Grants & Tax Credits for Small Business Owners

From The Small Business Owner’s 2022 Economic Relief Guide

Before you try anything else, you might want to look into applying for financial assistance through grants. The extra cash will be able to help get you through the difficult economy and invest it in the areas you need it most.

There are many different types of grants that provide free money for start-ups and existing businesses. We have provided a long list to help get you started.

Additionally, you may also be able to get some tax credits due to the ongoing effects of the pandemic. We have provided information about this as well in this article.

We will be updating this regularly, so keep checking it to discover new opportunities!

Recently Announced Grants

Atlanta-based Businesses: In August 2022, Atlanta Mayor Andrew Dickens announced a $3.5 million grant program for the city’s small businesses and property owners. Through the Commercial Property Improvement Grant Program (CPIG), small business owners can apply for grants up to $50,000 for exterior and interior enhancements to their business. Awardees must provide a match of at least 10% of the grant award and hold a current City of Atlanta Business License.

If you’re based in Atlanta, it’s worth checking out the city’s website for other grant opportunities, like their Creative Industries Grant Fund or Small Business Improvement Grants.

Service-Disabled Veterans: The U.S. Small Business Administration has a new funding opportunity for non-profit organizations, state and local government agencies, private sector firms, and institutions of higher learning to provide entrepreneurship training to service-disabled veterans. SDVTEP for short, recipients can use the money to market or deliver training programs for veterans who intend to start or expand a small business. For specific instructions, visit www.grants.gov and search SB-OVSD-22-001. Submissions are due August 18.

Federal Small Business Grants

Government agencies are some of the most prolific providers of grants for small businesses. It may take some time and effort to apply, but they can really help in times of need or when you are focused on growing your business.

Grants.gov: Grants.gov is a database of small business grants run by different government agencies, such as the Departments of Education and Veterans Affairs. This is the main portal for finding and applying for federal grants.

Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) Programs: The SBIR and the STTR grant programs award funding to businesses willing to explore their technological potential and invest in research, innovation, and development to help ultimately build a stronger economy. These programs also foster and encourage entrepreneurship by women and other socially or economically disadvantaged people. To qualify, you must operate a for-profit business, have no more than 500 employees and meet other eligibility requirements.

USDA Rural Business Development Grants: The U.S. Department of Agriculture leads the Rural Business Development Grant Program, which provides funding to small businesses in rural communities. Businesses must have fewer than 50 new employees, less than $1 million in gross revenue and be located in an eligible rural area to qualify. Applications are accepted through the USDA Rural Development’s local or state offices.

State and Regional Small Business Grants

Economic Development Administration (EDA): The EDA focuses on providing funding and resources for small businesses across the U.S in order to stimulate job growth and build durable regional economies throughout the nation. Based on the principle that sustainable economic development should be locally-driven, EDA works directly with communities and regions to help meet their needs. You can contact your regional office for more information here.

Small Business Development Centers (SBDC): Small Business Development Centers, located in every state, provide assistance to small businesses — including start-ups and companies looking to expand. SBDCs can help connect you with grants, financing opportunities, counseling, training, technical assistance and more. You can look up your local SBDC by zip code here.

Minority Business Development Agency Centers (MBDA): The MBDA is the only federal agency solely dedicated to assisting minority businesses. With a national network of centers, the MBDA offers programs that include customized business development and industry-focused services. Their clients are U.S. Minority Business Enterprises owned and operated by: African Americans, Asian Americans, Hasidic Jews, Hispanic Americans, Native Americans, and Pacific Islanders. You can search for the center nearest to you on their website.

State Trade Expansion Program (STEP): The STEP program specifically helps businesses enter international markets through grants. STEP also helps businesses learn to export, design international marketing products and campaigns, participate in export trade show exhibits and more.

Community Navigator Pilot Program: The Community Navigator Pilot Program supports a network of organizations committed to serving small businesses and entrepreneurs in underserved communities. They offer a comprehensive spreadsheet that lists all the organizations that offer different types of assistance for small businesses.

Corporate Small Business Grants

National Association for the Self-Employed (NASE) (NEXT DEADLINE SEPTEMBER 2022): NASE is the largest nonprofit, nonpartisan association of its kind in the U.S. They help support entrepreneurs and microbusinesses through funding, benefits, and training that have typically only been available to large corporations. Only members of NASE can apply for small business grants up to $4,000, and please note that their membership is fee-based. The grants are awarded throughout the year. The next round of grant applications will be reviewed in October.

