Vista Tax Relief | Accounting and Tax Blog

Separating Business and Personal Expenses

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Running a small business is a demanding task that requires careful attention to various aspects, including finances. One of the most critical financial practices is separating business and personal expenses. While it may seem like a minor detail, this separation is essential for the financial health and legal integrity of your business. Here’s why keeping these expenses distinct is important.

Accurate Financial Tracking

When you mix business and personal expenses, it becomes challenging to track the true financial performance of your business. Accurate financial tracking is crucial for understanding how your business is doing, making informed decisions, and planning for the future. Without clear records, you may struggle to see where your money is going, which can lead to poor financial decisions that could harm your business.

Simplified Tax Filing

Tax season can be stressful for any business owner, but it’s even more challenging when business and personal expenses are intertwined. The IRS requires that you report your business income and expenses accurately. If your records are muddled, you might miss out on valuable deductions or, worse, inadvertently claim personal expenses as business ones. This can result in penalties or even an audit. Keeping expenses separate simplifies tax preparation and ensures that you are compliant with tax laws.

Legal Protection

For businesses structured as limited liability companies (LLCs) or corporations, maintaining a clear distinction between personal and business finances is vital for protecting personal assets. This separation helps uphold the “corporate veil,” which is the legal barrier that protects your personal assets from being used to satisfy business liabilities. If you don’t keep your finances separate, a court could rule that your business is not truly separate from you, putting your personal assets at risk.

Professionalism and Credibility

Maintaining separate finances also boosts your business’s credibility. Whether you’re dealing with lenders, investors, or clients, having clear and organized financial records shows that you run your business professionally. This can build trust and open doors to opportunities that might not be available if your finances were disorganized.

Better Financial Management

When you separate business and personal expenses, it’s easier to manage your cash flow, create budgets, and forecast future financial needs. This clarity allows you to make better decisions about when to reinvest in your business, when to cut costs, and how to plan for growth.

How to Keep Business and Personal Finances Separate

  • Open a Business Bank Account: Use a dedicated bank account for all business transactions. This makes it easier to track income and expenses and simplifies record-keeping.
  • Get a Business Credit Card: Charge all business-related expenses to a business credit card. This keeps personal spending separate and helps build business credit.
  • Pay Yourself a Salary: Instead of dipping into business funds for personal use, establish a regular salary or owner’s draw. This ensures that business income and personal income remain distinct.
  • Keep Detailed Records: Maintain thorough records of all business transactions. Save receipts, invoices, and bank statements to ensure you have a clear trail for tax purposes and financial management.
  • Consult a Professional: Consider working with an accountant or financial advisor who can help you establish and maintain good financial practices.

Separating business and personal expenses is more than just a good habit—it’s a necessity for the long-term success of your business. By keeping these expenses distinct, you can ensure accurate financial tracking, simplify tax filing, protect your personal assets, and present a professional image to the world. In the end, this practice will save you time, reduce stress, and help your business thrive.

For more information on Business and Personal Expenses, call Vista Tax Relief at 480-916-2862 today!

Tax Diversification Can Be a Smart Strategy

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We are all familiar with some of the more common threats to our retirement savings. Inflation is a significant threat because it can make today’s dollar worth less in the future. An illness or injury that forces one to spend a large percentage of retirement savings on health care is another. Bad investment decisions and periods of sustained underperformance in the investment markets can also erode retirement savings. However, fewer people are familiar with an important but often overlooked threat to retirement savings — taxes.

Having to pay taxes can reduce the size of your retirement nest egg over time. However, there are strategies that can help minimize the impact of taxes on retirement savings. One of the most effective is tax diversification. It essentially involves spreading your retirement assets among accounts that are treated differently for tax purposes to achieve greater control over your taxes.

Taxable Accounts

When you invest in mutual funds,* stocks, bonds, and money market securities in a taxable account, any net realized capital gains, interest earnings, and dividends are taxable each year. The advantage of a taxable account, however, is that you don’t have to take annual required minimum distributions (RMDs) upon reaching age 73 (or other RMD age), so you can choose to withdraw your money when it suits your needs.

Roth Accounts

When you invest using after-tax dollars in a Roth IRA or a Roth 401(k) plan, investment earnings accumulate tax deferred, and withdrawals from the account will be tax free after you’ve had the account for at least five tax years and have reached age 59½. Investing in a Roth account could give you access to your retirement savings without the potential for being shifted into a higher tax bracket. And if you don’t need to withdraw money, you can simply leave it invested in your account — the RMD rules don’t apply to a Roth IRA or, starting in 2024, to a Roth 401(k) account during the owner’s lifetime.

Traditional Retirement Accounts

You won’t owe any taxes on the money you contribute to a traditional 401(k) or similar workplace retirement savings plan — or on tax-deductible contributions to a traditional IRA — until you make withdrawals. Investment earnings in these accounts are also tax deferred until withdrawal. Tax deferral lets your account grow faster than it would if taxes were paid on the income as it was earned. When you are retired and start taking withdrawals from your account, you may be in a lower tax bracket.

