We all know to pay our bills on time and carry as little debt as possible, and most of the time, that is all that matters in your credit score. Yet, there are other, smaller factors that many people aren’t aware of that can cause your score to suffer.
Small Unpaid Private Debts
Many people pay their mortgage, credit card and utility bills with unflappable consistency, yet neglect smaller debts. They may feel that these debts are illegitimate or that they will just go away if ignored. For example, municipalities have been known to report unpaid parking tickets and even library fines to credit bureaus. Unfortunately, any unpaid debt can weigh down your credit score.
You might not think of the IRS as an agency that reports to credit bureaus, but Uncle Sam figured out long ago how to use your credit history as leverage. In fact, these records remain in your credit history for 15 years; even longer than a bankruptcy. If you have an unpaid tax lien, paying it off will certainly help your credit score, but it can’t undo all the damage done by having there in the first place.
Your electricity bill or gas bill is not a loan, but failing to pay it will hurt your credit score. While these companies won’t normally report their customer’s payment history, they will report delinquent accounts much more quickly than other institutions, so be careful.
Too Many Recent Credit Applications
It can be tempting to sign up for various credit cards that offer some bonus for your business. Banks can offer tens of thousands of points or miles, while retailers grant in-store discounts when you apply for their credit card. By themselves, these applications have an insignificant effect, but too many credit checks in too short of a time period can lower your credit score. To avoid this problem, limit the number of applications for credit, especially when you are shopping for a home, car or student loan.
Long-Term Loan Shopping
Consumers may know that too many credit inquiries will lower their credit score. Nevertheless, to allow consumers to shop around for the best rates on automobile, student and home loans, the FICO will not penalize borrowers who have multiple credit checks in a short period of time. Various FICO formulas negate multiple inquiries with either 14 or 45 days. Therefore, continuing to shop around for a loan over several months will fall outside of this safe harbor and will lower your score.
Business Credit Card
Do you have a credit card in the name of your business? Nevertheless, almost all banks will still hold you personally responsible for your debts. Furthermore, your payment history is reported to the credit bureaus. Therefore, any late payments or unpaid debts in the name of your business will affect your personal credit, so long as you are the primary account holder on a business card.
Any incorrect information in your credit history can hurt your score. For example, people with common names frequently find other people’s information in their file. In other cases, typos and clerical errors result in adverse information affecting your score. This is one of the reasons why consumers are encouraged to complete soft inquires at least once a year and dispute any mistakes they find.
The Bottom Line
By paying close attention to the decisions they make, consumers can avoid taking actions that seem harmless, but can really hurt their credit.
Why is it smarter to operate a business as a LLC for tax purposes?
No matter the timing, it is important for you to consider which business entity will benefit your small business the most, during tax time. An LLC is specific type of business entity, whereof the federal government provides favorable tax benefits under certain scenarios. This type of structure has become very popular for small businesses.
LLCs are treated as “Pass Through” entities
No matter the size of your small business, the IRS essentially provides the tax benefit of larger companies to businesses that operate as LLCs. The term “Pass Through” relates to the fact that your LLC bypasses all of the taxes at the corporate level. In other words, as a registered LLC, you will not have to pay taxes for your company profits as a business, but you will be required to pay taxes for company profits individually. The taxes are assessed as the profits pass through the corporation down to the LLC’s owners, also called Members. These taxes are calculated by the distributive share of ownership, determined by the percentage profits allocated to each member of the LLC. Typically, these percentages are agreed upon in the LLC Operating Agreement. Each member then pays individual taxes on that amount. This is beneficial for a company, because a corporation pays taxes on profits from the business level, but at the shareholder (member) level.
Retained Earnings- LLC can choose C-Corp Taxation
Retained Earnings are the profits that a company chooses to keep within the LLC. If you are registered as an LLC, you still have the option to be taxed as a C-Corp. This is ideal for a company who expects to retain a substantial percentage of profits. Operating your company as an LLC, you can elect to be taxed as a C-Corp and receive the benefit of a 15% tax on the first $50,000 that is earned. 15% is a very low tax bracket for small businesses. It is a lower tax bracket than personal income taxation, which will give you more money to put back into your company.
Other ideas to consider
Small business owners must take into consideration the overall impact of their business entity, at present and in the future. Are you looking to take the company public someday? Are you looking to raise money through Venture Capitalists or Angel Investors? Decisions such as these will affect your ultimate decision regarding your legal business entity and the taxes that go along with.
The best way to avoid being audited is to follow the rules. File a return every year and be complete and honest. However, the IRS uses statistical sampling to identify auditees and you might just find yourself in their spotlight no matter how thorough you might be. If this is you, prepare yourself and manage expectations. An IRS audit might not be as bad as you think.
Getting an A+ on the audit is all about keeping accurate logs and correct reporting.
Not a tax expert? No problem. Hire a professional to do your taxes, especially if you are incorporated. Taxes are complex and your time is probably better spent managing your business.
