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How to Evaluate Your Business Idea Before Diving In

They say that everybody has at least one good novel in them, and many people feel the same way about ideas for a successful business. If you are considering diving into the world of entrepreneurship, it’s a good idea to pause for a moment, take a deep breath, and let your head take over before your heart leads you astray. There’s certainly a chance that your business idea is a good one and you’ll be highly successful, but it’s a good idea to evaluate, research, and analyze before you quit your day job. Here are steps to follow to ensure that you’re proceeding with care and caution.

Know That You Have an Audience

When you have a great idea for a product or service, you generally come up with it because it reflects a need that you’ve experienced. But are you sure that you’re representative of a wider market? Have you confirmed that others feel the same need and that enough of them will spend money to address it?

Knowing who your audience is, how many of them there are and what they’re willing to spend on what you’re selling are all keys to predicting the viability of your business idea. Asking a few friends will not be enough to confirm your hunch. You need to conduct real market research, preferably with the help of experts, and ask them to determine whether you’ve properly identified a legitimate market. Combine their analysis with your own observations and those of the people around you, including those who have tested your product or service and those who are investing in you or advising you.

Having a lightbulb moment is inspiring, but it is essential that you understand who you’re selling to in order to gauge their legitimate interest. The demographic factors that you need to determine and verify include: age; geographic location; income level; gender; marital status; ethnicity; number of household members; occupation; and education.

It’s only once you know who you are selling to that you can begin to address the right way to do so. Identifying your target audience will also help you establish your potential market, your sales goals, the importance of any competition that might exist, and whether the market will bear another provider.

You should also consider assessing your product’s potential by submitting it for feedback from a focus group, survey, or similar market testing. Not only will this provide you with valuable information about how your product may be improved upon, but it will also provide clarity about your ideal client.

Know What You’re Up Against

Not only do you need to know who you’ll be selling to, you also need to know who is already out there, going after the clients that you want. There’s nothing wrong with a little competition and diversity in the market, but if it’s there you need to make sure that what you’re offering has something that sets it apart and makes it worthwhile for potential clients to switch.

You also want to know what the most compelling aspect of your competition’s product is so that you can work to meet or exceed what it delivers. Your goal is to set yourself apart in comparison to all others in a similar niche by establishing a unique selling proposition (USP), and then make sure that your potential buyers are well aware of that differentiating factor by broadcasting it constantly. To make sure that you’re conducting effective research on your competition, make sure that you’re doing the following:

Understand Exactly Who They Are and What They Are Selling: Knowing a competitor’s name and price point is not good enough. You need to fully understand what people like and dislike about their products or services, how clients are paying for it, what their pricing history and strategy has been, how they’ve marketed themselves, and what clients think of them. The more you know about what clients are and are not satisfied with in your competitor, the more effectively you can position yourself.
Assess Whether You’re Facing Direct or Indirect Competition: Knowing whether your potential clients are currently buying the exact same products from your competition, something slightly different, or entirely different but a good substitute can guide many of your marketing and sales decisions.
Know How You Stack Up Against the Competition: Once you understand who your competition is and what they’re offering, you need to take a look at your own offerings and determine what makes you better. Once you’ve identified your competitive advantage you can play to your own strengths, using it as the marketing hook around which you will build all of your branding and messaging.
List Strengths and Weaknesses, Then Use Them: A big part of market research on your competition is to make a list of what they do well and what they do poorly. You can identify their strengths and weaknesses by asking clients, assessing the product yourself, and searching online reviews. Emulate what they’re doing right and then improve on what has drawn complaints.
Consider Engaging with Your Competitor: In many cases, healthy competition is facilitated by reaching out and engaging with your competitor. Not only can you exchange helpful information on how best to distinguish yourself and your company, you may end up able to help one another in times of crisis, or even form a collaborative partnership.

You also may find it helpful to conduct a Strengths Weaknesses Opportunities Threats (SWOT) analysis, or a competitive analysis on others in your niche.

Is Your Business Idea Financially Feasible?

Once you’ve established the objective potential for your business’ success, you still need to determine whether you have the ability to move forward. To assess this, consider the following:

What are your startup costs going to be?
Do you have a source of funding?
Once you’re up and running, what will your expenses be?
How much do you expect to make from the business?
How long can you survive financially between startup and earning a profit?

These are among the most difficult questions, and the answers are often what stops a business idea in its tracks. Still, it is better to give thoughtful consideration to each of these issues before rushing headlong into an idea — no matter how good or exciting — that you simply cannot afford.