Startup Business Grants

Hello Alice Grant Platform: Hello Alice was founded to help small businesses discover direct paths to success. They partner with different companies, like DoorDash, to provide grants for small businesses. By signing up on their website, you can receive notifications on new funding opportunities.

Amber Grant for Women: WomensNet awards two $10,000 Amber Grants every month and two of their monthly winners also get an additional $25,000 at the end of the year. Businesses that are women-owned are eligible. They also give out monthly tips on their website on how to get a grant.

COVID-19 Small Business Grants

There are still some options available for small businesses that need assistance due to the effects of the COVID-19 pandemic.

State and local coronavirus small-business grants: Some state governments are still running grant programs related to COVID-19 relief. Small businesses in New York can receive free financing up to $50,000 by applying for the New York State COVID-19 Pandemic Small Business Recovery Grant Program. In California, microbusinesses can receive grants of $2,500 by applying for the California Microbusiness COVID-19 Relief Grant Program. To see if your local area has assistance programs, visit your department of economic development, secretary of state, or other state government websites. We’ve included some state-specific grants below for residents of California, Texas, New York and Florida.

Main Street America’s Inclusive Backing Grant Program: Main Street America is a nonprofit organization that has continued to offer its Inclusive Backing Grant Program to help small businesses recover from the pandemic. They partner with American Express to award grants of $5,000 to businesses impacted by the pandemic. Preference is given to businesses owned by underrepresented groups, including members of the LGBTQ+ community, people with disabilities, veterans, women, and people of color.

Specialty Small Business Grants

Your small business may qualify for a specialty grant that focuses on assisting minority groups and underprivileged communities. See below:

  • Small-business grants for women.
  • Small-business grants for veterans.
  • Small-business grants for minority groups.
  • Small-business grants for Black women.

California Small Business Grants

California Dream Fund: Run in coordination with the Governor’s Office of Business and Economic Development (GO-Biz) and the Office of the Small Business Advocate (CalOSBA), the California Dream Fund helps ensure all aspiring and current small business owners and entrepreneurs have the opportunity to access funding, markets, and connect to the networks and resources they need to succeed. After completing an intensive training and consulting program, new businesses will be eligible to apply for a micro-grant up to $10,000. You can view all participating centers and access an interactive map here.

Oakland Black Business Fund (OBBF): This organization provides grants for Black-owned small businesses located in Oakland, CA. The grants are provided through a network of core service providers and professional partners. You can apply here.

Founders First Job Creators Quest Grant (DEADLINE IS NOVEMBER 30, 2022): Founders First is an organization dedicated to increasing the number of premium-wage jobs. A total of $100,000 will be awarded to 30 small businesses in Southern California in order to spur growth in the workforce. To qualify, your business must be located in the Los Angeles, Orange County, Riverside, San Bernardino, Imperial, or San Diego regions and have a current staff of 2-20 employees, and be a for-profit company with annual revenues between $100k and $3 million. Your company must also identify as one of the following: woman, military/veteran, Latinx, Black, Asian, LGBTQIA+ or be located in a low-to-moderate income area.

Florida Small Business Grants

Prospera Business Grants: Prospera, located in Orlando, FL, is a nonprofit organization that provides support to Hispanic entrepreneurs. Small business owners can apply and receive free development services, including QuickBooks consulting, branding development, marketing, sales planning, accounting assessments and more. The grants are given based on individual needs.

Miami-Dade County Mom and Pop Small-Business Grants: This program offers funding opportunities for small “mom and pop” businesses to help them purchase equipment, inventory, supplies, insurance, advertising/marketing, and make minor renovations. To be eligible, you must be located in Miami-Dade County, be a for-profit business, not be part of a national chain, and must have a physical address (can be home-based).

City of Orlando Business Assistance Program (BAP): BAP promotes expansion and redevelopment in Orlando, FL by matching 50% of the fees associated with small business improvement projects. BAP will award funds up to $20,000 for projects including, but not limited to, water and sewer line construction, street lighting, sidewalk repairs, curb, gutter, and street improvements. Eligibility is dependent on operating in certain industries and acquiring proper city permits for the project.

New York Small Business Grants

Global NY Fund Grant Program: Are you a small or medium-size business in New York that wants to export internationally? The Global NY Fund Grant Program provides grants and loans to businesses who are seeking to expand outside of the U.S. The grants are up to $25,000 and will reimburse up to 50% of total project costs, like trade shows, workshops, and market customizations. Your business must also have 500 employees or less in order to qualify.

City of Rochester Neighborhood Commercial Assistance Program: Businesses located in the city of Rochester, NY can apply to receive reimbursement grants for common expenses, such as advertising, equipment, furniture, computers, security systems, and signage. To be eligible, you must provide proper cost documentation.

