Child and Dependent Tax Credit for Married Filing Separately

There are several reasons why some married couples opt to file taxes as married filing separately. However, this tax filing status can prevent individuals from claiming certain types of tax credits and deductions they might otherwise be entitled to if they filed their taxes jointly. Here is some information to understand about this filing status and its impact on the child tax credit (CTC) and the child and dependent care tax credit (CDCTC) from the accounting professionals at TMD Accounting.

Why Would People Choose to File Taxes as Married Filing Separately?

When couples file tax returns as married filing separately, they can’t claim many credits to which they would otherwise be entitled. Before the passage of the Tax Cuts and Jobs Act (TCJA) in 2018, there was somewhat of a “penalty” for married couples who filed jointly because the standard deduction for joint filers was not twice that of single filers. However, the TCJA changed the tax brackets to make the standard deduction for joint filers double that of single filers, eliminating this so-called penalty.

Even though filing as married filing separately might make some people ineligible for certain tax credits, it might be advantageous for people in the following types of situations:

  • When a spouse has unpaid student loan or tax debt to avoid a refund being seized to pay for it
  • When one spouse believes the other is inflating deductions or otherwise being dishonest on their tax return and does not want to be liable by signing a joint return
  • When one spouse is applying for income-contingent student loan repayment plans
  • When one spouse’s income is substantially lower than the other spouse’s, and the lower-earning spouse does not want to be liable for the higher-earning spouse’s tax bill
  • When one spouse is unwilling or unable to sign a joint tax return
  • When the spouses are planning to separate or divorce
  • When the taxes owed on the separate returns equal the taxes owed on a joint return to avoid liability for each other’s tax bills

If you do have a good reason for choosing the filing status as married filing separately, here’s how that might impact your ability to claim the child tax credit and the child and dependent care tax credit.

Understanding the Child Tax Credit vs. the Child and Dependent Care Tax Credit

The child tax credit (CTC) is a tax credit parents can claim for each qualifying child they have up to age 17. This credit can be used for any type of expense and is provided in recognition of the fact that parents who have children have less disposable income and more expenses than others who make the same levels of income.

By contrast, the child and dependent care tax credit (CDCTC) is a tax credit a parent can claim to offset the cost of the child or dependent care so the parent can work. The CDCTC is available only to parents who have to pay for child care or adult dependent care so that they can work. On the other hand, the CTC is available to parents who have children younger than age 17 regardless of whether they have to pay for care to work.

Effect of Married Filing Separately Filing Status on the Child Tax Credit

The American Rescue Plan Act of 2021 temporarily expanded the child tax credit during that year, increasing the CTC of $2,000 for children younger than age 17 to $3,600 for children under age six and $3,000 for children ages six to 17. Eligible parents also could receive advanced payments of one-half of the child tax credit each month while receiving the remainder when they filed their 2021 income tax returns.

However, the enhanced CTC was allowed to expire at the end of 2021 and has not yet been renewed. While some people believe the expanded child tax credit might be renewed, it hasn’t been thus far. This means that the existing child tax credit of $2,000 for children ages 17 and younger is currently what might be available to tax filers when they file their 2022 returns.

People who file their tax returns as married filing separately can only claim a reduced child tax credit. The amount that someone with this filing status can claim is one-half of the available credit, and only one parent can claim it.

Effect of Married Filing Separately on the Child and Dependent Care Credit

In general, married couples can only claim the child and dependent care credit if they file joint returns. However, there are a couple of exceptions under which one spouse might be able to claim the credit even when their tax filing status is married filing separately.

According to the Internal Revenue Service (IRS), someone who is living apart from their spouse or who is legally separated might still be able to claim the child and dependent care credit. If you are legally separated from your spouse, the IRS does not consider you to be married and allows you to take the CDCTC if you file as head of household instead of married filing separately. To file as head of household, your child must primarily live with you, and you must pay at least 50% of the costs of supporting them during the year. You will also need to pay for care so that you can work.

If you are married and living apart from your spouse, you can claim the

CDCTC if the following criteria apply:

  • You file a separate tax return from your spouse
  • You maintain a separate household for you and the qualifying dependent for more than half of the year.
  • Your spouse does not live with you during the last six months of the tax year.
  • You pay more than 50% of the costs of maintaining your home.
  • You pay for child or dependent care during the year for the qualifying dependent so that you can work.

Get Help from TMD Accounting

Understanding the best filing status to choose for your situation and the potential impact on your available credits is important. To learn more about optimizing your taxes, contact TMD Accounting today at 1-856-228-2205.

Are GoFundMe Donations Tax Deductible?

Many people and organizations have turned to crowdfunding to raise money for various needs and causes. One of the most popular crowdfunding platforms available is GoFundMe. While many of the entities raising funds on GoFundMe are charitable, some people worry about whether donations they might make via the platform can be deducted from their taxes.

Whether or not donations made on GoFundMe can be deducted from your taxes depends on whether the donee is a qualified 501(c) organization. If the recipient of your donation is a qualified 501(c) organization, then you can claim your donation as a deduction on your tax return. If the recipient is not a 501(c) organization, your donation is considered personal and can’t be deducted. Here is some more information about crowdfunding donations and when they can be deducted from the tax professionals at TMD Accounting.

When Are GoFundMe Donations Tax Deductible?

