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Business Insurance — A Critical Safeguard

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An unexpected drop in sales, a competitor opening across the street, the loss of a key employee. Planning for these types of contingencies can be vital to the long-term success of a small business. Equally important is having appropriate insurance coverage for protection against financial losses resulting from accidents, natural disasters, lawsuits, and other risks.

Conducting an annual insurance review can help ensure that you have the right insurance for your company’s needs. Start by asking these questions.

How Much Insurance Does My Business Need?

It’s likely that you already have commercial property and general liability insurance coverage in place. You need to determine if your coverage is sufficient, especially if there have been changes in your business’s operations. You might need to increase your coverage if, for example, you have upgraded or added new equipment or if you have expanded your physical footprint.

You may be able to reduce the premium on a policy by raising the deductible. However, make sure the deductible isn’t more than the business can afford to pay.

Are There Gaps in Coverage?

As you review your policies, determine if there are any coverage gaps. The world changes, and so do the areas of potential vulnerability for businesses. For instance, employee lawsuits alleging sexual harassment, racial or age-related discrimination, and retaliation are more common now than in the past. If you don’t already have it, consider buying employment practices liability insurance that provides protection against such lawsuits.

In addition, cybercrimes that involve ransomware, the theft of confidential data, or hacking into a business’s bank accounts are issues of real concern. Cyber insurance can protect your business against significant financial losses if, despite your best efforts, your systems become compromised and criminals manage to access them.

Should We Have Key Person Life Insurance?

Envision how your business would cope if you, a partner, or a key senior manager were to die suddenly. What impact would it have on the continued viability of your business? Key person life insurance can provide a financial cushion to help a business in such a situation.

The way key person life insurance works is fairly straightforward. Typically, the business buys the policy, pays the premiums, and is the beneficiary. The policy payout can be used for a variety of business purposes. For instance, it could be used to compensate for lost sales and interrupted cash flow or to pay off debts.

A financial professional can explain in more detail what to look for when reviewing your company’s insurance coverage and may have suggestions about ways to provide even greater protection for your business.

Worker Classification: Pay Attention

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It isn’t easy deciding whether a worker should be treated as an employee or an independent contractor. But the IRS looks at the distinction closely.

Tax Obligations

For an employee, a business generally must withhold income and FICA (Social Security and Medicare) taxes from the employee’s pay and remit those taxes to the government. Additionally, the employer must pay FICA taxes for the employee (currently 7.65% of earnings up to $147,000).

The business must also pay unemployment taxes for the worker. In contrast, for an independent contractor, a business is not required to withhold income or FICA taxes. The contractor is fully liable for his or her own self-employment taxes, and FICA and federal unemployment taxes do not apply.

Employees Versus Independent Contractors

To determine whether a worker is an independent contractor or employee, the IRS examines factors in three categories:

  • Behavioral control — the extent to which the business controls how the work is done, whether through instructions, training, or otherwise.
  • Financial control — the extent to which the worker has the ability to control the economic aspects of the job. Factors considered include the worker’s investment and whether he or she may realize a profit or loss.
  • Type of relationship — whether the worker’s services are essential to the business, the expected length of the relationship, and whether the business provides the worker with employee-type benefits, such as insurance, vacation pay, or sick pay, etc.

In certain cases where a taxpayer has a reasonable basis for treating an individual as a non-employee (such as a prior IRS ruling), non-employee treatment may be allowed regardless of the three-prong test.

If the proper classification is unclear, the business or the worker may obtain an official IRS determination by filing Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.

Year-End Statements

Generally, if a business has made payments of $600 or more to an independent contractor, it must file an information return (Form 1099-MISC) with the IRS and send a corresponding statement to the independent contractor.

Consequences of Misclassification

Where the employer misclassifies the employee as an independent contractor, the IRS may impose penalties for failure to deduct and withhold the employee’s income and/or FICA taxes. Penalties may be doubled if the employer also failed to file a Form 1099-MISC, though the lower penalty will apply if the failure was due to reasonable cause and not willful neglect.

Correcting Mistakes

Employers with misclassified workers may be able to correct their mistakes through the IRS’s Voluntary Classification Settlement Program (VCSP). For employers that meet the program’s eligibility requirements, the VCSP provides the following benefits:

  • Workers improperly classified as independent contractors are treated as employees going forward.
  • The employer pays 10% of the most recent tax year’s employment tax liability for the identified workers, determined under reduced rates (but no interest or penalties).
  • The government agrees not to raise the issue of the workers’ classification for prior years in an employment-tax audit.

