Monthly Archives: March 2016

Run a Side Business? The Tax Implications

Make sure it’s no hobby

side businessIf you run a business “on the side” and derive most of your income from another source (whether from another business you own, employment or investments), you may face a peculiar tax risk:  Under certain circumstances, this on-the-side business might not be a business at all in the eyes of the IRS.

Generally, a taxpayer can deduct losses from profit-motivated activities, either from other income in the same tax year or by carrying the loss back to a previous tax year or forward to a future tax year. But, to ensure some pursuits are really businesses — and not mere hobbies intended primarily to offset other income — the IRS enforces what are commonly referred to as the “hobby loss” rules.

For example, if you haven’t earned a profit from your business in three out of five consecutive years, you’ll bear the burden of proof to show that the enterprise isn’t merely a hobby. If a profit can be proven within this period, the burden falls on the IRS. In either case, the agency uses nine nonexclusive factors to determine whether the activity is a business or a hobby — including management expertise and time and effort dedicated.

If your enterprise is redefined as a hobby, there are many business deductions and credits that you won’t be eligible to claim. You may still write off certain expenses related to the hobby, but only to the extent of income the hobby generates. If you’re concerned about the hobby loss rules, we can help you evaluate your situation.

Contact Jim Komos at jkomos@cp-advisors.com or 216.831.7171 for more information on any of our topics or to get expert tax assistance.

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The Pros and Cons of Roth IRA Conversion

March Tax Tips

© 2016

Don’t Neglect Your Own Financial Plan

Financial Planning Takes Work

7_istock_000005830377large_seedlingIf you’re responsible for the financial health of a company, it’s easy to neglect your personal wealth management goals. Finding the time to create a personal financial plan, however, is critical. A good plan documents your current financial picture and enables you to make the best spending, saving and investing decisions going forward.

In and out
Financial planning is the process of selecting and applying specific strategies to reach your goals. So if you haven’t already, identify what’s important to you. Do you hope to retire early and sail around the world? Establish a charitable trust? Ensure your grandchildren’s financial security?

You won’t know if any of this is possible until you assess your current income, assets and expenses, including:

  • Income from all sources,
  • Investments and other assets,
  • Basic, recurring expenses,
  • Major, periodic expenses,
  • Funds available for nonessentials, and
  • Expectations about future income and expenses.

A personal financial snapshot can make it easier to see whether you’re on track or need to revisit your current spending habits. For example, you may decide to cut back on luxury vacations to devote more money to your retirement plan or forgo a new car to send your child to a private school.

Big picture
Financial planning isn’t only about cash flow. It’s a “big picture” plan that also accounts for factors that affect net worth, such as insurance coverage and tax obligations. If your home or a vacation property isn’t adequately insured, a fire could ruin an otherwise well-crafted financial plan. And overpaying federal or state income tax will leave you with less capital to invest.
For this reason, estate planning goes hand in hand with financial planning — particularly for business owners. It’s never too early to start thinking about what you want to leave your heirs, including how you’ll transfer your business to the next generation.

A crystal ball
Keep in mind that financial planning is a process. You’ll need to review and update your plan at least annually to reflect new life events and changes in your income. A financial advisor can help you design your plan and conduct periodic reviews to track your progress and make necessary adjustments.

Need more information?  Contact Jim Komos at jkomos@cp-advisors.com or 216.831.7171 for more information on any of our topics or to get expert financial assistance.

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March Tax Tips

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A Good Tax Season for Ohio’s Small Business Owners

Ohio Tax Cuts

By David M. Reape, CPA, Ciuni & Panichi, Inc. Principal

David Reape HighRes-08Small business owners will reap the benefits of several Ohio tax cuts on their 2015 individual tax returns. The 2015 personal income tax rates were decreased 6.3 percent across the board as part of the budget bill passed this past summer. The top tax bracket, for example, decreased from 5.333 percent to 4.997 percent. This is especially good news, because most small business owners pay business income taxes on their individual tax return. These cuts free dollars that can help small business owners implement growth strategies such as increased marketing or staffing. Overall it makes the annual ritual of filing your taxes a little easier.

Again for 2015, 75 percent of the first $250,000 of business income will be excluded from your Ohio taxable income calculation. Business income includes income from pass through entities such as S-corporations, partnerships, and LLCs along with income reported on Schedules C, E, or F of your Federal 1040s. An important change for this year is in addition to the business income deduction, the remaining taxable business income will now be subject to a maximum tax rate of three percent! This rate change has the potential to save an Ohio business owner about $6,000 of tax on $500,000 of business income before the business deduction. Looking forward, it even gets better for 2016 and beyond. Next year, the deduction percentage for the first $250,000 of income increases from 75 to 100 percent.