Existing businesses (12 months or more in business) can receive up to $8,000 and new businesses (up to 12 months in business) can receive up to $5,000.

Wayne County Microburst Grant Program: If you are an entrepreneur in Wayne County, NY, you can apply for a grant through the Kick Start initiative. Grants range from $5,000 to $20,000 to fund startups. Microbusinesses that have less than five employees can also qualify to receive assistance for specific projects that will cover 10% of the total cost. Small-business owners must be in business for less than one year and take SCORE business classes in order to apply.

CitizensNYC Neighborhood Business Grants: Over the past 47 years, CitizensNYC has been awarding micro-grants to community-building projects, which are funded by corporate sponsors, individual donations, and private foundations. The Neighborhood Business Grant gives up to $10,000 to support many needs of a small business, like technical upgrades, marketing, training and more. Additionally, the All In Neighborhood Grant provides up to $5,000 for projects that address key issues and improve life in the community. Businesses owned by people of color, immigrants, or women are prioritized.

Texas Small Business Grants

Texas Workforce Commission Skills for Small Business Program: Businesses with fewer than 100 employees who need help training staff can receive a grant of up to $1,800 for each new employee and $900 for existing employees in a 12-month period. The training must be run by a public community college, technical college, or Texas A&M Engineering Extension Service.

Texas State Trade Expansion Program Grant: This grant focuses on helping small businesses start or expand in the area of exporting. To be eligible, you must meet their definition of a small business, be located in Texas, must have been in business for at least one year, be in good standing with the Texas Comptroller of Public Accounts, and have a product or service that is created in Texas.

Amegy Bank Small Business Boost Program (NOMINATIONS OPEN UNTIL OCTOBER 31, 2022): This program supports small businesses by awarding them grants to help with the growing community of Houston. Businesses must have under 500 employees, be independently owned and operated, and operate primarily in the Houston area to qualify. This year, 5 recipients will be selected.

Dayton Community Development Corporation Grant Programs: The purpose of this grant is to help with the growth and revitalization of the Downtown District in Dayton, TX by providing funds to small businesses that will be used for interior or exterior renovations, signage, parking lot improvements, and landscaping projects. Murals are funded in a separate grant. To qualify, your business must exist within city limits and you must receive approval for the proposed project. Grant funds are awarded on a 50-50 match basis and do not exceed $25,000.

Tax Credits

The Employee Retention Tax Credit (ERTC) can greatly help businesses that suffered a drop in revenue from COVID.

The ERTC is an IRS tax credit designed to help small businesses that retained employees despite suffering revenue losses due to COVID. It credits (aka refunds) payroll costs you’ve already spent.

To claim the ERTC, you need to demonstrate that your business’s gross receipts declined 50% or more in over a declared quarter in 2020 or a 20% decline over any declared quarter in 2021.

You don’t have to pay back the ERTC — it’s similar to the stimulus check that the everyday taxpayer received, but for businesses. Any business with fewer than 500 employees can qualify for this tax credit, including non-profits and start-ups.

And don’t worry: even if you applied and received a PPP loan, you can still claim the ERTC.

Although the ERTC has expired, eligible employers can still claim this credit for their 2020 or 2021 taxes by amending their returns. You can take the ERTC’s quick quiz to see if you’re eligible.

Questions About Grants and Tax Credits?

If you have questions after reading this post, we’re here to help. Contact us online or call our office at 916-400-3500.

How to Manage Inflation for Small Businesses

To say that entrepreneurs and small businesses have taken a beating since 2020 would be putting it mildly. Small business owners have weathered the COVID-19 pandemic, and supply chain and hiring crises with basically no breaks in between. Now, we’re onto the next challenge — figuring out how to stay afloat amid surging inflation. We’re going to break it all down before we kickstart your game plan to manage high inflation.

Inflation has always been a part of life. Think about it: a million dollars today doesn’t have the same purchasing power as it did in 1980. We’re now in the midst of the biggest jump in prices since that time.

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More than eight in ten (85%) small business owners or decision makers are concerned about the impact of inflation on their business, and 67% of small businesses have raised prices because of it, according to the US Chamber of Commerce.

It can seem like this economic swing is entirely out of your control — but don’t despair just yet! Let’s look at:

  • What inflation is
  • How inflation affects small businesses
  • How small businesses can manage inflation

What is Inflation?

Inflation is a measure of the increase in prices of goods over a period of time.