Your tax professional can help you sort through the IRS rules and fulfill your tax reporting obligations.

4 Tips for Saving Money on Real Estate Taxes

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If you’re a real estate investor, saving money on your taxes can be just as crucial to your bottom line as the deals you make daily. While numerous tax strategies that you can implement to save on taxes exist, a few of them are more valuable than others. Here, we discuss four of the top tips for saving money on real estate taxes.

1. The 1031 Exchange

A 1031 exchange is a way for real estate investors to defer capital gains taxes when selling an investment property by reinvesting their profits in a replacement property. This is also called a like-kind exchange. It is essentially a swap of one investment property for another. “Like-kind” refers to the fact that the properties in the exchange must be similar, and the exchange property must be of equal or greater value than the property sold. Because it is rare for an even property swap to occur between parties, the most common type of exchange is the delayed “forward” exchange. In this case, the sold property funds are sent to a qualified intermediary. The intermediary holds the transaction funds from the sale of the first property until they are transferred to the seller of a replacement property.

2. The Business Tax Deduction

The expenses that you incur from owning a property are deductions that can be advantageous for part- and full-time real estate investors. Qualifying expenses include mortgage interest, insurance, fuel used for travel to and from the property, phone, internet, home office, etc. If some expenses are shared for business and personal use (such as your phone or internet), be sure to divide the expenses accordingly and only deduct what is used for your business.

Also, note that the allowable expense deductions must be ordinary (common in your field) and necessary (aid you in conducting business).

3. Long-Term Capital Gains

When selling a property for profit, a capital gains tax can be assessed. If you sell a property in the short term (within one year of purchasing it), the profit you make from the sale is considered income. This can put you into a higher tax bracket and increase taxes that you owe significantly (the short-term capital gains tax can be as high as 35 percent!). However, you can avoid a large tax bill due to selling an investment property if you can hold onto the property until after the first anniversary of purchasing it. That’s because the long-term capital gains tax rate is lower than the rate on income tax that applies for short-term gains (the long-term capital gains tax usually tops out at 15 percent, depending on tax filing status and income).

4. Depreciation Losses

Depreciation, the gradual loss of an asset’s value, allows you to take a tax break for property wear and tear over time. By deducting depreciation of real estate investments on your taxes as an expense, you lower your taxable income. This could potentially lower your tax liability.

According to the IRS, the expected life of a parcel is 27.5 years for residential properties and 39 years for commercial properties. The depreciation deduction for the entire expected life of a parcel can be taken. For example, if you buy a house valued at $300,000 (value of the structure, not the land it sits on) as an investment property to rent, you divide that value by 27.5 years, which gives you $10,909. That is the amount you can deduct in depreciation each year on your taxes.

Be aware that if you ever sell the property, you will have to pay the standard income tax rate on the depreciation you claimed (Note: this is “depreciation recapture” and can be avoided with strategies like a 1031 exchange discussed in point 1.) You can also possibly depreciate improvements you make to investment properties like replacing the roof or similar significant upgrades.

Speak to your accountant about these money-saving strategies, as well as other potential ways to keep more profit in your pocket when conducting your real estate investment business.

Top Buyer Questions: Answers for Homebuyers

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Buying a home is a significant milestone and a major financial decision. Whether you’re a first-time buyer or looking to move into your next home, you’re bound to have many questions about the process. To help make your journey smoother, we’ve compiled some of the most common buyer questions and provided detailed answers to each. This guide will help you make informed decisions and avoid common pitfalls.

How Much Can I Afford?

This is usually the first question buyers ask, and it’s crucial to figure out before you start your home search. The general rule of thumb is to spend no more than 25-30% of your monthly income on housing. That said, your affordability depends on a number of factors, including your income, debts, credit score, and the amount of your down payment.

To determine exactly what you can afford, consider getting pre-approved for a mortgage. A pre-approval will give you a better idea of what loan amount you’re eligible for and will make you a more attractive buyer to sellers.

What Is a Pre-Approval and Why Do I Need One?

A mortgage pre-approval is a lender’s estimate of how much money they’re willing to lend you based on your financial situation. It’s different from pre-qualification, which is a rough estimate of what you can borrow. Pre-approval involves a more thorough analysis of your credit score, income, and financial history.

Having a pre-approval in hand shows sellers that you’re a serious buyer, and it can give you an edge in a competitive market. It also helps you set a realistic budget before you start looking at homes.

How Much Do I Need for a Down Payment?