If following these steps gives you a strong sense of who you are selling to, who the competition is, and whether you can thrive and pursue your dream without driving yourself into debt, you can move forward with a sense of optimism and hope. If it leaves you with a sense that your great idea won’t deliver on its promise, it’s better to find out early than to experience the misery of watching your business dream fall apart.

If you want to discuss a business idea or have any questions, please reach out!

IRS Extends Individual Return Filing Date

Article Highlights:

IRS Announcement
Limited to Individual Tax Returns
Tax Due Payments
Further Extensions
2021 Estimated Tax Payments Not Extended

The IRS has announced they are extending the filing due date for 2020 individual tax returns from April 15, 2021 to May 17, 2021. This was meant to be a one-month extension, but since May 15 fell on Saturday it was extended to the next business day which is May 17, 2021.

This extension only applies to individual 1040 and the 1040-SR tax returns. It extends not only the filing deadline but also the payment of any tax due including self-employment tax. Thus penalties, interest and additions to tax for the individual returns will not begin to accrue on any remaining unpaid balances until after May 17, 2021.

The extension to May 17 is automatic. For additional time beyond May 17, a traditional extension can be filed any time before May 17 extending the due until October 15, 2021. As a reminder, the additional extension only extends the time to file, not the time pay any tax due. The extension requires an estimate of any remaining tax due to be paid with the extension.

Caution: The IRS did not extend the due of the first installment of the 2021 estimated tax payment which continues to be April 15, 2021.

Although it is not known at this time if all states with income taxes will also extend their deadlines, but it is anticipated they will.

Even though the IRS has extended the deadline, clients are encouraged to file as early as possible since many will be receiving refunds and others will need to file 2021 estimated tax payments by the original April 15, 2021 deadline.

Are You Subject to Self-Employment Tax?

Article Highlights:

Self-employed Individuals
Estimated Taxes
Self-Employment Tax
Estimated Tax Safe Harbors
1099-MISC and 1099-K
Others Subject to Self-employment Tax
income Not Subject to Self-employment Tax

Self-employed individuals, unlike employees, don’t have someone withholding Social Security or Medicare (FICA) taxes along with pre-payments toward their federal (and state, where applicable) income tax from their wages during the year.

They are not being paid a wage; instead, a self-employed individual must keep a set of books showing income and expenses associated with their self-employed business that will allow them to determine their taxable profits (or losses). While an employer and an employee each pay half of the FICA taxes due on an employee’s wages, a self-employed person pays 100% of these taxes, termed the self-employment tax or SE tax for short, on his or her self-employment profit. If the individual has more than one self-employment activity, the net profits and losses from all of the self-employment activities are combined to determine the amount of the SE tax. However, two spouses have self-employment income, the couple cannot combine their SE incomes when figuring their individual SE tax.

Estimated Taxes – Since self-employed taxpayers don’t have taxes withheld on their self-employment income, they need to pay estimated taxes quarterly based upon their taxable profits for the quarter and, after the first quarter of the year, taking into account prior quarterly profits and estimated taxes already paid for the year. These estimated taxes are paid with an IRS Form 1040-ES and include the taxpayer’s income and SE taxes. In lieu of filing Form 1040-ES and sending a check to the U.S. Treasury, the payments can be made online through the IRS’s website or by using the government’s Electronic Federal Tax Payment System (EFTPS), which allows payments to be scheduled up to a year in advance, by having payments automatically withdrawn from the individual’s bank account at specified dates. The payments are due April 15, June 15, September 15, and January 15. If the due date falls on a weekend day or legal holiday, the due date will be the next business day. And if you didn’t notice, the second “quarter” is two months, and the third one is four months: one of many quirks in our tax system.

Self-Employment Tax – All self-employed taxpayers who have more than $400 in net profit from their self-employment must pay self-employment tax, which is made up of Social Security tax of 12.4% on the first $132,900 (2019) of profit from the business and a 2.9% Medicare tax on all of the profits. In addition, there is an additional 0.9% Medicare tax to the extent the profits exceed $200,000 for single taxpayers, $250,000 for married taxpayers filing jointly, and $125,000 for married taxpayers filing separately. In addition, half of the self-employment tax can be deducted from gross income. There are special rules for determining the self-employment taxes for farmers and fishermen.

If a self-employed taxpayer pre-pays less than 90% of his or her current year’s tax liability, including Social Security and Medicare taxes for the year, then the taxpayer can be subject to a penalty that assesses interest on underpayments by the quarter.

