expenses include solar panels, heat pumps, inspection and permit costs, batteries, contract labor for on-site preparation and installation, and sales tax. This credit will run until the end of 2032.

 

Electric Vehicle Tax Credit

Taxpayers who purchased a new electric vehicle before January 1, 2023, may be eligible for a tax credit of up to $7,500 and $4,500 for used electric vehicles. The amount of the credit will vary based on the manufacturing location of the vehicle when the car was purchased and placed in service, battery capacity to power, the vehicle, and other factors.

 

The Inflation Reduction Act is designed to grow the economy and reduce the deficit by billions and is projected to fall by more than $1.5 trillion during the year.

 

Disclaimer: The information provided above is not meant to be legal or tax advise. You should consult your CPA and attorney to determine the best course of action for your situation.

Mitzi E. Sullivan, CPA is a cloud based professional services provider specializing in cloud accounting.

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Economic Nexus

In 2018, the Supreme Court overruled the previous ruling that states can only require sellers to collect tax when they have a physical presence in the state. Now, states can require tax collection responsibilities on sellers who have an economic presence without a physical presence.

Many online retailers sell products all over the United States. Out of state sales without a physical presence can still trigger tax obligations in other states. Most states have economic nexus which is a threshold set by the state requiring the out of state seller to collect and remit sales tax. Economic nexus is triggered by reaching a certain amount of sales and/or number of sales transactions in another state.

If you reach any of the nexus thresholds, you must collect and remit sales tax in those states. If you do not reach the nexus threshold, you will collect and remit sales tax in the state your business is located in.

Disclaimer: The information provided above is not meant to be legal or tax advise. You should consult your CPA and attorney to determine the best course of action for your situation.

Mitzi E. Sullivan, CPA is a cloud based professional services provider specializing in cloud accounting.

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Defer Taxes with a Drop and Swap on Your 1031 Property

When all the partners don’t agree on what to do with the proceeds from the sale of real property, executing a “drop and swap” allows real estate investors to “drop” real property ownership from the LLC to individual partners as tenants in common (TIC) prior to selling the real property. The “drop” to individual partners as TIC should take place prior to the sale, allowing as much time as possible for the property to be “held for business or investment purposes” by the individual tenants. As with all 1031 exchanges, there is no clear rule in the tax code about how long before a sale the property must be owned by the tenants in common.

When the property is sold (the “swap”), the proceeds are divided among the TIC. Each individual can then decide whether to cash out and pay taxes or reinvest into another investment property and continue to defer taxes. 

Revenue Ruling 77-337 and Revenue Ruling 75-292 provide examples of exchanges that were disqualified due to transfers which occurred immediately before or after an exchange from or to an entity controlled by the taxpayer. 

Partners will want to ensure that the partners not involved in the 1031 Exchange (those that want to cash out) truly drop their interests in the partnership. If not, the IRS may recharacterize their TIC interests to partnership interests. Refer to Rev. Proc. 2002-22 for minimum “drop and swap” criteria. 

Be aware of two questions on the Form 1065, Schedule B:

Question 13 asks 

“…during the current or prior tax year, the partnership distributed any property received in a like-kind exchange or contributed such property to another entity (other than entities wholly-owned by the partnership throughout the tax year)”

 

Question 14 asks

 

 “At any time during the tax year, did the partnership distribute to any partner a tenancy-in-common or other undivided interest in partnership property?”

 

It is best to negotiate and take title as individuals rather than entities.

 

Disclaimer: The information provided above is not meant to be legal or tax advise. You should consult your CPA and attorney to determine the best course of action for your situation.

Mitzi E. Sullivan, CPA is a cloud based professional services provider specializing in cloud accounting.

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Active or Passive? That is the question…

Income falls into three buckets

1. Active Income (wages, business where the taxpayer is materially participating, etc.)
2. Passive Income

There are two kinds of passive activities.

1. Trade or business activities in which you don’t materially participate during the year

2. Rental activities, even if you do materially participate in them, unless you’re a real estate professional

 

3. Portfolio Income (royalties, capital gains, interest, qualified dividends, etc.)

How is Active Income is taxed? Ordinary tax rates plus self employment tax (SS and Medicare tax) of 15.3%.

