Crypto-currency Transaction Reporting: What it Means for You

The last two years have seen explosive growth in US consumer interest in crypto-currency transactions, purchases and use. Sadly, very few consumers understand the income tax and foreign reporting obligations that accompany crypto-currency activities, and the incorrect and misleading information floating around on the internet is frightening to we tax professionals.

Congress and the IRS have both become aggressively involved in monitoring the activities and the failure to correctly report crypto, and on November 15th the President signed even stronger legislation to track the activities. As an example, were you aware that one penalty for failure to report crypto activities can be 50% of the highest balance in the account each year?

We must strongly remind you that crypto activity must be reported to us so that we may appropriately report it on your tax return. Additionally, because of the compliance rules, the reporting is extraordinarily complex, and we will need you to consider using a tax basis tracking software to even start trying to prepare your return. To get your attention, the lowest price that the online tax trackers charge to prepare a return with cryptocurrency activities is $2,500, so be forewarned that this activity on your part will be greeted with a huge fee on our part. Our industry is seeing tax returns requiring as many as 20,000 separate entries on the return, and several hundred entries is not unusual at all for individuals trading crypto or using it to buy stuff. The most basic rule to investing is to understand the investment and its related reporting requirements and we are afraid that few Americans understand either when it comes to cryptocurrency.

Here are the 7 activities that require individual transaction reporting in addition to just reporting the existence of the account. You read that correctly-each individual transaction must be individually reported. For example if you use a crytpo currency to buy a cup of coffee we must report that transaction individually on your return!

  1. Selling (Converting) crypto to US Dollars
  2. Trading 1 crypto for another
  3. Spending crypto directly for goods or services
  4. Mining crypto from your own computers
  5. Staking or lending crypto and receiving payment in crypto or dollars
  6. Receiving Airdrop crypto
  7. Getting paid in crypto

Items 1,2 and 3 require that we report each and every transaction separately on your return!! Potentially hundreds or thousands of transactions must be reported if you are spending cryptocurrency, trading (even via a “Bot”), mining, etc.

In summary, this year we are reminding our clients in our organizers, interviews and engagement letters that these actions must be disclosed so that we may report them and have you avoid penalties. Tracking your crypto-currency transactions is incredibly important, and we want to help ensure you stay in compliance. If you have questions, please don’t hesitate to reach out: tzabel@zabelco.com

3 Reasons Why Employees Need to Understand Your Growth Vision

For some businesses, 2020 was a terrible year. But other companies were able to thrive in a changed marketplace fueled by online demand.

2021 has seen a slow return to some semblance of normalcy, which means that many mid-sized businesses are looking for ways to either reverse the setbacks of the previous year and re-grow their market or continue to build on the successes they’ve enjoyed.

How can your company close out the year on a high note and continue to expand and succeed well into 2022? Here are a few areas of focus that will help you to create winning growth strategies moving forward.

Increasing Customer Retention

With so many opportunities to shop in-store and online these days, consumers have no shortage of options for goods and services. While there are always going to be certain consumers that flit from one brand to the next, most buyers will gravitate toward the familiar — unless you give them a reason not to, that is.

Increasing customer retention starts by providing superior products or services, but it also requires companies to create positive and engaging experiences. Customers today want to be wooed, and this goes way beyond a “customer is always right” mentality.

Offering added value could come by designing a customer loyalty program, publishing original online content like how-to articles, or encouraging brand interactions via social media contests or challenges, for example.

You also want to follow up on sales, recommend products customers might like based on their shopping history, and provide exceptional customer service at every turn.

The long and short of it? You need to give customers every reason to return instead of looking elsewhere.

When you understand what consumers want and how to woo them, you can increase retention along with your brand reputation and referrals, fueling growth.

Offering New Products and Services

Sometimes, expanding your business requires diversification of the products or services you offer. You’ll want to create new offers that not only speak to your current consumer base but also draw in new customers.

A bagel shop, for example, might be known for breakfast, but by offering pre-packaged boxed lunches to go, they stand to increase purchasing potential and open a market for people seeking food for picnics, school lunches or field trips, corporate meetings, and more. This simple tactic has the potential to double sales by bringing in a lunch crowd.

Granted, this example relies on repurposing an existing product, but any time you can offer something new and increase the value of a product without spending a dime, you’re making a good business decision.

Investing in Creative Marketing Strategies

Satisfied customers can act as brand ambassadors to a degree, referring family and friends and writing online reviews that encourage others to give your company a try. However, this is not an entirely reliable source of growth.

This is why marketing is so important when it comes to reaching a new audience and convincing them to choose you over competitors. Your campaigns should be designed to grab attention and compel action, without the hard sales tactics that tend to repel consumers.

