Vidulich & Associates, Ltd
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An accounting firm with over 30 years experience servicing start-up to medium businesses PROFESSIONALISM
Our firm is one of the leading firms in the area.
Our firm provides outstanding service to our clients because of our dedication to the three underlying principles of professionalism, responsiveness and quality. By combining our expertise, experience and the energy of our staff, each client receives close personal and professional attention. Our high standards, service and specialized staff spell the difference between our outstanding performance
YEAR-END TAX PLANNING FOR BUSINESSES
There are a number of end of year tax planning strategies that businesses can use to reduce their tax burden for 2016. Here are a few of them:
Businesses using the cash method of accounting can defer income into 2017 by delaying end-of-year invoices so payment is not received until 2017. Businesses using the accrual method can defer income by postponing delivery of goods or services until January 2017.
PURCHASE NEW BUSINESS EQUIPMENT
Section 179 Expensing. Business should take advantage of Section 179 expensing this year for a couple of reasons. First, is that in 2016 businesses can elect to expense (deduct immediately) the entire cost of most new equipment up to a maximum of $500,000 for the first $2,010,000 million of property placed in service by December 31, 2016. Keep in mind that the Section 179 deduction cannot exceed net taxable business income. The deduction is phased out dollar for dollar on amounts exceeding the $2.01 million threshold and eliminated above amounts exceeding $2.5 million.
Bonus Depreciation. Businesses are able to depreciate 50 percent of the cost of equipment acquired and placed in service during 2015, 2016 and 2017. However, the bonus depreciation is reduced to 40 percent in 2018 and 30 percent in 2019.
Qualified property is defined as property that you placed in service during the tax year and used predominantly (more than 50 percent) in your trade or business. Property that is placed in service and then disposed of in that same tax year does not qualify, nor does property converted to personal use in the same tax year it is acquired.
Note: Many states have not matched these amounts and, therefore, state tax may not allow for the maximum federal deduction. In this case, two sets of depreciation records will be needed to track the federal and state tax impact.
Please contact the office if you have any questions regarding qualified property.
Timing. If you plan to purchase business equipment this year, consider the timing. You might be able to increase your tax benefit if you buy equipment at the right time. Here's a simplified explanation:
Conventions. The tax rules for depreciation include "conventions" or rules for figuring out how many months of depreciation you can claim. There are three types of conventions. To select the correct convention, you must know the type of property and when you placed the property in service.
The half-year convention: This convention applies to all property except residential rental property, nonresidential real property, and railroad gradings and tunnel bores (see mid-month convention below) unless the mid-quarter convention applies. All property that you begin using during the year is treated as "placed in service" (or "disposed of") at the midpoint of the year. This means that no matter when you begin using (or dispose of) the property, you treat it as if you began using it in the middle of the year.
Example: You buy a $40,000 piece of machinery on December 15. If the half-year convention applies, you get one-half year of depreciation on that machine.
The mid-quarter convention: The mid-quarter convention must be used if the cost of equipment placed in service during the last three months of the tax year is more than 40 percent of the total cost of all property placed in service for the entire year. If the mid-quarter convention applies, the half-year rule does not apply, and you treat all equipment placed in service during the year as if it were placed in service at the midpoint of the quarter in which you began using it.
The mid-month convention: This convention applies only to residential rental property, nonresidential real property, and railroad gradings and tunnel bores. It treats all property placed in service (or disposed of) during any month as placed in service (or disposed of) on the midpoint of that month.
If you're planning on buying equipment for your business, call the office and speak to a tax professional who can help you figure out the best time to buy that equipment and take full advantage of these tax rules.
OTHER YEAR-END MOVES TO TAKE ADVANTAGE OF
Small Business Health Care Tax Credit. Small business employers with 25 or fewer full-time-equivalent employees (average annual wages of $52,000 in 2016) may qualify for a tax credit to help pay for employees' health insurance. The credit is 50 percent (35 percent for non-profits).
