Small Businesses: Plan for Lower Section 179 Expense

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Top-line: In 2014, the annual expense limit for Section 179 is now $25,000, down from $500,000 in 2013. You will need to plan accordingly.


Section 179 of the tax code allows businesses to immediately expense qualified capital purchases versus depreciating (recovering) their cost over time. Qualified purchases can be new or used equipment and certain software placed in service during the year. This benefit can be maximized as long as total qualified asset purchases by your business do not exceed $200,000 (formerly $2 million) during your 2014 tax year.

What’s the Problem?

For years the threshold for qualified purchases was much higher than the lower Section 179 amount in 2014. The old Section 179 provision allowed for small businesses to upgrade equipment while lowering their current year tax obligation. Many small businesses like dentist offices, veterinarians, chiropractors and others used this provision in the tax code to help manage their cash flows through reduced taxes while purchasing needed equipment.

Time to Plan
Users of Section 179. If your business currently uses Section 179 as a tax planning strategy, you need to review your anticipated capital purchases for the year. Consider prioritizing your needs to ensure the most important capital purchases are at the top of your list.

Delay your Purchases? There is a slight possibility that Congress will act during the year to increase the Section 179 limits once again. This retroactive nature in Congress has been in place for the past number of years, so this is not out of the question. Consider delaying purchases until later in the year if you think this might happen.

Is Section 179 for you? Please remember that taking advantage of this provision in the tax code only changes the timing of expensing your capital purchases and not the over all deduction of your purchase. If you think Congress will continue to raise taxes to help balance the budget, your future income could be exposed to a higher tax rate. By using standard recovery periods for your capital purchases (typically three, five, or seven years), you are saving some expense for later (higher tax) years. In this case using Section 179 expensing may not be the right decision for your business.

Feel free to call for help to review your situation, especially if you are planning major capital purchases in the near future.

Non-taxable Income for Those in the Armed Services

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One of the benefits available to the men and women of our Armed Services and, in many cases, staff supporting them is the ability to exclude items from taxable income. Here is a list of the most common items that may often be omitted from income tax.

Excluded Items

Combat zone pay

  • Compensation for active service while in a combat zone

    Note: Limited amount for officers

Other pay

  • Defense counseling

  • Disability, including payments received for injuries incurred as a direct result of a terrorist or military action

  • Group-term life insurance

  • Professional education

  • ROTC educational and subsistence allowances

  • State bonus pay for service in a combat zone

  • Survivor and retirement protection plan premiums

  • Uniform allowances

  • Uniforms furnished to enlisted personnel

Death allowances

  • Burial services

  • Death gratuity payments to eligible survivors

  • Travel of dependents to burial site

Family allowances

  • Certain educational expenses for dependents

  • Emergencies

  • Evacuation to a place of safety

  • Separation

Living allowances

  • BAH (Basic Allowance for Housing)

  • BAS (Basic Allowance for Subsistence)

  • Housing and cost-of-living allowances abroad paid by the U.S. Government or by a foreign government

  • OHA (Overseas Housing Allowance)

Moving allowances

  • Dislocation

  • Military base realignment and closure benefit (the exclusion is limited as described above)

  • Move-in housing

  • Moving household and personal items

  • Moving trailers or mobile homes

  • Storage

  • Temporary lodging and temporary lodging expenses

Travel allowances

  • Annual round trip for dependent students

  • Leave between consecutive overseas tours

  • Reassignment in a dependent restricted status

  • Transportation for you or your dependents during ship overhaul or inactivation

  • Per diem

In-kind military benefits

  • Dependent-care assistance program

  • Legal assistance

  • Medical/dental care

  • Commissary/exchange discounts

  • Space-available travel on government aircraft

Note: The exclusion for certain items applies whether the item is furnished in kind or is a reimbursement or allowance. There is no exclusion for the personal use of a government-provided vehicle.

Source: IRS Publication 3 Table 2.

In the Military? Special Tax Benefits May Apply

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There are special tax benefits to members of the U.S. Armed Forces. If you or someone you know is in the military, prior to filing a tax return it makes sense to review your situation. Outlined here are some of the more common.

Combat Pay Income Exclusion. If you serve in a combat zone, certain pay received is not taxable. Usually this combat pay is noted on your W-2 and you will not need to take action to receive this benefit. However, if you are moved from one location to another or are in support of a combat zone, your pay can also be non-taxable.

Action step: Review your W-2 each year to ensure the proper pay has been excluded from your taxable income. Combat zones are published in IRS publication 3 each year.

Earned Income Tax Credit (EITC). Usually you need to have earned income (wages) to receive the Earned Income Tax Credit. However, as a member of the military, you may choose to use nontaxable combat pay to increase your credit. Even better, you can increase the credit but the combat pay still remains non-taxable income.

Action step: If you have combat pay, conduct the calculations to maximize your EITC tax benefit.

