Millennial? Wondering How the New Tax Laws Affect You?

No doubt, the new tax laws are creating a frenzy, especially among those that are somewhat new to the arena of ever-changing tax laws. In fact, many important decisions are often weighed based on tax implications, so changing rules will change behaviors and government uses tax code to promote certain types of behavior. Want to go to college? Great - here's a credit. Want to buy a home? Wonderful - here's another credit. Paying for dependent care so you can get back into the workforce? Sweet - here's another one. That leads to the question: What sort of behavior is the government trying to promote with the latest Tax Cuts and Jobs Act, colloquially known as the GOP tax plan, and how will it affect millennials?

Below is a wonderful summary of how the most common millennial will be affected by the new tax plan. The behaviors the government is trying to promote is up to you to figure out.

 

By Rebecca Lake | January 17, 2018 — 6:00 AM EST

 

The new tax law, the Tax Cuts and Jobs Act, has generated significant buzz as tax experts speculate on how the average American’s tax bill will be affected. Some of the most important changes center on key deductions and credits that could have a significant impact on the younger generation of taxpayers. For Millennials, the latest round of tax reform is a mixed bag. 

9 Key Tax Law Changes Millennials Need to Know

The new tax bill institutes a wide range of changes, including increases and decreases to certain tax breaks as well as the elimination of others. Here are the ones set to have the most immediate impact on single young adults and young families. All of them go into effect with 2018 taxes and last through the 2025 tax year.

1. THE STANDARD DEDUCTION IS INCREASING

A tax deduction reduces your taxable income, which may lower your tax liability. When you file your taxes, you have the option of itemizing your deductions – meaning you list each deductible expense separately – or taking the standard deduction.

Claiming this deduction usually makes sense if you file as single or are married filing jointly and your itemized expenses are less than what’s allowed for the standard deduction. Beginning in 2018 the standard deduction increases to $12,000 for single filers, $18,000 for heads of household and $24,000 for married couples filing jointly. Those limits are nearly double what was allowed in 2017, meaning less income you pay taxes on. 

2. PERSONAL EXEMPTIONS ARE GOING AWAY

The old tax code allowed for taxpayers to claim personal exemptions. This is an amount you can deduct for yourself and each of your dependents. In 2017 the maximum personal exemption was $4,050. The higher standard deduction is designed to offset the loss of the personal exemption. 

3. THE CHILD TAX CREDIT IS EXPANDING

Deductions reduce your taxable income. Credits offer a tax benefit by reducing your tax liability on a dollar-for-dollar basis. The Child Tax Credit is available to families with qualifying children who fit within the income thresholds. For 2018 the credit doubles from $1,000 per child to $2,000.

The tax bill also raises the phaseout limit to qualify. Now, married couples earning up to $400,000 can claim the credit, a huge jump from the $110,000 allowed by the old tax code. The tax bill also makes the first $1,400 of the credit refundable. That means you can still claim the credit even if you don’t have any tax liability for the year. That’s something families couldn’t do before.

4. MORTGAGE INTEREST DEDUCTIONS ARE CAPPED LOWER

Millennials who plan to buy a home in 2018 (through 2025) will be affected by a reduction of the mortgage interest deduction. Going forward, the deduction limit applies to $750,000 of debt on your primary residence. If you bought a home before Dec.15, 2017, you can still claim the deduction using the old limit of $1 million. This change would have the most impact on wealthier Millennials or Millennial real estate investors. 

One other thing to note if you’re one of the 39% of Millennial homeowners with a home-equity line of credit (HELOC). The deduction for interest on home-equity loans and HELOCs goes away in 2018. Interest on these loans is still lower than for many other kinds of loans but, without the deduction, borrowing will now cost you more.

5. THE STUDENT LOAN INTEREST DEDUCTION REMAINS INTACT

The Internal Revenue Service allows you to deduct up to $2,500 in student loan interest each year. While there was talk of doing away with this deduction, the final version of the tax bill allows it to stand. That’s good news for the average 20- to 30-year-old who’s paying just over $350 a month to a student loan debt servicer. 

6. JOB SEARCH AND MOVING EXPENSE DEDUCTIONS DISAPPEAR

When you’re in your 20s and 30s, looking for work or making a major move to pursue a career opportunity may be par for the course. Unfortunately, you will no longer be able to deduct any costs associated with these expenses going forward. Deductions for key job expenses, such as unreimbursed travel and mileage and the home office deduction, are also now a thing of the past. However, business owners can still take deductions for business expenses including their office and business travel.

