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How Mutual Fund Investments Are Taxed

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Business colleagues in meetingDo you invest in mutual funds? Unless you hold your investment in a tax-deferred account, you’ll want to consider taxes when you look at a fund’s returns. After all, it’s not what your fund earns but what you keep that counts.

Distributions of Fund Income

Mutual funds are required to distribute almost all of their income — including realized capital gains, dividends, and interest — to their shareholders each year. The tax bite from these distributions reduces the fund’s total return to the investor.

Capital gains. The tax rate on long-term capital gains is capped at 15% for most taxpayers, and 20% for those with higher incomes. However, if a fund sells a security at a gain before meeting the more-than-one-year holding period for long-term capital gain treatment, the gain is considered short term and is taxable to you when distributed at your regular tax rate. Regular individual tax rates currently range as high as 37%.

Dividends. The tax rates on qualifying dividends mirror the long-term capital gains rates. These rates apply to qualifying dividends a mutual fund receives on stocks in its portfolio and distributes to shareholders. Dividends that don’t qualify for a favorable rate are taxable to you at your regular tax rate.

Interest. Distributions of interest a fund earns on bonds, certificates of deposit, and other interest-bearing investments are generally taxable to you at your regular tax rate. However, interest you receive from a municipal bond fund is generally exempt from federal income taxes (and possibly state taxes as well).

Note that a 3.8% surtax on net investment income may also apply to your capital gains, dividends, and interest from mutual fund investments if your income exceeds a tax law threshold. And you must pay taxes on taxable fund distributions whether or not you reinvest the distributions in additional shares of the fund.

Sales of Fund Shares

When you sell shares in a mutual fund, you’ll typically have a gain or loss to report on your tax return. If the securities in the fund’s portfolio have gone up in value during the period the fund has owned them, this appreciation is reflected in the share price. Similarly, if the value of the fund’s holdings has dropped, the share price will reflect the loss in value.

Your gain or loss on a sale of fund shares is figured by comparing the amount you realize on the sale to your cost basis in the shares you sold. If you sell all the shares you own, figuring your taxes is easy. You just add up all the investments you’ve made, including reinvested dividends and other distributions, and compare that amount to the net sale proceeds to determine whether you have a gain or loss. However, if you don’t sell all your shares at once, you must use an IRS-approved method for figuring your cost basis.

Taxes can have a significant effect on your mutual fund returns. Be sure to consider them in evaluating your investments.

How to Improve Your Cash Flow

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Money and CalculatorSlow paying customers, seasonal revenue variations, an unexpected downturn in sales, higher expenses — any number of business conditions can contribute to a cash flow crunch. If you own a small business, you may find the suggestions that follow helpful in minimizing cash flow problems.

Billing and collections. Your employees need to work with clear guidelines. If you don’t have a standardized process for billing and collections, make it a priority to develop one. Consider sending invoices electronically instead of by mail. And encourage customers to pay via electronic funds transfer rather than by check. If you don’t offer a discount for timely payment, consider adding one to your payment terms.

Expense management. Know when bills are due. As often as possible, pay suppliers within the period that allows you to take advantage of any prompt-payment incentives. Remember that foregoing a discount in order to pay later is essentially financing your purchase.

Take another look at your costs for ongoing goods and services, including telecommunications, shipping and delivery, utilities, etc. If you or your employees travel frequently for in-person meetings, consider holding more web conferences to reduce costs.

Inventory. Focus on inventory management, if applicable, to avoid tying up cash unnecessarily. Determine the minimum quantities you need to keep on hand to promptly serve customers. Systematically track inventory levels to avoid overbuying.

Debt management. Consider how you use credit. Before you commit to financing, compare terms from more than one lender and keep the amount to a manageable level. For flexibility, consider establishing a line of credit if you do not already have one. You will be charged interest only on the amount drawn from the credit line.

Control taxes. Make sure you are taking advantage of available tax breaks, such as the Section 179 deduction for equipment purchases, to limit taxes.