Uniform Deduction. The cost to purchase and maintain uniforms that you may not wear while off duty are also deductible.

Action steps: Identify the uniforms that fit this requirement and save all the related expenses to ensure you maximize this tax deduction.

Deadline Extensions. If you are in a combat zone, you may often receive an automatic extension for filing your tax return. Sometimes this extension may include abatement of fines and interest.

Action steps: While it is always recommended to file the proper extensions, do not automatically assume if you are late in filing or paying taxes that you are subject to fines and interest if you were in a combat zone. These extensions also apply to service in support of the Armed Forces (Merchant Marines, Red Cross and other civilian support staff). With a few exceptions, these extensions can even be used by those whose spouses are in combat zones.

There are many other tax benefits for military personnel. If in doubt, ask for a review of your situation.

Do Not Wait to Save

Start Planning for Next Year’s Tax Returns Now

Saving on your tax returns requires careful planning. You need to start early and you need to stay on top of everything that is happening. If you want to make sure that you are making the most out of your income, that your tax return is as high as possible, and that you have everything figured out, then make sure that you are doing quite a bit of tax planning early. You have to start as soon as can by adjusting your tax withholding, taking action when something big happens in your life, and preparing to itemize all deductions. When you doing this with big returns in mind, you can be happier once tax season rolls around.

Get everything figured out immediately. This means doing things like adjusting your withholding so that you can maximize your returns while keeping a comfortable income. This is something that anyone can do and something that can be hugely beneficial. It is worth the time and effort that you put in, especially when you see the amount that you are getting back next year. Make sure that you are carefully making any necessary changes that can help you to increase the amount that you are getting back and make sure that you pay attention to every little detail.

A major part of tax planning is staying on top of the big events in your life. When something happens, you will need to take action immediately and have everything prepared for when you do your taxes. When you are able to keep track of all of this information, keeping everything accurate and doing everything necessary, you can trust that your taxes will be ready. You will be able to receive the most amount possible without any concerns regarding information or whether you forgot something. Since major life moments can pay out big, you do not want to miss this.

Get everything set for your tax returns. Itemize deductions, organize everything, and make sure that all information is correct. If you do this, you will be happier with your income and the returns that you receive. Tax planning is a lot easier and more beneficial when you are doing it over time, as things occur and as information comes to you. Do not wait another minute to start planning and do not let any part of the tax planning go without your attention. Time and work are how you make the most out of your taxes.

College Tax Savings: 2014 Edition Every little break helps

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With the start of school just around the corner, it is hard to ignore the high cost of funding a college education. Thankfully, there is some help within the tax code. Outlined here are three of the more popular ways to reduce your taxes in 2014 as a result of this educational expense burden.

Who Qualifies:

Typically you, your spouse, or a dependent who can be claimed as an exemption on your individual tax return

Qualified Expenses:

Tuition and fees, course-related books, supplies and equipment

Common Tax Benefits:

  1. American Opportunity Credit.
    • Amount of Credit: $2,500 per eligible student at an eligible institution ( 100% of initial $2,000 and 25% of the next $2,000 of eligible expenses)
    • Frequency: Available for the first four years of post-secondary education
    • Comments: In 2014, 40% of this credit is a “refundable” credit. This means you can receive up to $1,000 even if you owe no federal income taxes.
  2. Lifetime Learning Credit.
    • Amount of Credit: Up to $2,000 per taxpayer for eligible student expenses at an eligible institution (20% of $10,000 in eligible expenses)
    • Frequency: No limit on number of years you can claim the credit
    • Comments: The income limits for this credit are much lower than for the American Opportunity Credit.
  3. Student loan Interest Deduction.
    • Amount of Deduction: Reduce up to $2,500 of your income subject to tax
    • Frequency: Per taxpayer per year.
    • Comments: Loan interest not secured by a residence is typically not deductible, so this tax provision is an exception. This reduction in income is available even if you do not itemize your deductions.

The One that Got Away? Tuition and Fees Deduction

There is also a Tuition and Fee deduction for up to $4,000 in eligible expenses that was available to taxpayers through 2013. Unfortunately, this educational benefit has not been extended into 2014. So if you have used this deduction in the past, it is time to review your other alternatives. But be prepared in case Congress extends this tax benefit once again.

Tips to Maximize your Tax Benefit

  • The American Opportunity Credit is per student, while the Lifetime Learning Credit is per taxpayer. So if you have multiple, eligible students, the American Opportunity may be a better choice.
  • Do not use expenses for room and board, health fees, or transportation for these credits. While book expenses required for enrollment can be deductible, other book expenses are excluded from the credits.
  • You may not double dip expenses. In other words, if you received scholarships, grants, other tax-free assistance or have used educational expenses for one of the credits listed above you may not reuse that expense for other tax benefits.
  • Gifts, bequests, or inheritances do not reduce your eligible expenses.
  • Sometimes it is better to let your dependent claim the educational credit versus using them on your tax return.
  • Take care not to over withdraw funds from other special educational funds like 529 college savings plans or Coverdell ESAs. If you use up all eligible college expenses against your credits and still have unmatched withdrawals from these special accounts you could subject yourself to a 10% tax penalty.

