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Welcome to Selfmade Finance School, our new block of advisors money streak that helps small business owners with their tax, accounting, and payroll needs year round. This week we’re going to cover financial literacy and the money terms you should know about.
Financial jargon can be intimidating, and personally I think this is one of the main reasons people feel overwhelmed when they talk about money and taxes. I’ve found that if you can break down the jargon, it really isn’t that scary. Today I’m going to try my best to turn some heavy words into your new slang!
But don’t worry, you don’t have to memorize or even understand everything that is described here. If you work with a tax professional who specializes in small business taxes, they will do it for you. And should be able to explain anything that doesn’t make sense.
“Small business taxes and tax jargon can be tricky, but you don’t have to go it alone,” said Marcie Rahn, EA and Certified Master Instructor at Block Advisors. “Our small business certified tax professionals are up to date on all federal, state, and local tax laws, and have an average of 12 years experience. Let’s work up the details so you can focus on what They do best. For most people, that’s not tax, accounting, and payroll. Thankfully, Block Advisors is exactly what it does best. “
Adjusted gross income: That sounds fancy, but it’s a pretty simple concept. Your Adjusted Gross Income (AGI) is the starting point for calculating your taxes and determining your eligibility for certain tax credits and deductions that can help reduce your overall tax burden. Some common examples of deductions that reduce AGI are traditional IRA contributions, health savings account contributions, and educator expenses. In many types of businesses, your net business income is simply your total gross income minus specific deductions such as inventory, employee salaries and benefits, company vehicle mileage, business-related travel expenses, business utilities, training, and more. passes to you as the business owner and is included in your AGI. (Note: this is not an exhaustive list).
Photo of you X Ventures on Unsplash
What is depreciation?
If you own a business, you can deduct purchases that generate income for your business over time. This includes business goods such as equipment and property. To do this, you need to establish the depreciation schedule for the asset. Depreciation means that you spread and subtract the cost of the asset over several years. This gets pretty nuanced and based on the three, five, or seven year period (or more) that you can write off the assets. You may be able to instantly write off (deduct) the cost of some types of assets in the year you purchase them. You can also write off real estate if it is used in a trade or business if it will generate income for you. Understanding depreciation can get complex. I therefore recommend hiring a tax advisor for this.
What are capital gains and do I need to take care of them?
A capital gain is the increase in the value of a capital asset (e.g. a security or real estate) that gives it a value greater than the purchase price. The price you pay for something is known as your cost, or cost base. The difference between the price you sold it for and the cost base is considered a capital gain or capital loss. Dealing with capital gains and losses has different tax consequences. Therefore, it is always important to know what your tax liability would be before selling an asset.
Photo by Katie Harp for Unsplash
What does it mean to be audited?
There are different types of audits. An email review is limited to a few items on an examination letter given to you by the IRS. It’s usually something that has been tagged and they need clarity about it. It can be pretty easy to clarify that you have the correct documentation and get help answering it.
Most importantly – Never ignore a letter from the IRS!
An office or field audit is more work. You need to collect the information / documents the IRS requests and be prepared to answer in-depth questions about your company’s finances and activities. You also need to prepare to explain in detail the company’s accounting and record keeping system (as the business owner, make sure YOU understand). If you don’t have one at this point, it is highly recommended that you hire a licensed tax advisor to represent you and endorse your tax filing positions. If you don’t have anyone on your mind, turn to Block Advisors – they are experts.
What is a Schedule C and does it apply to me? The Schedule C is basically your income statement (P&L) from your company if you are a sole proprietorship. It is used to report income and expenses to the IRS and shows how much money you have made or lost in a business you run yourself. The form tells you how much of your income from your company is taxable or whether you have a tax loss. You submit a Schedule C along with your Form 1040. In many cases, you may also need to file a Schedule SE (Self-Employment Tax). Your Block Advisors Certified Small Business Tax Advisor can help.
This is a short list of the technical jargon used in taxation. There’s a lot more to it than that. As I said, I highly recommend hiring someone to help you with your taxes, especially if you feel overwhelmed.
Our certification as a small business tax advisor is awarded by Block Advisors, part of H&R Block, based on successful completion of in-house training. Our Block Advisors small business services are available from participating Block Advisors and H&R Block offices nationwide. The opinions expressed in this comment are those of the author and may not necessarily reflect the opinions of Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations to any person. It is recommended that you consult your financial professional, lawyer or tax advisor regarding your individual situation. Comments on past performance are not forward-looking and should not be taken as an indication of future results. Securities offered by Kestra Investment Services, LLC (Kestra IS), a member of FINRA / SIPC. Investment advice from Kestra Advisory Services, LLC (Kestra AS), a subsidiary of Kestra IS. O’Keeffe Financial Partners and other companies listed here are not affiliated with Kestra IS or Kestra AS Investor Disclosures: https://bit.ly/KF-Disclosures
Further content of the Selfmade Finance School can be found below:
4 Tips To Navigate The Pandemic Like A Small Business Pro
Do I really need an accountant for the tax season?
Photos by Katie Harp and You X Ventures for Unsplash