Paying Down Student Loans
Nov 05, 2015
Graduating from college is exciting. Having to repay student loan debt, not so much. According to a recent analysis of government data, average loan debt for 2015 graduates was approximately $35,000.* Finding ways to get out of debt faster should be a priority. Here are some strategies that may help reduce student debt sooner.
On Track with a Budget
Everyone — not just new college grads — should have a spending plan that shows income and expenses and allocates money accordingly. Creating a budget is the best way to see how much discretionary money is available to apply toward a student loan and save for retirement at the same time.
Paying from the Get-go
Borrowers may have a grace period (usually six months) after graduation before loan payments are due. But starting the repayment process as soon as possible saves on borrowing costs, since interest that accrues during that time is added to the loan principal. Even paying only the interest can save money.
Loan Forgiveness
Borrowers in certain career fields, including public service and education, may be eligible to have their loans partially or completely forgiven. Length of service and other eligibility requirements apply. Information on loan forgiveness programs is available at www.studentaid.ed.gov/sa/repay-loans/forgiveness-cancellation.
Paying Extra
Since federal and private student loans can be prepaid without penalty, paying more than the required minimum every month — even if it’s a small amount — can help reduce the balance faster. Borrowers should specify in writing that the extra amount should be applied to the loan principal. To save more in overall interest, extra payments should first go to the loan with the highest interest rate.
A Break on Taxes
Student loan interest of up to $2,500 may be deductible on a borrower’s federal income-tax return. Using a tax refund to make extra loan payments can be a valuable strategy.
Cash Contributions
Borrowers might consider using a bonus at work or gifts of cash to help prepay student loans.
- The Wall Street Journal, May 8, 2015
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Accounting For Leases: Capital or Operating?
Nov 03, 2015
As business owners you may or may not be aware of the differences in accounting for a capital lease vs. an operating lease, or the future changes to be made to accounting standards. We are here to help!
Let’s begin with the basics of how we have historically accounted for leases under Generally Accepted Accounting Principles (GAAP). Capital lease or operating lease?
A capital lease is a lease which transfers substantially all of the benefits and risks of ownership of the leased item from the lessor to the lessee. A lease is considered a capital lease if it meets one or more of the following criteria:
- The lease transfers ownership of the property to the lessee by the end of the lease term.
- The lease contains a bargain purchase option. This is an option permitting the lessee to renew the lease or purchase the leased property for an amount that is sufficiently below expected future market value at the date the option becomes exercisable.
- The present value of the minimum lease payments is at least 90% of the fair value of the leased property.
- The lease term is at least 75% or more of the estimated economic life of the leased property.
For a capital lease, the transaction is treated as if an asset were being acquired with a corresponding liability incurred. At the beginning of the lease, the lessee records the present value of all future lease payments as the cost of the lease then record only the interest portion of each payment as an expense then recognize the disposal of the asset at the end of the useful life. The asset and liability are recorded at the lower of the present value of the minimum lease payments over the lease term; or the fair market value of the asset at inception of the lease.
An operating lease is any lease that does not meet one or more of the criteria for a capital lease. When accounting for an operating lease, the rented asset and the corresponding long-term liability are not recorded. Instead, rent expenses are debited periodically and cash (or a short-term accrued liability) is credited.
The Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) have been working together to modify accounting for the rights and obligations regarding leases. The proposed accounting standards update primarily affects accounting for operating leases. The project has proposed recording long-term operating leases onto the lessee’s balance sheet. All long term leases will be recognized as either a capital lease or an operating lease for amortization purposes. Therefore, a leased asset and a leased liability will be recognized by capitalizing the present value of the operating lease commitments.
For lessees, recognizing lease-related assets and liabilities could have significant financial reporting and business implications. A couple implications that might be affected are debt covenants and borrowing ability, decisions about whether to lease or buy significant assets, and possibly the cost of borrowing, etc. Currently, these items have an effective date of January 1, 2018 or later. There is still a lot up in the air right now. Things could change and there are potential revisions to be made before it becomes effective.
