Are Your Earnings Subject to Self-Employment Tax?

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Self-employed persons are subject to a special tax to fund social security benefits under the Self- Employment Contributions Act. All self-employed persons, regardless of age, must file Schedule SE to compute the tax. For sole proprietors, SE tax is assessed on net earnings from self-employment, which is defined as gross income less allowable deductions from a taxpayer’s trade or business.

Trade or Business Requirement. To be engaged in a trade or business generally requires your continuous and regular involvement in the activity and the intent of making a profit. Thus, earned income received from an isolated or sporadic activity that differs from your regular trade or business is generally not subject to SE tax because it does not rise to the level of a trade or business. If your side work is in the same line as your regular job, you probably have income subject to SE tax. Side work does not necessarily need to be in the same line of work to constitute a trade or business. All facts and circumstances should be carefully reviewed considering the potential risks of taking a position contrary to that of the IRS.

Small Business Financing

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Financing can be one of the biggest obstacles small business owners face. Proper financing can help your business survive, grow or expand and increase profits. The alternative can be as severe as business failure.

A small business' primary use of a commercial finance company is to borrow money for the purchase of inventory and equipment, and to meet seasonal cash flow needs. A trustworthy financier can be an asset to any small business. While right now may be the perfect time to apply for a loan to purchase more equipment, finding a good lender may prove to be challenging. When shopping for a commercial finance company, look for the following qualities:

  • Doesn’t sell or broker loans to third parties. You shouldn’t have to worry whether the people you deal with today will be there tomorrow.
  • Provides prompt service. A good lender is available to address your issues, problems and concerns, and then respond promptly to your needs.
  • Understands the unique needs of small business. The lender should work with you throughout the business cycle by offering such options as seasonal financing.
  • Does not require outside collateral. Instead of pledging your home or other assets to secure financing, look for a lender that will apply judgment, not rules, in special circumstances.
  • Has competitive rates. Compare rates but understand that the lowest rate will not guarantee you the best service. Weigh the two carefully before making your decision.

Not sure if you need financing or if you found a good lender? Contact us for advice!

Physical Presence No Longer Required!

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In the recent U.S. Supreme Court case South Dakota v. Wayfair, the court determined that the mere “economic presence” in a state can be used to establish nexus for sales tax, even when the vendor has no physical presence. This decision overturned the long-standing law under the famous case of Quill Corp. v. North Dakota stating that “the physical presence rule of Quill is unsound and incorrect.” Economic presence can be met by surpassing an established threshold such as a certain number of transactions or an amount of sales in that state. Each state will have the ability to set their own thresholds and it may take some states longer to respond to this court ruling than others. Contact us to determine if your business will be impacted.

Postcard-Size Form 1040

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The Internal Revenue Service and the Treasury Department unveiled a draft version of the postcard-size Form 1040 that was promised from last year’s tax reform effort. For the 2019 tax season, the shorter Form 1040 will replace current Forms 1040, 1040A and 1040EZ so that all 150 million taxpayers can use the same form. The new form uses a “building block” approach, in which the tax return is reduced to a simple form and supplemented with additional schedules if needed. Taxpayers with straightforward tax situations will only need to file this new 1040 with no additional schedules.

Padgett was represented by Roger Harris, COO, on a call with the IRS Commissioner as he explained the new form and solicited feedback. The IRS plans to continue working with the professional tax community to finalize the streamlined Form 1040 over the summer. Stay tuned as we update you on this new tax filing opportunity!

Face-To-Face Networking

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When it comes to any small business, networking is the key to success. With the explosion of online marketing and social media, business owners can easily replace face-to-face networking with more time online. Although online is still important for business growth, person-to-person networking will build solid relationships that every entrepreneur can benefit from.

Many business owners avoid networking because they’re tired of hearing the same sales pitch, they don’t see the benefit, or they don’t know where to find networking events. If you find yourself falling into one of the above categories, there is no need to worry. Below are some suggestions for types of networking groups and why you should consider participating.

Organizations & events for networking. Small Business owners can benefit from either attending person-to-person networking events or joining a networking group. Below is a list of different places that you can network and promote your brand:

  • Expos, exhibitions & trade shows. These events are a good place to begin. You can go as an attendee or by purchasing a booth space at the event.
  • Local chamber of commerce. The goal of a chamber of commerce is to advance the interests of area businesses, so these meetings are a great place to meet other local business owners and find resources to help your business grow.
  • Networking group. Here, you can conduct person-to-person networking and build your contacts. These groups consist of different business owners or people of different trades and services. Some network groups may have a fee to join.
  • Job & career fairs. Here, you can find people that could potentially work for you in the near future or take on freelance work.
  • Community gatherings. A great way to network, community gatherings help you build relationships with other business owners and people in your community.

Networking is more than face-to-face sales. Many people avoid networking groups because they see it as one big sales pitch. Although this may hold some truth, networking events are far more than just sales and handshakes. You can build bonds with other businesses, potential employees, possible clients and people in the community. Face-to-face networking will expand your business in more ways than just making more sales.

Where to find face-to-face networking events. One place where you can start to look is in your local community paper for advertised events. Many business newspapers also have a calendar or list of events for the month. Social media sites are another outlet that can be utilized. Facebook will let you check out events that your friends or people you may know are attending or hosting. There are also popular event websites such that many business owners find useful.

Simplifying the Tax Code Causes More Complexities!

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While the Tax Cuts and Jobs Act (TCJA) sought to simplify the tax code, it also brought new complexity. For example, a new deduction provides substantial tax savings to people with “qualified business income” (QBI) from their pass-through business but calculating the deduction and limitations is complicated.

