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Accounting for the Work Opportunity Credit on an Iowa Tax Return

Question: does Iowa recognize the Work Opportunity Credit?

Answer: no, but they do allow a deduction equal to the amount of credit claimed.

Analysis and Background

The Work Opportunity Tax Credit (WOTC) is a federal tax credit designed to reward employers for hiring people from certain targeted demographics. I went into more detail about the credit in this blog post.

Iowa does not recognize the WOTC; it’s only available on federal tax returns. However, all is not lost on your Iowa return.

How to Handle on the Iowa Return

On the federal tax return, the amount of WOTC claimed reduces the amount of deduction you can take for wages paid. For example, if you pay $20,000 of wages and qualify for a $2,000 WOTC, your deduction for wages paid is reduced to $18,000.

On your Iowa tax return, this “lost” deduction of $2,000 is allowed as an adjustment to income.

So, you don’t get a credit with Iowa, but you do get to take a deduction equal to the amount of WOTC claimed on the federal return.

Glossary of Tax Terms: Depreciation

There’s no easy way to explain depreciation, but here’s a try!

For tax purposes, depreciation is a deductible expense relating to the purchase of assets used in a business or rental activity. Assets are things that have a useful life of more than one year, so generally we’re talking about buildings and equipment.

Tax law does not allow for a full deduction right away for purchasing assets. Instead, the cost is spread out over the useful life of the asset. (Note: actually, tax law does allow for full deductions right away for purchasing assets if the taxpayer employs “bonus depreciation” or “Section 179 expensing.” But those are different topics for a different blog post.)

The IRS determines the useful life of an asset. For example, the IRS assigned a useful life of 5 years to computers. Meaning the purchase of a computer is deducted over 5 years. This is true even if a business only intends to use the computer for 3 years.

This concept is different from “generally accepted accounting principles” which govern financial statements. For GAAP purposes, an asset is depreciated over its useful life, and the company gets to determine that useful life. So in our computer example in the last paragraph, the depreciation deduction would be spread over 3 years for GAAP.

In practice, most of the small businesses I deal with use Section 179 expensing to deduct the full asset cost in the year of purchase. Or the business will take bonus depreciation. (Again, these two topics are another blog post for another day!) But sometimes Section 179 isn’t an option, and bonus depreciation may not result in 100% expensing right away, so it’s useful for business owners to have an understanding of depreciation.

The Affordable Care Act and Small Businesses

(NOTE: This is a very, very, very basic overview of the Affordable Care Act as it relates to small businesses. I will be going into more detail in other blog posts in the months to come.)

My small business clients are, universally, afraid of the Affordable Care Act.

So am I.

I learn new things about the ACA on a weekly basis. Typically it’s something I’ve stumbled across while researching something else.

It’s scary, because I always wonder what else I’m missing. I’ve researched the ACA, given presentations on it, taken continuing education, and still I learn new and surprising things on a weekly basis.

Scary.

But the typical small business can breathe easy regarding one aspect of the ACA: the ACA does not require your business to offer health insurance to your employees.

50 or More Full-Time Equivalent Employees — Algebra Time!

The ACA requires companies with 50 or more “full-time equivalent” employees to offer health insurance. This requirement starts in 2016 for companies with 50-99 employees, and 2015 for companies with 100 or more.

If your business is nowhere near 50 employees, you’re in the clear.

But if you are close to 50 or above 50, how do you know if you’re affected?

Sharpen your pencils — it’s algebra time!

The definition of a full-time employee for this part of the ACA is: any employee who works 30 or more hours per week.

So, you’ll need to go through your entire workforce and determine the average number of hours worked per week. Employees who work 30 or more hours/week count as 1 full-time employee. Employees who work less than 30 hours/week count as a fraction of 1 full-time employee.

For example, an employee who works 20 hours/week would count as 0.67 of a full-time employee.

(This is a gross oversimplification of the process. If this affects you, consult with your accountant and/or insurance person to get more details about things like the “look-back period” and other things you need to take into consideration.)

