It's Not Fun, but It Has to be Done Benjamin Franklin wrote a 1789 letter that states, “But in this world nothing can be said to be certain, except death and taxes.” Even at the United States’ early beginnings, federal taxes were a necessary evil to fund various public projects and administrative costs. Today, federal taxes serve much of the same purpose. While virtually no one likes to prepare and file their taxes, it is a necessity if you want to avoid fines and further hassle. It is no secret that preparing and filing your taxes is notoriously complicated. Many people lament that it should not be so difficult to pay the government. However, some of the complications allow people to save money if they discover specific tax benefits. Knowing how to file your own taxes may be a good option if your tax situation is relatively straightforward, or if you are willing to learn the process. Why Do You Need to File Your Taxes Every Year? The short answer is that federal law requires that most individuals file taxes annually. Income taxes are assessed every year based on your income earned during that period. You then pay a percentage of that income to the government, less any deductions, adjustments, or credits that you qualify to receive. If you do not file (and pay) your taxes, then you may be assessed penalties and interest. The Internal Revenue Service (IRS) can even go as far as garnishing your wages and repossessing your property if you do not file and pay as required. The Benefits of Filing Your Own Taxes If you are one of the 43% of Americans that are doing your own taxes, you are certainly not alone. Roughly 53 million people prepared and filed their own taxes in 2018. There are many benefits to filing your own taxes, including: Saving money: Hiring a tax professional is expensive, and many people can prepare and file their returns on their own, completely free of charge. Control: Some people like knowing the exact information that is included in their return and being able to control the data, and for some, knowing precisely how the numbers work out, is comforting. Gain helpful information: When you prepare your taxes, you can see what items saved you money this year or which issues you should address so you can save money next year. While filing your own taxes is complicated, it can be beneficial under the right circumstances. There are several programs online that walk you through the process to help ensure you are taking advantage of all of your available deductions and credits. The Drawbacks of Filing Your Own Taxes In addition to the benefits, there are also some disadvantages to filing your own taxes. These include: Time and effort: Preparing and filing your taxes takes time and work You have to sift through financial information and deal with concepts that you may not understand well. The process can be frustrating and take a considerable amount of time. Error risk: If you do not completely understand how your taxes work, you run the risk of making a mistake because of misconceptions. If that happens, it could lead to underpayment and audits down the road. Questions: Even if you use a tax preparation software, you may still have questions that will remain unanswered unless you do significant research or reach out to a tax professional. For some people, the risk of having a substantial error that triggers the IRS’s attention is enough to scare them away from preparing their own taxes. Preparing for Filing Your Taxes When you begin work on your taxes, you should have information gathered throughout the year. Some of the most common items that you will need include: Social Security numbers for you, your spouse, and any dependents Information about wages, such as W2s or 1099s Investment income information Documents that represent any other source of income Information regarding adjustments to income, such as student loan interest paid, IRA contributions, and health savings account contributions, just to name a few Information regarding potential credits, including, for example, child care expenses, education expenses, or retirement savings contributions Data about any tax payments that you may have made throughout the year Keeping good records will help make tax preparation easier at the beginning of the year. [youmaylike] The Basics About What You Can Claim When Filing You must pay income taxes on all your income earned throughout the year. However, that income is reduced by a few things. The further you can reduce your taxable income, the less you tax you will pay. There are three general categories of tax reduction methods: Standard or Itemized Deductions Everyone can claim either the standard or itemized deductions. Standard deductions are a set amount that is based on your filing status. Itemized deductions are based on actual expenses that you incurred throughout the year. You can choose to use the higher deduction. The higher the deduction, the less tax you will have to pay on your income because your income decreases on paper. Itemized deductions include things like medical expenses, state and local tax payments, and home mortgage interest deductions. Itemized deductions will only decrease your income by a certain percentage, or up to a specific point. Adjustments Some adjustments to your income may also be available. These include things like paying student loan interest or alimony. Adjustments are more valuable compared to deductions because they decrease your income dollar for dollar. Credits A credit decreases your taxable income as well. Some credits are refundable while others are not. For example, you get a child tax credit simply for having children that qualify for that credit, but that credit will not be paid out to you if you do not have any tax obligations. On the other hand, the Earned Income Credit, which is available for low-income filers, will be refunded to you even if you do not owe any taxes. There are a wide variety of deductions and credits available. Take a look at the federal forms and related schedules to determine whether you might qualify for any of these. How to File Your Own Taxes If You Live Overseas If you earned income in the United States as a U.S. citizen or resident alien, you likely need to pay taxes on that income. This is true even if you live overseas. You can still choose to e-file or mail your tax return to the IRS once you have it prepared, just as if you physically lived in the United States. In some cases, you will be taxed on the income that you earned throughout the world. However, you may be able to deduct a portion or all of the revenue that was not made in the United States in some circumstances. Filing Online The IRS offers an online filing option that is free for individuals that have an adjusted gross income below a specific threshold. Generally, your income must be below $66,000 to qualify for this service. You can also file online by using a commercial tax preparation software. Examples of this type of software include: H&R Block TurboTax TaxCut TaxSlayer There are many programs available that will file your taxes for you, often for a fee. Knowing how to file your own taxes can be a great way to save money, but it can be tricky as well. If you want to file your taxes yourself, be sure to read the form instructions thoroughly and get familiar with various tax saving opportunities before you begin preparing your return.