Business Energy Investment Tax Credit. Business energy investment tax credits are still available for eligible systems placed in service on or before December 31, 2016, and businesses that want to take advantage of these tax credits can still do so.
Business energy credits include solar energy systems (passive solar and solar pool-heating systems excluded), fuel cells and microturbines, and an increased credit amount for fuel cells. The extended tax provision also established new credits for small wind-energy systems, geothermal heat pumps, and combined heat and power (CHP) systems. Utilities are allowed to use the credits as well.
Repair Regulations. Where possible, end of year repairs and expenses should be deducted immediately, rather than capitalized and depreciated. Small businesses lacking applicable financial statements (AFS) are able to take advantage of de minimis safe harbor by electing to deduct smaller purchases ($2,500 or less per purchase or per invoice). Businesses with applicable financial statements are able to deduct $5,000. Small business with gross receipts of $10 million or less can also take advantage of safe harbor for repairs, maintenance, and improvements to eligible buildings. Please call if you would like more information on this topic.
Partnership or S-Corporation Basis. Partners or S corporation shareholders in entities that have a loss for 2016 can deduct that loss only up to their basis in the entity. However, they can take steps to increase their basis to allow a larger deduction. Basis in the entity can be increased by lending the entity money or making a capital contribution by the end of the entity's tax year.
Caution: Remember that by increasing basis, you're putting more of your funds at risk. Consider whether the loss signals further troubles ahead.
Section 199 Deduction. Businesses with manufacturing activities could qualify for a Section 199 domestic production activities deduction. By accelerating salaries or bonuses attributable to domestic production gross receipts in the last quarter of 2016, businesses can increase the amount of this deduction. Please call to find out how your business can take advantage of Section 199.
Retirement Plans. Self-employed individuals who have not yet done so should set up self-employed retirement plans before the end of 2016. Call today if you need help setting up a retirement plan.
Dividend Planning. Reduce accumulated corporate profits and earnings by issuing corporate dividends to shareholders.
Budgets. Every business, whether small or large should have a budget. The need for a business budget may seem obvious, but many companies overlook this critical business planning tool.
A budget is extremely effective in making sure your business has adequate cash flow and in ensuring financial success. Once the budget has been created, then monthly actual revenue amounts can be compared to monthly budgeted amounts. If actual revenues fall short of budgeted revenues, expenses must generally be cut.
Tip: Year-end is the best time for business owners to meet with their accountants to budget revenues and expenses for the following year.
If you need help developing a budget for your business, don't hesitate to call.
CALL A TAX PROFESSIONAL FIRST
These are just a few of the year-end planning tax moves that could make a substantial difference in your tax bill for 2016. If you'd like more information about tax planning for 2017, please call to schedule a consultation to discuss your specific tax and financial needs, and develop a plan that works for your business.
TAX-FREE SAVINGS FOR COLLEGE
According to a recent study published by the Federal Reserve Bank of San Francisco, researchers found that over a lifetime, the average U.S. college graduate will earn at least $800,000 more than the average high school graduate--even after taking into consideration the cost of college tuition and the four years of lost wages it entails. Despite this, most people still feel that a college education is worth the investment.
That said, however, the need to set money aside for their child's education often weighs heavily on parents. Fortunately, there are two savings plans available to help parents save money as well as provide certain tax benefits. Let's take a closer look.
The two most popular college savings programs are the Qualified Tuition Programs (QTPs) or Coverdell Education Savings Accounts (ESAs). Whichever one you choose, try to start when your child is young. The sooner you begin saving, the less money you will have to put away each year.
Example: Suppose you have one child, age six months, and you estimate that you'll need $120,000 to finance his college education 18 years from now. If you start putting away money immediately, you'll need to save $3,500 per year for 18 years (assuming an after-tax return of 7 percent). On the other hand, if you put off saving until your son is six years old, you'll have to save almost double that amount every year for 12 years.
HOW MUCH WILL COLLEGE COST?
