If you had to make a list of some of the most critical elements of running a business that most new entrepreneurs don’t think enough about until it’s far too late, bookkeeping would undoubtedly be right at the top. On a surface level, bookkeeping is simply the process of keeping accurate, thorough records of the financial affairs of any business. But once you begin to dive deeper, you see that it’s about so much more than that. It’s what allows you to maintain a proper cash flow — something that has long been a major pain point for any organization. It’s what allows you to make more accurate and informed decisions regarding growth. More than anything, it’s what allows you to start making a plan for the future, which in and of itself is the most important benefit of all. Handling bookkeeping on your own can quickly become a full-time job, which is a bit of an issue since you already have one of those on your plate. But by keeping a few key things in mind, you can enjoy all the benefits of this process with as few of the potential downsides as possible. The Art of Business Bookkeeping: Breaking Things Down When it comes to small business bookkeeping, it’s critical to understand what you should be doing and, most importantly, when. The financial health of your organization has both short- and long-term ramifications, and the only way to control your own trajectory is to make a list of what you should be doing and why. On a weekly basis, for example, you’ll want to pay close attention to things like your cash flow statement and variable expenses. Cash flow is exactly what it sounds like — the money coming into and out of your business. If you’re not paying attention to this, you might not realize that you don’t have nearly as much money coming in as you think. This is especially true if you’re waiting on client invoices to get paid but have no real idea of when they were sent or when they’re due. You cannot assume that just because your revenue says one thing, you have an equal cash reserve sitting there waiting to be taken advantage of. Especially in the situation with client invoices outlined previously, that isn’t always the case. If there is a sudden business opportunity that you’re trying to take advantage of or if you need to pay for an urgent expense like a new piece of equipment or machinery, this is not the time to find out that your accounts don’t have as much in them as you assumed they did. Therefore, you need to have a constant idea of how much cash you have on hand, along with the amount of money required to manage critical aspects of your business. Variable expenses are a related concept, which themselves are defined as those expenses that don’t have a fixed monthly or annual rate. If you took out a loan to start your business, it’s likely that you have a set, predictable monthly payment. Unless you miss a payment and get hit with some type of penalty, that number isn’t going to change. Marketing, however, is something that changes all the time — particularly if you’re experimenting with all the different types of campaigns that you could run. If you’ve invested in digital advertising on sites like Google, you’re probably not going to hit upon the perfect campaign right away. You’ll need to run tests to see what works and what doesn’t, which will ultimately impact the amount of money you’ll pay. If you move into the world of print advertising and run newspaper ads or design fliers, this too will come with an entirely different set of costs. As a result of this, you need to make sure you understand what your variable expenses are at any given time. Only then will you be able to make the smartest and most informed decisions at the moment. Additional Considerations About Bookkeeping Likewise, there are a variety of important bookkeeping-related tasks that you’ll want to perform on at least a monthly basis, too. One of these involves getting a business snapshot — something that gives you a clear, concise idea of where you currently stand and the impacts of the decisions you’ve made over the past 30 days. A business snapshot will not only give you insight into things like your cash flow, but you’ll also get to see sales, expenses, income, and more. The key thing to understand is that these snapshots actually become more valuable as time goes on. You can compare the last several monthly snapshots to uncover trends and patterns that you may have otherwise missed. This, too, gives you insight into what you can do to improve your operations. On a monthly basis, you should also make an effort to stay up-to-date on what all your expenses actually are. Yes, there are certain “costs of doing business” that you’ll never be able to totally eliminate. But if you take the time at least regularly to look at where your money is going, you put yourself in a better position to find room for improvement. Case in point: Maybe that investment you made a few months ago isn’t paying off nearly as well as you’d hoped. Unless you look at and understand exactly what you’re spending, you’re not necessarily going to realize that. Armed with this information, you can eliminate these types of expenses and free up valuable cash so that you can funnel it back into other areas of the business where it can do the most good. Finally, when it comes to a topic as important as bookkeeping, it’s important to acknowledge your own limitations. Especially as far as things like taxes are concerned, the stakes of “getting this one wrong” are simply far too high to go at it yourself. You’re a business owner, and while it’s absolutely fair to say that your “can-do spirit” has already gotten you quite far, if you’re not comfortable handling bookkeeping yourself, you shouldn’t feel obligated to do so. Enlisting the help of a trained, experienced professional can immediately help you paint a clear picture of where your business currently stands from a financial perspective and where it might be headed, too. They’ll use bookkeeping software that, when combined with their own insight, can help make it far easier to accomplish all the tasks outlined above and more. A financial professional can step in and make sure that you have a solid foundation from which to build from, all while freeing up as much of your time as possible to focus on those tasks that actually require your full attention. If you’d like to find out more information about all the best practices that you can use to get the most out of your business, or if you just have any additional questions you’d like to go over with someone in a bit more detail, please don’t delay — contact our office today.
