Numbers in Boxes: Green Ledger Sheets

The best way to avoid feeling like a victim at tax time is to be armed with knowledge. Not only do you need to know what you are liable for at tax time, you need to learn what your deductions are. Tax planning allows us to work as a team so that we can help you make beneficial decisions that could end up saving you thousands of dollars on your tax return. When you understand how you are being taxed, you will learn how the business purchases that you make before the end of the year can drastically reduce your tax bill.

Tax preparation is more than just filing a tax return. It’s the planning we do during the year that culminates in a successful filing during tax season. As an informed and prepared taxpayer, your stress is reduced, you are able to make informed decisions, and you are no longer a victim of your tax situation.
The best way to avoid feeling like a victim at tax time is to be armed with knowledge. Not only do you need to know what you are liable for at tax time, buy you need to learn what your deductions are. Tax planning allows us to work as a team so that we can help you make beneficial decisions that could end up saving you thousands of dollars on your tax return. When you understand how you are being taxed, you will learn how the business purchases that you make before the end of the year can drastically reduce your tax bill.

Tax preparation is more than just filing a tax return. It’s the planning we do during the year that culminates in a successful filing during tax season. As an informed and prepared taxpayer, your stress is reduced, you are able to make informed decisions, and you are no longer a victim of your tax situation.

At Taxing Matters we take pride in providing accurate and confidential tax preparation services. We educate our clients on their tax situations and work diligently to minimize their tax liability. Our clients take advantage of our tax planning services throughout the year to avoid unpleasant surprises at tax time. Whether you are an individual, own a business, or hold rental properties, we have the experience and specialized tax knowledge to offer unparalleled service.

At Taxing Matters we take pride in providing accurate and confidential tax preparation services. We educate our clients on their tax situations and work diligently to minimize their tax liability. Our clients take advantage of our tax planning services throughout the year to avoid unpleasant surprises at tax time. Whether you are an individual, own a business, or hold rental properties, we have the experience and specialized tax knowledge to offer unparalleled service.

Article Highlights:

  • Exchange of goods or services
  • Bartering is taxable income
  • Bartering exchanges
  • Bartering credit units

Bartering is the trading of one product or service for another. Often there is no exchange of cash. In addition to individuals, small businesses sometimes barter to get the products or services they need. For example, a plumber might trade plumbing work with a dentist for dental services. Bartering may take place on an informal one-on-one basis between individuals and businesses, or it can take place on a third-party basis through a modern barter exchange company.

Some individuals and small businesses believe that bartering avoids taxable income because there is no exchange of money. This is not true, however; barter exchanges are considered taxable income by the IRS. The fair market value of goods and services exchanged must be included in the income of both parties to the exchange.

Business Owners – If you are the owner of a business, you may sometimes find it to your advantage to barter for goods and services rather than pay in cash. You should be aware, however, that the fair market value of the goods that you receive through bartering is taxable income, just as if you had received a cash payment.

Exchanges of services result in taxable income for both parties. Say, for example, that a computer consultant agrees to an exchange of services with an advertising agency. Both parties to the transaction are taxed on the fair market value of the services received. This is the amount they would normally charge for the same services. If the parties agree to the value of the services in advance, this will be considered the fair market value, unless there is contrary evidence.

Income is also realized when services are exchanged for property. For example, if an architectural firm does work for a corporation in exchange for shares of the corporation’s stock, it will have income equal to the fair market value of the stock.

Barter Exchanges – Individuals and business owners sometimes join barter clubs that facilitate barter exchanges. Some exchanges operate out of an office and others over the Internet. Unlike one-on-one bartering, members of exchanges are not obligated to barter or purchase directly from a seller. Instead, when a barter exchange member sells a product or a service to another member, their barter account is credited for the fair market value of the sale. When a barter exchange member buys, the account is debited for the fair market value of the purchase. These clubs generally use a system of “credit units” that are awarded to members who provide goods and services and can be redeemed for goods and services from other members.

If you participate in a barter club, you’ll be taxed on the value of credit units at the time they are added to your account, even if you don’t redeem the units for actual goods and services until a later year. For example, say that in Year 1, you earn 2,000 credit units and each unit is redeemable for one dollar in goods and services. In Year 1, you’ll have $2,000 of income. You won’t pay additional tax if you redeem the units in Year 2, since you will already have been taxed once on that income.

When you join a barter club, you’ll be asked to give the club your social security number or employer identification number and to certify that you aren’t subject to backup withholding. Unless you make this certification, the club must withhold tax from your bartering income at a 28% rate.