Develop a cash flow budget. Projecting monthly or weekly cash inflows and outflows gives you a critical snapshot of your business’s cash position and shows whether you’ll have enough cash on hand to meet your company’s needs.

Don’t get left behind. Contact us today to discover how we can help you keep your business on the right track. Don’t wait, give us a call today.

Find out how you can save time and stop worrying about the numbers and leave the accounting to us! Call our Fort Smith, AR accounting firm* today at 479-242-1236 or request a consultation.

Business Equipment – Lease or Buy?

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Analyzing financial chart

To lease . . . or not to lease. This is an issue business owners often face. If you are weighing the pros and cons of leasing versus buying, here are some things to keep in mind.

Cost
Evaluating costs is more complicated than comparing the price of leasing a piece of equipment versus its purchase price. You will also want to consider these issues:

  • How soon will the equipment need to be upgraded or replaced? Highly technical or specialized equipment becomes obsolete quickly and may be a good candidate for leasing.
  • How will you arrange for service and repair? Leasing arrangements often include maintenance of the equipment. If you’re thinking of buying, research the equipment’s repair history as well as the cost and availability of reliable service.
  • How long will you need the equipment? If your use will be short term, then leasing may be the better option.

Cash
If you’ve been leasing your equipment, then your costs have been predictable. Purchasing equipment can substantially alter your cash flow. Be sure you consider how purchasing your equipment might affect your business’ finances.

  • Can you save money by buying or leasing equipment? If — and when — cash savings will be realized is an important factor for you to weigh.
  • Do you have the cash available to purchase the equipment? If you use cash for a down payment, you may have less cash for operating and other business expenses.
  • How will financing your equipment purchases affect your ability to get credit for other things? If you anticipate having future credit needs, you may want to avoid adding equipment loans to your current debt load.

If you’re weighing leasing versus buying, give us a call. We can help you look at how the various options will play out.

Find out how you can save time and stop worrying about the numbers and leave the accounting to us! Call our Fort Smith, AR accounting firm* today at 479-242-1236 or request a consultation.

5 Things You Need to Know About Sales Taxes in QuickBooks Online

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Value MetrikThe most important thing you need to know about sales tax is that administering it correctly can be challenging.

If you sold only one type of product to customers in one city, collecting and paying sales tax would be easy. But most businesses have a wider reach than that.

QuickBooks Online offers tools that allow you to set up sales tax rates and include sales tax on sales forms. Further, it calculates how much you must pay to state and local taxing agencies.

This is one of the most complicated areas in QuickBooks Online because you may have to deal with numerous taxing agencies. If you’re not already working with sales taxes, we strongly recommend you let us help you get everything set up correctly from the start. Taxing agencies can audit your recordkeeping and you want to make sure it is set up correctly.

That said, here are five things we think you should know.

QuickBooks Online calculates sales tax rates based on:

  • Where you sell. Every state is different. If your business is located in Florida and you sell to a customer in Minnesota, you’ll be charging any sales tax levied by the state of Minnesota and possibly the city and county and other taxing authorities – if you have a connection, a “nexus” in that state (a physical location, active salesperson, etc.).
  • What you sell.
  • To whom you sell. Some customers (like nonprofit organizations) do not have to pay sales tax. You’ll need to edit their customer records to reflect this in QBO. Open a customer record and click the Edit link in the upper right. Click the Tax info tab and make sure there’s no checkmark in the box that says This customer is taxable. The Default tax code will be grayed out, and you can enter Exemption details in that field.

QuickBooks tips

Customer records for exempt organizations should contain details for that exemption. You’ll need to see their exemption certificate or at least know its official number.

Intuit now offers a revamped version of QuickBooks Online’s sales tax features.

At some point, you’ll be asked if you want to switch to the new, more automated system. The actual mechanics of the process are simple, but you’ll be moving historical and in-process data to a new structure. If you have sales tax set up right now and your situation is at all complicated, you’re going to want our help with the transition.

This enhanced feature only supports accrual accounting.