Monthly Archives: October 2021
Required Minimum Distributions Have Resumed for 2021
Article Highlights:
Required Minimum Distribution
Recent Law Changes
RMDs Resume in 2021
Still Working Exception
First Year RMD Exception
Determining the RMD Amount
Excess Accumulation Penalty
Qualified Charitable Distribution
Designated Beneficiaries
When Congress established tax-favored retirement plans, they allowed taxpayers to take a tax deduction for the amount of their allowable contribution to the plans. But they also included a requirement for a portion of the funds to be distributed each year and be subject to income tax. Such a distribution is referred to as a minimum required distribution (RMD). RMDs are commonly associated with traditional IRAs, but they also apply to 401(k)s, SEP IRAs and other qualified retirement plans. The tax code does not allow taxpayers to keep funds in their qualified retirement plans indefinitely. Eventually, assets must be distributed, and taxes must be paid on those distributions. If a retirement plan owner takes no distributions, or if the distributions are not large enough, he or she may have to pay a 50% penalty on the amount that is not distributed. There is no maximum limit on distributions from a Traditional IRA, and as much can be withdrawn as the owner wishes. However, if more than the required distribution is taken in a particular year, the excess cannot be applied toward the minimum required amounts for future years. There have been some recent tax law changes that have led to some confusion among taxpayers subject to the RMD requirement. Prior to 2020, the required starting age for RMDs was 70½. Thanks to the Secure Act passed by Congress in late December 2019, the age at which distributions have to begin was increased to age 72 starting in 2020. However, as part of the 2020 COVID relief, Congress suspended the RMD requirement. Thus those turning 72 in 2020, and those who turned 70½ in prior years, were not subject to the RMD requirement for 2020. RMDs Resume in 2021 – Since the suspension was for one year only, the RMD requirement resumes for 2021. Of course, the resumption applies to those that attained the age of 70½ in years before 2021, those who turned 72 in 2020 and those who turn 72 in 2021. Still Working Exception – If you participate in a qualified employer plan, generally you need to start taking RMDs by April 1 of the year following the year you turn 72. This is your required beginning date (RBD) for retirement distributions. However, if your plan includes the ‘still working exception,’ your RMD is postponed to April 1 of the year following the year you retire. This delayed-until-retirement distribution provision does NOT apply to IRAs, so even though someone age 72 or older with an IRA is still working, and perhaps still contributing to the IRA, they are required to take a minimum distribution from the IRA each year. First Year IRA RMD Exception – If a taxpayer so chooses, he or she can delay an RMD for the first year an RMD is required until the second year, thus making the distribution includible in the second year’s tax return. This is sometimes desirable if the taxpayer has substantial wages or other income in the year the mandatory distribution age is reached and expects less income the next year. In this situation, by delaying the distribution to the second year the tax bracket could be substantially lower. If the taxpayer chooses that option, then:
The first year RMD must be taken by April 1 of the following year, and
The taxpayer must also take the second year RMD distribution by December 31 of year two, thus doubling up the distributions in year two.