After you’ve completed this exercise, you add up the “full-time equivalent” number assigned to each employee. If you reach 50 or more, you’re required to provide insurance or pay a penalty.

ACA Affects Us All

That’s not to say the ACA doesn’t affect small businesses at all. It affects all of us in some way, because of the “individual mandate.” But that’s a different blog post for a different day.

Financing a Small Business: 4 Items to Remember

In December I had the honor of serving as a panelist for a discussion about small business financing, how to deal with bankers, sources of funding, etc.

In preparing for the panel discussion, I wrote down 4 key points that I wanted to make about financing, and I wanted to share them here:

One: There’s going to be paperwork. Learn to deal with it.

Some of my small business clients like to rant and rave to me about the fact that there’s paperwork and bureaucracy and laws and regulations at every step of everything they want to do.

My response is always “yep, there sure is.”

I’ve seen business owners, who had nothing to hide from the bank, throw their hands up and walk away from bank loans because the bank was asking questions and wanted to see financials and tax returns.

Guess what: there’s going to be paperwork and questions when you’re asking a bank for money. Deal with it.

Two: Work with your accountant.

Your accountant probably knows several good bankers (I know I do). Use your accountant as a resource for getting introduced to bankers who can help you with financing.

Three: Tell your accountant about major expenditures BEFORE you spend the money.

This is important so your accountant can advise you of the tax consequences and help you plan.

One example: I once had a client spend tens of thousands of dollars constructing a building, thinking that all of the money they were investing would be fully deductible that year. They were disappointed to learn that tax law considers a building to be commercial property, and most of their costs needed to be depreciated over 39 years rather than being fully deductible in the first year.

If they had consulted with me ahead of time, they may have made a different decision with their money.

Talk to your accountant before you spend the money. Once the transaction is completed, there’s not much I can do to change the tax consequence.

Four: Don’t spend money just to get tax deductions.

You’re wasting money if you make purchases just to get tax deductions. Make business purchases based on need, rather than solely the fact that you might get a tax deduction. Tax deductions save you cents on the dollar. So if your tax rate is 30%, you’re saving 30 cents on every dollar you spend on business expenses.

Or to put it another way: you’re not really “saving” 30 cents, you’re losing/spending 70 cents.

The tax deduction is great if you need the things your purchasing. But you’re wasting money if you’re just spending money to try to get deductions.

Small Businesses — Review Those Benefit Programs

When was the last time your small business reviewed the benefit programs your business offers?

Whether it’s health insurance, a cafeteria plan, a retirement plan or a health reimbursement arrangement, it’s a good idea to review those programs now and then.

As you review these programs, take into consideration these 3 things:

  1. Cost. This one is obvious and fairly self-explanatory. How much money are you spending on your benefit program? Is it worth it? What alternatives are available?

  2. Mechanics. By this I mean, look at how complicated it is for you to maintain. Is it eating up large chunks of your time? What sort of government paperwork to you have to file? What sort of compliance issues do you face? Are there simpler alternatives?

  3. Employee notices. If you have employees, you are probably required to give them various notices regarding the benefit programs you offer. Yes, most of these notices end up in the garbage and never get read. But you still have to hand them out. And the government typically requires that the notices contain certain specific language. When you review your benefit programs, also review your notices to make sure they’re saying what they need to say.

And of course, you should involve your accountant in these discussions.

Issuing 1099s to an Incorporated Veterinarian

It’s 1099 season! Typically a 1099 must be issued by a business that pays $600 or more to a person who provides contract labor or services to the business during the year.

An exception applies to payments made to corporations. Generally, payments to corporations do not require the issuance of a 1099. There are two exceptions to the “no 1099 to a corporation” rule:

  1. Payments made to law firms. Law firms must receive a 1099 for payments made for legal services in excess of $600.
  2. Payments made for medical services.

How about payments made to veterinarians? Do veterinarian services fall under the definition of “medical services?”