By: Aubrey Forche, Staff Accountant
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A Guide To Gifts & Taxes
Oct 30, 2015
Leaving a financial legacy is a wonderful achievement. However, there’s something to be said for sharing the wealth when you can experience the joy of giving. If you’re worried about taxes taking a bite, you might be surprised at how much you can give away before the federal gift tax becomes an issue. Here’s what you need to know.
How much can you give away tax-free?
For starters, you can make gifts of up to $14,000 (per person) to as many people as you wish during the 2015 calendar year and generally no gift tax will be due.* This gift-tax annual exclusion (which is periodically inflation adjusted) allows you to give away a substantial amount. For example, you could give eight grandchildren $14,000 each this year — $112,000 total — and no gift tax would be due. Your gifts can be cash, securities, or other property. And you can make the gifts to anyone, not just relatives.
Married couples who satisfy certain tax law requirements can agree to split their gifts. With gift splitting, all gifts made by either spouse to third parties during the calendar year are considered made one-half by one spouse and one-half by the other. That way, a couple’s combined annual exclusion gifts can be as much as $28,000 per recipient.
What if you exceed the limit?
Gifts that aren’t protected by the gift-tax annual exclusion generally count against the cumulative amount that can be protected from gift and estate tax by your unified credit. This basic exclusion amount is currently $5.43 million.
Are there other times when the gift tax doesn’t apply?
An unlimited tuition exclusion allows you to pay tuition at qualifying educational institutions. An unlimited medical exclusion allows you to pay medical providers for unreimbursed medical costs. Note that payments must be made directly to the institution and/or care provider and may be made on behalf of any individual, related or not.
Transfers to spouses generally are not subject to gift tax due to a marital deduction (exceptions apply). Similarly, gifts to charities aren’t taxed in most circumstances because of a charitable deduction.
- To use the gift-tax annual exclusion, the gift generally must be of a “present interest” (i.e., the gift recipient’s enjoyment of the property can’t be postponed until sometime in the future).
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Common Accounting Software Pitfalls
Oct 27, 2015
As an accountant, I have worked with many small businesses that purchase QuickBooks for their accounting software. Over the years, I have observed many of these businesses, large and small, make many of the same accounting errors. Here are just a few of the most common oversights and some tips to help avoid such mistakes.
Lack of accounting software understanding. QuickBooks is capable of offering meaningful reports and functions to assist small business owners. However, if the software is not set up correctly or wrong information is entered, reports will be incomplete. Your unhealthy reporting can lead to bad decision-making about the future of your organization.
Hiring the wrong person to handle your accounting. Be it a family member or even yourself, having the wrong person in charge of entering all the financial information into QuickBooks can be a disaster. It is essential to employ someone who understands general accounting principles, knows a debit from a credit, how to properly classify business expenses, and accurately record journal entries.
Not reconciling bank accounts on a monthly basis. Skipping routine accounting tasks due to an increase in business may seem like a good idea, but more often than not, it leads to wasting valuable time. At some point, you will have to address your accounting issues spend time reviewing prior months to check for errors. Take the time on a monthly basis to reconcile your general ledger.
Entering incomplete and delayed financial data into the software. In order to be able to reconcile your bank accounts, monthly posting of cash receipts and disbursements must be entered in a timely fashion. Simply recording cash receipts and disbursements into the bank without posting to the corresponding invoices will lead to critical errors on the financial statements. This brings to mind the adage “garbage in –garbage out” which will be no benefit in trying to make sound business decisions.
Underutilization of the accounting software. Many business owners use the accounting software to record their financial activity but never take the time to explore the various reporting options available. For example, accounts receivable aging will determine those customers behind in payment and possible issues with cash-flow. Profit and loss statements can help businesses determine if expenses are exceeding the budget and pinpoint the cause of excess costs. Making the most of your system and its report capabilities will guide you in the decision-making process and clearly state the profitability and efficiency of a company.