If you want to stand out, there are several ways to get creative with your marketing. You can personalize the message to your audience, showing that you understand their problems and you’re ready to solve them.

You can launch a campaign designed to let the customer do the talking for you, calling on satisfied consumers to participate – after all, consumer reviews tend to be more trustworthy than traditional advertising.

You might also turn to influencers to promote your brand to their audience as a trusted source. You could even play on a rivalry with another brand, like Burger King did when they launched an ordering app and advertised one-cent Whoppers for anyone ordering within 600 feet of a McDonald’s location.

Expanding into New Markets with Proven Growth Potential

If you see competitors succeeding in other markets, there’s no reason you can’t use the same tactics to grow your own business. It can be risky if you don’t plan and prepare accordingly, but when it’s been done before, all you have to do is find a way to do it better.

Focus on Differentiation

You don’t necessarily have to fall into a small niche to grow your mid-sized company – leave that to small and boutique businesses.

However, you do have to differentiate if you want to stand out from your competitors. If your products and services are similar to others in the space, focus on what makes your company unique – your inclusive culture, diverse staff, superior delivery, or outstanding customer service and support, for example.

When you set your sights on increasing customer retention, expanding your product/service lineup, marketing creatively, breaching new markets, and differentiating from competitors, you have the best opportunity to grow your brand and take your mid-sized company to the next level.

Looking for additional tactics to drive growth within your business? We’d love to chat. Connect with Todd to learn more: tzabel@zabelco.com

Can I deduct organizational and start-up costs for my new business?

Have you just started a new business? Did you know expenses incurred before a business begins operations are not allowed as current deductions? Generally, these start up costs must be amortized over a period of 180 months or 15-Years beginning in the month in which the business begins. However, based on the current tax provisions, you may elect to deduct up to $5,000 of business start-up and $5,000 of organizational costs paid or incurred. The $5,000 deduction is reduced by any start-up or organizational costs which exceed $50,000. If you want to deduct a larger portion of your start up cost in the first year, a new business will want to begin operations as early as possible and hold off incurring some of those expenses until after business begins. Contact us to help determine how you can maximize your deduction for start-up and/or organizational expenses. For additional information on what costs constitute start-up or organizational expenses, refer to IRS publication 535, Business Expenses.

How long should I keep my tax records for?

Federal law requires you to maintain copies of your tax returns and supporting documents for three years. This is called the “three-year law” and leads many people to believe they’re safe provided they retain their documents for this period of time.

However, if the IRS believes you have significantly underreported your income (by 25 percent or more), it may go back six years in an audit. If there is any indication of fraud, or you do not file a return, no period of limitation exists.To be safe, use the following guidelines.

  • Correspondence with Customers and Vendors
  • Duplicate Deposit Slips
  • Purchase Orders (other than Purchasing Department copy)
  • Receiving Sheets
  • Requisitions
  • Stenographer’s Notebooks
  • Stockroom Withdrawal Forms

Business Documents To Keep For Three Years

  • Employee Personnel Records (after termination)
  • Employment Applications
  • Expired Insurance Policies
  • General Correspondence
  • Internal Audit Reports
  • Internal Reports
  • Petty Cash Vouchers
  • Physical Inventory Tags
  • Savings Bond Registration Records of Employees
  • Time Cards For Hourly Employees

Business Documents To Keep For Six Years

  • Accident Reports, Claims
  • Accounts Payable Ledgers and Schedules
  • Accounts Receivable Ledgers and Schedules
  • Bank Statements and Reconciliations
  • Cancelled Checks
  • Cancelled Stock and Bond Certificates
  • Employment Tax Records
  • Expense Analysis and Expense Distribution Schedules
  • Expired Contracts, Leases
  • Expired Option Records
  • Inventories of Products, Materials, Supplies
  • Invoices to Customers
  • Notes Receivable Ledgers, Schedules
  • Payroll Records and Summaries, including payment to pensioners
  • Plant Cost Ledgers
  • Purchasing Department Copies of Purchase Orders
  • Sales Records
  • Subsidiary Ledgers
  • Time Books
  • Travel and Entertainment Records
  • Vouchers for Payments to Vendors, Employees, etc.
  • Voucher Register, Schedules

Business Records To Keep Forever

While federal guidelines do not require you to keep tax records “forever,” in many cases there will be other reasons you’ll want to retain these documents indefinitely.