You can combine individual tax rates.

If you are required to pay city, county, and state sales tax rates for a particular customer, for example, you can create a Combined tax rate that contains all of the individual components. The customer will only see the total on an invoice or sales receipt, but QuickBooks Online will track each one accordingly for payment and reporting purposes.

QuickBooks tips

You can combine sales tax rates in QuickBooks Online (image above from current Sales Tax Center in QuickBooks Online, not the enhanced one).

Product and service records should contain sales tax information.

This is another area that will require some research. Just as some services are subject to tax, some products are not (like groceries in Arizona). So, you’ll need to find out what the rules are for what you sell. You can find this information on the website of the state’s Department of Revenue (sometimes called the Department of Taxation).

Once you know, you can record that status in QuickBooks Online. Open a product record by going to Sales | Products and Services and clicking Edit in the Action column or create a new one by clicking New in the upper right. Scroll down to Sales tax category in the record. You can choose between Taxable – standard rate and Nontaxable.

There’s a third option here: special category. This gets complicated. We can help you determine whether it applies to you.

QuickBooks Online tracks the sales tax you owe.

You can see what you owe to each agency by running the Sales Tax Liability Report, and record payments when you’ve made them. Summary and detail versions of the Taxable Sales report are also available.

Once you get sales taxes set up in QuickBooks Online, it’s easy to add them to the relevant sales forms. Getting to that point, though, takes time, study, and careful attention to detail. If you’re getting ready to sell, or you’re already selling and struggling with sales taxes, let us know. We can schedule an initial consultation to see how we can be of assistance.

SOCIAL MEDIA POSTS

Did you know that QuickBooks Online can calculate and apply sales taxes to transactions? However, setup requires some upfront research. Here are a few things to get started.

Does your business have to charge multiple levels of sales taxes? QuickBooks Online allows you to combine them. Here’s how.

QuickBooks Online calculates sales taxes based on where and what you sell, and to whom. It’s a bit complicated and here is why. We can help you get through setup.

Did you know that Intuit has released an enhanced version of QuickBooks Online’s Sales Tax Center? Here are the details and we can help you make the transition

ValueMetrik CFO offers QuickBooks support as part of our package of accounting services for small and midsized businesses. Call us at 479-242-1236 now and find out how you can leverage QuickBooks to precisely track your finances or request your complimentary consultation online.

Investing for Tax-Favored Income

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Investing for Tax-Favored Income - Value MetrikIf you are seeking a steady income stream from your portfolio while trying to minimize the tax impact of that income, you may want to look into municipal bonds. Municipal bonds traditionally have had a relatively low default rate and may offer diversification benefits.1

What They Are

Municipal bonds are debt securities that are issued by states, cities, counties, and other government entities. Issuers use the funds to fund day-to-day obligations and to pay for capital projects.

Municipal bonds come in two basic types: general obligation bonds and revenue bonds. General obligation bonds are backed by the issuer’s taxing power. Revenue bond payments are funded by the revenues from a specific project or source.

Why Buy Municipal Bonds?

The interest investors earn on most municipal bonds is exempt from federal income taxes.2 In addition, many states do not tax their residents on interest earned from municipal bonds issued in the state. The tax-exempt feature of municipals may mean that, after taking into account tax considerations, you can earn a better return on a municipal bond than you would from a higher-yielding taxable bond.

The value of this tax benefit depends on your tax situation and is highest for investors in higher tax brackets or those who reside in high-tax jurisdictions.

Additional Benefits

You can potentially enjoy several other advantages apart from tax-exempt income when you invest in municipal bonds:

  • A predictable income stream for the life of the bond;
  • Marketability should you need to sell the bonds before maturity; and
  • Choices as to issuer, quality, and geographic location.

Municipal Bonds Are Not Risk-Free

Like all investments, municipal bonds have their own set of risks. The financial health of an issuer and its ability to make timely payments of interest and principal is something you should investigate before buying. Various credit rating agencies, such as Moody’s Investors Services, assess the credit rating of the governmental entities that issue municipal bonds. Generally, issuers with lower credit ratings tend to offer higher yields on their municipals to compensate for the added risk to your principal.