Originally starting as CreateA Fund in 2008, GoFundMe changed its name in 2010 and is a crowdfunding platform that can be used to raise money for nearly anything. Donations made on the platform are considered to be personal unless they are given to a qualified 501(c) organization.

If you give money to a non-501(c) organization on the site such as an individual who is trying to raise money for any purpose, your donation will be considered to be a gift and not a tax-deductible charitable donation. Even if you make a gift for a charitable purpose, it won’t automatically qualify you for a deduction.

Another thing to watch for is how much money you donate to an individual on GoFundMe. Since these types of gifts are not considered to be charitable by the Internal Revenue Service (IRS), if you give more than the annual exclusion amount for gifts, you might have to report what you gave and file a Form 709. The recipient will not be taxed on the amount they received.

How GoFundMe Works

Individuals, groups, or organizations can all raise funds on the GoFundMe platform. The site distinguishes between types of fundraisers, including standard campaigns and certified charity campaigns. Many organizers of standard campaigns are people who are raising money for any number of reasons and who can deposit any money they raise into their bank accounts.

While many standard campaigns are for worthy causes, the gifts that are made are given to individuals instead of registered charities. Donations to them are generally not tax deductible.

By contrast, certified charity campaigns are established by registered 501(c)(3) organizations. The organizers don’t handle the funds. Instead, the money is sent directly to the charitable organization through the PayPal Giving Fund. This is a fund that was created by GoFundMe to help registered charities receive donations. When you donate GoFundMe to a registered charity, you will receive a receipt from the giving fund so that you can claim a deduction on your tax return.

When GoFundMe Donations Are Tax Deductible

There are two exceptions under which a donation on GoFundMe could be tax deductible. First, if you give money to a qualified 501(c) organization on the platform, your gift will be tax deductible. Second, GoFundMe has established a program called “GoFundMe Causes”. Through this program, qualified organizations are grouped by their causes. You can make a tax-deductible contribution to the cause you choose, and the donation will be sent directly to the group of verified charities grouped by that cause.

Understanding Gift Taxes

The annual gift tax exclusion for 2022 is $16,000. If you give more than this annual amount to non-501(c) organizations, you could be required to file a gift tax return. While there are exceptions for donations given for educational or medical expenses, the exceptions require the funds to be sent directly to the institutions instead of an intermediary. Funds given on GoFundMe rarely are sent directly to institutions through standard campaigns.

Deductions for Charitable Giving

When you give money to a nonprofit organization, your donation will normally be deductible. You can deduct up to half of your adjusted gross income for cash donations, but there are limits set at 20% or 30% that might apply. Giving money to registered 501(c) organizations on GoFundMe could be a way to reduce your tax burden, but you will need to make sure to save your receipt. To claim a deduction, you will need to itemize your deductions instead of taking the standard deduction using Schedule A. A charitable deduction might be eligible as long as it is given to one of the following:

  • Nonprofit hospitals and schools
  • Some veterans’ groups
  • Local, state, and federal governments
  • Religious organizations

Donations to the following types of organizations generally cannot be deducted:

  • Political action committees (PACs) or political parties
  • Foreign organizations or governments
  • Individuals
  • For-profit hospitals or schools
  • Labor unions
  • Sports or social clubs
  • Homeowners’ associations (HOAs)
  • Responsibilities of Donees

Gifts are generally not considered to be taxable income. However, organizers should keep records to avoid problems.

If a donee receives donations in exchange for services or goods, the IRS might consider the donations to be taxable business income. Be clear in your campaigns that donors will not receive anything of value in exchange for making donations.

If you raise more than $600, the third-party payment processor will send you and the IRS a Form 1099. While the money you raise should not be considered taxable, you will have the burden to show that it was not income. Report the funds you receive on your tax return and then show a reduction of the same amount while including an explanation.

Talk to TMD Accounting

If you are unsure about whether your donations might qualify for deductions, you should talk to the professionals at TMD Accounting. Call us today at 1-856-228-2205.

Everything You Need to Know About the Business Travel Tax Deduction

Self-employed people and small business owners are generally allowed to deduct business travel expenses when they are required to travel away from home for business purposes. However, you need to ensure that you understand the definition of home from the Internal Revenue Service (IRS) and what ordinary and necessary expenses are to ensure you deduct your business travel expenses accurately. Here is what to know about the business travel tax deduction from TMD Accounting.

What Are Ordinary and Necessary Expenses?

The first thing you should understand is how the IRS defines ordinary and necessary expenses. Ordinary expenses are those that are accepted and common within your industry. Necessary expenses are those that are appropriate and helpful for your company.

How the IRS Defines Home

Your business travel expenses can be claimed when you are away from your business home, which is not necessarily where you live. The city in which your business is located is your business’s tax home, which might not be the same place where your family lives.

For example, imagine that you live in Colorado Springs, Colorado and have a permanent business location in Denver. Just because you might stay during the workweek in hotels in Denver and eat out, you won’t be able to deduct those expenses from your taxes or the costs of your transportation when you drive back to Colorado Springs on the weekends. This is because Denver will be your business’s tax home, so you can’t take deductions for your ordinary and necessary expenses during your time there.

Deductible Transportation Expenses

If you have to travel for business by bus, train, or plane, you can deduct the cost of your ticket and baggage fees. If you have to pay for a last-minute ticket, you can claim the higher price as an expense. However, if you pay for the ticket using your frequent-flyer miles, you won’t be able to deduct it.