The amount needed for a down payment can vary based on the type of mortgage you choose. Traditionally, 20% of the home’s purchase price was the standard down payment. However, there are many loan options today that allow for much lower down payments—some as low as 3%.

For first-time buyers, there are government-backed loans like FHA loans, which require as little as 3.5% down. Keep in mind, though, that putting less than 20% down may require you to pay for private mortgage insurance (PMI), which adds to your monthly costs.

What Are Closing Costs?

Closing costs are the fees associated with finalizing your home purchase. They typically range from 2-5% of the home’s purchase price and can include appraisal fees, title insurance, attorney fees, and loan origination fees.

Some buyers forget to budget for closing costs, which can lead to surprises down the line. Be sure to discuss these costs with your lender early in the process, so you’re prepared when the time comes to close on your home.

How Long Does the Buying Process Take?

The timeline for buying a home can vary widely depending on market conditions, the type of financing you’re using, and the property you’re interested in. On average, it can take about 30-45 days from the time your offer is accepted to close on the home. However, if there are any complications with the appraisal, inspection, or financing, this timeline could be extended.

Should I Get a Home Inspection?

Yes, a home inspection is highly recommended. An inspection gives you a professional evaluation of the home’s condition, identifying any underlying issues that may not be visible during a walk-through. This can include problems with the roof, foundation, plumbing, or electrical systems.

While inspections aren’t always required, skipping one could lead to expensive repairs later on. An inspection provides peace of mind and, if problems are found, can be used as a negotiating tool to lower the price or ask the seller to make repairs.

How Do I Know If a Property Is a Good Investment?

When buying a home, especially if you plan to live in it long-term, you’ll want to consider its potential for appreciation. Look at factors such as the location, school district, and future developments in the area. Homes in desirable neighborhoods tend to hold their value better and may appreciate more quickly over time.

Also, consider the condition of the home. If it’s a fixer-upper, calculate the renovation costs and ensure they fit within your budget. A home that needs too much work might not be the best investment unless you’re prepared for a big project.

In all, buying a home can be a complex process, but asking the right questions will help you navigate it with confidence. From determining how much you can afford to understanding the importance of inspections, being informed can make your home-buying experience smoother and more enjoyable. Remember to consult with a real estate agent and mortgage lender to ensure you have all the information you need to make the best decisions for your financial future.

Selling Inherited Property? Tax Rules That Make a Difference

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Sooner or later, you may decide to sell property you inherited from a parent or other loved one. Whether the property is an investment, an antique, land, or something else, the sale may result in a taxable gain or loss. But how that gain or loss is calculated may surprise you.

Your Basis

When you sell property you purchased, you generally figure gain or loss by comparing the amount you receive in the sale transaction with your cost basis (as adjusted for certain items, such as depreciation). Inherited property is treated differently. Instead of cost, your basis in inherited property is generally its fair market value on the date of death (or an alternate valuation date elected by the estate’s executor, generally six months after the date of death).

These basis rules can greatly simplify matters, since old cost information can be difficult, if not impossible, to track down. Perhaps even more important, the ability to substitute a “stepped up” basis for the property’s cost can save you federal income taxes. Why? Because any increase in the property’s value that occurred before the date of death won’t be subject to capital gains tax.

For example: Assume your Uncle Harold left you stock he bought in 1986 for $5,000. At the time of his death, the shares were worth $45,000, and you recently sold them for $48,000. Your basis for purposes of calculating your capital gain is stepped up to $45,000. Because of the step-up, your capital gain on the sale is just $3,000 ($48,000 sale proceeds less $45,000 basis). The $40,000 increase in the value of the shares during your Uncle Harold’s lifetime is not subject to capital gains tax.

What happens if a property’s value on the date of death is less than its original purchase price? Instead of a step-up in basis, the basis must be lowered to the date-of-death value.

Holding Period

Capital gains resulting from the disposition of inherited property automatically qualify for long-term capital gain treatment, regardless of how long you or the decedent owned the property. This presents a potential income tax advantage, since long-term capital gain is taxed at a lower rate than short-term capital gain.

Be cautious if you inherited property from someone who died in 2010 since, depending on the situation, different tax basis rules might apply.

Starting Your Own Business: The Essentials for New Entrepreneurs

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Once you have an idea, starting a business can be very exciting, but also daunting. It is important to map everything out before you start to avoid potential pitfalls down the road. Here is a guide to set up your new business for financial success.

Know Your Market

It is crucial to conduct research on the demographic you are targeting with your business. You should survey these people to determine if your product or service is something that can be of use. Make sure to question your actual target market. Many times, asking family and friends can lead to a falsely optimistic view of the targeted market. 

