Amy Northard, CPA, Author at Amy Northard, CPA - The Accountant for Creatives

IRS Scam Alert

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With tax season quickly approaching, it’s a good time to remind everyone that the IRS doesn’t initiate contact with taxpayers by email, text messages or social media channels to request personal or financial information. Please share this with your friends and family, especially those who are most likely to be targeted by these scammers.

IRS Scam Alert

The IRS will never:

  • Call you to demand immediate payment. The IRS will not call you if you owe taxes without first sending you a notice in the mail.

  • Demand that you pay taxes and not allow you to question or appeal the amount you owe.

  • Require that you pay your taxes a certain way. For instance, require that you pay with a prepaid debit card.

  • Ask for your credit or debit card numbers over the phone.

  • Threaten to bring in police or other agencies to arrest you for not paying.

If you receive one of these calls, please consider collecting their stated name, phone number they are calling from and contacting TIGTA and the Federal Trade Commission.

  • Contacting TIGTA to report the call. Use their “IRS Impersonation Scam Reporting” webpage. You can also call 800-366-4484.
  • Reporting the call it to the Federal Trade Commission. Use the “FTC Complaint Assistant” on FTC.gov. Please add “IRS Telephone Scam” in the notes.

Free Accounting Spreadsheet for Photographers

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Free Accounting Spreadsheet for Photographers

I created this spreadsheet for you, the busy photographer, who prefers a spreadsheet over tricky bookkeeping software. The tabs help you organize the information you or your accountant will need for tax time – all in one place!

  • INCOME – Use this sheet to record client/customer sales. Be sure that you do NOT include sales tax collected in the amounts recorded on this sheet.
  • EXPENSES – Use this sheet to track the money you spend from your business. Again, do NOT include the sales tax payments you make to your state.
  • MILEAGE – Track the mileage to and from business meetings. These would include photoshoots, pre-shoot client meetings, and even trips to the post office to mail client products.
  • TAXES – Use this sheet to calculate an estimate of what you should be saving and paying in for your quarterly income tax payments (this is NOT sales tax).
  • SALES TAX – Track the sales tax you’ve collected from your clients as well as the payments you’ve made to your state. If your state doesn’t have sales tax, count yourself lucky and ignore this sheet!

 

The Tax Benefits of 529 Plans

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Tax Benefits of 529 Plans

The Tax Benefits of 529 Plans

What is a 529 plan?

A 529 plan is a saving plan which provides tax advantages to encourage saving for college. 529 plans are sponsored by states, state agencies, or educational institutions. There are two types of 529 plans: Prepaid Plans and College Savings Plans.

Plan Types

  • The 529 College Savings Plans grows tax-free and can be withdrawn tax-free for educational expenses like tuition, room and board, and required textbooks and computers.
  • The 529 Prepaid Plans allow you to prepay part or all of an in-state public tuition, locking in the tuition at time of payment.

Your 529 plan investment will grow tax-deferred, and qualified withdrawals are federally tax-free and state-tax exempt in many states. 34 states offer tax deductions or credits on contributions to 529 plans. Click on the map below to see if your state offers a tax deduction or credit.
 


 

Can I pick a 529 plan in a different state?

Yes, however your state’s 529 plan may offer incentives to win your business. For instance, in the state of Indiana taxpayers can earn a state income tax credit equal to 20% of their contributions to a CollegeChoice 529 account, up to $1,000 per year. Since I’m a resident of Indiana, I will receive a $1,000 state income tax credit if I were to contribute $5,000 to the Indiana 529 plan. These incentives are state specific.

Can I use my 529 plan on non-educational expenses?

No, if you withdraw money from a 529 plan and do not use it on a qualifying eligible college expense, you will be subject to income tax and an additional 10% federal tax penalty on earnings.

Who is eligible for a 529 plan?

Any U.S. taxpayer can open a 529 plan for a U.S. Citizen or Resident Alien, including themselves. There is no limit to the number of plans you set up, and there are no income restrictions.

Whose name should I put on the 529 plan?

Whoever purchases the 529 plan is the custodian and controls the funds until they are withdrawn. You, as the custodian of the plan, will ultimately decide when the funds are released and what they are used for. You will set a beneficiary when you create the plan, however there is no penalty if you decide to change the beneficiary in the future.

Can I write off my car payment and expenses on my taxes?

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Auto expense deduction for small businesses

Unless you only work out of your home office, there could be a whole lot of driving going on for your business. All this driving can really rack up the expenses and if you track them thoroughly, you’re eligible to take a very helpful deduction.