College is expensive, and proper planning can lessen the financial squeeze considerably--especially if you start when your child is young. According to the College Board, average published tuition and fees for full-time in-state students at public four-year colleges and universities increased 2.9 percent before adjusting for inflation, rising from $9,145 in 2014-15 to $9,410 in 2015-16.
Average published tuition and fees at private nonprofit four-year institutions increased 3.6 percent before adjusting for inflation, rising from $31,283 in 2014-15 to $32,405 in 2015-16. Undergraduates received an average of $14,210 in financial aid in 2014-15, including $8,170 in grants from all sources, $4,800 in federal loans, $1,170 in education tax credits and deductions, and $70 in Federal Work-Study.
SAVING WITH QUALIFIED TUITION PROGRAMS (QTPS)
Qualified Tuition Programs, also known as 529 plans, are often the best choice for many families. Every state now has a program allowing persons to prepay for future higher education, with tax relief. There are two basic plan types, with many variations among them:
The prepaid education arrangement. With this type of plan, one is essentially buying future education at today's costs, by buying education credits or certificates. This is the older type of program and tends to limit the student's choice to schools within the state; however, private colleges and universities often offer this type of arrangement.
Education Savings Account (ESA). With an ESA, contributions are made to an account to be used for future higher education.
Tip: When approaching state programs, one must distinguish between what the federal tax law allows and what an individual state's program may impose.
You may open a 529 plan in any state, but when buying prepaid tuition credits (less popular than savings accounts), you will want to know what institutions the credits will be applied to.
Unlike certain other tax-favored higher education programs, such as the American Opportunity Credit (formerly the Hope Credit) and Lifetime Learning Credit, federal tax law doesn't limit the benefit to tuition, but can also extend it to room, board, and books (individual state programs could be narrower).
The two key individual parties to the program are the Designated Beneficiary (the student-to-be) and the Account Owner, who is entitled to choose and change the beneficiary and who is normally the principal contributor to the program.
There are no income limits on who may be an account owner. There's only one designated beneficiary per account. Thus, a parent with three college-bound children might set up three accounts. Some state programs don't allow the same person to be both beneficiary and account owner.
Tax Rules Relating to Qualified Tuition Programs
Income Tax. Contributions made by an account owner or other contributor are not tax deductible for federal income tax purposes, but earnings on contributions do grow tax-free while in the program.
Distributions from the fund are tax-free to the extent used for qualified higher education expenses. Distributions used otherwise are taxable to the extent of the portion which represents earnings.
A distribution may be tax-free even though the student is claiming an American Opportunity Credit (formerly the Hope Credit) or Lifetime Learning Credit, or tax-free treatment for a Coverdell ESA distribution, provided the programs aren't covering the same specific expenses.
Distribution for a purpose other than qualified education is taxable to the one getting the distribution. In addition, a 10 percent penalty must be imposed on the taxable portion of the distribution, which is comparable to the 10 percent penalty in Coverdell ESAs.
The account owner may change the beneficiary designation from one to another in the same family. Funds in the account roll over tax-free for the benefit of the new beneficiary.
Tip: In 2009, the American Recovery and Reinvestment Act (ARRA) added expenses for computer technology/equipment or Internet access to the list of qualifying expenses. Software designed for sports, games, or hobbies does not qualify, unless it is predominantly educational in nature. In general, however, expenses for computer technology are not considered qualified expenses.
Gift Tax. For gift tax purposes, contributions are treated as completed gifts even though the account owner has the right to withdraw them. Thus they qualify for the up-to-$14,000 annual gift tax exclusion in 2016 (same as 2015). One contributing more than $14,000 may elect to treat the gift as made in equal installments over the year of the gift and the following four years so that up to $56,000 can be given tax-free in the first year.
However, a rollover from one beneficiary to another in a younger generation is treated as a gift from the first beneficiary, an odd result for an act the "giver" may have had nothing to do with.
Estate Tax. Funds in the account at the designated beneficiary's death are included in the beneficiary's estate, another odd result, since those funds may not be available to pay the tax.