Estimated-Tax Safe Harbors – However, rather than having to determine their quarterly profits and estimate their income tax and SE tax liabilities, some self-employed individuals instead opt to use a quarterly safe-harbor-payments method allowed by the IRS, which avoids the underpayment penalty if used correctly. There are two safe harbors available:

100% of the prior year’s tax liability paid evenly for each quarter, provided the prior year’s adjusted gross income was $150,000 or less ($75,000 if using the filing status of married filing separate).
110% of the prior year’s tax liability paid evenly for each quarter if the prior year’s adjusted gross income was greater than $150,000 ($75,000 if filing married filing separate).

The underpayment penalty does not apply if the final amount due on an individual’s tax return is less than $1,000. The penalty also does not apply if a taxpayer did not have a prior year tax liability for a full 12-month year.

One thing to consider when deciding whether or not to use the safe harbor method is that because the safe harbor estimates are not based on the current year’s profits, a self-employed individual could be in for an unexpected substantial tax liability at tax time. Or, if their current year’s income is significantly less than it was in the prior year, they could be overpaying their current year tax and be eligible for a large refund when they file their current-year return. If an overpayment results, all or part of it can be applied to the next year’s estimated taxes, instead of the taxpayer receiving a refund payment.

Also remember that tax pre-payments are not just based on the self-employment income and must factor in all other taxable income, including investment income, retirement income, the self-employed individual’s wages from other work, and a spouse’s wages or self-employment income, as well as account for withholding from other sources.

1099-MISC and 1099-K – Generally, a self-employed individual keeps track of his or her own income but may also receive one or more 1099-MISC forms issued by a customer showing the amount of self-employment income paid by the customer. If that income has already been accounted for in the business’s income records, it should not be included again. Also, beginning in 2021 for earnings received in 2020, Form 1099-NEC will be used in place of the 1099-MISC to report nonemployee compensation.

Self-employed individuals that take credit card payments for sales of their business products or services use third parties to settle the transaction and return payment to the self-employed individual. To combat fraud, the IRS requires all third-party network transactions to be reported on Form 1099-K if the amount is $20,000 or more and the number of transactions is 200 or more. Again, the sales should have already been included as income and should not be included a second time.

Others Subject to Self-Employment Tax – Besides self-employed individuals having to pay SE tax on their trade or business income, the SE tax also applies to other situations:

Member of the Clergy – A housing allowance paid to a member of the clergy is generally excludable from taxable income, but it is subject to self-employment tax.
Partnership Distributions – If a taxpayer is a general partner of a partnership that carries out a trade or business, his or her distributive share of the partnership’s income is self-employment income and subject to self-employment tax, as are guaranteed payments to partners.
Foreign Self-Employment Income – If a taxpayer qualifies for excluding foreign-earned self-employment income, the income is still subject to self-employment tax.
Agricultural Co-op Payments to Retired Farmers – Even when retired from daily farming activities, taxpayers who are still contractually obligated to supply an agricultural commodity to the agricultural cooperative of which they remain a member are considered to be in a trade or business of producing, marketing, processing, and selling the commodity. The “value-added” payments received from the co-op are subject to self-employment tax.
Director Fees – Fees received for the performance of services as a director of a corporation, including a director attending a meeting, are self-employment income and subject to self-employment tax.
Fishing Boat Crew Members – Members of a fishing boat crew are self-employed when they are compensated solely from the proceeds of the sale of the boat’s catch.
Executors and Administrators (Fiduciaries) – A person who administers the estate of a deceased person is subject to SE tax if (a) the person is a professional fiduciary or (b) the person is a nonprofessional fiduciary who manages an estate that includes an active trade or business or manages an estate that required extensive management activities over a long period of time.

Income Not Subject to Self-Employment Tax – Income from an occasional act or transaction, absent proof of efforts to continue those acts or transactions on a regular basis, isn’t income from self-employment subject to the self-employment tax. In addition, the following are some sources of income as well as individuals not subject to self-employment tax.

A shareholder’s portion of an S corporation’s taxable income.
Fees for the services of a notary public.
Non-resident aliens
The fiduciary of an estate on an isolated basis
Rents paid in crop shares
Real estate rental income
Statutory employees
A self-employed taxpayer’s child employee under the age of 18.