Determining the RMD Amount – The required withdrawal amount for a given year is equal to the value of the retirement account on December 31 of the prior year divided by the life expectancy (‘distribution period’) from the Uniform Lifetime Table illustrated below, with the exception where the taxpayer’s spouse is 10 years younger, in which case the Joint and Last Survivor Table is used. It is not illustrated because of its size.
UNIFORM LIFETIME TABLE – THROUGH 2021
Age
Distribution Period
Age
Distribution Period
Age
Distribution Period
Age
Distribution Period
Age
Distribution Period
70
27.4
80
18.7
90
11.4
100
6.3
110
3.1
71
26.5
81
17.9
91
10.8
101
5.9
111
2.9
72
25.6
82
17.1
92
10.2
102
5.5
112
2.6
73
24.7
83
16.3
93
9.6
103
5.2
113
2.4
74
23.8
84
15.5
94
9.1
104
4.9
114
2.1
75
22.9
85
14.8
95
8.6
105
4.5
115+
1.9
76
22.0
86
14.1
96
8.1
106
4.2
–
–
77
21.2
87
13.4
97
7.6
107
3.9
–
–
78
20.3
88
12.7
98
7.1
108
3.7
–
–
79
19.5
89
12.0
99
6.7
109
3.4
–
–
Note: the above table is only valid through 2021. The IRS has released a new table which must be used for the RMD computations beginning for 2022 and subsequent tax years.
Example: An IRA account owner is age 75 in 2021, and the value of his only IRA account was $120,000 on December 31, 2020. His 73-year-old wife is the sole beneficiary of the IRA. From the uniform lifetime table, we determine the owner’s distribution period to be 22.9. Thus, his RMD for 2021 is $5,240 ($120,000/22.9). That amount must be withdrawn by no later than December 31 of 2021. If the same set of facts were to occur for a different taxpayer in 2022, using the new table (not illustrated), the distribution period will be 24.6 and the RMD $4,878 ($120,000/24.6). The new table was designed to take into account individuals’ longer life expectancies based on actuarial statistics developed since the last time the tables were updated. Thus, the comparable RMD is less than under the current table, and at least in theory, the IRA won’t be depleted as quickly.
The RMD for the year can be taken from any one or several of the taxpayer’s IRA accounts, but the minimum distribution amount must be figured separately for each account, and then totaled to determine the RMD for the year. Caution: Some individuals roll over their distribution in the mistaken belief they can circumvent the RMD requirement. This is not true – remember, the purpose of the RMD is to force taxable distributions. If the taxpayer dies prior to taking the entire RMD for the year of death, the IRA beneficiaries are responsible for figuring the owner’s required minimum distribution in the year of death and distributing it to the named beneficiaries. If there are no beneficiaries, the distribution goes to the decedent’s estate.Excess Accumulation Penalty – The tax law includes a penalty referred to as an excess accumulation penalty. This draconian penalty is 50% of the RMD that should have been distributed for the year and wasn’t. In the preceding example, if the taxpayer does not withdraw the $5,240 for 2021, he would be subject to a 50% penalty (additional tax) of $2,620 ($5,240 x 50%). Under certain circumstances, the IRS will waive the penalty if the taxpayer demonstrates reasonable cause and makes the withdrawal soon after discovering the shortfall in the distribution. However, the hassle and extra paperwork involved in asking the IRS to waive the penalty makes avoiding it highly desirable; to do so, always take the correct distribution in a timely manner. Some states also penalize under-distributions. Even though a qualified plan owner whose total income is less than the return filing threshold is not required to file a tax return, he or she is still subject to the RMD rules and can thus be liable for the under-distribution penalty even if no income tax would have been due on the under-distribution. Qualified Charitable Distribution – A taxpayer is allowed to transfer funds from their IRA to a qualified charity and the distribution is non-taxable. To constitute a qualified charitable distribution (QCD), the distribution must be made: (1) Directly by the IRA trustee to a qualified charitable organization other than a private foundation or a donor-advised fund, and (2) On or after the date the IRA owner attains age 70½. A distribution from an IRA made to a charitable organization in the year that the IRA owner turns 70½ but prior to the date the individual reaches age 70½ is not a qualified charitable distribution. For those 72 and older a QCD will also count towards the annual RMD requirement. However, after 2019 the restriction on making traditional IRA deductions after age 70½ was repealed and Congress added a complication to QCDs. That provision requires the non-taxable portion of a QCD to be reduced by any deductible IRA contribution made after reaching age 70½.