Generally, the QBI deduction is 20% of qualified income from a partnership, S corporation, or sole proprietorship. QBI, in a nutshell, is the net amount of income, gain, deduction, and loss with respect to your trade or business. Although we have a framework for the QBI calculation, we still await IRS guidance and clarification. This deduction will benefit many business owners, while phase-in and phase-out rules will reduce or eliminate the deduction for some taxpayers.

Complexities surrounding the new law can be daunting. Give us a call, and we can help you determine the impact that this deduction or other parts of the TCJA may have on your tax situation

3rd Quarter 2018 Due Dates

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July 31:

  • Employers. File Form 941 for 2nd quarter 2018. File Form 5500 or 5500-EZ for calendar-year 2017 if you maintain an employee benefit plan, or file Form 5558 to request an extension.

September 17:

  • Individuals. 3rd installment of 2018 estimated tax due.
  • Calendar-year C Corporations. 3rd installment of 2018 estimated tax due.
  • S Corporations. Calendar-year 2017 return due (Form 1120S) if on extension.
  • Partnerships. Calendar-year 2017 return due (Form 1065) if on extension.

Tax Deductible Vacations?

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Although technology has revolutionized the way we do business, there are still situations where it’s necessary for a face-to-face meeting with staff, management, or customers. With a little planning for the current vacation season, you can mix some leisure time in with your business travel and still get a tax deduction.

Deductible Travel Expenses — If your trip within the U.S. was primarily for business and, while at your business destination, you extended your stay for a vacation, made a side trip, or had other personal activities, you can deduct only your business-related travel expenses.

It’s important to keep records such as receipts, canceled checks, or bills, to support your expenses and be able to prove the number of days spent on business. The following is a list of expenses you may be able deduct depending on the facts and circumstances:

  • 50% of the cost of meals
  • Travel by air, rail, and bus fares
  • Baggage charges
  • Hotel expenses
  • Expenses of operating and maintaining a car
  • Local transportation costs for taxi fares or other transportation to and from the airport
  • Cleaning and laundry expenses
  • Computer rental fees
  • Telephone or fax expenses
  • Tips on eligible expenses

However, these same types of expenses aren’t deductible for non-business days. Personal entertainment costs on the trip, such as a sightseeing tour, aren’t deductible, regardless of the day on which they fall. Cost deductions for a spouse accompanying you on a business trip are allowed only if your spouse is a bona fide employee. Merely having your spouse-employee perform some incidental business service, such as typing up notes from a meeting, isn’t enough to establish a business purpose. Your spouse’s presence must be necessary to your business pursuits – not just helpful.

Travel Outside the U.S. — Travel outside the U.S. has its own set of unique rules and record keeping requirements. When documenting your business trips outside the U.S., your trip will fall into one of three categories:

  • Travel Entirely for Business,
  • Travel Primarily for Business, and
  • Travel Primarily for Vacation.

The factors which determine the category your trip falls into are related to the number of business days versus total days away. If your trip is less than one week, don’t count the day you leave the U.S. but count the day you return to the U.S. On the other hand, if your trip is more than one week, count both the day you leave the U.S. and the day you return. If your trip wasn’t entirely for business, you must allocate travel expenses on a day-to-day basis between days you did and didn’t conduct business.

Employing Youth

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Each June, millions of youth begin their search for a summer job. Before hiring any summertime help, it’s a good idea to be aware of the Federal and State laws governing youth in the workplace. The Fair Labor Standards Act (FLSA) youth employment provisions are designed to protect young workers by limiting the types of jobs and the number of hours they may work, based on the age of the minor. The following provisions apply to nonagricultural occupations:

18 Years of Age. Once a youth reaches 18, the Federal child labor provisions no longer apply to them – they can work any job for any number of hours.

16 & 17 Years of Age. Under the FLSA 16- and 17-year olds may work on any day for any number of hours. However, individual states may limit the hours or the times of day that anyone under the age of 18 may work. Also, all youth under the age of 18 are prohibited from working any non-farm jobs deemed hazardous.

14 & 15 Years of Age. 14 and 15-year-olds may work:

  • Non-school hours;
  • 3 hours on a school day;
  • 18 hours in a school week;
  • 8 hours on non-school day;
  • 40 hours in a non-school week; and
  • Between 7 a.m to 7 p.m. (except June 1-Labor Day when hours are extended to 9 p.m.)

If you are about to hire a youth and need assistance building a summertime schedule that follows the youth employment provisions, contact us.

Barter Transactions

In today’s economy, small-business owners sometimes look to the oldest form of commerce — the exchange of goods and services or bartering. The Internal Revenue Service wants to remind small-business owners that bartering transactions generally have associated tax reporting, accounting and record-keeping responsibilities.

Bartering is the trading of one product or service for another. Usually there is no swap of cash. Barter may take place on an informal direct one-on-one basis between businesses and individuals, suppliers, customers, distributors, partners, contract labor, and employees, or it can take place on a third-party basis through a modern Internet barter exchange.

Bartering is an exchange of one taxpayer's property or services for another taxpayer's property or services. The fair market value of property or services received through barter is taxable income. Be sure to use a reasonable fair market value for the property or services received in a barter transaction to include in your income. The transaction is not a wash if you report the fair market value of the property received that is greater than your cost or basis in the property given up.

For example: if bowling equipment given up has a cost or other basis of $500 to you there is a $500 gross profit on the transaction if the fair market value of the fishing equipment received in the barter exchange is $1,000. Simply put, you should identify the transaction in your records and report the income and any related business deductions and cost of goods sold on your tax return.

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