Business or Hobby? What's the tax difference?

For federal tax purposes, the determination of "business" or "hobby" is a matter of deduction. If your new venture is considered a business, you can deduct losses against other income.

However, when the activity is classified as a hobby, the "hobby loss" rules limit the amount you can write off. Expenses you incur might be deductible only if you itemize - or they might even be nondeductible.

The distinction affects the amount of tax you owe. So how can you prove you're trying to run a money-making business despite several years of losses?

One test you're probably familiar with is the general rule of earning a profit in three of the past five years. If your business has more income than deductions in three of five consecutive taxable years, the IRS generally accepts that you have a profit motive. (The time frame is two years in seven for certain horse-related activities.)

Unable to meet that test? Additional factors play a role as well. For instance, the Tax Court agreed that a volleyball consulting service with multiple loss years qualified as a business, in part because of a businesslike manner of operation. Among other items, the Court mentioned the maintenance of a separate bank account and accurate records as support for a profit motive.

Positive indicators of your profit-making intentions also include your expertise in the activity, the time and effort you put into your new business, and your success in other ventures.

If you'd like a complete list of the IRS "business vs. hobby" criteria, please contact us. We'll be happy to review the guidelines with you.

Consider providing low-cost benefits to employees

Fringe benefits are important to your employees. Wage levels often don't differ much between companies, so the fringes you offer can be an important factor in hiring and retaining workers.

Major fringe benefits such as health insurance are expensive. But if you're willing to be creative, you can design other attractive benefits at low or no cost. Often these benefits are tax-free to your employees. The exact benefits will depend on the size of your work force and the nature of your business. But here are some ideas to consider.

* Flexible schedules. If the nature of your business allows, offer flexibility in working hours. Canvass senior employees for suggestions on changes. Consider ideas such as closing earlier on summer Fridays to give employees a longer weekend. Make up the time with slightly longer hours on other days.

* Personal leave days. Offer eight hours of paid leave every two months for employees to take care of personal business.

* Transportation benefits. If you're in a metropolitan area, help your employees solve their commuting problems. Work with your local transit authority to offer free bus passes. Consider offering subsidized parking or even van pools in major urban areas.

* Company discounts. Give employees discounts on your own products. Negotiate discounts with other businesses - health club memberships, for example.

* Provide employees with a free monthly health newsletter, with updates and tips on health care issues. Many hospitals and charities publish such newsletters as part of their marketing efforts.

* Arrange lunchtime seminars on topics such as basic financial planning or health issues. It's not difficult to find professionals willing to speak for no fee as part of their business development.

The clock's ticking on 2013 tax-cutting

Want to lower your 2013 tax bill? The time for action is running out, so consider these tax-savers now.

* You can choose to deduct sales taxes instead of local and state income taxes. If you're planning big ticket purchases (like a car or a boat), buy before year-end to beef up your deductible amount of sales tax.

* If you're a teacher, don't overlook the deduction for up to $250 for classroom supplies you purchase in 2013.

* Consider prepaying college tuition you'll owe for the first semester of 2014. This year you can deduct up to $4,000 for higher education expenses. Income limits apply.

* Max out your retirement plan contributions. You can set aside $5,500 in an IRA ($6,500 if you're 50 or older), $12,000 in a SIMPLE ($14,500 if you're 50 or older), or $17,500 in a 401(k) plan ($23,000 if you're 50 or older).

* Establish a pension plan for your small business. You may qualify for a tax credit of up to $500 in each of the plan's first three years.

* Need equipment for your business? Buy and place it in service by year-end to qualify for up to $500,000 of first-year expensing or 50% bonus depreciation.

* Review your investments and make your year-end sell decisions, whether to rebalance your portfolio at the lowest tax cost or to offset gains and losses.

* If you're charity-minded, consider giving appreciated stock that you've owned for over a year. You can generally deduct the fair market value and pay no capital gains tax on the appreciation.

* Another charitable possibility for those over 70½: Make a direct donation of up to $100,000 from your IRA to a charity. The donation counts as part of your required minimum distribution but isn't included in your taxable income.

* Install energy-saving improvements (such as insulation, doors, and windows) in your home, and you might qualify for a tax credit of up to $500.

