Trusts are not only for the ultra-rich in our society. Many other taxpayers can benefit from the tax shelter a trust can provide. A trust can minimize gift and estate taxes, and distribute income to beneficiaries, such as children and grandchildren. Business owners also can establish trusts that spell out how their business will continue to operate after their death.
A trust is a legal entity separate from the person who sets it up. A trust can control the distribution of assets, perform legal transactions, pay bills, and file tax returns — with a little help from the person managing the trust, who is called a trustee. The trustee can be a person or an organization and is responsible for carrying out the wishes of the trust.
Assets need to be owned by the trust and are placed in the trust by a grantor, also known as donor, creator, or founder. The grantor determines the rules for the trust and decides how and when it will be distributed. The grantor and trustee can be the same individual. The organizations or people who receive assets or income from the trust are called beneficiaries.
A trust can earn income or incur expenses, which become the legal responsibility of the trust. In addition to ordinary income, sources of income can include interest, dividends, and capital gain. Expenses can include property taxes and administrative expenses related to managing the trust. Trusts report income and expenses on federal tax form 1041, U.S. Income Tax Return for Estates and Trusts.
There are many types of trusts, and they can be private or charitable. They can be created during a person’s lifetime (living trust) or after their death (testamentary trust) as specified in a Last Will & Testament (will). Living trusts can be revocable or irrevocable. Revocable means the grantor is able to change the terms of the trust at any time. In contrast, terms usually cannot be changed in an irrevocable trust without the beneficiary’s consent. Trusts can also be simple or complex. A simple trust is required to distribute income in the year it was earned, while complex trust can accumulate income and reinvest.
Each type of trust has pros and cons which could have a significant impact on tax liability for the trust and beneficiaries. It is best to speak with an estate planner to explore all options before making a decision.
If you’ve ever seen a black and white IRS envelope land in your mailbox, your first response may be, “Oh, no!” What should you do when you receive an IRS notice?
According to the IRS, you shouldn’t panic. A simple response may be all that is required.
An IRS letter may simply be a request for more information or a payment, or it may be a notice of a refund due to an overpayment. It may notify you of a change to your account or an adjustment that the IRS made. Or they may have a question about a recent payroll deposit.
Whatever you do, don’t just ignore the letter. Each IRS notice contains specific instructions which you should follow exactly. For example, if the IRS corrects your tax return, you should review your information and make sure you agree. There may be no further action required, or the IRS may require a payment.
If you disagree with the notice, respond within the time frame required. Send supporting documents for the IRS to review, and include the tear-off portion of the notice. Include your Social Security number or your employer identification number (EIN) with your correspondence. Mail the reply to the address on the notice, and allow a month for a response.
If you have a question, call the number on the notice or visit a local IRS office. Make sure to have the notice with you, as well as supporting documents such as the tax return in question.
Keep a copy of the notice with your records, and remember that the IRS never communicates with taxpayers via email.
You can visit IRS.gov: Understanding Your IRS Notice or Letter for more information about the specific notice you received. Look for the notice number in the upper right-hand corner of your notice and find it on the IRS page.
How are you handling the economic news of the impending fiscal cliff, or the massive influx of freshly minted cash to U.S. banks? Does it make you want to hunker down, or expand your business plans for 2013?
If your plans include borrowing money, the internet has an abundance of advice on the topic, including some humor from “anonymous”: “You can always borrow from a pessimist; he never expects anything back.”
Facts to Consider about Loans
All humor aside, you may be intrigued to know some interesting things are happening in the lending world…
- …SBA’s (Small Business Association) loan programs posted the second highest dollar amount ever in FY 2012.
- …Banks have record high reserves and are becoming very interested in lending again. In fact, commercial loan officers in smaller community banks are in demand and have seen a 39% raise in pay since 2008.
- …The Federal Reserve’s economic stimulus plan is set to continue into 2013 (“Operation Twist”). Theoretically, this will goose the economy by making loans less expensive for home and car purchases and for funding projects.
Non-Traditional Lending Options
Nope. I am not talking about venture capitalists. FOXBusiness (Dec. 2012) featured two non-traditional lending options to consider with faster turnaround (and higher fees than banks or credit unions):
- Revenue-Based Financing (RBF). The borrower pays 3-5% of their revenue until the loan is paid off, rather than committing to a monthly payment amount.
- Factoring. The borrower sells their invoices to a third-party for a fee in order to have cash, before the customer pays, for needed supplies.
RBF or factoring may be the right solution if your business does not yet qualify for bank loans.
Is It Time to Raise Capital?
I am not an accountant nor a tax professional, so I am not advising you to run out and borrow money. Decide for yourself. Do these conditions make it a favorable time to grow your business?
- Non-traditional options like RBF or factoring may provide the bridge you need to grow your business.