The auto deduction will help reduce your taxable income, which will reduce the tax owed at the end of the year. The downside: it takes a little work to track.

There are a lot of rumors going around in Facebook groups about deducting the entire cost and expenses associated with a vehicle because they use it occasionally for business purposes. First, let’s clear up the confusion on this topic. This is a direct quote from the IRS website:

“If you use your car in your job or business and you use it ONLY for that purpose, you may deduct its entire cost of operation. However, if you use the car for both business and personal purposes, you may deduct only the cost of its business use.”

The key term here is ONLY. Now that we’ve cleared that myth up – here’s the skinny on the two options available when it comes to deducting car and truck expenses:

Option One
The first option is pretty obvious.  You start by tracking the actual expenses you incur to operate your vehicle for business purposes – hey, running out to get more latte’s won’t cut it!  You need to keep tracking only things like gasoline, oil changes, lease payments, insurance, registration fees, tolls, parking fees, tires, repairs, depreciation, and garage rent.  You can handle that, right?

This option does not include down payments or monthly payments for a car loan but you can deduct the business use of your lovely vehicle’s expenses listed above. So, grab a pencil and paper or your favorite spreadsheet program and let’s get a handle on how much is for business use.  It’s all in the tracking of your business versus personal trips and that can be figured out by tracking your mileage.  Stick with me and I’ll explain the details of how to do that in a minute.

Option Two
If you aren’t into all that tracking, don’t fret it.  Here is that second option I told you about:  Just take a deduction based on your mileage. One caveat… If you want to use the mileage deduction, you must use it in the first year of business.  After that first year, you can then switch between the two methods.

In 2017, the deduction is 53.5 cents per business mile.  The frosting on this cupcake is that you can also add on parking fees and tolls.  For example, you’re meeting a client at a local coffee shop downtown. You can count the miles to and from the coffee shop as well as money paid to the parking meter.

What should you keep track of on your mileage log? You’ll want the trip’s date, destination, business purpose, and mileage to and from your starting location. You can keep a log book in your purse or car, but I’ve found that using an app on your phone can be just as effective because it uses your phone’s GPS. You just tell it when to start recording mileage and when to stop.  My favorite app is MileIQ and it works on Android and IOS. Use the code ANOR697A and you’ll receive 20% off their annual plan.

All of this may seem like a lot of work, but it’s worth it in the end!

P.S. Want to join a Facebook Group that provides reliable tax advice from yours truly, a Certified Public Accountant? Consider joining my Be Your Own CFO program: https://be-your-own-cfo.com/

Everything you need to know about S-Corporations

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Everything you need to know about S-Corporations

There is a lot of confusion and misinformation on the internet about S-Corporations, so today I’m taking a few minutes to clear up this confusion and discuss the advantages, disadvantages, and eligibility requirements of an S-Corp election.

What is an S-Corp?

An S-Corporation is a small business corporation. The S-Corp election allows the owner(s)/shareholder(s) to only be taxed at the individual level instead of at both the corporate and individual level. We’ll go over an example of this below.

Advantages of an S-Corp

  • The big advantage of the S-Corp status is a tax concept called pass-through taxation. Pass-through taxation means that your company isn’t taxed on the income it generates. Instead, this income can be distributed to the owner(s)/shareholder(s).
  • Another important advantage is the limited liability protection for owners and shareholders. There is an extra layer of security for your personal assets in the event your company is dissolved or is being sued.
  • Your company can attract investors through the sale of shares of stock, giving you investment opportunities for the continued growth of your business.
  • Your business will continue to exist even if the owner leaves, retires, or dies.

Disadvantages of an S-Corp

  • There is additional paperwork and fees involved. It is necessary to incorporate the business by filing Articles of Incorporation with your state, obtain a registered agent for your company, and pay the appropriate fees. Many states also impose ongoing fees, such as annual report or franchise tax fees. These fees are typically minimal and in most cases you will recoup the amount you paid in fees with tax savings.
  • Because the S-Corp status allows for distributions to a shareholder, the IRS scrutinizes payments to make sure the characterization conforms to reality.
  • If the company tax status is compromised by either non-resident stockholder or stock being placed in corporate entity name, the IRS will revoke the status, charge back-taxes for 3 years, and impose a further 5-year waiting period to regain the tax status.

What is pass-through taxation?