Do not ever lie to, or hide the truth from your preparer. For example, if they ask you to disclose a foreign bank account, do it. More and more international banking centers are complying with the US’s requests to disclose account information.
Computers have greatly increased the ability for the IRS to collect data and query to determine whose returns are not telling the entire story. For example, the 1099 INT that your bank mails to you is also reported to the IRS. If you fail to report your 1099 INT, be sure that the IRS is already aware through simple database querying. When your name makes it to their exceptions report, you could greatly increase your chances of being audited.
Statistical Sampling – How the IRS Finds You
Every year the IRS publishes the Data Book, which is an extremely large, complex document telling us what the IRS is looking for. The 2010 Data Book reveled how the following groups were audited:
1% of individuals with income of less than $200,000
8% of individuals with income greater than $1,000,000
8% of corporations earning more than $1,000,000
2.5% of corporations earning under $100,000
98% of corporation earning 20 B or more
Key triggers: missing schedules, excessive deductions, complex return
Key takeaway: if your corporation earns more than $1,000,000 you are a target. If you as an individual earn more than $1,000,000, you are a target. If you are a whale, 20 B or more, you are not just a target, but you have a full time IRS presence at your organization.
Sometimes just being a high profile, high net worth individual can trigger the IRS to scrutinize your return. Everybody should remember Richard Hatch of Survivor fame who served jail time for failing to report his million dollar prize. The IRS is known to target individuals whose incomes make headlines such as prize winners, executives, and star athletes and entertainers.
You’ve been selected, now what?
Proper record keeping will be your savior. If you are disorganized, you will want to apply for a delay so that you can organize your paperwork. Basically, what you will be doing is supplying support for every number recorded on the return. For example, you will need support for all revenues and expenses. If you deducted $12,000 in expenses you had better be able to supply documentation that totals $12,000. For any amount other than $12,000, the auditor will reverse your deduction. Expenses are where most people fail to keep accurate records.
Proper expense logs make an audit less of a burden, you will have readily accessible information to support the documentation. Otherwise, maintaining organized records is always a good business decision. A good log should include account number information. Docstoc has great logs for travel, mileage, and other expenses.
Special events like the sale of property and equipment, or grants and donations should command extra scrutiny on your part. Seek professional help if you need further advice on how to treat such transactions.
In many cases you can reconstruct missing information, but this requires time. The IRS will usually presume that the deducted expense should be reversed so long as there is no supporting documentation. Not having to reconstruct missing documentation is a great advantage in an audit because calling banks and vendors can take valuable time.
Where will the audit take place?
In a correspondence audit you will send in your support via fax, mail, or email. Most audits occur in this manner. If you are selected for a field office audit you will present your documentation at an IRS office or an IRS agent will visit your premises.
Should you hire an attorney or CPA?
In most cases yes. If you had a professional preparation or used a service like Turbo Tax, they might have certain guarantees and will assist you through the audit process. Turbo Tax’s website even claims that Turbo Tax will pay the penalty and interest, but read the fine print, this is only if you supplied accurate information.
An experienced professional will assist you in preparing supporting documentation. They will determine what to send and how to present it. Additionally, if the IRS does not request specific support, do not volunteer. A professional will have a much better sense of how to handle the IRS requests.
As 2011 W-2 forms and 1099s start arriving in mailboxes throughout the country, now is the time to remind taxpayers with health savings accounts (HSAs) that they have until April 17 to contribute to their HSAs to maximize their 2011 deductions, up to the legal limit.
For 2011, HSA contributions are tax deductible up to $3,050 for individuals and up to $6,150 for families. HSA holders who are 55 and older can deduct an additional $1,000. In 2012, tax-deductible contribution limits have been increased to $3,100 for individuals and $6,250 for families.
Health savings accounts have two components: a tax-advantaged savings account coupled with a high-deductible health insurance plan. In addition to the tax savings, a high deductible health insurance plan paired with an HSA typically costs significantly less in monthly premiums compared to more traditional health insurance while still providing quality coverage, including preventive care.
Savings deposited into an HSA grow tax-deferred and can be withdrawn tax-free as long as the HSA dollars are used for qualified medical expenses, which include health insurance deductibles as well as vision and dental care that are not covered by health insurance plans.
“HSAs make sound financial sense because they enable consumers to save tax-free for their current and future medical needs,” said Richard A. Collins, CEO, UnitedHealthcare’s Golden Rule Insurance Company.
According to a recent Fidelity Investments® survey, “almost seven in 10 (68 percent) of pre-retirees said the cost of medical care in retirement is one of their three biggest financial concerns.”
“Unspent HSA savings can accumulate year after year, earning interest. This helps build up a ‘medical nest egg’ that can be valuable later in life when health care needs can increase significantly,” Collins said.
To learn more about HSAs, visit www.HSAcenter.com, an interactive online resource developed by Golden Rule to educate consumers about the advantages that health savings accounts offer. Golden Rule’s expertise in the consumer-directed health care market goes back more than 20 years when the company introduced the first medical savings account (MSA), predecessor to the HSA.