When we are talking about building a sustainable business, we are talking about one that is built to last.

Often, entrepreneurs get caught up in the headlines about businesses with hyper-growth rates. We start thinking of how we can replicate these results.

But what is often missing is these results are just short-term, fueled by outside money or poor business models that are not sustainable.

There are many examples of the crash and burn businesses that are all the rage but come crashing down. WeWork comes to mind as a perfect example.

Understanding how to build a sustainable business might be the difference between success and failure.

Here are some tips to building a business meant to last:

1) Be nimble

We have all read about the crash and burn start-ups or the established businesses that suddenly can’t compete and are stuck on life support (Ex: Blockbuster, Sears, Blackberry). Big companies, by their nature, are not agile. They get stuck in bureaucracies and fear of risks that let smaller upstarts outflank them.

2) Listen to your customers

The pandemic showed us that human decisions and economic trends could be flipped in a very short period of time. From the great resignation to remote work, consumers have changed their behavior. Entrepreneurs need to listen to their customers to develop personas and segments to understand their unique pain points and needs better.

Ask for customer feedback.

Start customer advisory boards.

Track your critical KPIs.

From this data, you can be quick enough to take advantage of consumer trends and pivot your offering to meet these new realities.

3) Listen to your employees

The pandemic has caused a shift in the workforce. Listen to your employees to share their needs and aspirations with you, as this will help them feel supported by the company during these difficult times. Keeping an employee’s unique perspective becomes necessary for the survival or success of business operations due to changing conditions like increased competition from other companies who are also listening closely because it pays off big time! Help out those workers trying hard but stretched thin–it is important both physically AND mentally before anything else begins.

4) Budget, budget, budget

If anything, the pandemic has taught us that revenue streams can dry up overnight. From supply chain delays, and government regulations to inflation pressures, your margins are threatened more than ever.

It is difficult to know when your business will be profitable and what resources you might need without a proper budget. It can also make operating within one’s means more challenging as unexpected costs arise from the unpredictable nature of life (elements such as illness).

A detailed analysis that includes all probable expenses helps identify available capital for future growth opportunities while estimating how many dollars should go towards fixed or variable cost components to achieve maximum returns on investment.

A well-thought-out financial plan provides clarity around these topics: predicting revenue streams, deciding which type(s)of assets best fit company needs, and whether debt or equity financing is required.

5) Own a brand position

Too many businesses try to be all things to all companies. But the most successful brands are very targeted in their message, market, and the problem they are trying to solve. Sometimes it takes a leap of faith to focus on a smaller audience. But positioning your business is the fastest way to grow and utilize pricing power.

6) Retain your key employees

High employee turnover is a significant headwind to business sustainability. If you are constantly replacing key team members, you delay success in lost hours in training. These lost opportunity costs will make it harder to build a sustainable business. Investing in your key managers makes the life of the entrepreneur easier.

Internal training, streamlined processes, and improving efficiency are the key to scalability. This will allow you more time for external growth while still achieving results.

7) Be authentic

Many big corporations and entrepreneurs act more like chameleons, changing their belief systems based on the audience or the timing of the day. You are a leader when you lead with your heart and not just for the sake of it. Your true colors show in how others perceive you, so be authentic. Your employees and your customers will see this passion and follow it. Foster an environment that’s infused with curiosity by rewarding those who go against traditional norms or follow their passions – because we all need more inspiration now than ever before.

8) Partner wisely

This is true from every relationship you get into in business. By your choice of co-founders, investors, outsourced teams, and vendors (ex: your accounting firm), your decisions will impact your odds for success.

Always surround yourself with those that will make you better.

Closing

A sustainable business has fewer bumps in the road, from buying out a disgruntled founder to an investor with timelines that don’t match yours or the market. Closing A sustainable business is one where profitability and growth rates are in harmony. Running a sustainable business involves using your resources economically, where cash flow and budgeting lead to long-term success. Sacrificing the future for a short-term expansion may not always be the best strategy.

We partner with aspiring entrepreneurs to put them on the path to sustainability. Feel free to reach out to see how we can help you achieve your dreams.

If you have a child or children in college, or perhaps you or your spouse is a student, it can be confusing to figure out which of two potential education tax credits (1) you are eligible for and (2) gives you the greater tax benefit. This article looks at some of the twists and turns of these credits.