There are two basic types of inflation:

Cost-Push Inflation

When the price increase of specific goods or items, such as oil or food, is large enough to raise overall prices.

Demand-Pull Inflation

When demand outstrips the available amount of goods or services — think a supply shortage — which causes prices to rise.

Inflation can be calculated as a broad rate, for example showing the overall increase in prices or the cost of living in a country. It can also be calculated narrowly, showing the rate increases for specific items or services — think cereal, apples, haircuts or getting a manicure.

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To determine the rate of inflation, economists often turn to the consumer price index (CPI). The CPI shows the monthly change in prices US consumers are paying. This change in price represents the rate of inflation that US consumers face as a whole.

While uncomfortable, we’ve been here before: The US Bureau of Labor Statistics reported that over the 12 months ending June 2022, the CPI increased 9.1% — the largest 12-month increase since the 12-month period ending November 1981.

How Does Inflation Affect Businesses?

Since the start of the COVID-19 pandemic, Americans have experienced higher prices for everything from real estate to food due to rising inflation. Read on to see if you’ve already begun feeling the effects of skyrocketing prices.

Your Operating Costs Go Up

Consumers and businesses alike are feeling the hurt from soaring prices for food, rent, gasoline and pretty much everything else. Thirty-three percent of all US small businesses could not pay their full rent on time in May 2022 and 52% said rent has gone up over the past six months, according to small business referral network Alignable.

Inflation has hit every sector — climbing costs for supplies, services and inventory means the cost of running a business is on the rise. Some small business owners have seen their costs increase by as much as 20%. Small business owners across the nation are dipping into emergency funds, savings accounts and running up credit cards just to keep the lights on.

This can put businesses in danger — 47% of small business owners say their businesses are in jeopardy of closing by the fall, which is up 12% from summer 2021, according to Alignable.

You May Have to Raise Prices

It may become inevitable that you’ll have to raise prices on your customers or clients to counter the increase in your operating costs. If you did, you would be in very good company — 67% of business owners have reported raising their prices in the last year alone, according to the U.S. Chamber of Commerce.

You Might Have to Make Tough Decisions to Cut Costs

You can’t control inflation, but you can control your finances. You may have to take a hard look at the expenditures line on your budget and take decisive action to lower your overhead. You may consider reducing inventory, lowering or limiting your marketing spend and taking a hard look at your payroll. Cutting staff hours, working with skeleton crews, laying people off or deciding not to staff up for the holidays are all tough decisions to make. Many entrepreneurs are finding themselves in this position. In the last year, four in ten small business owners have reported they’ve decreased their staff or taken on debt in the form on a business loan to deal with inflation.

You Might Have to Fight For Profitability

Simply put, inflation often impacts your bottom line. Profit margins will shrink — and rising inflation makes reaching your margins more challenging. Profitability can truly become a moving target.

How Small Businesses Can Manage Inflation

Inflation will always be an issue for businesses for the simple reason that the value of items is constantly changing. That said, the rate at which inflation is rising now won’t last forever. That said, economists believe the current rate of inflation will eventually cool back down to more normal levels, around 2%. But business owners can’t wait around for the return to normalcy.

There are two approaches that businesses can employ when facing inflation: stay lean and mean or double down on growth. There’s no right or wrong answer. You can look at your business’ overall health, finances and risk tolerance to create a path forward that makes sense for now and the future.

How to Stay Lean and Mean to Combat Inflation

Choosing to deliberately stay small means making financial decisions to help improve cash flow and keep expenses as low as you possibly can. Some things you can do to stay lean include:

Examine Your Profit Margins

Thoroughly analyzing your profit margins is step one to a successful plan. Taking a hard look at your overall costs and analyzing the margins you’re facing can give you an idea of what changes you might need to make to increase margins while not hurting your business long-term by skimping on your products, services or experience.

Review your Finances and Operations

Think critically about every tool and service you’re paying for and make sure you’re getting ROI. Since payment processing is usually one of the biggest overhead costs behind rent and payroll, you may want to take a look at your payment processor. Review merchant statements to see what your effective rate has been. Have you been hit with a lot of markup from your processor?

Are you being hit with a lot of fees for things that you could fix through PCI compliance, chargeback prevention, and dispute resolution training? Plus, if you’d never considered a surcharge program, you might want to look into whether you offset your processing costs with one. If you want to compare payment processors, you can call a company and ask for a rate review. Heartland provides these cost-cutting programs and offers free rate reviews from our client management team.

Focus on Productivity

Everyone says “time is money” for a reason. If you and your staff are more efficient, you can save money and time to focus on revenue-generating activities. Consider leveraging your POS technology to keep track of inventory and take care of email marketing, social media management and payroll tasks.