Before you invest funds in your idea, you should consider doing a SWOT analysis. This stands for Strengths, Weaknesses, Opportunities, and Threats. Analyzing each of these aspects as if your business were to launch today can help you improve in the long run. Below are some examples to ask yourself in each category:

Strengths

  • What makes our business unique from the competition?
  • What traits/knowledge does our team bring to the table?

Weaknesses

  • What is slowing us down? (labor, technology, etc.)
  • What skills do we lack?

Opportunities

  • Can we market our product/service differently based on a current market need?
  • Can we expand our current services/products to include more?

Threats

  • Are we too similar to our competitors?
  • Are we dependent on a supplier?

Know Your Competitor

Researching your competitors can help in more than one way. You can research your competition to determine how to price your products. Many times, new business owners either under price or over price their products. Knowing what rate your competitors use can allow you to integrate your product to the market at a successful price point.

It is also possible to think of new ideas for your business model once you have seen how much overlap you share with your competitors. If you want your business to stand out, show the gap between your product/service and your competition’s. This can be difficult as you may have to go in a slightly different route for your business plan than you wanted, but it is necessary for the most success. 

Create a Sturdy Business Plan

Whether you need investors or are financing your business by yourself, having a business plan to use as a roadmap for establishing your new business can make the process smoother. A business plan gives anyone analyzing your business, the understanding of your foundation and how you intend to develop your business. Forbes has a great guide for entrepreneurs to create a business plan.

Determine How You Want to Structure Your Business for Taxes

Unfortunately, taxes determine the structure of every business. You should consider the different types of structures and how they each affect your operations.

  • Sole Proprietorship – This type of business structure is available to solo business owners. It means that the company and the owner are considered the same. You would be responsible for all legal and tax issues.
  • LLC – This structure can be owned by one or more people. This limits your personal liability for legal and tax issues, unlike the sole proprietorship.
  • LLP – This structure is similar to an LLC but requires a partnership. It is usually used for services from licensed professionals such as accountants.
  • Corporation – Like an LLC, a Corporation is able to limit your liability as a business owner. There are two types of tax corporations: C-Corps and S-Corps. C-Corps are usually for larger companies while S-Corps are for smaller companies.

Register Your Business

Now it is time to officially register your business. Try to think of a name for your business that you feel confident that you will like long-term. You will have a business name, but oftentimes, businesses use a DBA (Doing Business As). This means that the name that the public recognizes may not be the same as what the business legally filed. Some states may require you to file your DBA.

Unless you are a Sole Proprietorship, you will need to collect a sizable amount of tax documents at the time of registering your business. You will need to select a registered agent to accept legal documents for your business. You will also need to apply for an Employer Identification Number (EIN). This is an easy process you can submit to the IRS.

Figure out Your Finances

The first thing you need to do is open up a business checking account. You should never mix personal and business expenses. Having a separate checking account helps with this distinction. You should pay business expenses and receive income through this account. 

If you have a complicated business model, it is recommended that you hire a bookkeeper. This especially helps if you sell a product. You will need help with balancing your ledger with your inventory. Accounting software can also help with this. QuickBooks is a great resource for small businesses to stay on top of all of their tax requirements.

Funding Your Business

Once you figure out how much it costs your business to run, you need to figure out how to startup your business. Many people fund their own businesses from their savings accounts, personal credit cards, or from friends and family. This is a risky way to fund your business as it might leave you in trouble in your personal life if your business were to go south. There are other external options you can explore to fund your business such as small business loans or grants.

Getting Your Business Online

Now that you have figured out most of your business, it is time to create a website to properly showcase your products/services. Having a website is very important as it will get your business leads if marketed correctly. If you have no experience with website strategy, we suggest outsourcing to a web designer rather than making your own weak website. You will want to optimize your website so it will show up in search engines (SEO). A professional-made website will be able to put you in a good spot for this.

Registering your website on local listings can make a huge difference. Prioritize setting up listings for Google and Yelp. Make sure to add proper information in all of the fields. A good bio and pictures of your business and team can go a long way. 

Social Media is also a great way to market your business. You should think about your audience and the platforms they mainly use to determine your marketing strategy. For example, if you have a younger target audience like Gen Z or Millennials, Instagram will be the best platform you can use. You do not need to have every social media platform to market your business. Being consistent and patient is the best mindset to have at the end of the day.

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Creating a new business takes a good amount of tedious work but can lead to rewarding results. Using this guide can help you start in the right direction for your business. For more questions, contact us today!