There are two higher-education tax credits: the American Opportunity Tax Credit (AOTC) provides up to $2,500 worth of credit for each student, 40% of which may be refundable. The credit is equal to 100% of the first $2,000 of college tuition and qualified expenses and 25% of the next $2,000. The AOTC only applies to the first 4 years of post-secondary education.

The other credit is the Lifetime Learning Credit (LLC), which only provides a maximum $2,000 of credit (20% of up to $10,000 of eligible expenses) per family per year. None of it is refundable, meaning it can only be used to offset your tax liability, and any additional credit amount is lost.

Here are some of the issues that arise with these two credits:

1. Many students attend local colleges for the first two years and then transfer to a university for the remainder of their education. Knowing the university tuition will be higher, some parents take the LLC and wait on the AOTC, thinking they can use it in years with higher tuition and get a larger credit. This isn’t a good plan because the AOTC credit is only good for the first four years of post-secondary education. Thus, it is always better to claim the AOTC in the first four years.

2. A special rule allows the tuition for an academic period that begins in the first three months of the next year to be paid in advance and thus increase the amount of tuition qualifying for the credit in the year the tuition is paid. This allows for planning when to make tuition payments to maximize credits, especially in the first partial calendar year. 

Example: Jill graduated from high school in June and will start college in September. Her tuition and credit-qualifying expenses for the semester covering the last four months of the year and January of the next year are $1,500. Her mother, Cindy, is aware of the 3-month rule, and in December she prepays Jill’s $1,700 tuition for the semester beginning February 1 of the next year, bringing the qualifying expenses to a total of $3,200. The AOTC is equal to 100% of the first $2,000 of qualifying expenses and 25% of the next $2,000. Thus the AOTC for Jill is $2,300 ($2,000 + 25% of $1,200). Cindy could increase the credit for the year to the full $2,500 maximum by purchasing $800 worth of course materials needed for “meaningful attendance or enrollment” in Jill’s course of study.

3. Qualifying expenses other than tuition are often overlooked. Taxpayers can take advantage of a tax regulation that specifies for the AOTC that qualifying expenses include course materials needed for “meaningful attendance or enrollment” whether purchased from the school or an outside vendor. However, for the Lifetime Learning Credit only course material purchased from the school qualifies.

4. Taxpayers also often overlook another very important fact: Whoever claims the student as a dependent gets to claim the education credit even if someone else paid for the tuition and qualified expenses.

Example: Suppose Jill’s Uncle Lee pays her tuition but Cindy, her mother, claims Jill on her tax return. Cindy is the one who qualifies for and receives the credit.

5. What many also overlook is the fact that the AOTC and LLC are phased out for higher-income taxpayers based on their adjusted gross income (AGI). The phaseout kicks in for AGIs between $160,000 and $180,000 for married taxpayers filing jointly, and between $80,000 and $90,000 for others. As an exception, married taxpayers filing separately aren’t eligible to claim either credit. In past years the phaseout ranges were different for the AOTC and LLC, but in a simplification move, Congress made them the same starting with 2021 returns.

So, if the parent claiming the student has an AGI above the phaseout range, regardless of who paid the tuition and qualified expenses, no one will be able to claim the credit. Thus, it is important to consider the income of the individual who is claiming the student as a tax dependent when there is an option of who claims the child, such as in cases of some divorced parents.

6. Because of gift tax issues, a person other than the one qualifying for the credit, such as a grandparent, may hesitate to volunteer to pay a tuition expense. Where payments are made directly to the educational institution, they are excluded from gift tax rules. However, depending on the amounts involved, there may be a gift tax reporting requirement if a monetary gift is given to the student or the individual who is claiming the credit and then the gift money is used to pay tuition.

7. A question that often comes up is whether tuition payments to a trade school or foreign university will count toward the education credit. To qualify for the credit, the tuition must be paid to any accredited public, nonprofit or proprietary post-secondary institution eligible to participate in the student aid programs administered by the Department of Education. This would rule out foreign educational institutions because they don’t qualify for the student aid program administered by the Department of Education, but it would generally include most accredited public nonprofit or privately owned, profit-making post-secondary educational institutions in the U.S.

As you can see, there are several aspects of the education credits that must be considered. If you need assistance with education planning or have questions about the education tax credits as they apply to your particular circumstances, please call our office.

 

If you are engaged in an activity that produces income, the big tax question is whether the activity is a hobby or a business. The tax treatment of your income or loss from this endeavor hinges on the answer. The tax code (Section 183 – the so-called “hobby loss rule”) limits deductions when an activity is not engaged in for profit, resulting in no loss being deductible for a hobby.

