Six Credit Score Myths You Need to Know

If you’re like most people, you know the basics of what a credit score is for and how it works. Your score is a make-or-break determinant of whether you qualify for a loan and there are key things to know, and to avoid, concerning your score. Let’s debunk a few of the myths around credit scoring to put control in your hands, and avoid any potential harm to your score.

CREDIT MYTH #1: There’s only one credit score

There are actually thousands of formulas for calculating credit. Depending on what score your potential lender uses, your score could vary. However, FICO scores are most common, and widely available online.

CREDIT MYTH #2: Checking your credit score can lower your score

Only hard inquiries from lenders can lower your score. When you check your credit score, there is no impact on your credit. Hard inquiries, however, are flags on your account when a lender accesses your credit history, and can lower your score because it indicates you may be increasing the amount of your credit. Do this too often and you can be seen as a risk to financial institutions.

CREDIT MYTH #3: Lowering your debt will immediately raise your score

It depends on the type of debt you pay off, and your credit limits. Paying off debt is important, and often high debt can result in a lower score. Keeping your credit card balances low, for example, can help to keep your score high.

CREDIT MYTH #4: Your job impacts your score

The job you have and how much money you make a month has no direct impact on your credit score. However, the bank or loan company may want to see your proof of employment and a few paystubs to ensure that you have a steady source of income. This can help people who are building their credit score by proving they have the funds available to pay off the loan.

CREDIT MYTH #5: Closing your credit cards will raise your score

Potential lenders are more concerned with how much credit you are using rather than how much you could be using. Closing a credit card could actually lower your score because it decreases the amount of credit you have. Remember, your credit score is all about giving lenders a blueprint for how you manage your money. If you have nothing to show them, they can’t draw up a plan.

As a leading accounting services firm in Cincinnati, Donohoo Accounting Services strives to make our clients feel comfortable discussing their tax situation and finances. Still have questions about your credit score, and how you can improve it? Let’s get you on track! Contact us today or give us a call at 513-528-3982 to schedule a free consultation! For more tips and our latest updates, check us out on Facebook, Twitter or LinkedIn!

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Four Important Tax Tips for Nonprofits

As the close of the calendar year approaches, it may seem to be too early to start thinking about tax season. On the other hand, now may be the best time for nonprofit leaders to begin gathering the advice – and the documents – that they’ll need to maintain their organization’s tax-exempt status for 2021. These four important tips will help to get you on the right track:

Know Your Forms

Even though tax-exempt organizations don’t file taxes, most (except religious and political nonprofits) are required to annually file what’s known as a 990. However, there are four different IRS Form 990s. Which form your organization completes depends on its size in terms of its assets, gross receipts and funding sources.

  • Form 990-N (now only filed electronically) is for nonprofits that take in less than $50,000 from public sources over the course of the year. The form’s eight questions make it quick and easy to file.
  • Your nonprofit will file Form 990EZ only if it had less than $200,000 in gross receipts from public sources or it has a total of less than $500,000 in assets.
  • If your nonprofit is a non-public tax-exempt organization, such as a private foundation that uses the resources of an endowment or other privately-funded sources, then 990-PF is the required IRS filing.
  • Finally, IRS Form 990 is the form for large, established nonprofits that had $200,000 or more in gross receipts throughout the year, or if its assets total $500,000 or more.

Maintain Good Records

Having accurate records of your nonprofit’s finances are, of course, important to have throughout the year, as well as at tax time. But they aren’t the only records necessary for filing your 990. It’s also important to maintain detailed records of the organization’s structure, its board members, salaries paid, and its departmental and programming budgets.

Depending on the organization’s make-up, you may be required to file additional schedules with your 990. In addition to having this information accessible at tax time, prospective donors will appreciate your nonprofit’s transparency if it’s also available when they’re researching organizations worthy of their contributions.

Do a Double-Take

Because your annual 990 tax filing is essentially an application to retain your organization’s tax-exempt status, submitting an incomplete or incorrectly completed form may result in penalties, rejection or denial of its nonprofit standing. That’s why having someone check your work – and especially, to verify the accuracy of your records – is so vitally important.

Trust a Professional

Although software, websites and well-meaning individuals may be available to walk you through the process of completing your nonprofit’s Form 990, consider hiring a tax professional to do the job. Working with a tax professional not only saves time, but it also may save you the headache of re-filing in the new year. Donohoo Accounting Service is prepared to answer your questions before, during and after the tax-filing season. Talk with one of our accountants or schedule an appointment today by calling 513-528-3982 or contacting us via our website. Check us out on Facebook, Twitter or LinkedIn for our latest updates!

