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Making the leap beyond a one person business

April 28, 2015

A lot of extremely successful people run one person businesses. They work alone, have no assistants, do everything themselves, and what they do they do very well – better than anyone else could.

These people work hard, feel satisfied and make enough to not have them feeling like they want more. So this article is not directed to them but to others that might want more and would like to build a business independent of their own hard work and sweat. Following are some suggestions for these owners:

  • Consider hiring an assistant.
  • Using people to help with easy to delegate tasks such as envelope or package stuffing, mailing list maintenance, or bill paying frees up the owner for selling, product or services development and other more creative and essential parts of the business.
  • Many phone calls and emails can be responded to by an assistant. It is much easier to sit with an assistant for 10 or 15 minutes and tell them how to respond to a dozen or so callers than to return every call. If someone must speak to you personally, your assistant can tell them when you will call them, assuming you cannot do it right away.
  • Many people are reluctant to use others because they feel they do not know how to delegate. Delegating is not hard, but it has to be tried and learned.
  • Many don’t delegate because they believe no one could do it better than they could – stuffing envelopes? Get over it.
  • Even if they cannot do it better, the cost of the assistant is the price you are paying for the extra time you are getting from yourself. By most measures this is a bargain.
  • Another reason people do not delegate is that they feel they will spend too much time “teaching” and supervising and they will not pick up any additional time and just more responsibilities. That is true for the first or second time you delegate something to them, but that is an investment that will be paying dividends in a very short while.
  • Depending on the type of business, a better presence and stronger participation in social media activities could help branding, customer and prospect engagement, and sales. This can be done by an assistant or outsourced to a consultant.
  • I know many businesses where assistants became heads of technical or marketing departments or shadow “owners” able to deal with customers and clients more easily than their boss and certainly be more available with the ability to provide needed information almost on demand.
  • Establishing your business with staff creates greater equity and value that is transferrable along with sustainable and predictable cash flow.

Some of the best violinists can make heavenly music but when accompanied by an orchestra they create an unforgettable experience for the audience. A suggestion is not to be a soloist, but to be the conductor. When you are ready for that, you are ready to take the leap beyond a one person business.

Getting Rid of Tax Preparation Clutter

April 23, 2015

Here are some things I noticed during tax season that can make it a little easier to prepare your return next year and also to de-clutter part of your financial life.

  • Many people have substantial brokerage accounts for themselves and are custodians for their children with inconsequential total investments.  Yet, they will have accounts with three or four fund families and have each spread into four or five funds.  That’s about 15 funds that have to be reported separately; yet the total of all 15 accounts do not equal the smallest position in their personal account.  This makes no sense.  Consolidate them all into one mutual or index fund and stop incessant trading.
  • If you have an investment manager, check to see their range of investments.  Any small or minimal positions cannot have significant effects on your portfolio’s total results so ask your manager why they have them and to consider cleaning them up.
  • If you have stocks registered in yours and also a deceased person’s names, change the designation to just your name.  Even though the Social Security number is yours, this will facilitate transfers upon your death.  Alternatively substitute a name the shares can be transferred to upon your death.
  • If you still have many stocks in your name, transferring them to a brokerage account will reduce your correspondence and the number of dividend checks you receive and have to deposit.  This also applies to any Dividend Reinvestment Plans (“DRIP”) you might have.
  • Many companies that offer DRIPs now charge fees for the dividends they are reinvesting.  If you have these, consider closing them, transferring the shares to a brokerage account and receiving the dividends directly into that account.  Some brokers will reinvest the dividends for you.  So, if you want to continue that, check it out with your broker.
  • Custodian accounts for children over age 18 should be transferred directly to the child.
  • If you typically do not read all the mail you get, request it electronically and open and read only what you want.  Also, tell your brokerage firms to stop providing your phone number and this will stop the calls to vote your proxy.
  • Consolidate your brokerage accounts as much as possible.
  • Look at the tax allocation of your investments and try to minimize your taxes.
  • If you have inactive accounts, write a letter informing the bank, broker, custodian or insurance company that the account should be considered active and not subject to escheat laws
  • File a claim to recover unclaimed funds the State might be holding for you.  See my previous blog on this.
  • Donate stocks where you own an insignificant number of shares to reduce your mail, eliminate brokerage fees on the sale, get a tax deduction, not have to report the gain and conserve your cash.

Reducing the clutter will improve the quality of your life.

Never Stop the Wonder

April 21, 2015

At the end of last summer, my lawn was pretty crummy.  After the winter, it looked even worse.  Last week, I left my house early in the morning after a night rain amplified the fresh smell of the grass and I noticed my deep green lawn.  The wonder of nature.  Those couple of moments gave me the greatest feeling and made my day – even before it was to begin.

Most nights, I look up and see the dark sky lit with uncountable twinkling stars.  Even more wonder.