A hobby is any activity that a person pursues because they enjoy it and with no intention of making a profit. This differs from operating a business with the intention of making a profit.

That being said, it isn’t always clear-cut whether the activity is a hobby or undertaken to make a profit. The IRS has guidelines for determining whether an activity is carried on for profit, such as a business or investment activity, or if it is a hobby.

This article provides information that is helpful in determining if an activity qualifies as an activity engaged in for-profit and what limitations apply if the activity is considered a not-for-profit hobby.

Is your hobby really an activity engaged in for-profit? In general, taxpayers may deduct ordinary and necessary expenses for conducting a trade or business or for the production of taxable income. Trade or business activities and activities engaged in for the production of income are activities engaged in for profit.

The following factors, although not all inclusive, may help you determine the status of your activity– is it for profit or a hobby?

• Does the time and effort you put into the activity indicate an intention to make a profit?
• Do you depend on the income from the activity?
• If there are losses, are they due to circumstances beyond your control or did they occur in the normal start-up phase of the business?
• Have you changed methods of operation to improve profitability?
• Do you have the knowledge needed to carry on the activity as a successful business?
• Have you made a profit in similar activities in the past?
• Does the activity make a profit in some years?
• Do you expect to make a profit in the future from the appreciation of assets used in the activity?

An activity is presumed to be engaged in for-profit if it makes a profit in at least three of the last five tax years, including the current year (or at least two of the last seven years for activities that consist primarily of breeding, showing, training, or racing horses).

An activity produces a loss when related expenses exceed income. If an activity is not for profit, losses from that activity cannot be used to offset other income. The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corporations. It does not apply to corporations other than S corporations.

Hobby deductions – Prior to 2018, deductions for hobby activities, up to the amount of hobby income, could be claimed as miscellaneous itemized deductions on Schedule A, subject to a 2% of AGI (adjusted gross income) reduction. But the law was changed as part of the Tax Cuts and Jobs Act that was passed in 2017. That change, for years 2018 through 2025, prohibits any deduction for the types of miscellaneous deductions that were subject to the 2% of AGI haircut. So, if your activity is a hobby, this means that none of your hobby-related expenses can be deducted. But income you receive from the activity is still taxable and must be reported on your Form 1040, Schedule 1, line 8, for the year in which the income is received.

Sales from collections – If you collect stamps, coins, or other items as a hobby for recreation and pleasure, and you sell any of the items, your gain is taxable as a capital gain, reportable on Form 8949 for Schedule D. However, if you sell items from your collection at a loss, you can’t deduct the loss.

If you have questions related to your specific business or hobby circumstances, please give our office a call.

For several years now, the IRS has required payments made to merchants through various marketplaces, payment processors (credit & debit cards), and third-party settlement organizations (TPSOs) to be reported on Form 1099-K. The purpose being to uncover merchants that do not report all of their income by comparing the 1099-K amounts to the amount reported on the individual’s or business’s tax return and following up with the under-reporters by correspondence or by audit.

In the past the filing threshold for 1099-Ks was when the gross amount of total reportable payment transactions during a calendar year exceeded $20,000, and the aggregate number of transactions for that payee in that year exceeded 200. Thus, entrepreneurs with a small side hustle selling merchandise on the Internet directly or through the likes of Amazon, E-Bay and others may not have received a 1099-K in the past.

That will all change beginning in January 2023 when reporting begins for 2022 transactions, since the American Rescue Plan Act of 2021 included a provision to reduce the reporting threshold to $600, effective in 2022. Also impacted by this reduced threshold will be homeowners who rent out their vacation homes through the likes of Airbnb and VRBO who generally avoided 1099-Ks in the past because of the 200-transaction threshold. Also, individuals providing services through Internet websites such as for delivery, babysitting, companionship, home cleaning, elder care and other services seldom met the $20,000 threshold and have not received 1099-Ks in the past.

The 1099-K only reports gross income, and the cost of the products sold and other business expenses can be deducted to determine a merchant’s net taxable profit. Those renting vacation homes through TPSOs can deduct depreciation, utilities, repairs, and other expenses, while those providing services can deduct certain travel and other expenses. The net profits are subject to income tax, and generally are also subject to self-employment tax, including rentals where significant personal services are performed.

Thus, keeping records of expenses becomes important. Please contact our office for further information related to your specific side hustle and what expenses will be deductible.