These possibilities for cutting your taxes are just the starting point. Contact us now for a review of your 2013 tax situation and tax-saving suggestions that will work best in your individual circumstances.

Know the tax consequences of borrowing from your 401(k) plan

When you borrow from your 401(k), you become both a borrower and a lender. Whether that's a good idea depends on your personal financial situation – and in the process of making the decision about lending money to yourself, you may have questions regarding the tax consequences.

For instance, though you probably know the initial borrowing has no federal income tax effect, you might be wondering whether the interest you pay will be deductible. In general, the answer is no. That's true even when you use 401(k) loan proceeds for your home.

Ordinary loan repayments are not taxable events either. That is, you don't have to pick up the interest you repay into your account as taxable income. And, though you're increasing your 401(k) account with the principal portion of each payment, that amount is not considered a contribution. You can still make pre-tax contributions up to the annual limit ($17,500 for a traditional 401(k) during 2013, plus an additional $5,500 when you're age 50 or older).

What if you default on the 401(k) loan? The balance of your loan is considered a distribution to you, and you'll have to report it as ordinary income on your federal tax return. In addition, when you're under age 59½, a 10% early-withdrawal penalty typically applies.

Being both a 401(k) borrower and a lender can lead to tax surprises. Give us a call to make sure you have the whole story before you arrange a 401(k) loan.

Guide your children to financial maturity

Teaching your children about money and finances is easiest when you start early. Here's a quick review of what you should teach your children at each age if you want them to become financially competent adults.

Preschool – Skills to Teach

* Identify coins and bills; learn what each is worth.

* Understand that you can't buy everything; choices are necessary.

* Save money in a piggy bank.

Grade School – Skills to Teach

* Read price tags; learn comparison shopping.

* Do money arithmetic; make change.

* Manage an allowance; use it to pay for some of child's own purchases.

* Open a savings account and learn about interest.

* Participate in family financial discussions about major purchases, vacation choices, etc.

Teens – Skills to Teach

* Work to earn money.

* Budget for larger purchases.

* Learn to use a checking account.

* Learn about investing – stocks, mutual funds, CDs, IRAs, etc.

* Share in financial planning (and saving) for college.

College/Young Adult – Skills to Teach

* Learn about borrowing money (interest, default, etc.).

* Use credit card judiciously.

* Participate in family estate planning discussions.

Knowing about money – how to earn it, use it, invest it, and share it – is a critical life skill. It's never too early to start teaching your children about financial matters.

Do these upcoming tax deadlines apply to you?

You might think tax filing time is over for 2013, but that's not necessarily the case for many taxpayers. There are several important tax deadlines in September and October. Check the list below to see if any of them apply to you or your business.

September 16 - Due date for third quarter installment of 2013 individual estimated income tax.

September 16 - Filing deadline for 2012 tax returns for calendar-year corporations that received an extension of the March filing deadline.

September 16 - Filing deadline for 2012 partnership tax returns that received an extension of the April filing deadline.

September 16 - Due date for third quarter installment of 2013 corporate estimated tax.

October 1 - Deadline for self-employed individuals and small businesses to establish a SIMPLE retirement plan for 2013.

October 15 - Filing deadline for 2012 individual income tax returns that received an extension of the April filing deadline.

October 15 - Deadline for undoing a 2012 conversion of a regular IRA to a Roth IRA and switching the Roth back to a regular IRA without penalty.

Do these upcoming tax deadlines apply to you?

You might think tax filing time is over for 2013, but that's not necessarily the case for many taxpayers. There are several important tax deadlines in September and October. Check the list below to see if any of them apply to you or your business.

September 16 - Due date for third quarter installment of 2013 individual estimated income tax.

September 16 - Filing deadline for 2012 tax returns for calendar-year corporations that received an extension of the March filing deadline.

September 16 - Filing deadline for 2012 partnership tax returns that received an extension of the April filing deadline.

September 16 - Due date for third quarter installment of 2013 corporate estimated tax.

October 1 - Deadline for self-employed individuals and small businesses to establish a SIMPLE retirement plan for 2013.

October 15 - Filing deadline for 2012 individual income tax returns that received an extension of the April filing deadline.

October 15 - Deadline for undoing a 2012 conversion of a regular IRA to a Roth IRA and switching the Roth back to a regular IRA without penalty.