Raise Prices The Right Way

Fighting inflation may mean raising prices for your customers. It’s not ideal, but it could become necessary. Consumers already feel like they’re getting hit in every direction with price hikes — so if you raise prices, you have to do it carefully. Try to avoid surprise, across-the-board price increases. If you can, raise prices slowly and start on products or services that impact your margin the most to lessen the sting of the increases. Being honest and upfront and helping customers understand your value will go a long way in keeping repeat customers. You can also consider hosting a promotional event with special discounts, food and drinks or other elements that remind customers that you care.

Go After Customers

Inflation often creates new customer segments. Prices shift and as your competitors lower prices, you’ll need a strategy to be competitive in a price war. Adding price options or tiers can help you retain customers and find new ones. Lower tiers can help repeat customers that are struggling financially, while higher tiers/packages can be marketed as “premium,” which can appeal to customers looking for exclusivity. Diversifying and adding products at lower price points or bundling services can help you find new customers and keep your loyal customers happy as they navigate inflation. Continuing with marketing efforts such as growing your Instagram followers and selling on social media can help you find your target customers.

Invest in growth

Small businesses can also take a look at the current climate and decide that now is the time to invest in growth. A growth strategy focuses on generating enough revenue to outpace inflation and your competitors, who might be battening down the hatches to stay small. If you’re considering growth, you’ll actually take a look at the same things as businesses trying to stay lean — profit margins, finances and operations to start. The difference will be doubling down on steps that will help you now and in the future. If you’re considering growth, you might:

  • Take out a small business loan or line of credit: If you’ve done work to build your business credit and feel comfortable taking on debt, you can fund projects that will grow your business. Taking on debt during higher inflation with higher interest rates can be risky — so you may want to consult with a financial advisor first. If you’re a sole proprietor, you may want to weigh the potential risks to your personal finances. The Federal Reserve has already approved interest rate hikes to try to cool down the economy. If you think you’ll need a loan and are on the fence about it, applying sooner rather than later might help you secure the lowest interest rate possible with a lender — as it’s likely the Fed will continue to raise rates.
  • Invest in new technology: Whether it’s taking on a new POS system or HR software, your investments can help free you and your management staff from the back-office and improve overall productivity. The right technology can help with overhead costs in the short-term — like flagging your employee schedule if someone is about to go into overtime — and set you up for long-term growth in the future as well.

This Too Shall Pass

People love trotting out this quote when you’re in a tough season of life. And while on first read it may fall flat, there’s an honesty to it you have to admire. No one starts their own business or dives headfirst into entrepreneurship because they’re hoping to avoid hardships or frustration. You do it because you’re fueled by passion, and a belief in your ability to carry on even when the seas get rough.

Smooth seas never made a skilled sailor.

You’ve risen to the challenge before. We know that because resilience is one of the hallmarks of successful entrepreneurs. While small business owners are some of the toughest people around, like anyone, they need support. Get inspired to face everyday business challenges with real startup stories from business owners like you who found their way past bumps — or craters — in the road on The Entrepreneur’s Studio. It’s a welcoming community that reminds you why you started and gives you the support needed to weather the storm.

Questions About Inflation Impacting Your Business?

If you have questions after reading this article, we’re here to help. Please feel free to contact us online or call our office at 916-400-3500.

Depreciation of Real Estate

When you own rental property, depreciation is your best friend.

One reason depreciation is so valuable is that, unlike deductible rental property expenses such as interest and maintenance, in which hard earned dollars have to leave your wallet. Depreciation allows you to claim expenses (in the form of depreciation) year after year without having to pay anything beyond your original investment in the property.

In addition, rental property owners (commercial and residential) are entitled to depreciation even if their property goes up in value over time (as it usually does).

The basic idea behind depreciation is simple, however the practical application (especially in reporting it on your taxes) can become quite complex.

For example, if you own a motel with a depreciable basis of $1 million, you get to deduct $25,640 each year for depreciation (except the first and last years). If you own an apartment building with a $1 million basis, your depreciation deduction is $36,360.

Why the difference? A motel and apartment building are both rental real estate. Shouldn’t they be depreciated the same way? Not according to the tax law. An apartment building is a residential rental property, while a motel is a commercial rental property. There are different depreciation periods for commercial and residential property: it takes far longer to depreciate commercial property fully.

For this reason, you should always make sure you correctly classify your property as commercial or residential. Such classification can be more challenging than you might think, especially for mixed-use property. If you rent to residential and commercial tenants, the tax code classifies the building as residential only if 80 percent or more of the gross annual rent is from renting dwelling units.