Transportation expenses can be deducted when you have to travel away from your business’s location for business reasons. For example, if you have to fly from Denver to Los Angeles for a work conference, you can deduct the cost of your airfare to and from Los Angeles. You can also deduct the cost of renting a car in LA while you are there. The IRS allows you to deduct the actual costs or the standard mileage rate. During the first half of 2022, the standard rate was 58.5 cents per mile. For the second half, the mileage standard rate was increased to 62.5 cents per mile. You can also deduct parking fees and tolls you might have to pay during your business trip.

Deductible Taxi Fares

While you are away on business, you can also deduct the fares you pay for taxis or shuttles. The following types of fares you pay can be deducted:

  • Fares paid to get to and from the airport, train station, and your hotel
  • Fares paid to and from your hotel and your work location
  • Fares paid to and from clients in the city

For car rentals, you can deduct the expense as long as you exclusively use the vehicle for business. if you also use it for personal reasons, only deduct the portion of the rental costs that you used for business. For example, if you are in LA and drive to the conference and then back and forth to a few client locations, you can deduct the mileage and rental car expenses for those trips. However, if you later decide to go out to dinner or a movie from your hotel, you can’t deduct the expenses involved with that.

Deductible Incidental Expenses

You can also deduct the costs of your hotel, business meals, and tips as long as they are reasonable under the circumstances. Your meal deduction is limited to half of the actual cost of your meal or the standard meal allowance. The meal allowance is based on the federal per diem rate based on when and where you travel.

In general, business travelers can only deduct 50% of their meals. However, in 2022, the IRS is allowing business travelers to deduct the full cost of business-related meals and beverages that they purchase at a restaurant. If you decide to take the standard meal allowance, the deductible amount for incidental expenses is $5 per day for tips given to staff at your hotel, baggage carriers, or porters. It is still a good idea to keep receipts and track of the actual costs you pay.

What Qualifies as a Business Trip?

To qualify as a business trip and qualify for the business travel tax deduction, your trip must meet each of the following criteria:

  • Your trip caused you to leave your business’s tax home for more than a normal work day
  • Your trip must primarily consist of business
  • Your trip should qualify as an ordinary and necessary expense
  • Your trip should be planned in advance

Speak to an Accounting Professional

If you are unsure which expenses you can deduct under the business travel deduction, you should speak to the accounting and tax professionals at TMD Accounting. We can review your receipts and the purpose of your trip and explain what can and can’t be included. To learn more, call us today at 1-856-228-2205.

How to Find the Right Small-Business Tax Advisor for Your Business

Having a small-business tax advisor can help your business save money on taxes by working with you year-round. This is a certified professional who prepares and files business tax returns, provides financial and tax advice, and represents businesses when they are audited by the Internal Revenue Service (IRS). Certified tax advisors also perform record-keeping duties and help with tax planning to maximize your business’s returns. The tax advisor you choose should be experienced, qualified, and have specific knowledge about business taxes. Here is some information from TMD Accounting about how to find the right tax advisor for your small business.

What Are Tax Advisors for Small Businesses?

The IRS allows anyone to serve as a small-business tax consultant as long as they get a preparer tax identification number (PTIN) from the agency. However, you should look for a professional firm that offers both small business account services and business tax advice. The professional you choose should also be certified as a tax advisor by the IRS. Certified tax advisors have additional education, skill, and expertise requirements and can also represent you in case of an audit.

Enrolled agents are licensed tax professionals who must pass a specialized exam showing their tax proficiency and/or have worked for the IRS for at least five years.

Certified public accountants (CPAs) must pass the CPA exam and follow the requirements for CPAs. They are accounting professionals offering multiple services, including tax advice, preparation, and filing.

Finally, attorneys must pass the bar exam to obtain a license to practice law in their state. While all lawyers are included in this category, a business owner should look for an attorney who focuses on tax law and business taxes.

If you are searching for a tax advisor for your business, you should choose someone who falls into one of the three categories listed above. Make sure the professional you choose has experience with business taxes instead of personal taxes. Finding a certified tax advisor who is also familiar with your industry and with small businesses is even better.

How a Tax Advisor Can Benefit Your Small Business

A good business tax advisor can help your business in numerous ways throughout the year instead of just at tax time. Your tax advisor should provide you with all of the following benefits:

• Providing important information and advice to aid you in tax decisions
• Setting up a record-keeping system tailored to your business and its needs
• Preparing business tax forms and helping your business claim all of the deductions to which it should be entitled and highlighting red flags that could get your business in trouble with the IRS
• Providing advice and guidance when you are dealing with the IRS
• Representing you before the IRS during audits and investigations

Finding a Tax Advisor for Your Small Business

The first place to start is to ask your business’s accountant or bookkeeper for referrals and recommendations. If you are already working with a CPA for small business accounting services, they might also have the necessary experience to provide you with business tax advising services. You can also ask other business owners that you know and trust for their recommendations for business tax advisors in your area.

You can also ask your friends, banker, family, or attorney for recommendations and referrals to qualified business tax advisors in your area. Get several names. Look for listings in newspapers, directories, trade journals, referral panels, and professional associations. Look for CPA societies in your area or check online at www.cpadirectory.com for a CPA. If you want to find an enrolled agent, you can ask for help from the National Association of Enrolled Agents at www.naea.org. However, if you check an organization, you should consider referrals as the organization’s certification that it recommends the CPAs or EAs or that the names provided to you are competent professionals.