Example – Bob makes a traditional IRA contribution of $7,000 when he is age 71 and another $7,000 contribution at the age of 72 and deducts the IRA contributions on his returns. Then later when he is 74, he makes a QCD in the amount $20,000 to his church’s building fund. Since Bob had made the deductible IRA contributions after age 70½, his QCD must be reduced by the $14,000. As a result, of the $20,000 QCD, $14,000 is a taxable distribution and only $6,000 is nontaxable. However, because the $14,000 was taxable Bob can claim a $14,000 charitable contribution if he itemizes his deductions. In addition, the entire $20,000 will count towards his RMD for the year.
Designated Beneficiaries – Keeping your designated IRA beneficiary or beneficiaries current is very important. You may not want your account going to your ex-spouse, and you certainly do not want a deceased individual to be your beneficiary. In many cases, advance planning can minimize or even avoid taxes on Traditional IRA distributions. Often, situations will arise in which a taxpayer’s income is abnormally low due to losses, extraordinary deductions, etc., where taking more than the minimum in a year might be beneficial. This is true even for those who may not need to file a tax return but can increase their distributions and still avoid any tax. If you need help with planning, please call this office for assistance.
Video tip: An Expansion of the IRS Identity Protection PIN Program
The Identity Protection PIN Program by the IRS has been expanded to cover not only victims of identity theft but also all eligible taxpayers. What benefit does the program bring to the normal taxpayers and should you apply for it? Watch this video to find out.
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How Understanding the 'Rule of 72' Helps You Make Personal Finance Decisions
Though everybody wants their money to grow, few people understand the best way to make that happen. It’s all about where you choose to put your money and the rate of growth you’re able to achieve over a period of time. When you’re trying to figure out how compound interest works, the “rule of 72” is one of the most helpful tools available. What is the Rule of 72? The Rule of 72 is a helpful, easy-to-understand formula that predicts how many years it takes money to double based on a specific rate of return. You can use it to make decisions about where to put your money based on how much time you have for it to grow and what your risk tolerance is. If your goal is to have twice as much when you finish as when you start, you can identify the interest rate you need based on how much time you have. All you need is the interest rate to complete the calculation, which is based on the following formula: 72 / interest rate = years to double With this simple calculation, you can look at the interest rate offered by various savings tools or anticipated growth of investments and see exactly how long it will take for your money to double. Here’s how different rates of interest impact the time needed to double: At 1%, it will take 72 years for your money to double (72 / 1 = 72) At 3%, it will take 24 years for your money to double (72 / 3 = 24) At 6%, it will take 12 years for your money to double (72 / 6 = 12) At 9%, it will take 8 years for your money to double (72 / 9 = 8) At 12%, it will take 6 years for your money to double (72 / 12 = 6) This list provides as clear a picture as anybody could possibly need of the difference between parking your money in a super-safe, standard savings account that pays 0.09%, and investing in a riskier investment such as the stock market, where the average annualized total return for the S&P 500 index has been just shy of 10% over the last 90 years. It’s a 790-year difference when it comes to doubling! The same formula can be very useful when it comes to taking out loans. Whether you are looking for a new car, a mortgage for a home purchase, or paying interest on your credit card, if you divide 72 by your interest rate, you’ll see exactly how fast the lender (or credit card company) is doubling the money that you’re paying them. It’s a helpful guide to steering clear of usury rates by loan shopping and understanding the advantages of refinancing. As straightforward as the Rule of 72 is, getting your personal finances in order can be a complicated task. For help with navigating complex decisions, contact our office today to set up a time to discuss your specific needs and goals.