Even properties rented only for residential use may have to be classified as commercial if a majority of the tenants or guests are transients who stay only a short time. This rule can adversely impact the depreciation deductions for property owners who rent their property to short-term guests through Airbnb and other short-term rental platforms.

If you’ve been using the wrong depreciation period for your residential or commercial rental property, you should correct the error by filing an amended return or IRS Form 3115 to fix depreciation errors that are more than two years old.

Melissa Broughton is the Co-Owner of Busy Bee Advisors a Sacramento based Bookkeeping, Tax & Accounting firm. For more information on the services offered please visit their website at www.BusyBeeAdvisors.com

Having Your Cake & Eating It Too…The Best Of Both Worlds. Using A Vacation Home As Rental Property & For Personal Use

Chances are if you have a second home (one that may have been inherited or purchased with the best of intentions) you’ve considered the extra income stream with services like AirBnb or VRBO.

Not too long ago if you had a second home that was in a desirable location you would need to enlist the services of a property management company to rent out your property. Now with companies such as AirBnb and VRBO (just to name a few) you can turn the extra room in your house into some extra cash. However here are some items to consider before taking the jump.

When you use a home for both rental and personal use, regardless of that home’s location at the beach or in the city, you run into the tax code’s vacation home rules that make that home either a residence or a rental property.

It’s a residence when you;

  • Rent it for more than 14 days during the year
  • Use it for personal purposes for more than 14 days
  • 10 percent of the days that you rent the home out at fair market rates.

Example. You own a beachfront vacation condo. During the year, you rent it out for 180 days. You and members of your family stay there for 90 days. The property is vacant the rest of the year except for seven days at the beginning of winter and seven days at the beginning of summer, which you spend maintaining the property. Your condo falls into the tax code–defined personal residence because

  • You rented it out for 180 days, which is more than 14 days, and
  • You had 90 days of personal use, which is more than 14 days and more than 10 percent of the rental days.

Disregard the 14 days you spent maintaining the place.

The key principle that applies when your vacation home is a personal residence is that expenses other than mortgage interest and property taxes allocable to the rental use cannot exceed the gross rental income from the property. In other words, rental operating expenses and depreciation cannot cause a tax loss on Schedule E of your Form 1040 for the year in question.

If you need assistance on how your ‘vacation home’ can be considered a ‘vacation home’ or investment and not a personal residence our team of tax advisors is happy to help. Reach out to us at info@busybeeadvisors.com and we’d be happy to assist.

Is It A Business Or Is It A Hobby?

Are you a part of the growing gig economy? Do you run a side hustle? Wondering if it’s a business or a hobby? Are you reading this and wondering why you should care?

For the purpose of taxes these activities are more commonly referred sideline activities. Think Direct Sellers (i.e. Tupperware, Mary Kay, Pampered Chef, etc) or Uber and Doordash.

The tax benefits of being able to write off expenses for these endeavors can reap tremendous rewards.

To begin ask yourself this; From this sideline activity, are you claiming tax losses on your Form 1040? Will the IRS consider your sideline a business and allow your loss deductions or is it simply a hobby?

The IRS likes to claim that money-losing sideline activities are hobbies rather than businesses. The federal income tax rules for hobbies have been anti-taxpayer for years, and now an unfavorable change enacted in the Tax Cuts and Jobs Act (TCJA) made things even worse for 2018-2025.

Here’s the test:

If you can show a profit motive for your now-money-losing sideline activity, you can classify that activity as a business for tax purposes and deduct the losses. Are you doing it to make money?

Consider this;

  • Record Keeping is Key: Conducting the activity in a business-like manner by keeping good records and searching for profit-making strategies. (Did anyone say bookkeeping?!?)
  • Constantly Learning: Having expertise in the activity or hiring advisors who do. (Sideline activities provide an excellent reason to reinvest in yourself by researching, reading and attending seminars to not only re-energize you but to increase your knowledge base)
  • Time Spent: By spending enough time to justify the notion that the activity is a business and not just a hobby. (This is especially important for Real Estate Agents who must meet the annual 750 hour minimum)
  • Will your initial investment produce positive returns….eventually: Expectation of asset appreciation: this is why the IRS will almost never claim that owning rental real estate is a hobby, even when tax losses are incurred year after year.
  • Success in other ventures, which indicates that you have business acumen.
  • The history and magnitude of income and losses from the activity: occasional large profits hold more weight than more frequent small profits, and losses caused by unusual events or just plain bad luck are more justifiable than ongoing losses that only a hobbyist would be willing to accept.
  • Your financial status: Wealthy individuals may be able to afford ongoing losses (which may indicate a hobby), while ordinary individuals are usually trying to make a buck (which indicates a business).
  • Elements of personal enjoyment: breeding racehorses is lots more fun than draining septic tanks, so the IRS is far more likely to claim the former is a hobby if losses start showing up on your tax returns.

