How to Navigate the World of Crowdfunding

Crowdfunding

Crowdfunding is a phenomenon in which entrepreneurs raise money to fund their projects through the Internet, typically by obtaining small donations from a large number of people. An estimated $34 billion was collected using crowdfunding campaigns globally in 2015, and it’s expected to overtake the total amount of venture capital funding within the next several years.

Why crowdfunding?

In the past, an entrepreneur would pitch a creative idea to investors who put up the money. These investors could be a bank or venture capitalist providing a loan. Ultimately, it was a limited pool of people willing to take on financial risk to support an entrepreneur’s idea.

Crowdfunding goes directly to consumers over the Internet, asking them to donate a small amount of money to support a business or a creative project. The financial risk to each person is low, so the barrier to find funding for a project is also low.

Popular crowdfunding sites for business ideas and creative projects include Kickstarter, Indiegogo and GoFundMe.

The good, the odd and the silly

One of the additional benefits of crowdfunding is that a creator can measure the strength of their idea merely based on the number of people who agree to contribute.

One of the most successful crowdfunding projects so far is by Chris Roberts, creator of the popular 1990 video game Wing Commander. He took to Kickstarter to promote his plans to create an ambitious successor to his first game, called Star Citizen. To date he’s raised more than $175 million. The game is still under development.

Then there’s the Coolest Cooler, which raised $13 million to make a multifunction cooler with built-in water-resistant speakers, an ice-crushing blender, LED lights and a USB charging port. More than 60,000 people thought this was a good idea.

Or consider Zach Brown, who raised $55,000 to make a single bowl of potato salad (he ended up throwing a huge potato salad party for his backers).

Tips to try it yourself

If you are going to try crowdfunding out yourself, here are a few suggestions from experts:

Two Do your research. See if your idea has been pitched before, and how well it did. This will give you an idea of what your competition is, and what worked (or didn’t) for others.
Three Plan your campaign. Plan everything from the initial pitch, to the progress updates, to the rewards and equity stakes you offer people in exchange for their investment.
Three Make frequent video updates. The most successful projects use compelling videos of the creators introducing their ideas, as well as updates showing progress underway.
Three Set your funding goal as low as possible. The way most sites work is that if you reach your minimum funding goal, you can keep the money, but if you fall even a dollar short, you get none. Set your goal low to successfully fund your project, but not so low that you can’t complete it. Angry backers asking for their money back is not a pleasant outcome.
As always, should you have any questions or concerns regarding your situation please feel free to call.

Your New Life as a Pass-Through Entity Owner

Pass-Through Entity Owner

An initial look at the new business deduction

If you are a small business owner, your planning could get a lot trickier after the passage of the Tax Cuts and Jobs Act (TCJA). That’s because most small businesses have legal structures that are treated as pass-through entities for tax purposes, meaning they “pass through” their income to be taxed on owners’ Form 1040 individual tax returns. These entities include S corporations, partnerships and sole proprietorships.

On one hand, these kinds of businesses will benefit from the TCJA’s 20 percent reduction to the taxation of business income. On the other, the rules used to determine how much of that reduction each business gets are complex. Here are some tips to help find out where your business falls in the new structure:

Check Know your businesses’ QBI
QBI stands for qualified business income, which is generally your business net income other than income in the way of wage compensation. QBI is the basic figure you need to determine how much of the 20 percent reduction you get. It excludes business losses, as well as factoring in amortization and capitalized expenditures. QBI is determined separately for each business activity, not per taxpayer.The first simple threshold rule is:If your taxable income is less than $157,500 as an individual filer, or $315,000 as a married couple filing jointly, you can take the 20 percent deduction from your QBI.If your taxable income is higher than those levels, several other factors come into play. Buckle up and hold on, here is where it gets complex:
Check Know whether your profession matters

Several “specified service professions” are treated differently under the new rules. The list includes health, law, consulting, athletics, financial services, brokerage services, accounting firms or “any trade or business where the principal asset is the reputation or skill of one or more of its employees or owners.”

If your business is in one of these professions, the 20 percent deduction starts to phase out to zero once your taxable income passes $157,500 as an individual filer or $315,000 as a married joint filer. The phaseout range before the reduction reaches zero is $50,000 for individual filers and $100,000 for married filers.

The phaseout range also determines how much of the next factor matters:

Check Know whether wage and capital limits matter

Once you go above the threshold, special wage and capital limits start to reduce your deduction.

The formula for calculating the wage and capital limits is based on the greater of 50 percent of the W-2 wages paid by your business, OR 25 percent of the W-2 wages, plus 2.5 percent of the unadjusted basis of all qualified property acquired by your business over the year.