- You can get an influx of funds by “going public” and selling stock in your business.
- Banks are eager to lend, and interest rates are low.
- Also, friends and family may want to invest in your small business. See Patriot Software’s FREE 10-page white paper titled “How to Raise Capital for Your Business” for a step-by-step guide to private lending.
Remember, since you are not the federal government, you will have to repay every penny that you borrow. So, don’t borrow unless you know you can pay it all back.
Now it is your turn. Do you have a loan success story or nightmare to share? Please comment with your stories, insights, and suggestions. And if you found this information useful, please tweet, like or share!
A Minority Business Enterprise (MBE) may include individuals defined as a minority such as African-Americans, Hispanic- Americans, Native Americans, and Asian- Americans. The Minority Business Development Agency, part of the U.S. Dept. of Commerce, provides clear guidelines for establishing a business as an official MBE.
A business can identify itself as a Minority Business Enterprise. However, the state, city, or sometimes a federal agency, must certify that the business is in fact a MBE. The National Minority Supplier Development Council often handles the task of minority certification.
The overall goal of programs designed for MBEs is to encourage the development and sustain the growth of minority-owned businesses. The resources provided by the government enable more minorities to establish and maintain businesses for economic improvement and future generational success. Each state establishes guidelines for programs for MBEs and some private organizations do as well.
Qualifying as a MBE may give the business owner access to federal procurement markets and qualification for various projects. Additionally, there are various educational programs as well as types of financial assistance, such as grants and loans, available to minority-owned businesses. The Small Business Administration (SBA) offers these under the 8(a) program, and also serves to educate minority business owners on the accessibility of additional resources.
Need a way to simplify your accounting and save time? Try Patriot’s accounting software for free today! It’s an easy-to-understand solution to your cash-basis or accrual accounting needs.
The Internal Revenue Service has announced tax relief for areas in Louisiana and Mississippi affected by Hurricane Isaac. IRS filing and payment relief will be offered to businesses and individuals in the following affected counties (Note: More may be added as the Federal Emergency Management Agency (FEMA) assesses the damage.)
Louisiana Parishes: Ascension, Jefferson, Lafourche, Livingston, Orleans, Plaquemines, St. Bernard, St. Charles, St. John the Baptist, St. Tammany
Mississippi Counties: Hancock, Harrison, Jackson, Pearl
The tax relief:
- Postpones deadlines for tax filing and payments on or after Aug. 26. Individuals and businesses in affected areas have until Jan. 11, 2013, to file these returns and pay any taxes due.
- Applies to corporations and businesses that already received an extension until Sept. 17, 2012, to file their 2011 returns, as well as individuals and businesses receiving an extension until Oct. 15.
- Applies to the third-quarter estimated tax payments, normally due Sept. 17, 2012.
The IRS will abate interest, late-payment, or late-filing penalties that would otherwise apply. In addition, the IRS will waive failure-to-deposit (FTD) penalties for federal payroll tax deposits and excise tax deposits normally due on Aug. 26 and before Sept. 10, as long as the deposits are made by Sept. 10, 2012.
For more information on available relief for Hurricane Isaac and other disasters, visit www.disasterassistance.gov.
The Consumer Credit Protection Act (CCPA) aims to protect employees whose earnings are being garnished from discharge by employers. The Wage and Hour Division (WHD) of the U.S. Dept. of Labor (DOL) administers the Act.
All employers are covered by the Act, as well as the employees who receive wages, bonuses, salaries, commissions or periodic payments from retirement or pension plans. Typically, tips income is not included in the Act.
Wage garnishment refers to an employer withholding wages of an employee to repay a debt, as per a court order or other legal procedure. Even if multiple levies are made and proceedings brought for collection, employers cannot discharge employees because of garnishment for a single debt. However, Title III of the CCPA does not prevent employers from discharging workers if their wages are subject to garnishment for two or more debts.
The Act also sets a limit on the amount of money that can be garnished from the earnings of a worker per payday. This equals to the sum by which the wages are greater than 30 times the federal minimum wage per hour, as per the Fair Labor Standards Act, or 25% of disposable wages. (Disposable earnings refers to the amount of wages left after legally mandatory deductions like unemployment insurance, Social Security, state employee pension plans and local, state, and federal taxes. Deductions that are not legally mandatory such as life insurance, health insurance, and union dues are not considered while calculating disposable earnings.)
Regardless of the number of garnishment orders received by an employer, the garnishment limit applies. An amount greater than the above set limit can be garnished from employee wages for the payment of local, state, or federal taxes, bankruptcy, or child support. For more information on the Consumer Credit Protection Act, please refer to the Dept. of Labor (DOL) website.