Remember the key component is in the intention, can you (if questioned) prove that your intention was to make a profit?

A Word About Self-Directed IRAs

Tax-advantaged retirement accounts such as IRAs are a great way to save for retirement.

But when you establish a traditional IRA with a bank, a brokerage, or a trust company, you are ordinarily limited to a narrow range of investment options, such as CDs and publicly traded stocks, bonds, mutual funds, and ETFs. Many IRA custodians will not permit you to invest in alternative investments such as real estate, precious metals, or cryptocurrency.

A self-directed IRA could be for you if you want to walk on the wild side and invest your retirement money in assets such as real estate, small business ventures or cryptocurrency.

In fact the investment options are almost endless.

Here is what you can NOT use your self-directed IRA to invest in; (the list is short)

  • Collectibles (such as art or rare coins)
  • Life insurance
  • S corporation stock

Here is what you CAN use your self-directed IRA to invest in; (but are not limited to, the following):

  • Real estate
  • Private businesses
  • Trust deeds and mortgages
  • Tax liens
  • Precious metals such as gold, silver, or platinum
  • Private offerings
  • LLCs and limited partnerships
  • REITs
  • Livestock
  • Oil and gas interests
  • Franchises
  • Hedge funds
  • Cryptocurrency

Promissory notesAside from the vast array of investment options, a self-directed IRA is the same as a traditional IRA and subject to the same rules. The income the investments in your IRA earn is not taxed until you take distributions, but distributions before age 59 1/2 are subject to a 10 percent penalty unless an exception applies.

You can also have a self-directed Roth IRA for which distributions are tax-free after five years.

But you must avoid self-dealing and other prohibited transactions, or your self-directed IRA could lose its tax-advantaged status.

Establishing a self-directed IRA need not be too difficult. You first open an account with a custodian that offers self-directed investments. You can also acquire checkbook control over your self-directed IRA by forming a limited liability company to own all the IRA investments.

Please note investing in alternative assets such as cryptocurrency is riskier than stocks, bonds, and mutual funds.

  • The rewards can be great, as you’ve seen with recent returns for cryptocurrency investors.
  • And the damage to your investment portfolio can be substantial, as we’ve also seen over the years.

When it comes to alternative investments, you need to know what you are doing or have an investment professional you trust to do this for you. Busy Bee Advisors has access to several well-respected companies that can educate and assist you. Please reach out to us at info@busybeeadvisors.com if you would like more information or if you would like us to make an introduction.

2021 Tax Credits to Know

For tax year 2021, Congress is giving away billions of dollars in additional tax credits on your Form 1040 individual tax return.

These temporarily expanded tax credits include the child tax credit, the dependent care credit, and the health insurance premium tax credit.

With good planning on your end—which, if you are a small business owner you have more control over than most do because you are in business for yourself—the various credits could easily put an additional $5,000 or more in your pocket for tax year 2021.

Child Tax Credit—Current Law

In tax year 2020, you received a $2,000 tax credit for qualifying children who had not reached age 17 by the end of the tax year. Up to $1,400 of the credit was refundable if you had earned income and had no overall tax liability.

If your modified adjusted gross income (MAGI) exceeded $200,000, or $400,000 on a married-filing-jointly return, then your 2020 credit decreased by $50 for each $1,000 (or fraction thereof) your MAGI was over the threshold.

Child Tax Credit—Tax Year 2021

For tax year 2021 only, the child tax credit amounts are $3,000 ($1,000 extra) per qualifying child, for qualifying children ages 6 through 17 at the end of the tax year; or $3,600 ($1,600 extra) if the qualifying child is 5 or under at the end of the tax year.

Planning point. The tax code measures your child’s age on December 31. For example, if your child turned 4 in July, your child is 4 on December 31.

Phaseout 1. You’ll reduce the 2021 credit amount that exceeds the $2,000 base credit by $50 for each $1,000 (or fraction) by which your modified adjusted gross income (MAGI) exceeds

$150,000 for married, filing jointly, or for qualifying widower; $112,500 for head of household; or $75,000 for all other filing statuses.