Once you have a small list of names, interview a minimum of three firms or individuals. Treat the consultation like an interview. You want to both test the prospective advisor’s knowledge and ensure that they are a good fit for your company. Ask them about their experience, certification, and their knowledge of your industry and of working with small businesses. Ask about the types of tax issues small businesses might face and how they address them. Ask if the prospective advisor represents clients during audits before the IRS.

Ask the tax advisor about any success stories they can share and the types of strategies they employ when dealing with tax problems. You want to make sure the advisor you choose doesn’t use overly aggressive strategies that could potentially get your business in trouble.

Once you have completed your consultations, don’t rush to make a decision. Consider which prospective advisor made you feel confident in their knowledge and ability to help your business with its taxes. Make sure you choose an advisor with whom you feel comfortable since you will have an ongoing professional relationship. Finally, search for a tax advisor in the fall or summer instead of trying to find someone during tax season.

Find an Accountant for My Small Business

If you are searching for a full-service accounting firm to handle all of your business’s accounting and tax needs, you should consider TMD accounting. We provide a full range of accounting services for small businesses, including tax advice and preparation. Call us today for a consultation at 1-856-228-2205.

The Importance of Financial Planning for Small Businesses

One of the driving factors in ensuring your business is successful is whether you have a strong financial plan. The plan you create should control how you operate your business over a set period that depends on its projections. Financial planning is a process through which you assess the competitive environment, the goals you have for your business, the resources you need, your budget, and the risks that could arise. In other words, your financial plan helps to prepare you for the future. Regardless of the industry in which your business operates, financial planning is essential. The accounting team at TMD Accounting is prepared to assist you with the process no matter your business type.

How a Financial Plan Can Benefit Your Business

There are multiple benefits of financial planning for small businesses. Below are some of the key advantages planning can offer.

1. Helps to Define Your Goals

Having clearly defined goals can help you understand what your business wants to achieve over the next year or more. For example, if you are trying to create a product to fill a market need, you use your plan to create benchmarks to ensure you are on target. No matter what the goals for your business might be, having them clearly defined in your financial plan can help to provide a roadmap to guide your actions.

2. Helps to Manage Cash Flow

In your financial plan, you will include information about your business’s expected cash flow. While you’ll likely initially spend more than you have coming in, you will have to determine the expense level that is acceptable and establish ways to keep your business on track by easily measuring its cash flow.

3. Assist You With Setting Your Budget

During the financial planning process, you will set your business’s budget. Starting with your overall budget for the quarter or year, you will then break it down into specific, smaller budgets for different areas of your business while ensuring that how much you allocate to each is ordered in importance. A budget helps each team to understand its constraints and the resources it has available to meet its goals. Setting individual budgets for different teams can also help you to track the progress of your company and its spending overall.

4. Identifying Areas for Cost Reduction

Financial planning helps you identify areas in which you can save money. If you’ve been in business for a while, you can first review what you’ve spent and how quickly your business is growing. Identify unnecessary expenses and those that are over-inflated, and trim them accordingly in your budget for the upcoming year.

5. Mitigating Risks

A great aspect of financial planning is that it helps you to identify and mitigate risks that your company could face. You should include controls for inefficiencies, losses that can be covered with insurance, and protection against internal theft or fraud. A part of financial planning involves identifying the risks that apply to your particular type of business, ordering them in their order of priority, and determining strategies to implement to mitigate risks to help to reduce your chance of losses.

6. Managing Crises

Having a plan in place can be helpful whenever your company faces a crisis. During a crisis, you should review and rework your financial plan accordingly to include your response and which strategies to employ.

7. Easier Fundraising

If you need capital funding from an investor or bank, one of the first things you will be asked for is a copy of your business plan. Investors want to know what your plan is for growing your business, the risks you face, and how you will use your money wisely.

Your financial plan should provide all of these types of information to prospective investors so that they can get a clear idea of your business goals and the projections you have about the future. Even if you are not currently looking for funds, having a plan can come in handy if and when you are.

8. Serving as a Roadmap for Growth

Your financial plan helps you assess your business’s current situation and project where you see your business going in the future. Your larger business plan will accomplish these goals on a broad level and discuss information about your target markets, how many employees you need, and the services or products you plan to offer.

The financial section of your plan should include data showing how you will work to reach your goals and what you will need to invest to get there. Determine how much you expect your business to grow, the expenses you’ll have, and how much revenue you project to come in.

9. Building Trust Through Transparency

The financial planning process can help your company to build trust with both investors and your staff. When you are transparent with your employees, it helps to build their trust in you and your business. Employees want to know that the company they work for is managed effectively and working to be successful. You can share your financial plan with your employees in meetings so that they can also offer input from their experiences.

Talk to a South Jersey Accountant for My Small Business

If you are searching for small business accounting services and help with your financial planning, speak to the professionals at TMD Accounting. We are a full-service accounting firm that serves companies in many industries. Call us today to schedule an appointment at 1-856-228-2205.

Tax Deductions for Small Business Owners Working From Home

Many small business owners have a space inside their homes where they work. These business owners can make certain deductions on their taxes. Remember, there are a few rules from the IRS concerning these write-offs. If you want to know what tax deductions you can take, here are a few points to consider.