Here is an example of how pass-through taxation works for an S-Corp:

Sarah is the owner of a graphic design business which generates $100,000 in profit. Sarah formed an LLC to operate her graphic design business, and she has elected to have it taxed as an S Corporation. Sarah is an employee of the LLC and receives a $40,000 salary. The remaining $60,000 of the business’s profits are passed through the S corporation and reported as S corporation profit on Sarah’s personal income tax return, not as employee salary. Because this $60,000 profit is not viewed as employee wages, neither Sarah nor her company need to pay Social Security or Medicare tax on this amount. Sarah and her corporation only pay a total of $6,120 in employment taxes (15.3% x $40,000 = $6,120). Then, Sarah just has to pay income tax on the S-corporation profit of $60,000. Had Sarah not elected S corporation status for her LLC, she would have had to pay self-employment tax and income tax on this entire $100,000 profit. This would have required her to pay an additional $9,180 in Social Security and Medicare tax.

When should your business become an S-Corp?

Every business that files for corporation status is first classified as a C Corp or single-member LLC. Once that’s complete, you have to elect to the subchapter S corp status and meet all requirements for an S-Corp.

Answer the questions below to determine if you qualify for the S-Corp election:

Chart of Accounts for Photographers

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Chart of Accounts

Does a photographer need a chart of accounts?

Yes, a chart of accounts can give you a clear picture of where your money is going, and will provide you with the necessary information to make informed business decisions in the future.  The information in a chart of accounts is used to fill out small business tax forms like the Schedule C.  A Schedule C (Form 1040) is used to report income or (loss) from a business you operated or a profession you practiced as a sole proprietor.

What is a Chart of Accounts?

Think of a chart of accounts as a filing system for categorizing all of a company’s financial accounts and classifying all transactions according to the accounts they affect.   The chart of accounts is a listing of all accounts used in the general ledger of an company. The chart of accounts is used by the accounting software (Quickbooks, Xero, Wave, etc.) to create your business’s financial statements.  A chart of accounts is usually divided into five categories: assets, liabilities, equity, income, and expenses.

How should a photographer organize a chart of accounts?

Keep your chart of accounts as simple as possible, and only include information you actually need.  This is the general template to follow when creating and numbering your accounts (numbering is optional):

  • Assets – Asset accounts should include anything you own that has value, like a building, land, equipment, vehicles, and inventory.
    • 1010 Checking
    • 1020 Savings
    • 1030 PayPal
    • 1040 Accounts Receivable
    • 1050 Inventory
    • 1060 Property
    • 1070 Equipment
  • Liabilities – Liabilities should include things like loans, mortgages, payroll taxes due, and any bills that haven’t been paid.
    • 2010 Accounts Payable
    • 2020 Sales Tax Payable
    • 2030 Payroll Tax Payable
    • 2040 Mortgage Loan
    • 2050 Other Loans
  • Equity – (Total equals Assets minus Liabilities)
    • 3010 Owner’s Contributions
    • 3020 Retained Earnings
  • Income
    • 4010 Sales From Products (albums, prints, etc)
    • 4020 Sales From Services
    • 4030 Affiliate Income
  • COGs
    • 5010 Materials and Supplies (cost of albums, prints, etc)
    • 5020 Labor Costs (directly related to sales made)
  • Expenses
    • 6010 Advertising
    • 6020 Travel Expenses
    • 6030 Contract Labor (indirect, benefits the whole business, not just one sale)
    • 6040 Office Supplies
    • 6050 Studio Rent
    • 6060 Gear/Equipment Rentals
    • 6070 Meals and Entertainment
    • 6080 Wages paid to employees
    • 6090 Dues and Subscriptions
    • 6100  Education
    • 6110  Props & Backdrops

A properly structured and updated chart of accounts will allow you to understand the financial health of your company at a glance. It’s important to consistently track these numbers to ensure that your company is moving in the right direction.

Top 5 Questions to Ask Your Small Business Accountant

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5 Questions to Ask Your Small Business Accountant

It can be a tough task finding the perfect accountant for your creative small business.  Once you’ve narrowed down your list of providers,  I recommend hopping on a quick 15 minute call to learn more about your accountant.  During this call you’ll want to see if they are a good fit for you and your business needs. Even though we live in a virtual world, I think it’s important to connect via a call or video chat to get a better sense of personality, and start building the side of the work relationship that an email cannot convey.

Hint: Hire someone who you will enjoy working with – someone who understands and cares about the success of your business.  Many accountants have never worked with virtual businesses who sell digital products, generate affiliate or online ad revenue, so it’s important to understand who their target client is.