7. STATE AND LOCAL TAX DEDUCTIONS ARE LIMITED

The deduction for state and local taxes, including sales, income and property tax, remains under the tax bill, but there are now limits. Deductions for these taxes can’t exceed a total of $10,000, a blow to taxpayers in high cost-of-living states.

8. COMMUTERS MAY TAKE A HIT

If your employer pays some of your commuting expenses, be prepared to cover those costs yourself from now on. The tax bill eliminates a deduction for companies that help with things such as transit, parking and bicycle commuting expenses. Your company could still offer commuter benefits, but the lack of a deduction means there’s no longer an incentive for it to do so. 

9. YOUR PAYCHECK COULD BE A LITTLE BIGGER

One of the aims of the tax bill is to increase the U.S. gross domestic product (GDP). The Tax Foundation estimates that the tax bill will increase after-tax incomes for all taxpayers by 1.1% over the long term when the projected increase in GDP is accounted for. That’s not a huge nudge, but for younger adults who may be trying to save a down payment on a home or plan for retirement every penny counts. 

Source:

https://www.investopedia.com/taxes/9-ways-tax-reform-affects-millennials/

Look for These 5 Warning Signs in Your Financial Statements

Financial analysts and CPAs have the uncanny ability to identify worrying trends after only a cursory glance at a set of financial statements. You can do the same thing if you know what red flags to look for. To fully analyze your financials, you need a copy of your balance sheetincome statement, and cash flow statement. Obtain these financial statements from the last two or three years to track year-over-year trends.

Here are five big warning signs to watch out for:

Increasing Inventory

If you’re expanding your offerings, a higher inventory balance may be warranted. However, if inventory is increasing, it may also mean your products aren’t selling — and the longer they sit on your shelf, the higher the risk is of obsolescence or spoilage.

How to spot it: Calculate average inventory for the year, using the ending inventory figure from last year’s balance sheet as the beginning balance for this year. Divide average inventory by this year’s sales. If this percentage is higher than it is for prior years, you may have some inventory on your books you simply can’t sell.

Growing Receivables

A high accounts receivable figure is a good thing — if you’re sure you can collect it. However, the farther past due an account becomes, the less likely it is the customer will pay down the balance. A growing receivables account could indicate you’re not being effective at collecting what you’re owed.

How to spot it: Divide the average accounts receivable balance by annual sales. If the ratio is higher than it’s been in previous years, receivables are building up. For further investigation, run an aging schedule in your accounting software that categorizes receivables balances by due date. If most of the receivables are past due, put more effort into collections or look into factoring your receivables.

Disposal of Fixed Assets

It’s okay to sell equipment that’s not performing well or is now unnecessary for operations. The problem is some business owners dispose of fixed assets and use the cash for short-term expenses or to pay down debt. Unless proceeds from fixed assets are reinvested into the business, fixed asset disposals can hamper future operating revenue.

How to spot it: Gains and losses from fixed assets are noted on your income statement and disposals are apparent on the balance sheet. As the business owner, you know why you sold the fixed assets. If disposals are significant, prepare an explanation of your reasoning for the sale and what you intend to do with the cash proceeds.

Poor Cash Flow Patterns

Some companies have great profit on paper but are still cash poor. If cash isn’t flowing into the business, investors may be concerned you aren’t collecting receivables quickly enough, are struggling with loan repayments, or are exaggerating your revenues.

How to spot it: There will be some difference but net cash should generally track net income. If net cash flow is low year-over-year compared to net income, you could be headed for a cash crunch.

Non-operating Income

Investors and creditors love to see consistent income from continuing operations. They’re more wary of income from other sources, like large, one-off sales, gains from the sale of fixed assets, and gains from the sale of investments. These non-operating revenues aren’t as valuable because there’s a strong possibility this revenue won’t reoccur.

How to spot it: Non-operating income is easy to identify because it’s stated separately from operating income on the income statement. Analyze the relative proportion of operating income to non-operating income year-over-year. If it’s decreasing, you may need to refocus your efforts into revenue sources that won’t disappear.

 

Credit: http://quickbooks.intuit.com/r/accounting-money/look-for-these-5-warning-signs-in-your-financial-statements/

When Can You Write Off Meals On Your Taxes?

Being able to write off the cost of food and drink while traveling or meeting with clients is a huge perk for business owners. You should be careful, though, because the IRS rules related to meal deductions are complicated. Meals purchased while traveling or to entertain clients are generally 50 percent deductible, while food purchased for the benefit of employees can be fully deductible.

Meals While Traveling

If you’re traveling for business, your travel expenses are partially deductible. While you can deduct 100 percent of your lodging and mileage expenses, you can only deduct 50 percent of the meals you purchase. You may include the entire cost of the bill when you calculate the expense, including food, beverages, sales tax, and gratuity.