Remember, like most tax provisions, these benefits are all subject to income limitations. To receive the maximum credits noted above your Modified Adjusted Gross Income must be below beginning phase-out amounts. When you reach the maximum phase-out amount you are no longer eligible for the tax benefit. For 2014 they are:

Educational Benefits:2014 Modified Adjusted Gross Income Phase-outs
Filing status American Opportunity Credit Lifetime Learning Credit Student Loan Interest
$80,000 90,000
$54,000 64,000
$65,000 80,000
Married Filing Joint
160,000 180,000
108,000 128,000
130,000 160,000

Cash Flow

Cash Flow

Anybody who is in to business knows that cash flows are the main ingredient for a business’ survival. Opinion is divided amongst business experts regarding what’s more important for the business to thrive in the industry; the ability of the business to deliver goods and services, or to generate healthy cash flows. Even though this might seem unnatural, consider the fact that if one customer is displeased and takes his business elsewhere, you can always try harder to please the next one. However, if you don’t have enough cash in order to pay your employees, creditors or suppliers, your business is likely to come to an end.

What is a Cash Flow?

In the simplest of terms, cash flow refers to the movement of money coming in and going out of your business. These are also known as cash inflows and cash outflows. As you can expect, cash inflows are generated when sales are made of goods and services to customers. However, it should be known that only sales made in exchange for cash are counted as inflows, or a collection is made of the receivables. It is the cash that matters. There are other examples of cash inflows as well; such as borrowed funds, income that is generated by selling off assets as well as the additional income generated from interest.

On the other hand, cash outflows occur when you pay cash to cover business expenditure. There are numerous examples of cash outflows, such as the payment of employee wages, purchase of raw materials or inventory, purchase of fixed assets, payment of operating costs, repayment of loans as well as payment of taxes.

[learn_more caption=”Note:” state=”open”] Note: If you want to know how your cash flow statement works, the most qualified person you can get in touch with is an accountant. Please get in touch with us and we can help you prepare your cash flow statement as well as provide you clear insight regarding the formation of the numbers.[/learn_more]

Cash Flow versus Profit

Even though they seem similar, there is a marked distinction between cash flows and profits, and both of which provide different results/ views on the performance of the business. Profit generally encompasses a greater number of elements, and covers a certain period usually, such as a fiscal quarter. Profit is a very useful item however, as it helps you calculate taxes that need to be reported to the IRS.

On the other hand, cash flow is a very different term, one that holds a significant amount of meaning for the daily operations of a business owner. Cash flow is related to the movement of money in and out of the business. Importantly, cash flow also takes in to account the periods in which the money moves in and out of the business.

Theoretically, every company that is generating profits can go bankrupt. Obviously, significant amounts of negligence and utter disregard to cash flows will be needed for that situation to materialize, but it is possible. Let’s consider how cash flows and profits are different when they are connected to your business.

[learn_more caption=”EXAMPLE” state=”open”] Example: If you purchase inventory for $1,000 and manage to sell it off for $2,000, you are generating a profit of $1,000. But, what happens if the buyer purchases the item on credit, and pays money six months after the purchase was made? Your retail business is still showing a profit, but since no cash has flown in to the business, how will you be able to pay the expenditure incurred due to the running of the business over the period of the six months? Even though you made a profit on the sale, you don’t have enough cash in your coffers to pay off your bills. Now, ultimately, this delay in the inflow of cash might also make you miss out on further profit generating opportunities. It can also damage your credit rating, and ultimately force you to take out loans and increase your debt. Repeat this mistake over and over again, and your business will go bankrupt sooner than you know.[/learn_more]

Analyzing your Cash Flow

For business owners, it is important to learn how to manage their cash flows, as that will significantly improve their chances of survival. Moreover, you will also be able to improve the position of your business in the short term, ultimately enhancing its reputation in the long run too!

The first thing that you can do in order to take control of your business cash flow is to understand the components that have a direct impact upon your cash flow statement. Once a careful analysis of these elements has been carried out, you will know the areas that are causing the most problem in your cash flow statements. Reducing or completely closing these gaps is important to the proper management of your cash flows.

Here are some of the most important components of the cash flow statement:

Accounts Receivable: Accounts receivable are simply sales that have been made, but cash on which has not been collected. These are registered as assets on your business’ balance sheet. You create accounts receivable when you sell anything to customers on credit; the payment on which will be collected on a later date. The longer it takes for your accounts receivables account to be cleared, the more negative will be the impact on your business cash flow statement.

Credit Terms: These are the time limits that you can set on your customers to clear their dues for the purchases that they have made. These inflows impact your cash flow statement. A simple way to improve your cash flow statement is to ensure that your customers make their payments quickly.