These wage and capital limits are phased in over the threshold and apply in full after passing the $50,000 range for individual filers or $100,000 for married filers.

Bottom line: Get help

As you can see, the 20 percent deduction can be a great benefit, but taking it can get complex very quickly. If you are a small business owner, don’t try to do it yourself. The new rules apply for the 2018 tax year, so after you’ve wrapped up 2017 taxes under the old rules, reach out for a consultation to determine how to position your business under the new laws.

In the meantime, please be patient. The IRS has yet to publish guidance on the new rules.

New Tax Legislation Requires Planning

Seven Tax Reform Areas

Though many taxpayers appreciate the income tax cuts in the Tax Cuts and Jobs Act (TCJA) passed late last year, others are skeptical that it will simplify their tax planning. With every simplification, there are many more tax issues that still require planning to realize extra tax benefits. Here are seven of them:

Point 2 Planning for all the moving parts
In many ways, the TCJA gives with one hand and takes away with the other. The “giving hand” provides a lower income tax rate structure and a higher standard deduction, while the “taking hand” gets rid of personal exemptions, suspends many itemized deductions and limits deductions that remain. There are many variables that determine whether you come out ahead or behind and a tax planning session can help you figure it all out.
Point 2 Getting creative and flexible about itemizing
Many itemized deductions remain the same, others were eliminated completely and some have new limits. For example, while charitable contributions are still a qualified deduction, there is now a $10,000 combined cap on state, local and property tax deductions. The new constraints mean considering creative solutions to maximize these deductions. One idea is to make better use of the donation of appreciated stock as part of your charitable giving.
Point 3 Dealing with new complexity in small business ownership
Small business owners and sole proprietors will have to do a complicated calculation to see how much of the 20 percent reduction to pass-through qualified business income they can take. It depends on your profession and your expenditures on capital and wages. This calculation can get complicated very quickly.
Point 4 Understanding the newly changed “marriage penalty”
The disadvantage for married couples within the tax code is still very much in place, but it is changing. For instance, the marriage penalty that had given unfavorable income tax rates to married joint filers when compared to single individuals goes away in the TCJA for most income levels. But it rears its head again in the $10,000 combined state, local and property tax limitation, which does not double for married joint filers. This is something you’ll have to plan around.
Point 5 Getting credit for your kids
There are many new tax benefits for parents in the TCJA. The child tax credit doubles to $2,000 and the phaseout threshold jumps to $400,000 from $110,000 previously for joint filers, making it available to more taxpayers. Dependents ineligible for the child tax credit can qualify for a new $500 per-person family tax credit. On top of that, distributions from 529 education savings plans can now be used to pay private school tuition for K-12 students.
Point 6 Adjusting to disappearing tax breaks
If your tax planning was built on any of the following expiring tax provisions, you’ll have to change your plan: personal exemptions; miscellaneous itemized deductions; home equity interest; alimony deductions (expiring in 2019); the additional child tax credit; theft and casualty losses; and the domestic production activity deduction (DPAD).
Point 7 Facing the old complexities
Many areas of the tax code remain largely the same and contain both potential pitfalls and opportunities to find tax savings: Managing capital gains and tax-loss harvesting; charitable activity deductions; and a tax-advantaged retirement strategy are just a few areas where you can unlock extra value with smart planning.

The big changes to tax reform this year may be disconcerting at first, but in change there is opportunity. After the dust settles on the 2017 tax season, get ready to take a detailed look at what 2018 tax reform means for you.

 

 

April Ambrozy, Owner of @ambrozytax Twitter is live on All Business Media!

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Credit Card Transactions Could Pose Audit Risk

Credit Card Transactions

What small businesses need to know

Small business owners beware: the IRS may more closely scrutinize reporting of credit card transactions after it was criticized for lax enforcement.

The IRS’ overseer, the Treasury Inspector General for Tax Administration (TIGTA), recently said the IRS had been missing opportunities to audit tax returns that had large discrepancies between income and the card payments reported on Forms 1099-K.

This means small businesses that accept credit, debit or gift card payments can expect to draw the attention of IRS auditors if there are material differences between what is reported on their tax returns and what is on their 1099-Ks.

Tax gap concern driving the scrutiny

TIGTA has estimated an underpayment of more than $450 billion in income taxes every year. In an effort to close this “tax gap,” it recommended the IRS focus on some of the larger or more obvious sources of underpayment.

One area TIGTA identified was on Forms 1099-K, where more than 20,000 taxpayers who received them had discrepancies of more than $10,000 on their returns. Calculating from this small sample size, there was at least a $200 million underpayment.