 

For employees, SS and Medicare is automatically taken out of your paycheck and split 50/50 with employer. For someone who is self employed or active in a business, they must pay both halves of the SS and Medicare, known as self employment tax.

 

How is Passive Income taxed? Ordinary tax rates with no self employment tax. Subject to Net Investment Income Tax (NIIT) of 3.8% if your AGI is above the threshold of $250,000 for MFJ.

 

How is Portfolio Income taxed? Ordinary tax rates or preferential rates for LTCG and qualified dividends.

 

So this might seem that having passive income is better than active income. NOT NECESSARILY.

 

Losses: When you are an owner in a pass through entity (partnership, S Corp), you need to be careful with how you categorize your participation in the business because if the company is generating losses, you may not get to take them.

 

Passive Activity Losses (PALs): When a taxpayer has a loss from a passive activity, it can only offset passive income, NOT active income.

 

Example of passive investor and passive activity loss limitations:

Pete is an individual taxpayer who owns a 25% interest in an LLC. He is categorized as a limited partner and his 25% ownership interest is just an investment as he does not participate in the day-to-day managerial decisions of the business. This means that Pete is a passive partner. The LLC generated a $100,000 loss, $25,000 allocated to Pete on his Schedule K-1. Pete has a full time job where he makes a salary of $100,000.

 

It would appear that Pete can offset his $100,000 income from his W-2 with his $25,000 loss from his Schedule K-1, however, because the loss is passive and the income is active, Pete cannot deduct the $25,000 loss until he has passive income. Therefore, the loss rolls forward until the LLC generates income in a future year, or Pete has passive income from another income stream.

 

How do you qualify as material participation?

1. 1. You participated in the activity for more than 500 hours.
   2. Your participation was substantially all the participation in the activity of all individuals for the tax year, including the participation of individuals who didn’t own any interest in the activity.
   3. You participated in the activity for more than 100 hours during the tax year, and you participated at least as much as any other individual (including individuals who didn’t own any interest in the activity) for the year.
   4. The activity is a significant participation activity, and you participated in all significant participation activities for more than 500 hours. A significant participation activity is any trade or business activity in which you participated for more than 100 hours during the year and in which you didn’t materially participate under any of the material participation tests, other than this test. See Significant Participation Passive Activities under Recharacterization of Passive Income, later.
   5. You materially participated in the activity for any 5 (whether or not consecutive) of the 10 immediately preceding tax years.
   6. The activity is a personal service activity in which you materially participated for any 3 (whether or not consecutive) preceding tax years. An activity is a personal service activity if it involves the performance of personal services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, or any other trade or business in which capital isn’t a material income-producing factor.
   7. Based on all the facts and circumstances, you participated in the activity on a regular, continuous, and substantial basis during the year.

Rental Activities

Rental activities are always passive unless you are a “Real Estate Professional.” There is a special $25,000 allowance for a taxpayer who actively participates in a passive rental real estate activity. So you can deduct up to $25,000 of passive loss against active income if you are deemed to have “actively participated” in the rental real estate activity.

 

 

Active participation- not the same as material participation. Active participation is a less stringent standard than material participation. Examples of active participation (management decisions, approving new tenants, deciding on rental terms, approving expenses, etc.).

 

**So basically any taxpayer can easily qualify as active participation as long as they are making high level decisions for the rental.

 

Real Estate Professional Status

 

You qualified as a real estate professional for the year if you met both of the following requirements.

 

• More than half of the personal services you performed in all trades or businesses during the tax year were performed in real property trades or businesses in which you materially participated.
• You performed more than 750 hours of services during the tax year in real property trades or businesses in which you materially participated.

Disclaimer: The information provided above is not meant to be legal or tax advise. You should consult your CPA and attorney to determine the best course of action for your situation.

Mitzi E. Sullivan, CPA is a cloud based professional services provider specializing in cloud accounting.

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