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.
Inside the World of Venture Capitalists To Learn How They Can Help You
If you are familiar with the TV show “Shark Tank,” you’ve seen how entrepreneurs present such cash-worthy business ideas that the sharks are willing to pony up thousands, and even millions, of dollars to help.
The sharks are considered venture capitalists (VCs). This wealthy group of investors provides funding for thousands of start-ups that may have otherwise never have had a chance of getting off the ground. They also help established business with their expansion efforts.
A key difference between VCs and funding sources such as banks, which grant loans and line of credits, relates to risk. VCs are notorious for putting up their dollars for projects that a bank wouldn’t dare touch because of the high-risk of losses from the fledgling outfits.
There are many advantages of seeking VC funding if you are an entrepreneur, or even an established business owner. On that same note, there are just as many factors that can mitigate the benefits.
Here, we’ll go over the venture capital space, pointing out how it can be an alternative financing source for entrepreneurs.
How VCs Turn Start-ups Into Unicorns
If it weren’t for VC funding, the largest social media platform in the world may not exist. Mark Zuckerberg had the idea for the Facebook, but not enough money to fully fund it. The thought of connecting the world via a website that was simply comprised of posted pictures and such was not seen as a financially sound venture by many banks. Zuckerberg and thousands of other start-ups capitalized on VC funding, and turned their ideas into thriving businesses.
The most recent examples of start-ups that became behemoths thanks to VCs include Uber, Beyond Meats and Pinterest. They are good examples of how people with risky, curious ideas can turn them into multi-billion-dollar companies by literally starting with seeds, or seed money, that is.
VCs bank on the start-up flourishing financially, including it eventually going public. When this happens, early investors like VCs cash out their equity shares that are worth far more than they were when they initially invested.
The Stages of VC Funding
Venture capital funding can come from private individuals or from institutions.
In exchange for their investments, and their advice, VCs typically want a stake in the company. That means they want equity in the business.
There are many variations of the stages of VC funding. The most common are:
- Seed capital
- Early-stage capital
- Early-growth funding
Seed capital is for entrepreneurs who merely have an idea for a product or service. You may not even have a prototype because you don’t have the money to fund it. Seed funding often goes toward research and development (R&D).
Early-stage capital can be used to expand your team. As you prepare to roll out your product or service, early-stage capital can be used for marketing and advertising campaigns, too.
Early-growth funding can be especially useful in manufacturing. At this stage, your product or service may have grown so much that you need more capacity. You may need a larger facility, equipment or anything that help you keep up with demand.
“Is VC Funding for Me?”
These are some scenarios where a VC can help you.
- You lack the funds to scale your business’s growth.
- You are still working out of your garage on a shoe-string budget, and are unable to meet demand.
- Your production efforts are hindered because you don’t have enough employees.
- You lack the business or networking connections that could help you.
Not all business owners find VC funding to be ideal. Whether it’s the thought of losing any control of their operations, equity in their businesses, or both, many small business owners don’t see VC funding as a good idea.
More than likely, the VC will want some kind of say in how the business they are investing in operates. Their suggestions and ideas may not jive with those of the business owner, which could cause friction.
In determining if VC funding is worth considering, ask yourself these questions:
- Can I tolerate answering to others?
- Am I willing to let someone else dictate my schedule?
- How much ownership am I willing to relinquish?
If you answered yes to any of the questions, VC funding should be considered. Understand that VCs are not like banks. They set their own terms when it comes to their investments and they typically aren’t subject to the same rules as traditional finance outfits.
VCs Want Something for Their Money
If you answered yes to any of the above questions, there are some important things to know. Most important to understand is VCs don’t just invest and walk away. You must understand that you will have to give up equity and some, and sometimes most, of the control you have in your company.
If you want VC funding, this is something you will likely have to accept. Furthermore, if you have issues taking constructive criticism, or you see no benefit of giving a stranger a stake in your business, VC funding is not for you.
Understand, however, that the wealth of VCs goes beyond funding. It extends to them also having a wealth of knowledge and connections that you may lack. For example, if you are having production problems, such as not being able to meet demand, a VC’s connections could help. Your VC, or contact if you go with a firm, may have partnerships that you’d never have privy to.
To go back to the “Shark Tank” television show, one of the investors has ties to the home shopping network QVC. Often, she gets the products of the companies she invests in on the show.
The Money Game
Be prepared to give up at least 20% of your ownership to the VC who agrees to invest in your business. Some of them have been known to ask for 50% or more. They justify the percentage based on a number of factors that include:
- How much time the VC thinks they will have to spend to help you
- Your business’s valuation or worth
- The amount of money you want
The amount of ownership you may have to hand over may be unnerving, and that’s understandable. Entrepreneurs tend to treat their product or service ideas as their babies. Many are not keen on others tinkering with their product or service.
VCs rationalize the equity they expect as being fair because of the time and money they are risking on someone else’s project. Many don’t just sit on the sidelines, and not offer advice. They step in and may rule with more authority than some may like.
VC funding can come in many rounds, or what are called series. Start-ups often raise capital on an as-needed basis so there can several of these rounds as the company grows. During these rounds, funding can come from several different firms, and their individual investments can vary.
The VC will likely ask you how much money you have raised or invested on your own. Entrepreneur Matt Suster said in a “Both Sides” Medium post:
“If you’ve raised large amounts of money and can’t show much progress obviously you’ve got a tougher time to explain the past [than] if you’ve been frugal and over-achieved.”
Many VCs want to see at least 10 times their returns in less than seven years, according to Inc.
They're not interested in linear growth and will pressure you to manage the business to grow sales at that rate.
The VC Hunt Is On
If you’ve decided to go the VC route, here are some tips to standout in the crowd:
- Don’t rely on a friendly email to the potential investor in which you present a business plan. It will likely be lost in the shuffle. Instead, search out people who have direct relationships with the VC or firm and ask for a proper introduction.
- Keep potential investors you’ve reached out to in the loop by regularly sending them notes about the progress of your product or service.
- Legitimize your product or service by getting a patent for it.
- Attempt to raise capital on your own, if even just from friends and family, to show potential investors you’re committed financially.