Top 5 Questions to Ask Your Small Business Accountant

  1. Who is your target client?
    If your accountant doesn’t have a specific client in mind or if they specialize in assisting clients outside of the scope of your business, you may want to continue your search.  Because I work with creative entrepreneurs, I have a deep understanding of the business structures, deductions, and tax regulations that are associated with photographers, graphic designers, bloggers, design agencies, etc.
  2. Are you a Certified Public Accountant (CPA), an Enrolled Agent (EA), or Bookkeeper?
    I may be a little biased, but I would recommend hiring someone who has CPA at the end of their name – for a few reasons:

    • The Certified Public Accountants (CPA) designation is one of the most widely recognized and highly trusted professional designations in the business world.
    • A CPA is licensed by a state, and must keep current with tax laws in order to maintain a license in that state.
    • After they are licensed, CPAs also must comply with continuing education requirements in order to maintain their licenses; accountants and bookkeepers don’t have this requirement or restriction.
    • CPAs must abide by the AICPA Code of Ethics and Professional Conduct and are at risk of loosing their license if they do not comply with these rules and regulations.
  3. What are your fees?
    Consulting, tax preparation, and bookkeeping fees can vary widely depending on the size of the firm you are working with, the structure of your business, and the amount of transactions your business processes.  Asking for a fees upfront can save you from a lot of heartache in the future.  My philosophy is to be up front and transparent about my pricing, which is why I list my fees directly on my website.
  4. Do you provide any education or training?
    I’m a big fan of the show Shark Tank, however it seems like every season there is a guest on the show who has no idea what their financials are for their business – and they never get a deal.  I’m all for working on your passion, but understanding your business financials are imperative for future success of your business –  your accountant should be able to assist you in understanding this information.  I spend a lot of time on client education in my blog, on my YouTube channel, and via my Be Your Own CFO course.
  5. Do you have any references?
    When you’re hiring an accountant, you are trusting that person with your most sacred business information, and it’s important to check reviews and references.  Most accountants will have a few clients that will vouch for the level of service they provide.  A quick Google search for reviews can ensure you’ve found the right accounting partner for your business.

What kind of Education can be Deducted as a Business Expense?

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You may be able to deduct work-related education expenses paid during the year as an itemized deduction. To qualify for a deduction, your expenses must be for education that:

  1. Maintains or improves your job skills or
  2. Your employer or a law requires to keep your salary, status, or job.

The education must relate to your present work. Expenses that you can deduct include:

  • Tuition, books, supplies, lab fees, and similar items
  • Certain transportation and travel costs, and
  • Other educational expenses, such as the cost of research and typing

Self-employed business owners can deduct costs for their own education, subject to certain limitations in the same way as individual taxpayers.

To be deductible, you must be able to show that the education:

  • Maintains or improves skills required in your present work,” or
  • It is required by law or regulations for maintaining a license to practice, status, or job. For example, professionals can deduct costs for continuing education.

Your work-related education expenses is not deductible if it:

  • Is needed to meet the minimum educational requirements of your present trade or business, or
  • Is part of a program of study that will qualify you for a new trade or business.

You can find more information, and examples of what qualifies on the IRS website.

How much does my business need to make to report it to the IRS?

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How much does my business need to make to report to IRS?

There is a common misconception that I’ve seen on the internet that says if you make under $600 (contracting, freelancing, etc.) – you do not need to report it to the IRS.  This is false, there is no minimum amount that a taxpayer may exclude from gross income.  Independent contractors must report all income that they receive as taxable, even if it is less than $600, and even if the client does not issue a Form 1099-MISC.

Next time you see this rumor in a Facebook group or post, be sure to share this post. You don’t have to just take my word for it, here’s the official guide from the IRS: https://www.irs.gov/uac/reporting-miscellaneous-income

The IRS will never catch you. This is the typical response from someone who has never been audited.  I’m sure there are a lot of taxpayers who have skirted the law, and not reported all their income to the IRS.  If you get caught, you will be responsible for paying the tax, plus interest, and a penalty. You may also be subject to criminal prosecution – underreporting income is a crime and you’re signing a tax return on penalty of perjury. Failing to report income may also lead to the loss of deductions and credits which rely on taxable income limits (such as childcare and dependent credits).

Why is $600 the common amount for this myth?  Taxpayers often get this law confused with the law that states that as a business owner, you must issue a Form 1099-MISC to any independent contractors if:

  1. You made the payment to someone who is not your employee;
  2. You made the payment for services in the course of your trade or business (including government agencies and nonprofit organizations);
  3. You made the payment to an individual, partnership, estate, or in some cases, a corporation; and
  4. You made payments to the payee of at least $600 during the year.

To report your miscellaneous income, you must use the Form 1040 (Schedule C) or Form 1040 (Schedule C-EZ).  Contact me if you need any assistance preparing your taxes or issuing 1099’s to your contractors.

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