Phaseout 2. Once your MAGI exceeds $200,000, or $400,000 on a married-filing-jointly return, then your $2,000 base credit decreases by $50 for each $1,000 (or fraction thereof) that your MAGI is over the thresholds.

In addition, the entire child tax credit is 100 percent refundable as long as either you or your spouse has a principal place of abode in the U.S. for more than one-half of the tax year.

Heads up. Here’s a new wrinkle you need to manage: the IRS will advance you 50 percent of your anticipated child tax credit based on your last filed tax return.

You’ll reconcile the advance payments received with your actual 2021 child tax credit, and if the advance payments exceed your actual credit, you have to pay back the excess with your 2021 tax return.

The IRS will make the advance payments in equal monthly amounts between July and December 2021. You will have access to an IRS online portal where you can opt out of the advance payments or can update your information to avoid having to repay any of the amounts on your 2021 tax return due to a change in circumstances.

Dependent Care Credit—Current Law

In tax year 2020, you could claim a tax credit if you paid someone to care for your under-age-13 dependent or for your spouse or dependent who isn’t able to care for himself or herself.

Your maximum expenses eligible for the credit were $3,000 for one qualifying individual, or $6,000 for more than one qualifying individual.

The credit rate was 35 percent up to an AGI of $15,000. Your credit rate then decreased by 1 percent for each additional $2,000 of AGI (or fraction thereof). Once your AGI was $43,000 or higher, you had a 20 percent credit rate.

Dependent Care Credit—Tax Year 2021

For tax year 2021 only, the maximum creditable expenses are $8,000 for one qualifying individual, or $16,000 for more than one qualifying individual.

The credit rate is 50 percent up to an AGI of $125,000. Your credit rate then decreases by 1 percent for each additional $2,000 of AGI (or fraction thereof). Once your AGI is $185,000 or higher, you have a 20 percent credit rate.

However, there is a new upper limit: once your AGI reaches $400,000, you reduce your credit rate by 1 percent for each additional $2,000 (or fraction thereof) of AGI until the rate is 0.0 percent at an AGI of $440,000.

In addition, the dependent care credit is 100 percent refundable as long as either you or your spouse has a principal place of abode in the U.S. for more than one-half of the tax year.

Employer-Provided Dependent Care Assistance

For tax year 2021 only, the maximum employer-provided dependent care benefit excluded from your income as part of your cafeteria plan goes from $5,000 to $10,500 (or $5,250 for married filing separate).

Premium Tax Credit—Current Law

The Affordable Care Act (Obamacare) created the premium tax credit to help you afford insurance purchased on your state’s health insurance marketplace.

Your premium tax credit is equal to total monthly premiums for the tax year for the second-lowest silver health plan available on your state’s health insurance marketplace, less a certain percentage of your annual household income, with that percentage determined by your annual household income.

The percentage of your annual household income you must pay ranges from 2.06 to 9.78 percent in tax year 2020.

Once your household income exceeds 400 percent of the federal poverty level (FPL), you are no longer eligible for the premium tax credit. For example, the 400 percent thresholds outside of Alaska and Hawaii for tax year 2020 are $67,640 for a household of two,$85,320 for a household of three, and $103,000 for a household of four.

You can receive advances of the premium tax credit based on information you provide to the health insurance marketplace. On your tax return, you then compare your credit with the advance amounts and pay back any advance payments in excess of the actual credit, subject to limits.

New Law—Good Deal

The American Rescue Plan Act of 2021 (ARPA) retroactively removed the requirement to repay any excess advance premium tax credit payments for tax year 2020.

Premium Tax Credit—Tax Years 2021 and 2022

ARPA made several changes to expand access to the premium tax credit for tax years 2021 and 2022.

For tax year 2021 only, if you receive (or receive approval for) unemployment for any week beginning during tax year 2021, then you qualify for the premium tax credit (but if married, you must file a joint return with your spouse), and you will not take into account any of your household income in excess of 133 percent of the FPL for a family of the size involved. The above provision creates larger premium tax credits for most anyone who receives unemployment during tax year 2021.

In addition, for tax years 2021 and 2022 only you can claim the premium tax credit even if your household income exceeds 400 percent of the FPL, and the amount of your household income you must contribute toward your health insurance to calculate your premium tax credit ranges from 0.0 percent to 8.5 percent based on your household income, which is a significant decrease over tax year 2020. The 0.0 percent rate goes up to 150 percent of the FPL.

As you can see, you have far more opportunities for tax credits in 2021.

Melissa Broughton is the proud owner of Busy Bee Advisors, a Sacramento-based Bookkeeping & Tax firm. She can be reached at 916-400-3500 or online.

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