So just because a taxpayer receives a 1099-MISC (or 1099-NEC, beginning in 2021) does not mean that the taxpayer is subject to self-employment tax. If you need help preparing your books for your tax preparer to then figure your self-employment tax, please contact us.

It’s Official! Another Round of Stimulus Payments Approved by Congress

Article Highlights:

Economic Impact Payments
High-Income Taxpayer Phaseout
Reconciliation
Dependents
Decedents
Social Security Number Requirements
Non-Filers
IRS Information Sites

The American Rescue Plan Act has passed and includes a third much-anticipated economic impact payment (EIP). This is one of several government measures intended to help financially stressed citizens. This will be the third round of EIPs since the pandemic began disrupting the economy at the beginning of 2020, leaving many Americans without jobs or any way to support their families.

This round of EIPs will be:

$1,400 ($2,800 for joint filers), plus
$1,400 per dependent—unlike the prior payments, the payment will apply to all of a taxpayer’s dependents regardless of age.

Since the payments are meant for lower-income taxpayers, they will phase out for higher-income taxpayers. Thus, the payment amounts will phase out for taxpayers with adjusted gross incomes (AGI) between:

$150,000 and $160,000 for married taxpayers filing jointly;
$112,500 and $120,000 for head-of-household filers; and
$75,000 and $80,000 for all other filers.

The Treasury will make these payments automatically based on a taxpayer’s filing status, AGI, and claimed dependents on their 2019 return—or the 2020 return if it has been filed and processed by the IRS by the time the IRS generates the payments.

Example: Don and Shirley file jointly, have one dependent, and their 2019 AGI is $152,500 (they had not filed their 2020 return by the time the third round of EIPs were determined). Because their AGI is a quarter of the way through the phaseout range for joint filers, their EIP3 will be reduced by 25%. Here is the computation for their EIP3:

EIP for Don & Shirley: 2,800

EIP for their dependent 1,400

Total before phaseout 4,200

Phaseout (25%) <1,050>

Economic impact payment 3,150

Had Don and Shirley had an AGI of less than $150,000, their EIP would have been $4,200.

Had Don and Shirley had an AGI of $160,000 or more, their EIP would have been $0.

It is anticipated that the Treasury will begin issuing the EIP3s within a week after President Biden signs the American Rescue Plan Act into law.

Reconciliation – When taxpayers file their 2021 tax returns, they will need to reconcile the payments they received with the amounts they were entitled to based upon the 2021 tax return filing status, AGI and claimed dependents. If payments were less than what they were entitled to, the difference becomes a refundable tax credit on the 2021 tax return. Taxpayers who received more than they were entitled to are not required to repay any difference.

Example (continued) – Don and Shirley’s actual 2021 AGI ends up being $148,000, so none of the recovery rebate credit (RRC) has to be phased out because the AGI is less than $150,000. Therefore, they’ll be allowed $1,050 (the difference between $4,200 and the EIP3 they received of $3,150) as a refundable credit on their 2021 tax return.

Dependents – Dependents who file their own returns are not eligible for an EIP or the RRC.

Decedents – Individuals who died prior to January 1, 2021 will not be eligible for the EIP3 or RRC.

Social Security Number – A Social Security number is required for eligibility for filers and their dependents. An exception to the SSN requirement is if a dependent is adopted or placed for adoption and has an ATIN (adoption taxpayer identification number). The SSN has to have been issued by the Social Security Administration on or before the due date for filing the 2021 return.

Regulations – The Act specifies that the Treasury Secretary is to issue regulations or other guidance to ensure, to the maximum extent administratively practicable, that in determining the amount of the RRC, an individual is not taken into account more than once. This includes claims by different taxpayers and by reason of a change in joint return status or dependent status between the taxable year for which an advance refund amount is determined and the taxable year for which the RRC is determined.

Non-filers – An individual does not have to file a tax return to be eligible for the EIP. The Treasury has developed methods for directing payments to non-filers, such as Social Security recipients who don’t have other income. If you are a non-filer who received the two prior EIPs, you should automatically receive this third one. Although it may take a bit of time for the IRS to update their website to incorporate the recent changes, they provide a Non-Filer Tool on their website.

Following Up – You will be able to check on the status of your rebate using the “Get My Payment” feature on the IRS webpage.

Also, realize there may have been births, deaths, changes in dependents, marriages, separations, divorces, and income changes that can cause the rebate amounts to be different from expected or, in some cases, incorrect.

The IRS provides an extensive Q&A related to rebate issues and situations that may answer any questions related to your rebate once the information is updated for this third round of payments.