Funds in the account at the account owner's death are not included in the owner's estate, except for a portion thereof where the gift tax exclusion installment election is made for gifts over $14,000. For example, if the account owner made the election for a gift of $56,000 in 2016, a part of that gift is included in the estate if he or she dies within five years.
Tip: A Qualified Tuition Program can be an especially attractive estate-planning move for grandparents. There are no income limits, and the account owner giving up to $56,000 avoids gift tax and estate tax by living five years after the gift, yet has the power to change the beneficiary.
State Tax. State tax rules are all over the map. Some reflect the federal rules; some reflect quite different rules. For specifics of each state's program, see College Savings Plans Network (CSPN). If you need assistance with this, please contact us.
SAVING WITH COVERDELL EDUCATION SAVINGS ACCOUNTS (ESAS)
You can contribute up to $2,000 in 2016 to a Coverdell Education Savings account (a Section 530 program formerly known as an Education IRA) for a child under 18. These contributions are not tax deductible but grow tax-free until withdrawn. Contributions for any year, for example, 2016 can be made through the (unextended) due date for the return for that year (April 17, 2017). There is no adjustment for inflation; therefore the $2,000 contribution limit is expected to remain at $2,000.
Only cash can be contributed to a Coverdell ESA, and you cannot contribute to the account after the child reaches his or her 18th birthday.
The beneficiary will not owe tax on the distributions if they are less than a beneficiary's qualified education expenses at an eligible institution. This benefit applies to higher education expenses as well as to elementary and secondary education expenses.
Anyone can establish and contribute to a Coverdell ESA, including the child. An account may be established for as many children as you wish; however, the amount contributed during the year to each account cannot exceed $2,000. The child need not be a dependent, and in fact, does not even need to be related to you. The maximum contribution amount in 2016 for each child is subject to a phase-out limitation with a modified AGI between $190,000 and $220,000 for joint filers and $95,000 and $110,000 for single filers.
A 6 percent excise tax (to be paid by the beneficiary) applies to excess contributions. These are amounts in excess of the applicable contribution limit ($2,000 or phase out amount) and contributions for a year that amounts are contributed to a Qualified Tuition Program for the same child. The 6 percent tax continues for each year the excess contribution stays in the Coverdell ESA.
Exceptions. The excise tax does not apply if excess contributions made during 2016 (and any earnings on them) are distributed before the first day of the sixth month of the following tax year (June 1, 2017, for a calendar year taxpayer). However, you must include the distributed earnings in gross income for the year in which the excess contribution was made. The excise tax does not apply to any rollover contribution.
The child must be named (designated as beneficiary) in the Coverdell document, but the beneficiary can be changed to another family member--to a sibling for example when the first beneficiary gets a scholarship or drops out. Funds can also be rolled over tax-free from one child's account to another child's account. Funds must be distributed not later than 30 days after the beneficiary's 30th birthday (or 20 days after the beneficiary's death if earlier). For "special needs" beneficiaries the age limits (no contributions after age 18, distribution by age 30) don't apply.
Withdrawals are taxable to the person who gets the money, with these major exceptions: Only the earnings portion is taxable (the contributions come back tax-free). Also, even that part isn't taxable income, as long as the amount withdrawn does not exceed a child's "qualified higher education expenses" for that year.
The definition of "qualified higher education expenses" includes room and board and books, as well as tuition. In figuring whether withdrawals exceed qualified expenses, expenses are reduced by certain scholarships and by amounts for which tax credits are allowed. If the amount withdrawn for the year exceeds the education expenses for the year, the excess is partly taxable under a complex formula. A different formula is used if the sum of withdrawals from a Coverdell ESA and from the Qualified Tuition Program exceeds education expenses.
As the person who sets up the Coverdell ESA, you may change the beneficiary (the child who will get the funds) or roll the funds over to the account of a new beneficiary, tax-free, if the new beneficiary is a member of your family. But funds you take back (for example, withdrawal in a year when there are no qualified higher education expenses, because the child is not enrolled in higher education) are taxable to you, to the extent of earnings on your contributions, and you will generally have to pay an additional 10 percent tax on the taxable amount. However, you won't owe tax on earnings on amounts contributed that are returned to you by June 1 of the year following contribution.