The Benefits of Tax Diversification

Diversifying across different types of accounts can give you greater control over when and how much you take from your retirement accounts. By spreading taxable distributions over a longer period, you may end up paying less tax and retain more of your savings.

The challenge is to determine the most strategic way to allocate your retirement assets among the different accounts. A tax professional can provide more insights on how tax diversification may work for you.

*You should consider the fund’s investment objectives, charges, expenses, and risks carefully before you invest. The fund’s prospectus, which can be obtained from your financial representative, contains this and other information about the fund. Read the prospectus carefully before you invest or send money. Shares, when redeemed, may be worth more or less than their original cost.

For more information on Tax Diversification, call Vista Tax Relief at 480-916-2862 today!

Unpaid Payroll Taxes: A Common Small Business Mistake

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Managing a small business involves juggling many responsibilities, and payroll taxes often get overlooked. Unfortunately, failing to handle payroll taxes properly is a common mistake that can lead to significant financial and legal issues.

What Are Payroll Taxes?

Payroll taxes include federal income tax withholding, Social Security and Medicare taxes (FICA), unemployment taxes, and state income tax withholding. Employers must withhold these taxes from employees’ wages and remit them to the government.

Why Small Businesses Struggle with Payroll Taxes

  • Lack of Awareness: Many small business owners underestimate the importance of timely payroll tax payments.
  • Cash Flow Issues: Delaying payroll tax payments to manage cash flow is risky due to penalties and interest.
  • Complex Regulations: Federal, state, and local tax laws can be confusing and challenging to navigate.
  • Inadequate Systems: Relying on outdated or manual processes often leads to errors.
  • Poor Record-Keeping: Missing payments or reporting errors are common without proper documentation.

Consequences of Unpaid Payroll Taxes

  • Penalties and Interest: The IRS imposes hefty fines for late or insufficient payments.
  • Legal Action: The IRS can take legal measures, including asset seizure or business closure.
  • Personal Liability: Business owners can be held personally responsible for unpaid taxes.
  • Reputation Damage: Failing to pay taxes can harm your business’s credibility.

How to Avoid Payroll Tax Mistakes

  • Educate Yourself: Understand your payroll tax obligations and deadlines.
  • Use Reliable Systems: Invest in payroll software or a service provider to ensure accuracy.
  • Separate Payroll Funds: Set aside taxes in a separate account to avoid spending them elsewhere.
  • Keep Accurate Records: Maintain detailed records to avoid errors and prepare for audits.
  • Consult a Professional: Seek help from a tax professional or accountant if you’re unsure.

Payroll tax management is crucial for small businesses. By staying informed, using the right tools, and seeking professional guidance, you can avoid the common pitfalls of unpaid payroll taxes and keep your business on track.

For more information on Unpaid Payroll Taxes, call Vista Tax Relief at 480-916-2862 today!

“Big Picture” Retirement Planning

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What makes a “successful” retirement? The answer for many people is: Retire with enough money saved to live through all the years of retirement with some degree of financial security. Of course, financial security is a critically important retirement goal. But it’s not the only component of a truly successful retirement. Other factors can also play an important role. To help you envision the big picture, consider the following.

What Makes You Happy?

This is an important consideration. Do you derive the greatest happiness from being around your family and other loved ones? Do you thrive on social interaction or do you prefer solitude? Do you have hobbies or other interests that you enjoy? Do you find that travel and exploring new places are important to your well-being? A deep understanding of what makes you happy can influence where you live, how much spending money you’ll need, and whether your retirement savings will last.

Where Will You Live?

Family ties and their importance can influence whether you’ll want to stay close to where you are living now or spread your wings and retire to a different area. The opportunity to access recreational and cultural events, educational programs, reliable transportation, and excellent health care facilities and providers are additional factors that can contribute to a satisfying retirement.

Your financial health also could be a factor when you are deciding where to live. You may need to downsize if the cost of keeping up your current home eats up too much of your retirement income. However, if you have done well saving for retirement, you will have more options. Thinking about where you may want to live in retirement long before you actually retire will give you time to strategize about how much you need to save to achieve your goals.

What Will You Do With Your Free Time?

Post-working life may leave you feeling aimless and discontented if you can’t find ways to occupy yourself. You’ll find retirement more satisfying if you have activities that are meaningful and pleasurable. You may want to volunteer for organizations in your community or try different hobbies well before retirement to see if these activities will capture your interest. It can be particularly satisfying if you can find some way to share particular skills or knowledge you have with others in your community.

Will Health Be an Issue?

Exercising, eating a healthy diet, and avoiding stress now can pay off big in retirement. Good health in retirement means that you will be able to be active and do more things you may enjoy, such as taking trips to see places you’ve always dreamed of seeing. Moreover, health care is expensive. Even with Medicare or other health insurance, out-of-pocket medical expenses can add up. So it pays to stay as healthy as possible and to have a strategy in place before retirement to deal with anticipated medical expenses that you or a loved one will incur.

What About Taxes?

State income tax rates vary, and some states tax Social Security payments while others do not. There also can be significant differences among localities when it comes to property and sales taxes. If your tax burden is significant, it can be worthwhile to consult with a tax professional to see how beneficial it might be to move to a lower tax area in retirement.

