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Mike DiSabatino CPA

A blog by Michael DiSabatino CPA with topics on Tax Savings, Business, Management and more...

July 2017 DiSabatino, CPA Newsletter

 news header

July 2017
In this issue:

  • Zombie Billing: Automatic Payments Have a Life of Their Own
  • Five Home Office Deduction Mistakes
  • Simplified Home Office Deduction
  • How Much Do You Need to Retire?
  • Common Mistakes When Buying or Selling a Business

This month:

  • July 4th:Independence Day

Happy Fourth of July! While you're doing your best to avoid the summer heat, take a look at these tips for your tax and personal financial planning. This issue includes articles on retirement planning and on keeping your automatic bill payments under control. For the business-minded, there is a list of things to avoid when buying or selling a business, and five common mistakes made by those using the home office deduction.  As always, feel free to forward this newsletter to anyone who may benefit.

 

Zombie Billing: Automatic Payments Have a Life of Their Own

The turn it on and forget it nature of automatic payments can create "zombie billing" cycles that go on without being reviewed or challenged, even after the product or service you pay for is no longer of value.

Here are some ideas to keep this from happening to you.

Bullet Point Create a list. Make a list of the companies you authorize to use automatic bill payment. Include the account number each company uses, as well as payment amounts and frequency. When there's a change in a card or bank account, you can consult the list to find the companies you need to notify.
Zombie billing image
Bullet Point Watch for fees. Make sure the bill-payment system you're using is low-cost or no-cost. Some companies will charge you a fee for automatic payments. If your biller wants to charge you, pay them with a traditional check. Consider consolidating all your automatic payments within one bill-paying service. Your bank may even offer online bill payment with no fee.
Bullet Point Review underlying bills. Automated billing usually means you're not getting paper copies of your bill. If you're not receiving a physical copy, changes to your service may go unnoticed. If possible, opt to continue receiving email or paper billing statements. Review statements monthly to verify that your payment has not changed and there are no additional fees or errors.
Bullet Point Drop underused services. Periodically review all automatic payments. Drop products and services that are no longer of value.

Automatic billing is meant to simplify your life, but if you allow it to turn into zombie billing, it will have the opposite effect. Take care to review your accounts and statements to protect yourself and keep your finances under your control.

 

Five Home Office Deduction Mistakes

If you operate a business out of your home, you may be able to deduct a wide variety of expenses. These may include part of your rent or mortgage costs, insurance, utilities, repairs, maintenance, and cleaning costs related to the space you use.

It is a tricky area of the tax code that's full of pitfalls for the unwary. Here are some of the top mistakes people make.

Bullet Point Not taking it. This is probably the biggest mistake those with home offices make. Some believe the deduction is too complicated, while others believe taking a home office deduction increases your chance of being audited. While the rules can be complicated, there are now simple home office deduction methods available to every business.
Home office deductions
Bullet Point Not exclusive or regular. Your home office must be used exclusively and regularly for your business.
Exclusively: If you use a spare bedroom as a business office, it can't double as a guest room, a playroom for the kids, or a place to store your hockey gear. Any kind of non-business use can invalidate your deduction.
Regularly: Your office should be the primary place you conduct your regular business activities. That doesn't mean that you have to use it every day nor does it stop you from doing work outside the office, but it should be the primary place for business activities such as record keeping, billing, making appointments, ordering equipment, or storing supplies.
Bullet Point Mixing use with other work. If you are an employee for someone else in addition to running your own business, be careful in using your home office to do work for your employer. Generally, IRS rules state you can use a home office deduction as an employee only if your employer doesn't provide you with a local office.

Unfortunately, this means if you run a side business out of your home office, you cannot also bring work home from your employer and do it in your home office. That could invalidate your use of the home office deduction.

Bullet Point The recapture problem. If you have been using your home office deduction, including depreciating part of your home, you could be in for a future tax surprise. When you later sell your home you will need to account for this depreciation. The depreciation recapture rules create a possible tax liability for many unsuspecting home office users.
Bullet Point Not Getting Help. There are special rules that apply to your use of the home office deduction if:
You are an employee of someone else.
You are running a daycare or assisted living facility out of your home.
You have a business renting out your primary residence or a vacation home.

The home office deduction can be tricky, so ask for help, especially if you fall under one of these cases.