Considering the wide differences among state plans, federal and state tax issues, and the dollar amounts at stake, please call the office before getting started with any type of college savings plan.
THE HOME-BASED BUSINESS: BASICS TO CONSIDER
More than 52 percent of businesses today are home-based. Every day, people are striking out and achieving economic and creative independence by turning their skills into dollars. Garages, basements, and attics are being transformed into the corporate headquarters of the newest entrepreneurs--home-based businesspeople.
And, with technological advances in smartphones, tablets, and iPads as well as rising demand for "service-oriented" businesses, the opportunities seem to be endless.
IS A HOME-BASED BUSINESS RIGHT FOR YOU?
Choosing a home business is like choosing a spouse or partner: Think carefully before starting the business. Instead of plunging right in, take the time to learn as much about the market for any product or service as you can. Before you invest any time, effort, or money take a few moments to answer the following questions:
Can you describe in detail the business you plan on establishing?
What will be your product or service?
Is there a demand for your product or service?
Can you identify the target market for your product or service?
Do you have the talent and expertise needed to compete successfully?
Before you dive head first into a home-based business, it's essential that you know why you are doing it and how you will do it. To succeed, your business must be based on something greater than a desire to be your own boss, and involves an honest assessment of your own personality, an understanding of what's involved, and a lot of hard work. You have to be willing to plan ahead and make improvements and adjustments along the way.
While there are no "best" or "right" reasons for starting a home-based business, it is vital to have a very clear idea of what you are getting into and why. Ask yourself these questions:
Are you a self-starter?
Can you stick to business if you're working at home?
Do you have the necessary self-discipline to maintain schedules?
Can you deal with the isolation of working from home?
Working under the same roof that your family lives under may not prove to be as easy as it seems. It is important that you work in a professional environment. If at all possible, you should set up a separate office in your home. You must consider whether your home has space for a business and whether you can successfully run the business from your home. If so, you may qualify for a tax break called the home office deduction. For more information see the article, Do You Qualify for the Home Office Deduction? below.
COMPLIANCE WITH LAWS AND REGULATIONS
A home-based business is subject to many of the same laws and regulations affecting other businesses, and you will be responsible for complying with them. There are some general areas to watch out for, but be sure to consult an attorney and your state department of labor to find out which laws and regulations will affect your business.
Be aware of your city's zoning regulations. If your business operates in violation of them, you could be fined or closed down.
Restrictions on Certain Goods
Certain products may not be produced in the home. Most states outlaw home production of fireworks, drugs, poisons, sanitary or medical products, and toys. Some states also prohibit home-based businesses from making food, drink, or clothing.
Registration and Accounting Requirements
You may need the following:
Work certificate or a license from the state (your business's name may also need to be registered with the state)
Sales tax number
Separate business telephone
Separate business bank account
If your business has employees, you are responsible for withholding income, social security, and Medicare taxes, as well as complying with minimum wage and employee health and safety laws.
Money fuels all businesses. With a little planning, you'll find that you can avoid most financial difficulties. When drawing up a financial plan, don't worry about using estimates. The process of thinking through these questions helps develop your business skills and leads to solid financial planning.
Estimating Start-Up Costs
To estimate your start-up costs include all initial expenses such as fees, licenses, permits, telephone deposit, tools, office equipment and promotional expenses.
In addition, business experts say you should not expect a profit for the first eight to ten months, so be sure to give yourself enough of a cushion if you need it.
Projecting Operating Expenses
Include salaries, utilities, office supplies, loan payments, taxes, legal services and insurance premiums, and don't forget to include your normal living expenses. Your business must not only meet its own needs but make sure it meets yours as well.
It is essential that you know how to estimate your sales on a daily and monthly basis. From the sales estimates, you can develop projected income statements, break-even points, and cash-flow statements. Use your marketing research to estimate initial sales volume.