By January 31st of each year, the barter club will send you a Form 1099-B, which shows the value of cash, property, services, and credits that you received from exchanges during the previous year. This information will also be reported to the IRS.

If you have questions related to bartering income, please give this office a call.

At Taxing Matters we take pride in providing accurate and confidential tax preparation services. We educate our clients on their tax situations and work diligently to minimize their tax liability. Our clients take advantage of our tax planning services throughout the year to avoid unpleasant surprises at tax time. Whether you are an individual, own a business, or hold rental properties, we have the experience and specialized tax knowledge to offer unparalleled service.

Article Highlights:

  • Exchange of goods or services
  • Bartering is taxable income
  • Bartering exchanges
  • Bartering credit units

Bartering is the trading of one product or service for another. Often there is no exchange of cash. In addition to individuals, small businesses sometimes barter to get the products or services they need. For example, a plumber might trade plumbing work with a dentist for dental services. Bartering may take place on an informal one-on-one basis between individuals and businesses, or it can take place on a third-party basis through a modern barter exchange company.

Some individuals and small businesses believe that bartering avoids taxable income because there is no exchange of money. This is not true, however; barter exchanges are considered taxable income by the IRS. The fair market value of goods and services exchanged must be included in the income of both parties to the exchange.

Business Owners – If you are the owner of a business, you may sometimes find it to your advantage to barter for goods and services rather than pay in cash. You should be aware, however, that the fair market value of the goods that you receive through bartering is taxable income, just as if you had received a cash payment.

Exchanges of services result in taxable income for both parties. Say, for example, that a computer consultant agrees to an exchange of services with an advertising agency. Both parties to the transaction are taxed on the fair market value of the services received. This is the amount they would normally charge for the same services. If the parties agree to the value of the services in advance, this will be considered the fair market value, unless there is contrary evidence.

Income is also realized when services are exchanged for property. For example, if an architectural firm does work for a corporation in exchange for shares of the corporation’s stock, it will have income equal to the fair market value of the stock.

Barter Exchanges – Individuals and business owners sometimes join barter clubs that facilitate barter exchanges. Some exchanges operate out of an office and others over the Internet. Unlike one-on-one bartering, members of exchanges are not obligated to barter or purchase directly from a seller. Instead, when a barter exchange member sells a product or a service to another member, their barter account is credited for the fair market value of the sale. When a barter exchange member buys, the account is debited for the fair market value of the purchase. These clubs generally use a system of “credit units” that are awarded to members who provide goods and services and can be redeemed for goods and services from other members.

If you participate in a barter club, you’ll be taxed on the value of credit units at the time they are added to your account, even if you don’t redeem the units for actual goods and services until a later year. For example, say that in Year 1, you earn 2,000 credit units and each unit is redeemable for one dollar in goods and services. In Year 1, you’ll have $2,000 of income. You won’t pay additional tax if you redeem the units in Year 2, since you will already have been taxed once on that income.

When you join a barter club, you’ll be asked to give the club your social security number or employer identification number and to certify that you aren’t subject to backup withholding. Unless you make this certification, the club must withhold tax from your bartering income at a 28% rate.

By January 31st of each year, the barter club will send you a Form 1099-B, which shows the value of cash, property, services, and credits that you received from exchanges during the previous year. This information will also be reported to the IRS.

If you have questions related to bartering income, please give this office a call.
Tax season 2014 is right around the corner, and a host of tax changes that become effective this year will be particularly painful for taxpayers in a higher tax bracket.  A former 39.6 percent bracket has been reinstated for taxpayers with higher taxable incomes.  For 2013, the 39.6 percent bracket starts at taxable income levels of $400,000 for single and $450,000 for married couples.  This newly reinstated tax rate is now permanent until Congress changes it.

 

Capital gains rates of 0 and 15 percent are now permanent, but a new 20 percent rate applies for taxpayers with higher taxable income.  This 20 percent rate applies to taxpayers with long-term capital gains that fall into the above-mentioned 39.6 percent tax bracket.

 

Beginning in 2013 medical expenses will need to exceed 10 percent of the taxpayer’s adjusted gross income (previously 7.5 percent) in order to be deductible.  Taxpayers over sixty five, however, will be able to deduct medical expenses that exceed 7.5 percent of adjusted gross income for taxable years 2013-2016.  An additional 2013 change to itemized deductions is a phase-out of itemized deductions for higher income taxpayers.  The phase-out level is $250,000 for single and $300,000 for joint filers.