The “Exclusive Test”

While you may work out of your home, not all spaces can be claimed as a home office. According to the IRS, you must be able to show that a portion of your home is a principal place of business. You must exclusively use that space to work. If you don’t have a dedicated space in your home, you cannot take the home office deduction. This is known as the “exclusive test” by the IRS.

For example, a spare room in your home can be claimed as a business office and deducted from your taxes. However, you cannot claim a living room or bedroom because those areas are used for personal purposes. There are a few exceptions, such as individuals using their home as a daycare or businesses storing inventory in the home.

You must also be an independent contractor or registered business owner to take the home office deduction. Anyone working from home as a business employee is not eligible for the deduction. The IRS rules about this deduction can be confusing. If you have questions, our small business accounting services can help to address your concerns.

Will These Deductions Cause an Audit?

Some people worry whether taking the home office deduction will cause the IRS to audit their returns. Yes, the IRS does have strict rules, but you will not get an automatic audit with these deductions. There are ways to reduce your chances of an audit.

First, you will want to ensure you qualify for all those deductions. Maintain accurate records of your purchases and expenses. You will want to keep those personal and business expenses separate. The IRS has a system that can detect any red flags. For example, the system will compare your situation with others in your industry. Making higher claims than the average person in the industry could signal a problem with the IRS. Remember that IRS audits are rare, but you should always be prepared with the proper paperwork and documentation for your deductions.

Tax Deduction for a Home-Based Business

Those home office-related deductions are based on the percentage of space that you use for the business. You will need to divide your office’s square footage by your home’s total square footage. With that number, you can deduct the right percentage of each home expense. Sometimes, you can deduct your office’s homeowner’s insurance and association fees, mortgage insurance, and cleaning service. Utilities can also be deducted from your business taxes, including electricity, water, phone, and internet.

If you make upgrades or repairs to the space, then you can write those expenses off. However, the amount of the write-offs will depend on whether the repairs benefitted your office or the entire home. While you may want to deduct every expense for your home office, you really need to hire a professional to look over your business taxes.

Over the years, the IRS has been cracking down on fraudulent deductions. You want to make sure that these deductions are appropriate for your situation.

Other Business Expenses

What else can you deduct from your taxes? There are plenty of standard deductions for other business expenses. For something to be qualified as deductible, that expense must be considered “ordinary and necessary.” What does that mean? The expense must be common and also helpful for your industry. For example, you cannot take a lavish vacation and deduct the expenses, claiming it was a necessary part of your business.

There are some common business expenses for your taxes.

If your business manufactures products or purchases items for resale, then you can deduct the cost of goods sold. You may write off direct labor costs, factory overhead, storage fees, and the cost of the raw products on your taxes.

Capital expenses are the costs that are required to operate your business. There are three types of capital expenses: business assets, improvements, and startup costs.

You may deduct certain car expenses if you use the vehicle as a part of the business. Like the home office write-off, you can deduct a certain percentage of the car’s usage. For example, business owners can calculate the miles driven for business purposes to receive a deduction.

You might be able to deduct rental expenses if you do not own the business property. In some situations, the interest could be deducted if an owner borrowed money for the business. You can also deduct state, local, federal, and foreign taxes from your taxes.

Travel expenses are also eligible, but you can only claim them if you reimburse those costs under an accountable plan. Once again, travel expenses must be related to the business and not for personal use.

Any supplies or materials are deductible from your taxes. Plus, professional services are also considered a business expense. You can write off those fees from a lawyer, bookkeeper, or an accounting firm.

Finally, all of your business development and marketing expenses are eligible for a write-off. These business expenses are used to find and keep clients. With that, you can deduct them from your yearly taxes.

Many people are hesitant to take some deductions off their taxes. The IRS provides detailed explanations of these expenses on their website, which can help you determine what is eligible for a deduction. Completing your taxes can be challenging, especially for small business owners working from home. You may want to find an experienced accountant for your small business to help make the correct deductions on your taxes.

Need a South Jersey Accountant for Your Small Business?

At TMD Accounting, we have over 40 years of helping small businesses in the Gloucester County area. Our team can assist with your taxes, payroll, and bookkeeping needs. When you need a flexible and affordable option, we are here to help. Schedule a consultation by calling us at 856-228-2205.

What Is Financial Planning Why It Is Important In Business?

Do you need a financial plan for your small business? Creating these types of plans is a crucial step for any business owner. Financial planning can help you to make daily decisions for your business. By comparing numbers to actual results, you can make those crucial decisions regarding your financial future. Even with a one-person company, you should have a financial plan in place. Why are financial plans so important? Keep reading to learn more.

Financial Planning for Your Business

Financial planning is very vital to the success of your business. This planning usually allocates funds to specific areas of your business. Also, financial planning will determine how a company can achieve different objectives and goals. While you might think establishing a business is hard, creating a financial plan can be just as challenging without the right help. Businesses in all industries need to focus on financial planning. However, many small businesses will not use a financial planner because they think those services are too costly.

Financial planning is essential to the overall business operations. Small businesses can’t be financially stable and operate without confidence in their financial plans. Unfortunately, many companies will fail. In some situations, those failures are tied to a lack of financial planning.

What Can Financial Planning Do for Your Business?

There are many ways that a financial plan can affect your business. Small business accounting services can help implement a plan for you. Here is a look at a few of these benefits to financial planning.