What is Business Equity?
Business equity, in layman's terms, is the amount of money the business owners have left over after paying off all debts. As a business owner, you should have a handle on your business equity as part of your overall business plan. It needs to be managed well to ensure the business can grow, survive and become profitable.
Equity in Accounting Terms
Business equity is the measurement of assets (what the business owns) minus liabilities (what the business owes). Equity is used as an indication of how financially healthy your company is. It shows if you have a good mix of capital and other assets versus debt.
Calculating Business Equity
Business equity is calculated on your company's balance sheet. A balance sheet is a financial statement that outlines:
- Total Assets
- Cash or property you can convert into cash within one year (current assets)
- Property, plant, and equipment or other items that require more than one year to sell or otherwise convert into cash (fixed assets)
- Total Liabilities
- Short-term bills such as your annual taxes (current liabilities)
- Long-term bills from larger bank loans (fixed liabilities)
- Shareholders' Equity (aka Business Equity)
- The value of ownership of the company (capital stock)
- Profits that are reinvested into the company (retained earnings)
To calculate business equity, you would use the following accounting equation: Business Equity = Assets - Liabilities
Types of Assets
A company's assets should either be cash or, at some point, convertible into cash. Business assets are commonly made up of different things such as cash, accounts receivables (customer invoices pending payment) and purchased equipment.
Assets can include items that are harder to put a concrete monetary value on since they are not physical items, such as a brand's reputation. These are considered intangible assets. The assets previously listed, such as equipment, are considered tangible (physical) properties.
Depending on your type of business, it will be important to consider both tangible and intangible assets to increase your overall business assets. Intangible assets are generally more important as you start out your business, as cash is normally low. Therefore, many start-ups focus on building a reputable brand name and developing intellectual property.
Building a strong brand will come from having a large and loyal customer base, who advocate for all your products. For example, Apple has one of the strongest brand names in the world. Every time they release a new product, hundreds of thousands of their loyal customers will instantly purchase the product even if there are lower price alternatives.
The value of intellectual property, on the other hand, is measured in trademarks, copyrights and patents. By protecting your technology from being used by another company, you can immediately increase your company's worth.
Types of Liabilities
Liabilities will come in different flavors as you grow your business. In the beginning, your business' largest debts might just be your monthly rent or credit card bills.
As you expand and grow, you might be able to convince banks to provide you with larger loans in exchange for interest payments.
Importance of Business Equity
Similar to personal net worth, business equity is another way to measure the financial success of your business at any given time.
In the first few years, a company's equity is normally zero or in the negative. Negative business equity indicates that you don't have enough to pay off all your bills. Being negative doesn't mean that the company is bankrupt yet ,though, since larger debts are usually not required to be paid off all at once. This gives your business time to earn enough money to pay it off slowly.
For example, prior to opening up a restaurant, the owner may need to make renovations to the building. This will require cash immediately to pay the construction and interior design teams. Therefore, the restaurant owner might take out a $50,000 bank loan. After one year of operations, the owner may still be paying off that initial loan with any business profits earned.
As you grow and expand your business, though, you should aim for positive equity. Prolonged negative equity will signal to potential investors or partners that your business may be trouble. Having negative equity can eventually result in company bankruptcy.
It might sound counterintuitive to grow by giving out equity, however, it is a common route that start-ups take. The equity referred to here is ownership of the company, not the excess of assets minus liabilities.
Rather than taking out a bank loan, businesses can look to sell shares (ownership) of their company.
Good loans can also be very hard to secure as a new business. Most banks will deem your start-up too risky. Therefore, banks will not want to give your company a long-term loan with low interest rates. Instead, they might only offer a small one-year loan of $10,000 with 10% interest. A loan like this is too expensive for someone starting out, who needs more capital over a longer time to grow.
The sale of company shares will give the business more cash without the financial obligations of monthly loan payments. The value of this financing can usually be a lot larger than what a traditional financial institution would offer. In 2018, the median value of a seed (initial) funding round for start-ups was $2.2 million.
The downside of selling ownership is loss of control over your business. Going forward, decisions and profits will need to be shared with your new co-owners. Shares can always be bought back as well, however usually with higher costs. Therefore, it will be important to determine ahead of time how much control you as a business owner are willing to give up.
The state of your business equity will help determine if your company is moving in the right direction. As you grow, you will need to balance how you increase cash through profits or financing. In the beginning, it will most likely be through financing. Eventually, the company should aim to be profitable in order to ensure positive business equity.