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.

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.

 

Year-End Tax Checklist

Year-End Tax Checklist

Now is a good time to review your year-end tax situation while there is still time to act. Here’s a handy checklist to help you do that. There are details on “must-dos” to get the most out of your charitable donations. As the year draws to a close, there are several tax-saving ideas you should consider. Use this checklist to make sure you don’t miss an opportunity before the year is out.

Bullet Point Retirement distributions and contributions. Make final contributions to your qualified retirement plan, and take any required minimum distributions from your retirement accounts. The penalty for not taking minimum distributions can be high.
Bullet Point Investment management. Rebalance your investment portfolio, and take any final investment gains and losses. Capital losses can be used to net against your capital gains. You can also take up to $3,000 of capital losses in excess of capital gains each year and use it to lower your taxable ordinary income.
Bullet Point Last-minute charitable giving. Make a late-year charitable donation. Even better, make the donation with appreciated stock you’ve owned more than a year. You often can make a larger donation and get a larger deduction without paying capital gains taxes.
Bullet Point Noncash donation opportunity. Gather up noncash items for donation, document the items, and give those in good condition to your favorite charity. Make sure you get a receipt from the charity, and take a photo of the items donated.
Bullet Point Gifts to dependents and others. You may provide gifts to an individual of up to $14,000 per year in total. Remember that all gifts given (birthdays, holidays, etc.) count toward the annual total.
Bullet Point Organize records now. Start collecting and organizing your end-of-year tax records. Estimate your tax liability and make any required estimated tax payments.

 

 

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.

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.

Business or Hobby?

Credit Score Ingredients

When you incorrectly claim your favorite hobby as a business, it’s like waving a red flag that says “Audit Me!” to the IRS. However, there are tax benefits if you can correctly categorize your activity as a business.

Why does hobby versus business activity matter?

Chiefly, you’re allowed to reduce your taxable income by the amount of your qualified business expenses, even if your business activity results in a loss.

On the other hand, you cannot deduct losses from hobby activities. Hobby expenses are treated as miscellaneous itemized deductions and don’t reduce taxable income until they (and other miscellaneous expenses) surpass 2 percent of your adjusted gross income.

Here are some tips to determine whether you can define your activity as a business.

BUSINESS versus HOBBY
You have a reasonable expectation of making a profit. Profit Motive You may sell occasionally, but making money is not your main goal.
You invest significant personal time and effort. You depend on the resulting income. Effort and Income It’s something you do in your free time; you make the bulk of your money elsewhere.
Your expenses are ordinary and necessary to run your business. Reasonable Expenses Your expenses are driven by your personal preferences and not strictly necessary.
You have a track record in this industry, and/or a history of making profits. Background You don’t have professional training in the field and have rarely or never turned a profit.
You have multiple customers or professional clients. Customers You have few customers, mainly relatives and friends.
You keep professional records, including a separate checkbook and balance sheet; you have business cards, stationery and a branded business website. Professionalism You don’t keep strict professional records of your activities; you don’t have a formal business website or business cards.

The IRS will consider all these factors to make a broad determination whether you operate your activity in a businesslike manner. If you need help ensuring you meet these criteria, reach out to schedule an appointment.

 

Overtime Rules Go Into Overtime

Time Clock

The fate of a Labor Department rule extending mandatory overtime pay to workers by doubling the eligible salary cap is uncertain under the new presidential administration.

The rule introduced by the Labor Department under the direction of former President Barack Obama increases the salary cap for workers eligible to receive mandatory overtime to $47,476. It extends mandatory overtime, or time-and-a-half pay, to workers primarily in managerial or administrative roles in the retail, restaurant, and nonprofit industries.

Opponents of the rule won a court injunction blocking it in November 2016. The case may be abandoned altogether depending on the priorities set by President Donald Trump’s appointee to lead the Labor Department. Andrew Puzder, chief executive of fast food corporation CKE Restaurants Holdings Inc. (owner of Hardee’s and Carl’s Jr.) is undergoing Senate confirmation for the role. Until the case is resolved, the previous salary cap of $23,660 remains in place.

 

Save

Save

Create your cash flow snapshot

Identify your challenges. See if you have months where more cash is going out than is coming into your bank account. This is often when large bills are due. Try to balance these known high-expense months out over the year if at all possible. Common causes are:

Check The holidays
Check Property tax payments
Check Car and homeowners insurance
Check Annual income tax payments
Check Vacations
Bullet Item Build a reserve. If you know there are challenging months, project how much additional cash you will need and begin to save for this reserve in positive cash months.
Bullet Item Cut back on annuities. See what monthly expense drivers are in your life. Can any of them be reduced? Can you live with fewer cell phone add-ons? How about cutting costs in your cable bill? Is it time for an insurance review?
Bullet Item Shop your current services. Some of your larger bills may create an opportunity for savings. This is especially true with homeowners and car insurance.
Bullet Item Don’t confuse savings with cash flow. Think of your savings as the accumulation of positive cash flows from prior months. A high savings balance can often mask a monthly cash flow problem where more is going out than is coming in over a period of time.
Bullet Item Create savings “expense” to add to cash flow. Consider adding a “bill to yourself” in your cash outflows. This money saved is a simple technique to create positive cash flow each month to build an emergency reserve.