Today’s harried business owners can save time and money by taking advantage of an EFT (Electronic Funds Transfer)process, which is available at financial institutions.
Using EFT for banking can reduce the time and money spent paying expenses or receiving income. Within hours instead of days, a much-needed payment can be made to meet bill payment deadlines. Convenient for both buyer and seller, an electronic money transfer is secure and convenient for busy professionals who are striving to pay bills on time and manage receivables.
Here are a few more ways EFTs can help your business:
- With an electronic transmittal system in place, business owners can manage transfers on an as-needed basis, or set up a routine process.
- Business owners don’t have to worry about running out of postage or forgetting to pay an invoice.
- Business owners can use EFTs to pay recurring expenses such as office equipment rentals, payroll, and inventory payments, without spending time to write and mail checks, or paying a staff person to handle them.
- Privacy is guaranteed by most or all financial institutions. The federal Electric Fund Transfer Act protects consumer rights with respect to unauthorized or inaccurate electronic fund transfers.
One caveat: Business owners using electronic funds transfer must ensure adequate funds are in the account to cover all scheduled automated payments. If an electronic fund transfer is attempted from an account with an inadequate balance, the account holder may be fined or have to pay a service charge.
The IRS offers two tax credits: The Child Tax Credit and the Child and Dependent Care Credit. Knowing which tax credits a family can claim, and how to claim them, can save time and money.
A family can claim a child tax deduction for a child that is resides with the family for more than half the year. However, if they intend to claim a child that another person may also claim, consult with an accountant to determine who should claim the tax credit. Qualifying children must be under 17 at the end of the tax year to claim the credit, and cannot provide more than half of their own support for the tax year in question. The maximum amount that can be claimed for the Child Tax Credit is $1,000.00 for 2011. More information on the Child Tax Credit is available on the IRS website.
The Child and Dependent Care Credit can be used to assist families with care of children too young to be unsupervised, or disabled children who cannot care for themselves. Taxpayers must earn income from a salary, wages or self-employment to be eligible for the credit, and the credit cannot be used by those whose children are cared for by a parent or another dependent child. For the Child and Dependent Care Credit, the maximum that can be claimed is 35% of child care expenses. And while employing a nanny does make one eligible for the Child and Dependent Care Credit, doing so may involve other taxes and requirements. Find out more about the Child and Dependent Care Credit on the IRS website.
Divorced or separated parents must comply with certain conditions to claim a child tax deduction, which include how much time each parent spends with the child, support arrangements, and how much each parent makes. Information on child tax deductions for divorced or separated parents is available on the IRS publication 504.
Understanding the tax credits that a taxpayer is eligible for is key to avoiding costly and time-consuming mistakes.
Small business owners have one thing in common: an entrepreneurial spirit. You started your business because you believed in your product and knew you could sell it. But businesses need money to grow, and that’s in short supply these days. We will show you how to raise money.
It’s a conundrum: you can’t grow your business without money, but these days, you can’t find money to grow your business! And with traditional funding sources drying up even for high-growth industries, what’s a small business owner to do? Here’s one option: Set up a private offering to your friends and family to raise money for your business. Your investors may get a better return than a traditional bank CD or money market account, and they’ll help you build your business in the process.
The FREE whitepaper “How to Raise Money for Your Business” from Patriot Software, LLC, describes how small business owners can quickly, easily, and legally raise capital through a private lender investment program. You can infuse your business with the money you need to not only survive, but thrive. We’ll tell you how!
If you have young children, day care expenses may be a costly fact of life for you, as well as for any working parents on your payroll.
You’re probably aware that you can take a tax credit for child care expenses. But did you know that qualifying summer day camp expenses may also apply? That’s where the Child and Dependent Care Credit comes into play. What is the Child and Dependent Care Credit? It’s a federal tax credit that can reduce your tax bill for certain qualified child and dependent care expenses.
Keep these IRS tips in mind when determining whether your day camp or other child care expenses qualify for the Child and Dependent Care Expenses Credit:
- The child must be under age 13 when the care was provided.
- You cannot take the credit for overnight camp expenses.
- You may qualify for the credit whether you use a home sitter or a day care facility.
- Depending on your income, the credit can be up to 35% of your qualifying expenses.
- You can use up to $3,000 of un-reimbursed expenses annually for one qualifying individual or $6,000 for two or more qualifying individuals.
You will need to identify the child care provider to the IRS by providing the name, address, and Taxpayer Identification Number. If the provider is a tax-exempt organization such as a church or a school, you don’t have to show the TIN — just write in tax-exempt. Use Form W-10, Dependent Care Provider’s Identification and Certification, to request this info from the child care provider.
If you pay someone to watch your child in your home, you may be required to withhold payroll taxes. For more information on this rule, check out IRS Publication 503, Child and Dependent Care Expenses.