Who is impacted

If you have a business that accepts payment cards like debit cards or credit cards, you will probably receive a Form 1099-K from your payment processor. The form is also required for anyone who has $20,000 in card payments and 200 transactions or more per year. Examples of those who would receive Forms 1099-K include users of PayPal, sellers on Ebay and Etsy, cab drivers and any small business that accepts card transactions as a form of payment.

Here’s how you can prepare

Receiving a Form 1099-K and reporting it in such a way that the IRS is satisfied can be complicated. You could easily double-report your revenue from 1099-Ks out of an excess of caution. Or, you may not be disclosing your correct reporting of card income in a way that IRS audit programs are able to identify. It’s often best to get professional guidance to ensure your return does not stick out when the IRS tries to comply with the TIGTA request for more oversight.

 

Dos and Don’ts of Business Expensing

Home office deductions

Knowing whether you can or can’t expense a purchase for business purposes can be complicated. However, there are a few hard-and-fast rules to help you.

According to the IRS, business expenses must be ordinary and necessary to be deductible. That means they are common and accepted in your business, as well as helpful and appropriate. You’ll need to maintain records (such as statements and ledgers) and supporting documents (receipts and invoices) to substantiate your deductions. Certain expenses are subject to extra requirements, as described below.

Travel expenses pertain to business trips and can include transportation to and from airports, your hotel and business meeting places. They also generally include lodging, meals, tips and other related incidentals.

Do: + Maintain trip logs describing your business expenses and the purpose of each. If your trip is mostly for business but includes personal components, separate them in your log. These nondeductible personal items could include extending your stay for a vacation or taking personal side trips.
+ Deduct travel-related meal costs, but only up to the 50 percent limit allowed by the IRS.
Don’t: Rely on estimates to determine the business vs. personal components of your expenses.
Deduct any of your travel expenses if your trip is primarily for personal purposes.
Deduct any of your meal costs if they could be considered unreasonably extravagant.

Entertainment expenses need to be either directly related to or associated with the conduct of your business. That means that business is the main purpose of the activities and it’s highly likely you’ll get income or future business benefits. Expenses from entertainment that aren’t considered directly related may still be deductible if they are associated with your business and happen right before or after an important business discussion.

Do: + Keep records of entertainment expenses, including who was present and clear descriptions of the nature, dates and times of the pertinent business discussions.
+ Deduct up to 50 percent of entertainment expenses, as allowed by the IRS.
Don’t: Claim the costs of pleasure boat outings or entertainment facilities (e.g., hunting lodges) that are not related to business activity.

Business use of your personal car is calculated according to your actual business-related expenses, or by multiplying your business mileage by the prescribed IRS rate (53.5 cents per mile in 2017).

Do: + Log odometer readings for each business trip and record your business purpose.
+ Claim actual business deductions by applying the ratio of your business-miles-to-total mileage.
Don’t: Claim mileage or expenses pertaining to commuting to and from work.

If you have any questions about how to handle your business expenses, reach out for further guidance.

Contractor or Employee?

Company benefits

Knowing the difference is important

Is a worker an independent contractor or an employee? This seemingly simple question is often the contentious subject of IRS audits. As an employer, getting this wrong could cost you plenty in the way of Social Security, Medicare, and other employment-related taxes. Here is what you need to know.

 The basics…

 

As the worker. If you are a contractor and not considered an employee you must:

Bullet Point Employee Pay self-employment taxes (Social Security and Medicare-related taxes)
Bullet Point Employee Make estimated federal and state tax payments.
Bullet Point Employee Handle your own benefits, insurance and bookkeeping.

As the employer. You must ensure your employee versus independent contractor determination is correct. Getting this wrong in the eyes of the IRS can lead to:

Bullet Point Employer Payment and penalties related to Social Security and Medicare taxes.
Bullet Point Employer Payment of possible overtime including penalties for a contractor reclassified as an employee.
Bullet Point Employer Legal obligation to pay for benefits.

Things to consider

When the IRS recharacterizes an independent contractor as an employee they look at the business relationship between the employer and the worker. The IRS focuses on the degree of control exercised by the employer over the work done and they assess the worker’s independence. Here are some guidelines:

Bullet Point Consider The more the employer has the right to control the work (when, how and where the work is done), the more likely the worker is an employee.
Bullet Point Consider The more the financial relationship is controlled by the employer the more likely the relationship will be seen as an employee and not an independent contractor. To clarify this, an independent contractor should have a contract, have multiple customers, invoice the company for work done, and handle financial matters in a professional manner.
Bullet Point Consider The more businesslike the arrangement the more likely you have an independent contractor relationship.

