Posts by Mark Fearon, CPA:
- Investment Opportunities
Have you ever heard someone say they couldn’t afford to pay off their loan because they would lose the interest deduction on their tax return?
Although it’s true that the taxpayer will be able to deduct their loan interest at tax time, there’s a lot more to consider – read on to learn more about the tax treatment of loans and interest to identify a repayment strategy that works best for you.
It Is Worth It To Be In Debt?
Let’s assume that you are in the 25 percent tax bracket, which means that for every dollar you pay the bank in interest, the government will give you 25 cents back in tax savings. BUT – you have to remember that you are still out of pocket 75 cents of every dollar you pay the bank in interest. From an overall cash flow standpoint, that doesn’t really sound like a winning strategy to me.
Even though it would be nice to have a tax break to look forward to in the spring, you will ultimately end up paying more over the duration of your repayment period if you choose not to pay your loan off. That being said, if you have the funds available to pay off the principal loan balance you will save yourself the cost of the interest you are being charged by the bank.
Without the tax deduction, you will pay a little more in income taxes but you will be left with more money in your bank account at the end of the day.
Possible Reasons to Hold On To Your Loan
Let’s say your loan balance is $50,000. If you have $50,000 of excess funds available to pay off your loan, you may also want to consider what your investment options are if you didn’t pay that loan off. Could you earn a rate of return greater than the interest rate you are paying on your loan? If so, then you may be better off keeping the loan and investing your excess funds.
Another consideration is the liquidity. You may have the funds to pay off the loan but you may want to keep a reserve of funds for an emergency or unknown need that may arise. Everyone has their own comfort level when it comes to maintaining an excess supply of cash reserves and your decision may vary whether you are holding on to a home mortgage loan or a business loan. As a business owner, for example, you might find it to be more beneficial to keep the borrowed money readily available to cover any fluctuations pertaining to your company’s equipment or inventory needs. Or you may want to keep a reserve of funds to get through your slow season.
Depending on where you are with your business or personal finances, you’ll want to consider various factors when deciding if you should pay off your mortgage or business loan. If you are only looking at the tax savings, then paying off the loan is likely your best option. However, it may also be important to consider other factors such as alternative investment options and liquidity. If you have questions about paying off your loan, email your Rea advisor.
Are you looking for more tips and tax breaks to maintain your financial security? Check out these articles for more tips and advice.
As a small business owner, you probably find the end of the year a busy time. Before you know it, you find yourself into January trying to determine what the New Year will bring. One of the keys to being a successful business owner is taking a break from the day-to-day routine and spending some time doing valuable planning. This is sometimes referred to as working on your business, not just working in your business. To help you with this process, here are five things you should consider doing as a small business owner as you start the New Year. Read the rest of this entry “
When is the last time you talked to your accountant about your business’s entity type? If you’re like most business owners, it’s probably not something you regularly think about. Whether you are taxed at the corporate level as a C-corporation, or have a pass-through entity such as an S-corporation or a limited liability company (LLC), there have been plenty of changes in the tax laws recently to warrant at least considering your entity type. Read the rest of this entry “
As you have probably heard by now, starting Jan. 1, 2014, you will have to comply with the “pay or play” guidelines of the Affordable Care Act (ACA) if you have more than 50 employees. If you have anywhere near 50 or more employees, hopefully you are looking at the requirements and considering your options. If you have less than 50 employees, you may jump to the conclusion that the ACA will not impact you. Not so fast… Read the rest of this entry “
Do you plan to sell your business someday? Although you may not think of your business as a traditional retirement plan, it may be the largest asset you have to “cash in” upon retirement. There are many issues to consider when thinking about selling your business.
Timing of Business Sales
One of the first things a potential buyer is going to ask for is historical financial statements. If your most recent financial statements show healthy profits, you are more likely to be able to justify a larger selling price than trying to sell your business after several less profitable years.
Current developments in your industry may also impact the timing of when you want to sell your business. Do you anticipate new government regulations that could impact your business? Or is there a trend of consolidations in your industry? If so, this may increase the value of your business.
Do you process your own payroll? If so, do you ever find it challenging to stay current on the filing and payment of your payroll taxes? If so you are not alone. In 2008, the Government Accountability Office estimated that 1.6 million businesses are behind on paying their payroll taxes. It estimates that collectively, these businesses owe approximately $58 billion in payroll taxes. And, the recession may have made those delinquent tax numbers even worse. Read the rest of this entry “
The Ohio Bureau of Worker’s Compensation’s board of directors recently approved a four percent reduction in workers’ compensation base rates for private employers. The new rate became effective July 1, and will result in a collective cut in premiums of around $65 million for Ohio businesses. The new rates will be reflected in the next BWC payroll report. Read the rest of this entry “
The U.S. Small Business Administration (SBA) is accepting currently accepting applications for a commercial mortgage refinancing program that was created as part of the Small Business Jobs Act. Read the rest of this entry “
May 16-20 is National Small Business Week, and several organizations are providing materials, events and other tools to help small businesses. Read the rest of this entry “
In your next IRS audit, don’t be surprised if the agent requests a copy of your QuickBooks files instead of your printed general ledger. The agency has purchased 1,100 user license agreements for the software program and recently completed training its agents on the software. The IRS can also accept Peachtree accounting software files. Read the rest of this entry “
On April 2, the Federal Trade Commission implemented new rules that require websites advertising free reports to direct consumers to the government-approved www.annualcreditreport.com. On September 1, television and radio ads must do the same. Read the rest of this entry “
If your small business or not-for-profit pays at least half the cost of single coverage for employees, it could be eligible for a tax credit of up to 35 percent of the premiums it pays in 2010. Read the rest of this entry “