 

Simplified Home Office Deduction

There's a simple "safe harbor" home office deduction. You take the square footage of your office, up to 300 square feet, and multiply it by $5. This gives you a potential $1,500 deduction under the simplified option. However, your savings could be much greater than $1,500, so it's often worth getting help to calculate your full deduction using the standard rules.

Time Clock
 

How Much Do You Need to Retire?

Most Americans simply don't save enough for retirement. Nearly half of working-age households don't have any retirement assets, according to the National Institute on Retirement Security. Of those working-age households close to retirement (age 55 and above) nearly two-thirds have less than one year's worth of their annual salary in retirement savings.

The goal: a comfortable retirement

So how much do you actually need to retire comfortably? There are many variables to consider, including retirement age, available pensions, and investment returns. Mutual fund broker Fidelity estimates you need enough savings to replace roughly 85 percent of your annual pre-retirement income. Many experts estimate you will have to save between eight and 12 times your pre-retirement annual income to reach this goal.

But the amount you need depends on when you plan to retire. For example, Fidelity estimates a person planning on retiring at age 65 will need to save 12 times their pre-retirement income. By delaying retirement by just five years, to age 70, their savings estimate lowers to eight times your annual income.

How much do you need to retire

This may be why an increasing number of Americans plan on delaying retirement or working during retirement. A majority of workers (51 percent) surveyed in 2016 by the Transamerica Center for Retirement Studies said they plan to continue working during retirement.

Some ideas to consider now

There are actions you can take now to put you in a better position during your golden years:

Bullet Point Contribute as much as possible every year to your employer-provided retirement plans. With a 401(k) pre-tax retirement plan, up to $18,000 can be contributed each year, or $24,000 if you are age 50 or older.
Bullet Point Contribute as much as possible to a Traditional or Roth IRA every year, up to the $5,500 maximum, or $6,500 if you are age 50 or older.
Bullet Point If available, contribute as much as possible to a Health Savings Account, which can be used to offset medical expenses with pre-tax dollars. Individuals can contribute up to $3,400 a year, or $4,400 for ages 55 or older.
 

Common Mistakes When Buying or Selling a Business

It is said with every major purchase there's some kind of remorse either on the part of the buyer or the seller. This can be especially true when buying or selling a business. No matter which side of the negotiating table you sit on, there are some critical areas that could leave you with feelings of regret. Avoid these mistakes and you'll feel better about your deals after they're done.

SELLER MISTAKES   BUYER MISTAKES
Not researching the value of similar businesses within the industry
Overestimating the value of the company and losing a well-qualified buyer
Insisting on cash-only terms
Selling price
Overpaying based on emotion
Stretching personal resources too thin
Maintaining sloppy financial records that potential buyers cannot trust
Accounting records
Relying on company financials not prepared by a third-party accounting professional
Not requesting payroll returns and other tax filings in the financial review
Agreeing to seller-financing without proper vetting of the buyer's creditworthiness
Financing
Settling for a high-interest loan, or one with too short a maturity
Selling the assets of the business when it would have been more tax-efficient to sell the corporate shares instead
Assets
Purchasing less than all of the assets used in the business, overlooking items such as licenses, patents or important contractual arrangements
Making a stock-purchase transaction without understanding the benefits of an asset purchase
Neglecting to check the background of the buyer and assessing their ability to run a business
Failing to verify the buyer's liquid assets
Due diligence
Not asking why the business is for sale
Conducting too little research into the competition or overall industry trends
Not searching for the existence of company loans and other liabilities
Signing a non-compete agreement that is too restrictive in scope or timeframe
Non-compete
Failing to require a non-compete clause from the seller, especially in a service-industry business
Leaving too much of the sale price dependent on the ongoing success of the company
Transition
Having unclear expectations for seller participation in the business after the sale
Not positioning the business to sell well in advance of the first offer
Requesting professional help too late in the sales process
Expert help
Not assembling a team of legal, tax, and insurance experts before agreeing to terms

Buying or selling a business is likely one of the most important transactions an entrepreneur faces. It is always best to seek professional help.

 
As always, should you have any questions or concerns regarding your situation please feel free to call.

This newsletter is provided by

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Camarillo, CA 93012
Phone: 805-389-7300
Fax:  805-419-5672

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