While there are no hard-set rules, the more reasonable your basis for classification and the more consistently it is applied, the more likely an independent contractor classification will not be challenged.

Simplified Home Office Deduction

Time ClockThere’s a simple “safe harbor” home office deduction.

You take the square footage of your office, up to 300 square feet, and multiply it by $5. This gives you a potential $1,500 deduction under the simplified option. However, your savings could be much greater than $1,500, so it’s often worth getting help to calculate your full deduction using the standard rules.

Five Home Office Deduction Mistakes

Home office deductions

If you operate a business out of your home, you may be able to deduct a wide variety of expenses. These may include part of your rent or mortgage costs, insurance, utilities, repairs, maintenance, and cleaning costs related to the space you use.

It is a tricky area of the tax code that’s full of pitfalls for the unwary. Here are some of the top mistakes people make.

Bullet Point Not taking it. This is probably the biggest mistake those with home offices make. Some believe the deduction is too complicated, while others believe taking a home office deduction increases your chance of being audited. While the rules can be complicated, there are now simple home office deduction methods available to every business.
Bullet Point Not exclusive or regular. Your home office must be used exclusively and regularly for your business.
Exclusively: If you use a spare bedroom as a business office, it can’t double as a guest room, a playroom for the kids, or a place to store your hockey gear. Any kind of non-business use can invalidate your deduction.
Regularly: Your office should be the primary place you conduct your regular business activities. That doesn’t mean that you have to use it every day nor does it stop you from doing work outside the office, but it should be the primary place for business activities such as record keeping, billing, making appointments, ordering equipment, or storing supplies.
Bullet Point Mixing use with other work. If you are an employee for someone else in addition to running your own business, be careful in using your home office to do work for your employer. Generally, IRS rules state you can use a home office deduction as an employee only if your employer doesn’t provide you with a local office.Unfortunately, this means if you run a side business out of your home office, you cannot also bring work home from your employer and do it in your home office. That could invalidate your use of the home office deduction.
Bullet Point The recapture problem. If you have been using your home office deduction, including depreciating part of your home, you could be in for a future tax surprise. When you later sell your home you will need to account for this depreciation. The depreciation recapture rules create a possible tax liability for many unsuspecting home office users.
Bullet Point Not Getting Help. There are special rules that apply to your use of the home office deduction if:
You are an employee of someone else.
You are running a daycare or assisted living facility out of your home.
You have a business renting out your primary residence or a vacation home.

 

The home office deduction can be tricky, so ask for help, especially if you fall under one of these cases.

Common Mistakes When Buying or Selling a Business

It is said with every major purchase there’s some kind of remorse either on the part of the buyer or the seller. This can be especially true when buying or selling a business. No matter which side of the negotiating table you sit on, there are some critical areas that could leave you with feelings of regret. Avoid these mistakes and you’ll feel better about your deals after they’re done.

SELLER MISTAKES BUYER MISTAKES
Not researching the value of similar businesses within the industry
Overestimating the value of the company and losing a well-qualified buyer
Insisting on cash-only terms
Selling price
Overpaying based on emotion
Stretching personal resources too thin
Maintaining sloppy financial records that potential buyers cannot trust
Accounting records
Relying on company financials not prepared by a third-party accounting professional
Not requesting payroll returns and other tax filings in the financial review
Agreeing to seller-financing without proper vetting of the buyer’s creditworthiness
Financing
Settling for a high-interest loan, or one with too short a maturity
Selling the assets of the business when it would have been more tax-efficient to sell the corporate shares instead
Assets
Purchasing less than all of the assets used in the business, overlooking items such as licenses, patents or important contractual arrangements
Making a stock-purchase transaction without understanding the benefits of an asset purchase
Neglecting to check the background of the buyer and assessing their ability to run a business
Failing to verify the buyer’s liquid assets
Due diligence
Not asking why the business is for sale
Conducting too little research into the competition or overall industry trends
Not searching for the existence of company loans and other liabilities
Signing a non-compete agreement that is too restrictive in scope or timeframe
Non-compete
Failing to require a non-compete clause from the seller, especially in a service-industry business
Leaving too much of the sale price dependent on the ongoing success of the company
Transition
Having unclear expectations for seller participation in the business after the sale
Not positioning the business to sell well in advance of the first offer
Requesting professional help too late in the sales process
Expert help
Not assembling a team of legal, tax, and insurance experts before agreeing to terms

Buying or selling a business is likely one of the most important transactions an entrepreneur faces. It is always best to seek professional help.