 

Two new and potentially painful taxes will also rear their heads this year.  The 3.8% Net Investment Income Tax (NIIT) tax went into effect January 1, 2013.  Taxpayers with incomes over $200,000 for individuals or $250,000 for married couples will be paying an additional 3.8% tax on income from interest, dividends, annuities, royalties and rents.  Capital gains on a primary home sale that exceed $250,000 for individuals or $500,000 for a married couple, meeting the income threshold, will face the 3.8% tax realized on the excess gain.  Although this tax is aimed towards higher income taxpayers, it can include anyone who has a big one-time shot of investment income or gain.  Also, beginning in 2013 is an additional .9 percent Medicare Tax assessed on individuals with wages or self-employment earnings that exceed $200,000.

 

All of these changes are part of the American Taxpayers Relief Act of 2012 and the Affordable Care Act and are geared towards generating additional tax from higher income taxpayers.  Some taxpayers will be surprised to find themselves in this situation and many will feel the impact of not just one hit but multiple hits coming from different areas.  For example, taxpayers in the higher 39.6 percent tax bracket will have additional federal income tax, a higher capital gains rate, lower itemized deductions, an additional .9 percent Medicare Tax and an additional 3.8% investment tax.  Unfortunately, many of these people will also be paying tax on 85 percent of their social security benefits as well.  Just a few weeks ago I did a tax planner for a couple and these tax hikes added a whopping $18,000 to an already steep tax bill.

 

Now more than ever, a proactive approach to tax planning and strategizing is necessary.  Armed with the above information taxpayers have the ability and should strategically plan asset sales and expenses like medical payments so that they can take advantage of tax bracket changes and phase outs.  Higher taxes for taxpayers with income in these ranges may be inevitable, but taxpayers who plan strategically can act accordingly and potentially reduce their tax liability.

Numbers in Boxes: Green Ledger Sheets

 

 

My path to a career in numbers in boxes was one that started when I was a young girl. I saved my allowance and pedaled my bike miles away to the nearest Ben Franklin store in the pursuit of green ledger books. Pads of paper lined and ruled with beautiful columns and boxes just ready to be filled with perfectly formed numbers. From a young age I practiced filling in the columns and balancing my books; keeping track of expenditures and making loans to my brothers amortizing interest at a market rate. My first job was also that of an entrepreneur. One year I decided to take my head out of a book long enough to decide I wanted to play softball on my school’s softball team. There was a new young and exciting softball coach encouraging even bookworms like myself out onto the field. There was only one problem; I needed a softball glove. I read an advertisement for a seed company looking for independent sellers so I sent off for my starter kit. One of the prizes at stake was a softball glove. I spent that spring pedaling my seeds; harassing my neighbors with tales of the huge pumpkins and vine ripened tomatoes that they could grow with my seeds. I managed to sell all of my packets of seeds and played softball that year with the glove I had earned with my sales efforts. I wasn’t the best softball player on the team, but I sure had one fabulous glove.

 

Forty years later I am still an entrepreneur putting numbers in boxes only these days most of the boxes are on a computer screen. When I first started my career, I was driving around with boxes of tax forms in the trunk of my car. Everything was written on IRS produced blue 1040 tax forms. I used three copies of each form and two sheets of carbon paper. One copy for the IRS, one for the client and one for the file. One change or mistake on any form meant that every sheet was torn up and the entire return recalculated with a calculator and everything rewritten by hand. When I had questions I called the clients for answers. Many clients didn’t even have answering machines so I called and called or wrote letters asking for clients to respond. There was no email, electronic filing or direct deposit. A tax return would often take weeks to complete while I waited for a client to respond to letters or calls.

 

Today, clients respond almost immediately to emails and scan and upload forms. I can call my clients on their cell phones while they are waiting in line at their nearest coffee shop. The exchange of data is almost instantaneous. The number of forms and numbers that cross my desk in a day can be staggering, but in my mind’s eye I can see the faces and I know the stories of the people connected to these documents. Every once in a while an older client will come in, and out of the corner of my eye before it even hits my desk I will catch a glimpse of those old green ledger sheets. In a world of computer generated profit and loss statements the honest simplicity of a client’s green ledger sheets provide a welcome respite. Often times these numbers in boxes reveal the writer’s shaking hand, but the beauty of these numbers in boxes never fails to excite me. Small precisely formed penciled numbers confined into their small boxes are a meditation in form. And sometimes when the numbers are moving too quickly or I have questions about how numbers are flowing to certain forms I turn away from my computer and go into a cabinet in my office to the stack of dusty green ledger books I keep hidden there. I know that the perfectly formed numbers in their little green boxes will give me the answers I need.

 

Both comments and pings are currently closed.

Comments are closed.