We live.  We breathe.  We think.  We feel.  We imagine.  We love.  We don’t always appreciate what we have when things are going well.  Many times we need adversity, problems and some hurt to pass over before we are grateful about the wonders around us.

A message for all of us: Don’t wait for trouble.  Appreciate what you have.  Never stop the wonder.

Oops, It Might Be Time For An Amended Return

April 16, 2015

Sometimes mistakes happen on a tax return and the IRS has a pretty easy way to correct them.  You can file an amended return.

Use Form 1040X where you would indicate and explain the change and either mail a check with the added payment or wait to receive an extra refund.

Amended returns cannot be filed before the due date, which was yesterday, more than three years later than when you filed or the original due date – including extensions.

Form 1040X requires the attachment of other forms and schedules that are explained in the instructions.  If you have a complicated or involved change, including copies of the substantiation with the return could help avoid an audit.

Unless the refund is extremely large, the filing of an amended return would not increase the chances of an audit.  It is a pretty routine procedure for the IRS.  If you never filed an amended return it might not feel routine for you, but you should not worry excessively about it.  If you owe tax, interest and penalty would be due.  You can calculate it yourself, or wait for a bill.  Paying the tax with the form will stop the interest and penalty from accruing.  I recommend filing the amended return as soon as you discover the error.

Form 1040X and its instructions can be downloaded at

Not-For-Profit Unrelated Business Income

April 14, 2015

Not for Profit (“NFP”) organizations that are recognized as tax exempt under IRC 501(c)(3) are generally exempt from Federal income tax unless they participate in certain activities that generate unrelated business income (“UBI”).  Using the profits for exempt activities does not make the income non-taxable.

Not only does an organization need to be careful about the income tax effects, they also need to be aware that too much UBI can jeopardize the organization’s tax exempt status.  The rules concerning when income generating activities are taxable or non-taxable are quite complicated and each stream of revenue should be analyzed with due care.

UBI is net income from a trade or business regularly conducted by an exempt organization that is not substantially related to the performance by the organization of its exempt purpose or function.  There are three key items to take away from the definition of UBI:

  • A business activity is not substantially related to an organization’s exempt purpose if it does not contribute importantly to accomplishing the Organization’s mission and reason for tax exempt status as initially established with the IRS through the determination letter.  Whether an activity contributes importantly depends in each case on the facts involved.  The size and extent of activities should be considered in relation to the nature of the exempt function they intend to serve.
  • A trade or business is any activity conducted for the production of income from selling goods or performing services.  It is irrelevant whether the activity generates a profit for purposes of determining whether the gross revenue derived from the activity is subject to UBI rules.
  • Business activities are regularly conducted if they show a frequency and continuity and are pursued in a manner similar to comparable commercial activity.

Not all unrelated activities, however, are considered taxable income.  Examples of excluded trade or business activities include the following:

  • Any trade or business in which substantially all the work is performed for the organization by volunteers without compensation
  • A trade or business conducted for the convenience of the members is not an unrelated trade or business
  • Any payment made by a person engaged in a trade or business for which that person will receive no substantial benefit other than the use or acknowledgement of the business name, log or product lines
  • A trade or business that consists of selling merchandise which the organization received as donations, gifts or contributions is not UBI
  • Bingo games
  • Convention or trade show activities
  • Certain investment income (interest, dividends and capital gains)
  • Royalty income
  • Rents from real property (not debt-financed property) if certain restrictions are met

When a NFP has a revenue stream that meets the criteria above, it should be reported on IRS Tax Form 990-T.  The net income from the unrelated activity is subject to taxation.  The 990-T is a separate tax filing from Form 990 and follows the same due dates.  It is advisable to contact your accountant or tax preparer related to matters of UBI.

Brad Caruso, CPA, Senior manager in our Not-for-Profit and Education Service Group assisted in the preparation of this blog.  If you have any questions you can contact Brad directly at 732 828-1614.

Tax Issues When Changing Your State of Residence

April 9, 2015

When more than one residence is owned, a perplexing issue is determining the state or locality the owner is a resident of for tax purposes.

For many states, an individual can be a tax resident if they are either domiciled in that state or maintain a permanent place of abode in the state and spend more than 183 days during a calendar year in that state.  Most states are aggressive in auditing this confusing area so it is important to follow the rules and do it right.

Many states and localities define when a person is considered domiciled in their jurisdiction and/or is a resident.  They say that person is a resident for personal income tax purposes, unless for that year, such person maintains no permanent place of abode in the jurisdiction during the taxable year; maintains a permanent place of abode outside the jurisdiction during the entire year and spends in the aggregate not more than 30 days of the taxable year in the jurisdiction.  In addition, some states and localities have a rule regarding presence in a foreign country.