Cash Management and Budget

When you have a financial plan in place, you can help organize your short-term budget. Many small businesses will experience variations in revenue on a monthly or seasonal basis. In simple terms, that can translate to a period when there is strong cash flow or a time when a shortage occurs.

Budgeting is a critical task for any business. When you plan out a budget, you can make those financial decisions and allocate funds for different projects. A smart budget will help generate profits while cutting losses and costs. Creating a reasonable budget without a financial plan can be challenging.

Financial plans can assist those struggling small businesses in getting a handle on their budget. Additionally, that financial plan gives companies deeper insight into funds, making it easier to see the bigger picture. You can even break down a complicated budget into more manageable, smaller steps.

Small business owners can consider these cycles by building a solid financial plan. During those slow times, these businesses can monitor those expenditures for low revenue periods. In many cases, poor cash management results in negative consequences, such as not making payroll for your employees.

You should structure your financial plan to have a cash cushion in case of downtimes. With a cash cushion, your small business can take advantage of special opportunities, including purchasing reduced-priced inventory from suppliers.

Long-Range View

On a daily basis, your small business may have to deal with issues or crises. It can be easy to focus on those problems, but that leaves you not thinking about any long-term goals. Unfortunately, that can take away from planning for the future, preventing businesses from growing. A financial plan allows a small business owner to see what expenditures are needed to keep the company on track and stay ahead of the competition. Think of a financial plan as a blueprint to implement the company’s performance for both short- and long-term goals.

Spot Trends

Over the course of a month, a business owner must make critical decisions. Often, it can be hard to tell if those decisions were successful. When you prepare your financial plan, you can set those quantifiable targets to compare with actual results throughout the year. For example, the owner can see if their increase in advertising expenditures led to more sales for the business. These sales trends for individual products can help the owner make decisions about allocating money for marketing.

Prioritizing Expenditures

When you allocate your capital and conserve those financial resources, it can lead to a successful business. These benefits of financial planning can help owners identify their most important expenditures, which can help improve efficiency, productivity, and marketability. Those decisions are often only made when cash is plentiful for the business. Even those well-capitalized corporations will prioritize their expenditures.

Measure Progress

During those early stages of the business, many owners will deal with numerous changes and have to work long hours. Sometimes, it can be difficult to tell whether any progress is being made or if serious problems are on the horizon. Seeing those actual results help small business owners to feel more confident in their decisions. On the other hand, if there is an issue, the owner can take the appropriate steps to correct it. A chart displaying steady revenue growth for each month is a great motivating factor for both new and experienced business owners.

Talk To an Experienced Accountant

If you need help with your financial planning, turn to TMD Accounting. We are a family-owned and -operated business that focuses on helping companies in all industries plan for the future. We offer a flexible, affordable, and convenient way to handle those financial responsibilities. You need to focus on growing your business, and we are the ones to help you.

Need a South Jersey accountant for my small business? Our accounting team is ready to help. Schedule your consultation by calling 1-856-228-2205.

Tax Planning vs. Tax Preparation: What is the Difference?

Most taxpayers want to find ways to reduce how much they might have to pay in taxes. A good way to reduce your tax burden is to work with a tax professional. However, many people confuse tax preparation with tax planning. While both types of services are important, they have separate purposes. Here’s some information about the differences between tax preparation and tax planning from the accounting professionals at TMD Accounting.

Understanding Tax Preparation

Most Americans of working age are required to file income tax returns every year. However, the tax filing process can be complicated, leaving many people uncertain about how to file their tax returns properly. Mistakes made on your tax returns could result in you owing more money than you anticipated. Tax preparation services help with filing your tax returns and ensuring they are correct. Most tax preparers will offer help with filing your returns with local, state, and federal tax authorities.

Tax preparers use your financial information to fill out your income tax returns while complying with relevant laws. They also check to see whether you might qualify for deductions or credits that can reduce your tax bill. If your tax situation is complicated, hiring a professional tax preparation service can be helpful. Doing so can also be important if you have undergone recent changes in your life, including a job or household size change.

Understanding Tax Planning

While tax preparation is completed before you file your income tax returns, tax planning is a service that helps you to plan ahead to optimize your situation to minimize or avoid any tax consequences that you might face as a result of your financial decisions. Tax planning can help you make financial choices that are better for your overall financial situation.

Tax planning is geared toward helping you make proactive decisions about specific areas of your finances, including investments, retirement accounts, inheritances, estates, businesses, and charitable contributions that could impact your tax situation. While tax preparers might give you advice when they prepare your tax returns, their advice is typically general and not intended for you to use for proactive decision-making.

Accounting professionals that provide tax planning services thoroughly research to gain a solid understanding of both your current finances and your future goals so that they can make specific recommendations. If you want tax planning, you will need to ask your accountant specifically for this service so that they understand what you are wanting.

If you already use a tax preparer, you might need to look for a different tax professional for tax planning. many tax preparers are only trained to help their clients comply with their tax obligations and might not know enough about the system to make informed and knowledgeable recommendations.

Tax Planning Vs. Tax Preparation

Since you likely are required to file annual income tax returns, you will likely benefit from tax preparation services. You can either choose to complete and file your return by yourself or get help from a tax preparer. If your tax situation is complex, it might be worthwhile to get professional help to prepare your tax returns. A professional tax preparer can ensure you complete your tax returns correctly and claim the deductions and credits for which you are eligible. This can help you to save money.