Municipals, like other bonds, are subject to interest rate risk. Rising interest rates cause bond prices to fall. In a period of rising interest rates, selling a municipal bond before it matures may mean having to accept a lower price than you paid for it. In addition, municipal bonds can be impacted by other market forces.

Despite credit, interest, and market force risks, municipal bonds may have a role to play in a carefully structured, diversified fixed-income portfolio. We invite you to call our office at 479-242-1236 to learn more or request an introductory consultation through our website.

1Diversification does not ensure a profit or protect against loss in a declining market.

2The interest on certain “private activity” bonds must be included in income for federal alternative minimum tax purposes.

A message to small business owners seeking Payroll Protection Program loans… Appreciate your banker!

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Business people discussion advisor conceptWe at ValueMetrik CFO want to send a shout out to all our community bankers here in the Arkansas River Valley and across the country.  We all know that healthcare professionals around the country are on the front line of this war against COVID19 and that they are our true heroes.  However, our bankers have been brought into the battle of helping small businesses survive over the last couple of weeks, and they have emerged as our “small business heroes.”

Bankers have been put in a very difficult position recently.  It’s almost as if there’s no way for our community bankers to win in this situation.  Their small business customers are flooding in loan applications requesting funding immediately while banks generally are not staffed to handle the surge in volume and the rules surrounding the new loan program have been a challenge to digest.

It’s been a “pressure-cooker” situation for bankers to be sure.  We at ValueMetrik CFO, like many other financial management consultants and accountants have been coordinating with many bankers and small businesses in our area to help arrange loans under the new Paycheck Protection Program (PPP) recently.  Throughout, we’ve witnessed bankers going above and beyond to do everything they can to be responsive to the needs of their small business customers. Bankers have been working long days. Most of them worked all weekend last weekend, so many have been working for 10 days, straight, as of the date of this message.

Bankers will get this job done for their customers. But even after doing all the work and figuring out all the new rules, let’s face it, this is not a hugely desirable rush of business for banks.  That is, bankers are straining to make all these loans that stand to generate only very low amounts of interest income. The interest rates are extremely low and many of the loans may only be on the books for two or three months.  As a former banker, I know that’s not a way for banks to make money, so it seems there’s little, if any, financial upside for banks in making PPP loans.

That being the case, PPP loans are one thing bankers are working their butts off for really just to serve others, and we want them to know we appreciate them for that.  Concerning is that, instead of receiving praise and “thank you” right now, we suspect most of them are just on the receiving end of frustration and complaints from impatient, if not desperate, business owners.

It’s understandable because small business owners are nervous, upset, and scared about the uncertainty surrounding us right now.  But we at ValueMetrik CFO have been so impressed by the efforts we’ve witnessed recently by our community bankers to rise to the challenge.  We appreciate their efforts and we know they are doing their best to take care of our small business community. In our view, they are motivated not by an opportunity to make money, but by their sense of duty to our community and their desire to be a part of the solution.  Bankers are working to do the right thing regardless of the unprecedented risk they may be taking in making these loans and regardless of a general lack of appreciation for their efforts.

For those reasons, we think our small business community should see our bankers as the small business heroes they are and go out of their way to support and thank our community bankers for putting forth so much effort to help us fight this battle.  But, hey, don’t pick up the phone and call our bankers to thank them right now… they don’t have time to chit chat. Don’t flood their inboxes with long “thank you” emails. Instead, just be patient. Know they are working hard for you right now. They are very aware of how time is of the essence in getting PPP loans out to small businesses.  Respond to their requests for information as quickly as possible and be kind and courteous in your communication. Let them know you appreciate them by the way you interact with them while they’re working their butts off for you. Then, when the moment is right… and you’ll know when that is, please be sure to express appreciation for all their efforts.

Take Care and Be Safe,

Darren Brewer, ValueMetrikCFO