Another new twist for this year is what business income is subject to the adjustment. Prior to 2015, only Ohio sourced income was eligible for the small business deduction. Beginning in 2015, business income from any state is eligible for the deduction. This means potential tax savings for anyone filing an Ohio income tax return containing income from any business regardless of its source. Also the business income calculation has been simplified this year. Prior to 2015, we had to adjust business income for certain federal adjustments such as one half of the self-employment tax, the self-insured health insurance deduction, and certain retirement contributions. Those federal adjustments are no longer considered when determining business income for purposes of the business deduction and new three percent tax rate. This results in more of the business owner’s income being eligible to the new three percent tax rate.

These are good changes for Ohio’s small businesses. As always, please feel free to reach out to a tax representative at Ciuni & Panichi, Inc. for any questions regarding your tax situation.

Ciuni & Panichi, Inc.’s Tax Compliance and Consulting members have advised hundreds of business owners on their tax issues and more. To learn how you could benefit from their advice contact David Reape, CPA, Principal, at 216-765-6944 or dreape@cp-advisors.com.

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March Tax Tips

Make a 2015 contribution to an IRA before time runs out

iraTax-advantaged retirement plans allow your money to grow tax-deferred — or, in the case of Roth accounts, tax-free. But annual contributions are limited by tax law, and any unused limit can’t be carried forward to make larger contributions in future years. So it’s a good idea to use up as much of your annual limits as possible. Have you maxed out your 2015 limits?

April 18 Deadline
While it’s too late to add to your 2015 401(k) contributions, there’s still time to make 2015 IRA contributions. The deadline is April 18, 2016. The limit for total contributions to all IRAs generally is $5,500 ($6,500 if you were age 50 or older on December 31, 2015).

A traditional IRA contribution also might provide some savings on your 2015 tax bill. If you and your spouse don’t participate in an employer-sponsored plan such as a 401(k) — or you do but your income doesn’t exceed certain limits — your traditional IRA contribution is fully deductible on your 2015 tax return.

Evaluate your options
If you don’t qualify for a deductible traditional IRA contribution, see if you qualify to make a Roth IRA contribution. If you exceed the applicable income-based limits, a nondeductible traditional IRA contribution may even make sense. Neither of these options will reduce your 2015 tax liability, but they still provide valuable opportunities for tax-deferred or tax-free growth.
We can help you determine which type of contributions you’re eligible for and what makes sense for you.

How to max out education-related tax breaks

college moneyIf there was a college student in your family last year, you may be eligible for some valuable tax breaks on your 2015 return. To max out your education-related breaks, you need to see which ones you’re eligible for and then claim the one(s) that will provide the greatest benefit. In most cases you can take only one break per student, and, for some breaks, only one per tax return.

Credits vs. deductions
Tax credits can be especially valuable because they reduce taxes dollar-for-dollar; deductions reduce only the amount of income that’s taxed. A couple of credits are available for higher education expenses:

  1. The American Opportunity credit — up to $2,500 per year per student for qualifying expenses for the first four years of postsecondary education.
  2. The Lifetime Learning credit — up to $2,000 per tax return for postsecondary education expenses, even beyond the first four years.

But income-based phase-outs apply to these credits
If you’re eligible for the American Opportunity credit, it will likely provide the most tax savings. If you’re not, the Lifetime Learning credit isn’t necessarily the best alternative.

Despite the dollar-for-dollar tax savings credits offer, you might be better off deducting up to $4,000 of qualified higher education tuition and fees. Because it’s an above-the-line deduction, it reduces your adjusted gross income, which could provide additional tax benefits. But income-based limits also apply to the tuition and fees deduction.

How much can your family save?
Keep in mind that, if you don’t qualify for breaks for your child’s higher education expenses because your income is too high, your child might. Many additional rules and limits apply to the credits and deduction, however.

To learn which breaks your family might be eligible for on your 2015 tax returns — and which will provide the greatest tax savings — please contact Jim Komos at jkomos@cp-advisors.com or 216.831.7171 for more information on any of our topics or to get expert tax assistance.

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February Tax Tips

January Tax Tips
© 2016