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6 Common Mistakes Business Owners Make on Their Taxes

Filing your small business’s tax return may be a dreaded task you’re tempted to put off until April 14, but we advise that you don’t. That’s because mistakes are made when you’re in a rush, resulting in interest charges, penalties or unwanted attention from the IRS. Mistakes can be avoided by being prepared and planning ahead. Here are the 6 most common tax mistakes business owners make:

Mistake #1: Filing late

It’s important to file your taxes on time to avoid a 5 percent per month penalty by the IRS (that increases until the return is filed), a 6 percent interest penalty and a late payment penalty. You can request a filing extension, but you will still need to pay a portion by the original due date. It’s better to avoid the headache, be organized and file on time.

Mistake #2: Not paying estimated taxes during the year

If you are a sole proprietor, S corporation, are self-employed or a partner and you expect to owe $1,000 or more when you file a return, you are required to make estimated tax payments throughout the year. The same is true if you are a corporation expecting to owe $500 or more in taxes.

Mistake #3: Not having organized, visible financials

Using Excel to track your income, expenses and receipts might suffice when you are first starting out, but once you get bigger you will need a program that is more robust. Your financials need to be up-to-date, accurate and all in one place so you can make good tax and cash decisions.

Mistake #4: Intermingling personal and business expenses

It’s important to keep your business expenses separate from your personal ones. You can do this by having a separate bank account and credit card for your business, and always use your business credit card for business expenses. Even if you purchase both personal and business items at an office supply store, use different credit cards to pay for them so you can keep those expenses separate.

Mistake #5: Not tracking expenses

Throughout the year you need to save receipts, log the business miles you put on your car and track your expense categories. Did you know that only 50 percent of certain business meals are deductible? Platforms like QuickBooks and Freshbooks can help you keep track of expenses, and apps like MileIQ can track your business mileage.

Mistake #6: Not getting professional help

It may be tempting to save money and do everything yourself, but unless you know what you are doing, it could cost you time, money and headaches in the end. Consider consulting with a bookkeeper or accountant throughout the year to make sure you have good processes in place come tax season.

Donohoo Accounting Services has more than 20 years of experience helping clients with their tax and financial issues. Advising small businesses on their taxes is what we do best. If you have any questions about preparing your taxes or would like to know more about the services we provide, please call us at 513-528-3982 for a free consultation.

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Do You Qualify for a Home Office Deduction?

If you worked from home pre-COVID or have landed a home office job since quarantine, you may be wondering if you qualify for a home office deduction on your taxes. Tax season will be here before we know it, so it’s not too soon to be thinking about these types of deductions.

The answer is maybe. Eligibility rules can be confusing, but here are some boxes you need to check to qualify:

You’re NOT a W-2 employee

Being a W-2 employee means you work for someone else who withholds income, Medicare taxes and Social Security from your paycheck. W-2 employees are NOT eligible for home office deductions.

If you are self-employed, a contract worker/freelancer, or are a 1099 employee, you may qualify for this deduction.

You have a designated workspace

The IRS says home office expenses can be deducted when the home office space is used exclusively for conducting business. A spare bedroom, room, or a nook in your basement would count. It doesn’t have to be a completely separate room and you don’t need to construct permanent partitions, but it does need to be a “separately identifiable space.” Consider arranging furniture to mark your office boundaries, or use a panel room divider, a bookcase or even a curtain.

Your space is used regularly and exclusively for work

In order to qualify, the space must be regularly used for business, and not a shared space for your personal tasks. That rules out your kitchen table. Spaces that are used only occasionally or incidentally for business don’t count either.

It’s your principal place of business

If you meet with patients, clients or customers outside of your home, your home office could still qualify if you use the space exclusively and regularly for invoicing, scheduling and other business-related tasks.

A freestanding structure on your property could also be a deduction if you have a studio, garage or barn that you work out of. If you use part of a large room in your home as your dedicated workspace you could deduct it if you figured out the percentage of your home this space accounts for.

You can calculate your home office deduction using the regular method or the simplified method.

The regular method considers the actual expenses of your home office — such as mortgage interest, insurance, repairs, depreciation, insurance and utilities — as a percentage of your whole house. The simplified option allows the qualified taxpayer to determine actual expenses by multiplying a prescribed rate by the square footage of the office space.

Donohoo Accounting Services knows that determining your eligibility for a home office deduction is confusing. We are here to help you understand the IRS rules, how they apply to you and which calculation method to use. With more than 20 years of experience in the business, we can help you find every deduction possible to reduce your tax burden. Give us a call today at 513-528-3982 for a free consultation.

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