Domicile is viewed as a state of mind and some of the questions that need to be answered are:

  • Where do you really want to live and where is your “home?”
  • Where do you want to spend most of your time and where do you spend your time?
  • Where are your most precious and important possessions kept?
  • Where are your business interests located and how active is your participation?
  • Where does your family live?

When an individual does change their domicile, a taxpayer should consider doing the following:

  • Change car registrations
  • Change driver’s license
  • Change voter registration and vote there
  • Change passport
  • Establish religious affiliations in the new area
  • Establish social affiliations such as country clubs, dining clubs and other groups
  • Move personal items including the near and dear things you have.  Near and dear items include family photo albums and mementoes and valuable art
  • Insurance policies should show your primary address in new state
  • File for homestead exemption, if applicable
  • File an affidavit of Domicile in new state, if applicable for that state
  • Execute a new will and any applicable trusts with an attorney in the new state under that state’s laws
  • Change credit card billing addresses
  • Open local bank accounts and brokerage accounts and change all account addresses to your new address
  • If you use a safe deposit box, open one in the new jurisdiction
  • File non-resident tax returns in state you moved out of if you have business or employment income from that state
  • Buy municipal bonds from new state and dispose of bonds from previous state

Failure to do most of the previous items will cause the jurisdiction to question whether a taxpayer has really changed their domicile.  Each taxpayer’s situation is different with their own distinct facts and circumstances so adapt the list to suit your circumstances.

Even if the jurisdiction agrees that a taxpayer has changed their domicile, the day count or 183 statutory day test is put into place. The jurisdiction’s position in cases where taxpayers are being audited for residency is that every day has to be accounted for.  In some cases, that could be extremely hard to do.  Also, proving a negative is very difficult so taxpayers should keep contemporaneous diaries or detailed schedules.  Third party documents such as grocery and credit card receipts, bills and airline tickets should be kept in order to verify where you were.  The burden of proof for this is always the taxpayer’s. Remember, any part of a day (with certain exceptions) in a jurisdiction counts as a day for residency purposes.  The consequences of not having adequate records can be very costly.

It is also possible to be deemed a resident of more than one state or jurisdiction if residences are maintained in more than one jurisdiction making recordkeeping even more important.  This can lead to excessive tax assessments and onerous penalties.  Also note that depending on circumstances, both spouses do not have to be domiciled in the same state.

Many taxpayers’ returns where a change of residence has occurred will likely be reviewed and possibly audited by the taxing authorities. Like all tax matters, planning and compliance must be done early and not started only when a response is necessary to a challenge by a taxing authority.

Barry Horowitz, CPA, MST, Partner in charge of our State and Local Tax group assisted in the preparation of this blog.  If you have any questions or concerns about any residency issues, please contact Barry directly at 212.829.3211.

Making Estimated Tax Payments

April 7, 2015

Those that have income not subject to withholding taxes or more than one job where the withholding is inadequate might need to pay estimated taxes four times a year.

Income not subject to withholding includes self-employment, partnership or S corporation income, interest, dividends, capital gains, option writing, rent income, prizes, awards, gambling or lottery winnings, pensions, certain legal settlements and alimony.

Taxes need to be paid to the IRS and any state you are taxed in.  Also, to be included is self-employment tax.  The general rule is that estimated taxes must be paid if the balance due after subtracting all withholdings is greater than $1,000 and also greater than 90% of this year’s tax.  However, there is an exemption from paying estimated tax if your withholdings are greater than last year’s tax (or greater than 110% of last year’s tax if your AGI last year was over $150,000 for a joint taxpayer), or if this is the first year you are filing a tax return.

25% of the estimated taxes are due on each of April 15, June 15, September 15 and January 15 of the next year. Underpayments will cause a penalty of 3% that is annualized on the amount that should have been paid.  Not a terribly onerous amount.  For those that have trouble budgeting the payments, you can make more frequent payments and even weekly or monthly payments if you want – just make sure you pay the required amount prior to each of the four due dates.

You can avoid paying estimated taxes if withholdings are sufficient.  You can ask your employer to increase your withholding or have greater amounts withheld from retirement plan distributions.  Further, even if you are not required to take an IRA distribution you can take one and have the funds applied fully to withholding tax; and then, to avoid having this treated as a taxable distribution, repay from other funds the full amount to the IRA within 60 days designating that it should be a tax-free rollover.

You are still required to pay estimated tax even if your income is earned erratically or at the end of the year.  In that situation, you can pay the proper estimated tax on actual income received through the month before the estimated tax payment due date.  This requires separate calculations before making each payment.  You will also have to record these calculations on Form 2210 when you file your taxes.

Those that will have an extension should consider including the first estimated payment along with the extension payment.  When you finally file, any overpayment will be considered as estimated payments and if you underpaid your extension payment the added estimated tax amount will cushion so interest and penalties for an underpayment with the extension will be avoided.  Those penalty and interest amounts are greater than the penalty for not paying the right estimated tax amounts.


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