While tax planning is not essential for everyone, it is worthwhile for many people. Many decisions you make about your finances could have a large impact on your taxes for years. Understanding the impacts your financial choices might cause can help you make better decisions that can also play a role in your overall financial planning.

Why the Assistance of Tax Professionals Is Beneficial

Tax professionals offer a substantial amount of knowledge about the tax laws and how they can impact both how much taxes you might owe and your overall financial picture. Taxes are complicated, and the federal tax code contains more than one million words. Most people do not have a good understanding of the U.S. tax system and the rules that you can use to save money.

Tax professionals can help to eliminate a lot of uncertainty. Even if you only work with a tax preparer, they can help you claim credits and deductions that you were not previously aware of. If you hire a tax planning professional, you might derive even greater tax benefits. A tax planning professional can help you understand how to plan for retirement, invest, and leverage charitable contributions for the greatest benefits. They can also help you understand how your financial goals might affect your tax situation.

Working with tax professionals also offers you some peace of mind. You won’t have to worry nearly as much if you are selected for an audit. A professional is less likely to make errors on your tax return.

Finally, tax professionals can help to optimize your financial plans. When you work with a tax planning professional, you might find that it is easier to make otherwise stressful financial choices and follow through with them because you will know what the likely outcomes will be.

Both tax preparation and tax planning can offer numerous benefits that you can benefit from. However, they are different services. Understanding your financial needs can help you determine which of these services you might need or possibly help you to determine that you might need both.

Contact TMD Accounting to Find an Accountant for My Small Business

If you want help with tax planning and tax preparation for either yourself or your small business, you should reach out to the professional accountants at TMD Accounting. We offer small business accounting services and individual tax planning services and can help you understand your tax situation and guide you toward reaching your financial goals while minimizing your tax burden. Call us today to schedule an appointment at 1-856-228-2205.

The Ultimate Guide to Independent Contractor Taxes – New Jersey

Independent contractors have to worry about federal income tax, self-employment tax, and local and state taxes when they file their returns. Sole proprietors use Schedule C with Form 1040 to report their business profits and losses to calculate the taxes they will have to pay. To avoid an underpayment penalty, independent contractors must also submit quarterly estimated tax payments each year. When you begin working for one or more companies, they should determine whether you should be treated as an independent contractor or employer based on several factors. If you are classified as an independent contractor, you will be responsible for paying both your portion and the employer’s portion of your taxes and will receive a 1099-NEC at the end of the year instead of a W-2 for your annual earnings. Here is what you need to know as an independent contractor about taxes from TMD Accounting.

Taxes Self-Employed People Must Pay

Independent contractors must pay federal, state, and local taxes and the federal self-employment tax. Here are the taxes self-employed people must pay:

  • Federal income tax at a rate ranging from 10% to 37% based on the total income for the tax year
  • Self-employment tax to pay into Medicare and Social Security with tax rates of 15.3% for net profits of up to $147,000 and 2.9% for net earnings above that amount
  • Additional federal taxes in some situations such as the net investment income tax, alternative minimum tax, and additional Medicare tax
  • State and local taxes, including income tax, registration and licensing fees, and business tax
  • Sales tax if you sell goods
  • Excise tax if you sell items such as guns, cigarettes, alcohol, or telephone services

Understanding the Self-Employment Tax

The self-employment tax includes a 12.4% Social Security tax on your net profits up to $147,000 and a 2.9% Medicare tax on all net earnings. This means you will pay a total self-employment tax of 15.3% on your earnings up to $147,000 and 2.9% on any earnings above that amount. If you have net earnings of more than $200,000 as a single taxpayer or $250,000 as a joint filer, you might also have to pay an additional 0.9% Medicare tax.

Available Deductions for Independent Contractors

There are many different deductions that might be available to independent contractors, including the following:

  • Home office deduction for contractors who work from home and use the office space solely for business purposes on a regular basis
  • Health insurance premiums
  • Retirement plan contributions
  • Depreciation of your equipment, machinery, and furnishings for your office and business use
  • Truck and auto expenses if used for work
  • The qualified business income deduction
  • Expenses for outside services and contract labor
  • Miscellaneous business expenses

Preparing to File Your Taxes as an Independent Contractor

Before you file your taxes, it is important for you to organize everything. You will need to know the gross amount you made as an independent contractor and how much you spent on tax-deductible expenses. Gather your 1099-NECs, profit and loss statements, expense statements and bills, receipts, and other relevant documents together.

Report Income and Deductions on Schedule C

When you fill out your Form 1040, you will use Schedule C to report your business income and deductions. You will report other sources of income, including rental income, dividends, and interest on Form 1040.

Report Net Self-Employment Income on Schedule SE

Once you complete Schedule C, you will then carry over the self-employment income to Schedule SE to calculate your self-employment tax. The self-employment tax will then need to be entered in your Form 1040 tax section.

Complete Form 1040

On your Form 1040, you will include all of your other non-business income. You can also claim non-business deductions on Form 1040, including things like student loan interest, charitable donations, self-employed health insurance, itemized deductions, and others.

Calculate Your Federal Taxes

When you enter everything into your Form 1040 and perform the calculations, you will see your total federal tax obligation. After you subtract your estimated tax payments made during the year, you will either owe taxes or have an expected refund.