What Will Your Retirement Look Like?

A successful retirement requires clear, unemotional thinking about the type of life you want when you are no longer in the workforce. It requires holistic planning and a commitment to save as much as you can afford so that you will have enough money to lead your retirement life on your terms. Talk with your financial professional for ideas on how you can see the big picture when it comes to retirement planning.

For more information on Retirement Planning, call Vista Tax Relief at 480-916-2862 today!

What’s the Value of Your Business?

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Like most business owners, you have probably invested a lot of energy into growing your business. And like other business owners, you probably hope to exit your business at some point in the future with enough money to ensure your financial security. When the time comes to sell your business, you’ll have to determine its fair market value (FMV) to ensure you’ll receive a fair price. Since it is a difficult undertaking to assess fair market value, the assistance of an appraiser who specializes in business valuations is crucial.

Different Approaches

Business valuation professionals will typically use a variety of approaches to determine the value of a business.

An asset-based approach basically looks at a company’s balance sheet. If the valuation is based on a going concern, the company’s assets (net of depreciation) are listed and its liabilities are then subtracted. Generally, the resulting “book value” is adjusted to reflect the current market value of the company’s assets.

Earnings-based approaches assume that a business’s true value lies in its future wealth-producing abilities. One common approach involves capitalizing past earnings using a rate of return that a reasonable buyer would expect on the investment.

Market-based approaches attempt to establish the value of a business by comparing it to similar businesses that have recently sold. This approach works well for most businesses except sole proprietorships, since finding public information on prior sales of like businesses is difficult.

IRS Approach to Valuing a Business

It also may be helpful to look at the factors the IRS considers when determining the value of a business for tax resolution purposes. The IRS typically weighs the following factors when attempting to compute the fair value of a business:

  • The nature of the business and the history of the company
  • The future prospects of the economy at large and the business’s industry in particular
  • Book value and overall financial health
  • Earning capacity of the company
  • Dividend-paying capacity
  • Goodwill or other intangible value
  • Sales of the stock and the size of the block of stock to be valued,/p>
  • The market price of stocks of corporations engaged in the same or a similar line of business.

Timing of the Valuation Is Important

As a business owner, it makes sense to have your business valued long before you intend to sell it. Why? If it transpires that your business’s valuation is lower than you assumed, you will have sufficient time to implement various changes in your business that can drive up its value.

For more information on Business Valuation, call Vista Tax Relief at 480-916-2862 today!

Trusts Can Help Accomplish Numerous Goals

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Trusts are remarkably flexible and helpful planning tools. They can be used to protect and transfer assets to loved ones and to accomplish other goals, such as long-term asset management. Here’s a look at some of the reasons why you might consider creating a trust.

Manage Assets

If you have acquired significant assets, you understand that managing them requires time, effort, knowledge, and patience. You may feel that your time is better spent doing something other than managing your assets, or you may not be completely confident that you have the skill set to do so. There’s the additional concern of how you could manage your assets effectively if you were to fall ill or suffer an injury. A trust can help to alleviate these concerns by ensuring that your assets will be managed by a responsible trustee in such a way that will preserve them for you and your loved ones.

Protect Your Assets

We live in a litigious society and lawsuits are more common now than in the past. One of the most effective ways to protect your assets for the next generation is to place assets in a trust for your child instead of giving them to your child outright as a gift or bequest.

Facilitate Charitable Gifts

With a charitable remainder trust, you can gift assets to the charity of your choice without giving up the income from those assets during your life. A charitable lead trust pays income to a charity of your choice and then returns the trust’s remaining assets to an individual beneficiary when the trust ends. Both types of trusts offer tax advantages.

Protect the Interests of a Minor

A trust can be used to manage assets for the benefit of a child or grandchildren. A trust can be particularly helpful if you have concerns about the maturity or the spending habits of a beneficiary in that you can structure the trust to stagger distributions to the beneficiary throughout adulthood.

Provide for a Loved One With Special Needs

You can help ensure that a special needs child or adult relative will benefit after your death by creating a trust designed specifically to provide sufficient funds to take care of that individual. You can choose who you want to serve as trustee of this trust, and change the trustee if necessary, which can provide a degree of assurance that your wishes for the special needs person will be closely followed.

Trusts Are Flexible

Trusts offer individuals and families a high degree of flexibility. A trust established during your lifetime is called a living trust. One that is created in a will is called a testamentary trust.

Living trusts can be revocable or irrevocable. A revocable living trust generally names you or you and your spouse as trustee(s) and beneficiaries. As the creator of the trust, also known as the “grantor,” you can change the trust’s terms, add or withdraw funds, and end the trust if you wish. With a revocable living trust, you always retain control over the assets.

An irrevocable trust is intended to benefit someone other than the trust’s creator. In the trust agreement, you, as creator, specify who the trust will benefit, the manner of its operation, and the name of the person(s) (or institution) who will manage the trust. In general, you cannot change the terms of an irrevocable trust once it has been created.

Your financial professional can explain in greater detail the many ways you can use a trust to further your financial and estate planning goals.

For more information on Trusts, call Vista Tax Relief at 480-916-2862 today!