Not recognizing the need for accounting help. A business owner may have the next great product idea, but when it comes to the financial aspect they are clueless. An accounting professional is there to help you make sense of your financial data. Having a trusted partnership with an accountant will allow you to focus on what you do best, running a business.
Need help choosing the right software for your business? What about training? William Vaughan has qualified QuickBooks professionals who can guide you in software selection and implementation. We can also train your personnel. Sometimes just a quick email or phone call can save you valuable time and money William Vaughan offers a variety of small business solutions. Click here to find out more!
By: Christine Schultz, Accountant
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Daily Fantasy Sports: Taxes & Legalities
Oct 23, 2015
If you are a football fan, or probably even if you have watched any TV at all in the last couple months, you are probably familiar with phrases such as “immediate cash payouts, no season-long commitments” and “welcome to the big time.” These, of course, are phrases from the overplayed and nearly intolerable commercials for the daily fantasy sports (DFS) sites FanDuel and DraftKings. Per USA Today these companies combined to spend $31 million on 9,000 ads in the first week of the NFL season alone.
These two companies are fighting for control of the huge DFS market. Both companies are valued at over $1 billion and both will be paying out over a billion dollars in prizes to over a million users during the 2015 NFL season. The future appears bright for DFS, but there has been a large amount of controversy in the industry over the past month.
On October 4, 2015, a DraftKings employee won $350,000 on a FanDuel contest. This employee had access to DraftKings player ownership percentages, which would provide inside information which could be used to help win the FanDuel contest. After an independent review from a law firm, the employee was cleared of any wrongdoing.
Despite being cleared of wrongdoing, this incident has ignited a very large amount of scrutiny on the DFS industry. The FBI, in conjunction with the U.S. Department of Justice, is investigating the legality of DFS based on federal law. This investigation is being led by U.S. Attorney Preet Bharara’s office in the Southern District of New York. This is significant because Mr. Bharara had a key role in shutting down the U.S. online poker industry in 2011.
Additionally, on October 15, 2015, the Nevada Gaming Control Board ruled that “DFS constitutes gambling under Nevada law” and that “a person must possess a license to operate a sports pool (DFS) by the Nevada Gaming Commission”. This is significant because the claim DFS sites make to make the activity legal is that DFS is a skill game and is not considered gambling. However, this ruling from Nevada states DFS is gambling and is not a skill game. There are many other states looking into the legality of DFS, and this ruling could provide support for them to outlaw DFS in the future. Currently, DraftKings and FanDuel can be played in all but six states, with Nevada being the first state to make it illegal (without a license).
Despite all of the controversy and investigations, DFS is a huge industry. In 2015, FanDuel is expected to pay out over $2 billion in prizes, while DraftKings is expected to pay out over $1 billion. With that kind of money being paid out, you can bet the IRS is making sure they get their cut. If you participate in DFS and are “skilled” enough to win over $600 in net profit, that is prizes won minus entry fees plus bonuses, both DraftKings and FanDuel will require you to complete an electronic W-9. This form will provide the companies with the information needed to issue you a 1099-MISC to report your winnings to the IRS. The amount of your winnings that are taxable can be reduced by entry fees, transaction fees, research materials (such as magazines) and losses from other methods of fantasy sports participation where you weren’t quite as lucky. So be sure to keep records of all your expenditures to support the information reported on your 1040.
Once you come to the net of all your winnings less all expenses, this amount will be reported as other income on line 21 of your 1040. Since the amount reported will not match the 1099-MISC you received, you will need to attach a statement to the return reconciling the 1099-MISC to the amount reported. Note that if you participated in a large amount of fantasy sports to the point that overall you lost more money than you won, you will not be able claim a loss on your return and will just report income of $0.
Next year when you file your tax return, avoid controversy and be sure to report all of your fantasy sports activity correctly.
By: Mark Sawyer, CPA
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