According to the IRS, the answer is … yes. Per Letter Ruling 201349013:

Generally, yes. Payments made by a taxpayer in the course of the taxpayer’s trade or business to an incorporated veterinarian must be reported to the IRS to the extent the payments aggregate to $600 or more per year. Incorporated veterinarians are not exempted from the reporting requirement by Treas. Reg. Sec. 1.6041-3(p)(1) because veterinarians are “engaged in providing medical and healthcare services” for the purposes of Treas. Reg. Sec. 1.6041-3(p)(1).

To be clear: this only applies to BUSINESSES that make payments to veterinarians in the course of conducting business (so farmers, ranchers, pet stores, zoos, etc.). Private citizens who take the family pet to the vet don’t need to issue a 1099 to the vet.

It may seem strange to think that veterinarians would fall under the definition of “medical and healthcare services,” but the IRS says it’s consistent with prior rulings in which the phrase “medical and healthcare services” is not necessarily limited to services performed on humans:

Congress and the IRS have historically included veterinarians in the field of medical and healthcare services, and specifically excluded veterinarians when exclusion was intended. For example, in Rev. Rul. 91-30 the IRS determined that veterinarians are in the “field of health” and should be included within the meaning of “similar healthcare providers” akin to doctors, nurses, and dentists, for purposes of defining a Personal Service Corporation. As an example where Congress intended to exclude veterinarians from a consideration of what is considered “medical, Congress specifically limited the definition of “medical device” in IRC Sec. 4191(b)(1) to devices “intended for humans.” Under Treas. Reg. Sec. 1.6041-3(p)(1) the language does not limit the terms “medical” or “healthcare” to services intended to treat humans. Accordingly, we conclude that a corporation providing veterinary services is “engaged in providing medical and healthcare services,” for purposes of Treas. Reg. Sec. 1.6041-3(p)(1), and is therefore not excepted from the information reporting requirement of IRC Sec. 6041 as a corporate payee.

Got 1099s to Issue?

As a business owner, you may need to issue 1099s to certain people you paid money to in your business this year. A 1099 may need issued if:

  1. You paid $600 or more in total to any 1 person during the year for services provided to your business. This also applies to payments made to businesses organized as partnerships. However, a 1099 does NOT need issued for payments made to a corporation. Payments made to an LLC may or may not require a 1099, depending on how the LLC is taxed.
  2. You paid $600 or more in total to a law firm during the year, regardless of how the law firm is organized. In other words, even if the law firm is a corporation, you would need to issue it a 1099 if you paid the firm $600 or more.
  3. You paid $600 or more in rental or lease payments to an unincorporated person or partnership during the year (similar rules as listed under item #1).

The due date for issuing 1099s to recipients is January 31. As a reminder, tax returns now contain two questions pertaining to whether or not you issued 1099s. There are penalties for not issuing 1099s when you were required to, or for issuing 1099s after the due date.

This blog post obviously oversimplifies 1099s. Active businesses often grapple with who needs issued a 1099, and sometimes it’s not entirely clear what payments should be included on the 1099 versus what might not need included.

Your accountant can help navigate these issues. You do have an accountant, right?

Review Your Small Business Operations as Part of Year-End/Year-Beginning Planning

The end of one year and the beginning of a new year is a good time to analyze your financials. It’s also a good time to analyze your operations.

Here’s an example: one time a business client had a turbulent year with his business. By the end of the year, he was at his wit’s end and was considering selling or just simply shutting down.

I helped him review his operations, and he and I came to realize that the problem was that his business has grown faster than expected. This is obviously a good problem to have. But it creates challenges.

He had an employee, but the owner was still the one answering the phone, responding to e-mails, coordinating the work, dealing with collections, and just generally dealing with all the administrative tasks that come with having a business.

He also operated on the “any customer, anywhere” mantra. Meaning, he would drive hundreds and sometimes literally thousands of miles to serve anyone who came along.

He was seemingly well-paid for these excursions, but all of the travel — in addition to trying to keep up with the basics of running the business — was too much.

I suggested some simple changes — things that didn’t cost any additional money — and he ended the year a much happier camper.

Questions to ask yourself (and that I’m asking my clients) include:

  • How are you getting your work done? Are your processes and procedures working or are you stressed out?