  • Audit Reports from CPAs/Accountants
  • Cancelled Checks for Important Payments (especially tax payments)
  • Cash Books, Charts of Accounts
  • Contracts, Leases Currently in Effect
  • Corporate Documents (incorporation, charter, by-laws, etc.)
  • Documents substantiating fixed asset additions
  • Deeds
  • Depreciation Schedules
  • Financial Statements (Year End)
  • General and Private Ledgers, Year End Trial Balances
  • Insurance Records, Current Accident Reports, Claims, Policies
  • Investment Trade Confirmations
  • IRS Revenue Agent Reports
  • Journals
  • Legal Records, Correspondence and Other Important Matters
  • Minutes Books of Directors and Stockholders
  • Mortgages, Bills of Sale
  • Property Appraisals by Outside Appraisers
  • Property Records
  • Retirement and Pension Records
  • Tax Returns and Worksheets
  • Trademark and Patent Registrations

Personal Documents To Keep For One Year

While it’s important to keep year-end mutual fund and IRA contribution statements forever, you don’t have to save monthly and quarterly statements once the year-end statement has arrived.

Personal Documents To Keep For Three Years

  • Credit Card Statements
  • Medical Bills (in case of insurance disputes)
  • Utility Records
  • Expired Insurance Policies

Personal Documents To Keep For Six Years

  • Supporting Documents For Tax Returns
  • Accident Reports and Claims
  • Medical Bills (if tax-related)
  • Sales Receipts
  • Wage Garnishments
  • Other Tax-Related Bills

Personal Records To Keep Forever

  • CPA Audit Reports
  • Legal Records
  • Important Correspondence
  • Income Tax Returns
  • Income Tax Payment Checks
  • Property Records / Improvement Receipts (or six years after property sold)
  • Investment Trade Confirmations
  • Retirement and Pension Records (Forms 5448, 1099-R and 8606 until all distributions are made from your IRA or other qualified plan)

Special Circumstances

  • Car Records (keep until the car is sold)
  • Credit Card Receipts (keep until verified on your statement)
  • Insurance Policies (keep for the life of the policy)
  • Mortgages / Deeds / Leases (keep 6 years beyond the agreement)
  • Pay Stubs (keep until reconciled with your W-2)
  • Sales Receipts (keep for life of the warranty)
  • Stock and Bond Records (keep for 6 years beyond selling)
  • Warranties and Instructions (keep for the life of the product)
  • Other Bills (keep until payment is verified on the next bill)
  • Depreciation Schedules and Other Capital Asset Records (keep for 3 years after the tax life of the asset)

What tax services will I need for my business?

Ensuring the solidity of financial records for tax is an important part of business. Evaluating your tax procedures to produce strategies that help in the myriad of tax changes in business can only help to ensure your keeping what is rightfully your as the business owner.  There are many various tax review plans that can help and the best way to learn about them is by getting in-touch and learning how Zabel can help. 

How can I reduce my tax liablity?

Many individuals today are looking to find ways to save federal and state taxes using generally excepted principals by the IRS.  Over the years the tax codes have developed many unknown deductions to individuals that can be used as financial planning tools that may help you reduce your tax bill.

Charitable Giving – Instead of selling your appreciated long-term securities, donate the stock instead and avoid paying tax on the unrealized gain while still getting a charitable tax deduction for the full fair market value.

Health Savings Accounts (HSAs) – If you have a high deductible medical plan you can open an HSA and make tax deductible contributions to your account to pay for medical expenses. Unlike flexible spending arrangements (FSAs), the contributions can carry over for medical expenses in future years.

ROTH IRAs – Contributions to a ROTH IRA are not tax deductible but the qualified distributions, including earnings are tax-free.

Municipal Bonds – Interest earned on these types of investments is tax-exempt.

Own a home – most of the cost of this type of investment is financed and the interest (on mortgages up to $1,000,000) is tax deductible. When the property is sold, individuals may exclude up to $250,000 ($500,000 if married jointly) of the gain.

Retirement Plans – Participate in your employer sponsored retirement plan, especially if there is a matching component. You will receive a current tax deduction and the tax-deferred compounding can add up to a large retirement savings.

Can I deduct my mortgage interest?

The simple answer is yes, if you own a home, and you itemize your deductions on Schedule A, you can claim a deduction for the interest paid. To be deductible, the interest you pay must be on a loan secured by your main home or a second home (including a second home that is also rented out for part of the year, so long as the personal use requirement is met). The loan can be a first or second mortgage, a home improvement loan, or a home equity loan. To be deductible, the loan must be secured by your home but the proceeds can be used for other than home improvements. You can refinance and use the proceeds to pay off credit card debt, go on vacation or buy a car and the interest will remain deductible. There are other financial reasons for not wanting to do this but it will not disqualify the deduction.