Business owners can only take this deduction if they are truly out of town. In the eyes of the IRS, that means you’re outside or general area where your work is located. To qualify as a business trip, the period of time must be substantially longer than a day’s work and you need to rest or sleep while away. So unless it’s exceptionally long, a day trip doesn’t qualify.

Before you deduct the expense, make sure that there’s a legitimate business activity connected to the trip. Traveling for a conference, seminar, trade show, continuing education, or to visit a customer or potential client are all valid business activities.

Meals as a Form of Entertainment

As long as there’s a business connection, meals can be considered a deductible form of entertainment. You need another person to make this one work — there’s no deduction allowed if it’s just you. However, you may write off the cost of your meal when you’re purchasing it along with a meal for a current customer, potential client, or employee. To write it off, there must be some substantial business discussion before, during, or directly after the meal. If you expect to get some income or business benefit from providing the meal, it also qualifies as a deduction. As with travel-related meals, you can only deduct 50 percent of meals as entertainment expense.

100 Percent Deductible Meals

If you have employees, some of your meal expenses are 100 percent deductible. For example, the IRS allows businesses to fully deduct occasional small snacks and meals that are purchased for the benefit of employees. Doughnuts and coffee purchased for an office meeting are a perfect example. Lunches and dinners brought in to facilitate working through lunch or working late also count. The cost of food and drink involved in hosting a companywide event – like an annual picnic or a summer outing – are also deductible.

Final Word

Tax guidelines and requirements for meal deductions are surprisingly complex. Luckily, there are helpful resources available to help you sort through it. IRS Publication 463 has all the information you need but can be time-consuming to navigate. Grant Thornton maintains a 9-page guide [PDF] detailing specific requirements. And accounting firm Barnes Dennig created a quick reference guide [PDF] to categorize common meal expenses.

 

 

http://quickbooks.intuit.com/r/taxes/when-can-you-write-off-meals-on-your-taxes/

Cloud Computing in our Industry

A buzz word in today's business environment is Cloud Computing. It is a service that is provided by many tech firms including Google, Microsoft, Amazon, and Apple. Public clouds are great to store documents, music, pictures, and email, but how can businesses benefit from this technology? Well, private clouds are used primarily by companies who are "looking for safety, reliability, and efficiency" (Kinsella 2014). For Pioneer, it allows us to store and share sensitive data between our team and our client. Transmitting confidential information across email can be very dangerous, so cloud computing and storage gives us a safe platform to share these documents. Also, storing data electronically on a server that has multi-user access means we are not tied down to a physical office and file cabinet. Intuit offers a broad suite of cloud-based products, as well, so we no longer need a server to host licensed software, and can now operate from anywhere that has internet. Below is a great article that outlines how this trend in the tech-industry has helped provide more value to our clients: 

http://www.journalofaccountancy.com/issues/2010/oct/20102519.html

Back-to-Basics Pt. 1- Income Statement

Hands down, the greatest skill an independent accountant can develop is translating accounting information to non-accountants. A small-business owner has the majority of their time in their craft. Accountants have spent years learning and understanding financial data, something that many business owners have not done, and frankly have no need to do. That is why they hire accountants. We are starting a Back-to-basics series on our blog to present important financial information for small-business owners. The first topic- Income Statements.

Income Statements, sometimes referred to as a Profit and Loss, show how much money the company is making. It is broken out into Revenue, the business' income stream, Cost of Goods Sold, these are expenses directly related to the revenue, and Overhead, these are other expenses to keep the business running. Example:

Peter is a carpenter, and builds custom wood furniture. He buys wood, stain, and paint in January for $1,000, and will sell his products to a customer who commissioned him for the work for $5,000. On his income statement, he would show $5,000 of revenue, and $1,000 of direct costs, giving him a gross margin of $4,000; however, we now need to incorporate costs to keep his craft alive including business insurance, cell phone payments, marketing expenses, and rent. That is his overhead, and lets say it costs him $2,000 in January to keep his business running. This gives us a $2,000 net profit.

Although simplified, this is the basic information an Income Statement shows. Here is a great article from Entrepreneur magazine discussing this topic: http://www.entrepreneur.com/article/244207

We are up and running!

Thank you to everyone who patiently waited for our new website to be up and running, and for everyone who had a part in its creation! We are in the process of creating our social media accounts, and will be setting up our phone routing systems in the next couple of days. You can expect a weekly post on our website and our social media accounts. These posts will pertain to a range of topics from IRS news, to helpful tips-and-tricks for your year-end tax filings. 

To be continued...