Second quarter Individual & S Corporation Estimates are due
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Know This Number!
Knowing your net worth and understanding how it is changing over time is one of the most important financial concepts that everyone needs to understand. This number is used by banks, mortgage companies, insurance companies and you! Your net worth impacts your credit score, which in turn impacts your interest rates and things as mundane as the amount you pay for auto insurance.
A simple definition
Net worth is the result of taking all the things you own (assets) minus what you owe others (debts and liabilities).
Assets include cash, bank account balances, investments, your home, vehicles or anything else that you could sell today for cash. Assets also include any businesses or business interests you own.
Liabilities are what you owe others, such as a mortgage or car loan, and any other debt, like credit card or student loan debt.
Your net worth changes over time, reflecting how you spend your money. For example, if you have tons of bills and spend more than you bring in, your bank account balances will be lower. If you spend a lot on your credit cards, your debt will go up. The net effect is a lower net worth.
Everyone has a net worth
Yes, everyone. Even a 6-year-old with money in their piggy bank has a net worth. If your child is saving up for a bike, they will convert one asset (cash) into another asset (their new bike)!
Calculating your net worth
Step one. Reconcile your bank accounts and loans. Try doing this every month, as these are the easiest parts of your net worth to track and calculate.
Step two. Calculate the value of all your remaining assets. For some of your assets, such as stocks, you can go online and find the current value of the stocks you own. For other assets, you’ll have to estimate what you could sell that asset for today.
Step three. Add up all your asset values, then subtract all your debts. What you’re left with is your net worth (and yes, your number could be negative)!
Why you should know your net worth
Knowing your net worth contributes to the big picture of your financial circumstances. Here’s why it’s beneficial to know your net worth:
You want to apply for student loans. You’ll likely need to submit an application that details all your cash and other assets when applying for student loans. If your net worth is high enough, you may have to foot some of the tuition bill yourself.
You want to get insurance. Some types of insurance use your credit score as part of the calculation for determining your premium payments. Knowing if you have a high net worth may help in obtaining a favorable premium amount.
You want to diversify your investments. Certain investments are available only to individuals who have a high enough net worth.
You want to buy a home. Banks want to see that you have plenty of cash when compared to your debts. If you have too much debt, you may need to either pay down the debt or increase your down payment.
Knowing your net worth and how to calculate it can help you achieve some of your financial goals. Please call if you’d like help calculating and understanding your net worth.
The Hidden Tax Consequences of Cryptocurrency
You may recognize the name Bitcoin and maybe even Ethereum, but what about Litecoin, Dogecoin or Ripple?
These are just some of the more than 4,500 cryptocurrencies available today. There are hidden tax complications, however, associated with every cryptocurrency transaction. Here’s what you need to know.
Every transaction has a tax consequence. The IRS treats cryptocurrency as investment property, like stock, and taxes every transaction as a capital gain or loss. When you pay for something in the traditional manner with U.S. dollars, the IRS doesn’t care what the value of the dollar is at the time of the transaction. For virtual currency purposes, however, the value matters. For example, assume you buy Bitcoin for $10 and two months later the market value of that Bitcoin grows to $15 and you spend that $15 worth of Bitcoin to buy something, you’ll have a $5 taxable short-term gain that needs to be reported on your tax return. If you spend a lot of cryptocurrency, tracking the gains and losses can be very complicated.
Big gains mean big taxes, but big losses may be limited. In classic IRS form, there is no cap on the amount of taxes you might owe in a single year for gains on the value of cryptocurrencies you sell, while losses might take many years to recoup because of the annual $3,000 loss limit against income. Adding to the complexity, virtual currencies have dramatic valuation changes…much more so than most traditional investment securities. So you will need to budget appropriately for the taxes you’ll owe whenever you use or sell cryptocurrencies.
Cryptocurrency puts you on the IRS’s radar. Being relatively new, virtual currency has caused the IRS to become very concerned about potential mistakes and fraud related to how cryptocurrency is reported on tax returns. The IRS is so concerned about you not reporting cryptocurrency activity that the very first question of your tax return, right beneath where you put your name and address, asks if you took part in any virtual currency transactions over the past year.
You are responsible for bookkeeping. With the IRS watching so closely, it’s important to be accurate with your recordkeeping so you can properly report all virtual currency gains and losses on your tax return and substantiate all your transactions in the event of an audit.
Ideas to Identify and Manage Problem Accounts
As a small business, once you decide to extend credit to a customer, you now have a financial stake in continuing that relationship even if you suspect there might be trouble brewing. While you don’t want to crack down on a good customer too hard, too soon, you also don’t want to be taken advantage of by a customer who has become unable or unwilling to pay. Here are some ideas to help you manage this risk.
Develop a rating system. Score each customer with a number. The number represents to whom you will sell on credit and how much risk you are willing to take. Also have scores that represent customers you will not bill and those who you will no longer take orders from because of credit risk. Develop a system to objectively assign the score. Payment history and external credit scoring reports are both good indicators of whether a particular customer will be an acceptable credit risk.
Consider credit applications. Create a simple credit application. The application should be signed by the responsible party to pay the bill. If large credit amounts are expected, get a person to take personal responsibility to pay the bill. This will provide an additional means to collect your money should the company fail to pay. You will need this signed document if you wish to use a collection agency to collect delinquent accounts.
Look at history. Those to whom you provide a credit line must have their payment history monitored. If they are habitually late payers, reduce their credit line. If they frequently miss payments, move them to prepay only.
Create a notes section on your customer records. Use this to record what a late paying customer tells you. Over time, this will reveal the customers who are honest and the customers who fail that test. This idea also provides continuity of communication for the customer that tries to tell different employees different stories.
Develop a collection system. The best credit rating system starts with a receivable aging report run once a month. This will quickly show you current trouble customers and potential trouble customers. When a bill ages through the report, know what you are going to do to collect bills at 30 days, 60 days, 90 days and anything older than that.
Look for other signs of trouble. Train your team to be on alert for:
Customers paying smaller invoices while larger invoices go unpaid.
The customer fails to return your phone calls or shows annoyance at your inquiries.
Your requests for information, such as updated financial statements, are ignored.
The customer places multiple, large orders and presses you for a higher credit limit.
The customer tries to coax you into providing a good credit report to another supplier.
You get word that the customer’s credit rating has been downgraded.
Remember, great customers can have sincere problems paying a bill. By having a good credit rating system, you can more readily identify the customers you want to accommodate to pay their bills and those customers whose activity should be suspended because they are truly problem accounts.
As always, should you have any questions or concerns regarding your tax situation please feel free to call.