The interest deduction for home acquisition debt (that is, a loan taken out after October 13, 1987 to buy, build, or substantially improve a qualified home) is limited to debt of $1 million ($500,000 if married filing separately). The interest deduction from your home equity loan is also not unlimited. You can generally deduct interest you pay on the first $100,000 of a home equity loan. Debt which you incurred to buy, build or substantially improve your home that is in excess of the $1 million home acquisition debt limit may also qualify as home equity debt.

In addition to the deduction for mortgage interest, points paid on the original purchase of your residence are also generally deductible. Taxpayers who are required to pay mortgage insurance premiums may also be able to deduct this amount subject to certain income limits. For more information about the mortgage interest deduction, see IRS Publication 936.

What are capital gains or losses and how do they effect me?

Most individuals dont think about accounting when it comes to use for personal purposes, pleasure or investment is a capital asset. Almost everything you own is an asset and the IRS says when you sell a capital asset, such as stocks, the difference between the amount you sell it for and your basis, which is usually what you paid for it, is a capital gain or a capital loss. While you must report all capital gains, you may deduct only your capital losses on investment property, not personal property.

While you must report all capital gains, you may deduct only your capital losses on investment property, not personal property. A “paper loss” — a drop in an investment’s value below its purchase price — does not qualify for the deduction. The loss must be realized through the capital asset’s sale or exchange.

Capital gains and losses are classified as long-term or short-term, depending on how long you hold the property before you sell it. If you hold it more than one year, your capital gain or loss is long-term. If you hold it one year or less, your capital gain or loss is short-term. For more information on the tax rates, refer to IRS Publication 544, Sales and Other Dispositions of Assets. If your capital losses exceed your capital gains, the excess is subtracted from other income on your tax return, up to an annual limit of $3,000 ($1,500 if you are married filing separately). Unused capital losses can be carried over indefinitely to future years to net against capital gains, however the annual limit still applies.

Capital gains and losses are reported on Form 8949Sales and Other Dispositions of Capital Assets, summarized on Schedule D, Capital Gains and Losses, and then transferred to line 13 of Form 1040. Accounting and planning for the sale and purchase of capital assets is usually a very complicated matter, so please contact us so that you may receive the professional advice you deserve.

What is a Coverdell Education Savings Account (ESA)?

A Coverdell Education Savings Account (ESA) is a savings account created as an incentive to help parents and students save for education expenses.

The total contributions for the beneficiary (who is under age 18 or is a special needs beneficiary) of this account in any year cannot be more than $2,000, no matter how many accounts have been established. The beneficiary will not owe tax on the distributions if, for a year, the distributions from an account are not more than a beneficiary’s qualified education expenses at an eligible education institution. This benefit applies to higher education expenses as well as to elementary and secondary education expenses.

Generally, any individual (including the beneficiary) can contribute to a Coverdell ESA if the individual’s modified adjusted gross (MAGI) income is less than an annual, constantly changing maximum. Usually, MAGI for the purpose of determining your maximum contribution limit is the adjusted gross income (AGI) shown on your tax return increased by the following exclusion from your income: foreign earned income of U.S. citizens or residents living abroad, housing costs of U.S. citizens or residents living abroad, and income from sources within Puerto Rico or American Samoa. Contributions to a Coverdell ESA may be made until the due date of the contributor’s return, without extensions.

How can I decide if I have a business or a hobby?

Great question let’s see if we can help. It is generally accepted that people prefer to make a living doing something they like. A hobby is an activity for which you do not expect to make a profit. If you do not carry on your business or investment activity to make a profit, there is a limit on the deductions you can take. You must include on your return income from an activity from which you do not expect to make a profit. An example of this type of activity is a hobby or a farm you operate mostly for recreation and pleasure. You cannot use a loss from the activity to offset other income. Activities you do as a hobby, or mainly for sport or recreation, come under this limit. So does an investment activity intended only to produce tax losses for the investors.

The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corporations. For additional information on these entities, refer to business structures. It does not apply to corporations other than S corporations. In determining whether you are carrying on an activity for profit, all the facts are taken into account. No one factor alone is decisive. Among the factors to consider are whether:

  1. You carry on the activity in a business-like manner,
  2. The time and effort you put into the activity indicate you intend to make it profitable,
  3. You depend on income from the activity for your livelihood,
  4. Your losses are due to circumstances beyond your control (or are normal in the start-up phase of your type of business),
  5. You change your methods of operation in an attempt to improve profitability,
  6. You, or your advisors, have the knowledge needed to carry on the activity as a successful business,
  7. You were successful in making a profit in similar activities in the past,
  8. The activity makes a profit in some years, and
  9. You can expect to make a future profit from the appreciation of the assets used in the activity.