Determining Cash Flow
Working capital--not profits--pays your bills. Even though your assets may look great on the balance sheet, if your cash is tied up in receivables or equipment, your business is technically insolvent. In other words, you're broke.
Make a list of all anticipated expenses and projected income for each week and month. If you see a cash-flow crisis developing, cut back on everything but the necessities.
If a home-based business is in your future, then a tax professional can help. Don't hesitate to call if you need assistance setting up your business or making sure you have the proper documentation in place to satisfy the IRS.
PAYING OFF DEBT THE SMART WAY
Between mortgages, car loans, credit cards, and student loans, most people are in debt. While being debt-free is a worthwhile goal, most people need to focus on managing their debt first since it's likely to be there for most of their life.
Handled wisely, however, that debt won't be an albatross around your neck. You don't need to shell out your hard-earned money because of exorbitant interest rates or always feel like you're on the verge of bankruptcy. You can pay off debt the smart way, while at the same time, saving money to pay it off even faster.
ASSESS THE SITUATION
First, assess the depth of your debt. Write it down using pencil and paper or use a spreadsheet like Microsoft Excel. You can also use a bookkeeping program such as Quicken. Include every instance you can think of where a company has given you something in advance of payment, including your mortgage, car payment(s), credit cards, tax liens, student loans, and payments on electronics or other household items through a store.
Record the day the debt began and when it will end (if possible), the interest rate you're paying, and what your payments typically are. Next, add it all up--as painful as that might be. Try not to be discouraged! Remember, you're going to break this down into manageable chunks while finding extra money to help pay it down.
IDENTIFY HIGH-COST DEBT
Yes, some debts are more expensive than others. Unless you're getting payday loans (which you shouldn't be), the worst offenders are probably your credit cards. Here's how to deal with them.
Don't use them. Don't cut them up, but put them in a drawer and only access them in an emergency.
Identify the card with the highest interest and pay off as much as you can every month. Pay minimums on the others. When that one's paid off, work on the card with the next highest rate.
Don't close existing cards or open any new ones. It won't help your credit rating, and in fact, will only hurt it.
Pay on time, absolutely every time. One late payment these days can lower your FICO score.
Go over your credit-card statements with a fine-tooth comb. Are you still being charged for that travel club you've never used? Look for line items you don't need.
Call your credit card companies and ask them nicely if they would lower your interest rates. It does work sometimes!
SAVE, SAVE, SAVE
Do whatever you can to retire debt. Consider taking a second job and using that income only for higher payments on your financial obligations. Substitute free family activities for high-cost ones. Sell high-value items that you can live without.
DO AWAY WITH UNNECESSARY ITEMS TO REDUCE DEBT LOAD
Do you really need the 200-channel cable option or that satellite dish on your roof? You'll be surprised at what you don't miss. How about magazine subscriptions? They're not terribly expensive, but every penny counts. It's nice to have a library of books, but consider visiting the public library or half-price bookstores until your debt is under control.
NEVER, EVER MISS A PAYMENT
Not only are you retiring debt, but you're also building a stellar credit rating. If you ever move or buy another car, you'll want to get the lowest rate possible. A blemish-free payment record will help with that. Besides, credit card companies can be quick to raise interest rates because of one late payment. A completely missed one is even more serious.
PAY WITH CASH
To avoid increasing debt load, make it a habit to pay for everything you purchase with cash. If you don't have the cash for it, you probably don't need it. You'll feel better about what you do have if you know it's owned free and clear.
SHOP WISELY, AND USE THE SAVINGS TO PAY DOWN YOUR DEBT
If your family is large enough to warrant it, invest $30 or $40 and join a store like Sam's or Costco--and use it. Shop there first, then at the grocery store. Change brands if you have to and swallow your pride. If you're concerned about buying organic, rest assured that even at places like Costco you will have many options. Use coupons religiously. Calculate the money you're saving and slap it on your debt.
Each of these steps, taken alone, probably doesn't seem like much, but if you adopt as many as you can, you'll watch your debt decrease every month. If you need help managing debt, please call for assistance.
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