Estimate Your Taxes for the Next Tax Year

As a self-employed person, you will need to estimate the taxes you’ll likely owe in the next tax year so that you can divide that amount into quarterly estimated payments to send each quarter throughout the year.

Complete Your State Income Tax Return

Once you have completed your federal tax return, you will then need to complete your state return.

What Happens if You Can’t Pay?

If you can’t pay your taxes in full, you can complete Form 9465 to request an installment arrangement. However, you can’t owe more than $25,000 and must show that you do not have the means to pay your taxes. You will then have three years to pay. The IRS will penalize you for waiting to pay your taxes after the deadline. If you fail to file a tax return by the deadline, you will be assessed a 5% penalty for each month of the outstanding amount you owe but haven’t paid. If you submit your return on time but do not pay what you owe, the late payment penalty will be 0.5% of the tax owed for each month you are overdue.

Find an Accountant for My Small Business

Small business accounting services can help to make filing your taxes simpler. If you are self-employed, working with TMD Accounting might help to ensure your taxes are filed on time and correctly and that you claim the deductions that are available to you. Contact us today to schedule an appointment at 1-856-228-2205.

How to Prepare Tax Records for Your Accountant

When it comes time to prepare your income tax returns, you need help from an accountant. Most business owners don’t have the time to file taxes or want to make a costly mistake. An accountant can sort through all those records, but they need a little help from you. You must bring the proper documents and forms to help your accountant during tax time. Here are some ways to prepare your tax records for your accountant.

What To Bring

Before you head over to your accountant, you need a few essential documents. First, you must bring identification information. These documents will prove your identity. You should bring your Social Security card and a photo ID. Along with that, take a copy of your most recent tax return.

In some cases, you might not qualify for the same write-offs or deductions as the previous year. However, these documents can help your accountant access certain information and calculate deductions. If you are working with a new accountant, your past tax return will allow them to discover any discrepancies between those previous tax returns.

Don’t forget about those wage statements. If you are an employee at a company, you should bring your employer’s W-2 wage and tax statement. Freelancers and independent contractors are considered non-employees. While they don’t receive the traditional W-2s, these workers often get a 1099-MISC from each client. You should send these forms to your accountant.

All dividend income from investment, unemployment, and Social Security income will need to be reported. You should have received a statement for those sources of revenue. Bring those documents to help your accountant.

Any real estate documents are essential. When it comes to real estate, there are many deductions. You should deliver all documents related to proof of paid mortgage, home equity loan interest, a recent home purchase, or paid personal property taxes to your accountant.

You want to get all those credits and deductions during tax time. Always have your proof of expenses. These documents include IRA contributions, invoices, medical bills, charitable contributions, self-employment expenses, mileage logs, and job hunting expenses. You would rather bring too much documentation to your accountant rather than miss critical pieces of information for tax time.

Common Business Records

There are plenty of tax documents you will want to bring for your accountant. First, you need all those financial statements for your business. These documents include balance sheets, cash flow records, and profit-loss reports. If you have employees, payroll information is another vital document for your accountant.

If you have any business expenses, take those records and hand them to your accountant. These expenses can include rent, utility, office supplies, telecommunication, internet, advertising, and travel costs. For those businesses that have vehicles, you will need to record all of the motor vehicle expenses, including driving logs and operating costs. You will need to keep track of asset additions and disposals involving machinery, buildings, and land.

Make the Process Easier for Your Accountant

When you use small business accounting services, you will want to make their job easier. In most cases, you pay the accountant by the hour. If they have to search for information, it could lead to frustration for all parties. Plus, it adds to your expenses. Here are a few ways you can help your accountant.

Speed Up the Process

With all of that information, documentation, and receipts on hand, your accountant will have an easier time with your tax returns. Remember that accountants are busy and work on several tax files during tax time. When you have all of your information, it can help them efficiently prepare and file your taxes.

Stay Organized

Whether you are a sole proprietor or operate a large company, you always need to stay organized. You should keep all receipts together. With the proper organization, your accountant does not have to spend time shifting through boxes of receipts. Those unsorted documents will increase your accountant’s time spent on your taxes.

Summarize Your Expenses

Consider providing your accountant with a summary of your records. All of your checks, business expenses, and invoices should be totaled and categorized. When everything is indexed, it will make your accountant’s job much easier for tax season.

Keep Personal and Business Expenses Separate

If you have several businesses, always separate each company’s revenue and expense documents. In addition to that, you never want to mix both your personal and business expenses together. Once again, if you do that, it will take time for your accountant to separate those expenses for your tax returns.

Don’t Wait Until Tax Time

When you work with an accountant, they can provide advice throughout the year. You do not have to wait to ask questions for the tax season. These professionals will be able to provide answers to your business questions. Plus, they can maximize your credit and deductions. In addition to that, they can analyze your financial health to plan for the future.

Come Prepared

Every year, filing tax returns can be complicated. Accountants know how to handle these tasks, but you can make their jobs easier by preparing the proper documentation. You can take the stress out of the season by staying organized when working with an accountant.

Final Thoughts

When you need an accountant for my small business, reach out to TMD Accounting. We have helped small and large companies for the past 40 years in Gloucester County. Our family-owned and -operated business can assist with your payroll, taxes, and bookkeeping services. Schedule your consultation by calling 1-856-228-2205.

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