  • If you have employees, what are they doing, and can you have them take over things that are currently on your plate?

  • It might not always make sense to take on “any client, anytime.” So look at your sources of income. How much money are you really making from those sources when you factor in your actual costs and the time commitment involved? For example, if your service area involves a lot of out-of-state work, how much is it costing you in terms of travel costs and travel time to do those jobs? What’s the intangible cost of the added stress of traveling and trying to do everything else? Could you turn the same profit margin and have better quality of life by taking on more jobs closer to home and fewer jobs that involve travel?

These are questions I ask my clients this time of year (and throughout the year, for that matter).

Small Business Planning: Got Your Financial Statements and Budget Done Yet?

In an ideal world, small business owners would review financials statements and budgets on an ongoing basis.

In the real world, the day-to-day struggle of running a business, paying bills and keeping customers happy causes the financial side of things to get pushed aside.

I’m not too proud to admit that I often fall behind on keeping my own practice’s books up to date.

It’s hard.

But it needs done.

December and January are good times to review the old year’s financials and plan for the new year.

Review of the Old Year

All businesses need an income statement (sometimes called a profit-and-loss statement). An income statement shows how much money you brought in and how much money you spent.

Your profit margin is an important thing to look at on the income statement, as is simply a general review of where your money is being spent. You might find areas where you’re wasting money.

Most businesses will want to create a balance sheet, too. A balance sheet lists your assets (cash in the bank, accounts receivable, equipment) and your liabilities (accounts payable, debt that your business owes).

Keys to look at on a balance sheet include your debts in relation to your assets, as well as how many uncollected receivables you have.

Planning for the New Year

Creating a budget is hard.

Let me rephrase that: creating a budget is not hard, but creating a budget that’s actually useful is hard.

Ideally, a budget will paint as accurate of a picture as possible of your income and expenses for the year. This helps manage cash flow and is useful in planning for big expenses.

The biggest mistakes I see on budgeting are:

  1. Just taking last year’s totals and increasing by a certain percentage across the board and calling it good, and
  2. Creating monthly budgets where you just take the estimated totals for the year and divide by 12. If you’re going to do a month-by-month budget (which you should, so you can better manage cash flow), do it based on your knowledge of what your income and expenses are likely to really be for that month, rather than just taking 1/12th of the full-year totals. Otherwise you’ll get skewed numbers in certain months.

And of course, you should involve your accountant in these tasks.

You do have an accountant … right?

Six Things I’m Talking to My Small Business Clients About at Year-End (Part 2)

This is a continuation of my rundown of the things I’m discussing with clients as we reach the end of 2013.

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Four: The Affordable Care Act Won’t Require All Small Businesses to Offer Health Insurance to Employees

Only employers who have 50 or more “full-time equivalent” employees are required to offer health insurance. A full-time equivalent employee is someone who works 30 or more hours a week. If your total employee count is pushing towards 50, you should talk to your accountant and your insurance person for more details.

The typical small business with less than 50 employees isn’t required to offer insurance.

Five: But the Affordable Care Act WILL Affect All of Us in Some Way

Your business might not be directly affected by the Affordable Care Act, but all of us will be affected by the ACA in some way in 2014. It’s impossible to adequately summarize everything in one short paragraph, but examples include: the requirement that all individuals maintain health insurance, and surtaxes on wages and investment income if total income is above certain levels.

Six: Timing of major purchases

Accountants tend to throw out one universal piece of advice this time of year: buy assets, supplies, etc. before December 31 to reduce your tax liability this year. I’m not one of those accountants who just tosses this out as universal advice, because it may or may not be a good idea.

Stuffing as many purchases as possible into 2013 makes sense if you think your income is going to be higher in 2013 than in 2014. But if you think your income will be higher in 2014, it probably makes sense to wait until 2014 to make those purchases, so you can take the deduction when your income is higher.

Also, it’s poor planning to buy “things” just for the sake of getting a tax deduction. The deduction is nice, but if you don’t have a clear business purpose for making a purchase, then you’re wasting your money.

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