Does your business require real estate for its operations? Or do you hold property titled under your business’s name? It might be worth reconsidering this strategy. With long-term tax, liability and estate planning advantages, separating real estate ownership from the business may be a wise choice.
Businesses that are formed as C corporations treat real estate assets as they do equipment, inventory and other business assets. Any expenses related to owning the assets appear as ordinary expenses on their income statements and are generally tax deductible in the year they’re incurred.
However, when the business sells the real estate, the profits are taxed twice — at the corporate level and at the owner’s individual level when a distribution is made. Double taxation is avoidable, though. If ownership of the real estate is transferred to a pass-through entity instead, the profit upon sale will be taxed only at the individual level.
Separating your business ownership from its real estate also provides an effective way to protect the real estate from creditors and other claimants. For example, if your business is sued and found liable, a plaintiff may go after all of its assets, including real estate held in its name. But plaintiffs can’t touch property owned by another entity.
The strategy also can pay off if your business is forced to file for bankruptcy. Creditors generally can’t recover real estate owned separately unless it’s been pledged as collateral for credit taken out by the business.
Separating real estate from a business may give you some estate planning options, too. For example, if the company is a family business but all members of the next generation aren’t interested in actively participating, separating property gives you an extra asset to distribute. You could bequest the business to one member and the real estate to another.
If you’re interested in this strategy, the business can transfer ownership of the real estate and then the transferee can lease it back to the company. Who should own the real estate? One option: The business owner can purchase the real estate from the business and hold title in his or her name. One concern though, is that it’s not only the property that’ll transfer to the owner but also any liabilities related to it.
In addition, any liability related to the property itself may inadvertently put the business at risk. If, for example, a client suffers an injury on the property and a lawsuit ensues, the property owner’s other assets (including the interest in the business) could be in jeopardy.
An alternative is to transfer the property to a separate legal entity formed to hold the title, typically a limited liability company (LLC) or limited liability partnership (LLP). With a pass-through structure, any expenses related to the real estate will flow through to your individual tax return and offset the rental income.
An LLC is more commonly used to transfer real estate. It’s simple to set up and requires only one member. LLPs require at least two partners and aren’t permitted in every state. Some states restrict them to certain types of businesses and impose other restrictions.
It isn’t always advisable to separate the ownership of a business from its real estate. If it’s a valuable move, the right approach will depend on your individual circumstances. Contact us to help determine the best way to minimize your transfer costs and capital gains taxes while maximizing other potential benefits.
© 2024
As a small business owner, looking ahead and planning for the future can feel overwhelming, especially when there are so many day-to-day challenges. But with the right forecasting tools, predicting what’s next for your business doesn’t have to be complicated. Forecasting can help you plan for growth, manage expenses, and make smarter decisions based on where your business is headed.
So, what exactly is forecasting? At its core, it’s about using information from the past and present to make educated guesses about the future. Whether you’re deciding how much inventory to buy, when to hire new staff, or how to handle cash flow, forecasting is the tool that can help you make those calls with confidence.
Here’s a simple guide to some basic forecasting techniques and how to use them to keep your business on track.
The easiest way to start forecasting is by looking at what’s already happened in your business. By analyzing past sales, expenses, and seasonal trends, you can see patterns that will help you make future predictions. For example:
This kind of forecasting is often called time series forecasting. It involves looking at trends over time and using those to make predictions.
A great way to smooth out fluctuations in your data is by using something called a moving average. This method takes the average of a few recent periods (say, the last three months) to give you a clearer picture of your trend.
Here’s how it works: instead of reacting to every little up or down in your sales, you focus on the average over time, which helps you avoid panic over short-term dips and plan for long-term growth.
For example, if your sales have fluctuated over the last six months, calculating the moving average can help smooth those peaks and valleys so you have a clearer idea of where your business is actually headed.
Sometimes, you don’t have enough historical data to make accurate predictions—especially if you’re launching a new product or entering a new market. This is where qualitative forecasting comes in. Essentially, it means leaning on the expertise of others—whether it’s your employees, industry experts, or even customer surveys—to get a better idea of what’s coming.
This method isn’t about crunching numbers. It’s more about gathering wisdom from people who understand your industry and can offer informed opinions. For example, if you’re opening a second location, you might talk to other business owners who’ve done something similar to understand the challenges and opportunities ahead.
Scenario planning is about imagining different futures for your business and planning for each one. It’s like playing out different “what if” situations and thinking about how to handle them. What if the economy slows down? What if your biggest supplier goes out of business? By thinking through these possibilities, you can prepare for them before they happen.
For example, let’s say your business relies on one major client. A scenario plan could explore what might happen if that client left. Would you have enough cash reserves to cover the gap? Could you expand your marketing efforts to attract new clients in a pinch? Thinking ahead like this helps you stay flexible and ready for the future.
The best forecasts often come from using more than one technique. For instance, combining time series forecasting with qualitative methods can give you a more rounded view of your business’s future. While the numbers can give you solid data, expert opinions, and scenario planning provide the context and insight that numbers can’t always offer.
Incorporating these forecasting techniques into your business planning helps you make decisions from a place of confidence rather than guesswork. When you know where your business is headed, you can plan for things like:
While forecasting can’t predict the future perfectly, it’s a tool that keeps you one step ahead. The more you do it, the better you’ll get at spotting trends and responding to changes in your business.
Forecasting might initially seem intimidating, but you don’t have to tackle it alone. A CPA or financial advisor can help you analyze your data, choose the right forecasting techniques, and ensure your numbers add up. They can also guide you in making smarter financial decisions based on the information you gather. So, whether you’re just starting out or looking to grow, reach out to a CPA for advice on how to use forecasting to your advantage.
Here are some of the key tax-related deadlines affecting businesses and other employers during the fourth quarter of 2024. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.
Note: Certain tax-filing and tax-payment deadlines may be postponed for taxpayers who reside in or have a business in a federally declared disaster area.
Contact us if you’d like more information about the filing requirements and to ensure you’re meeting all applicable deadlines.
© 2024
Working from home has become increasingly common. The U.S. Bureau of Labor Statistics (BLS) reports that about one out of five workers conducts business from home for pay. The numbers are even higher in certain occupational groups. About one in three people in management, professional and related occupations works from home.
If you work from a home office, you probably want to know: Can I get a tax deduction for the related expenses? It depends on whether you’re employed or in business for yourself.
Business owners working from home or entrepreneurs with home-based side gigs may qualify for valuable home office deductions. Conversely, employees can’t deduct home office expenses under current federal tax law.
To qualify for a deduction, you must use at least part of your home regularly and exclusively as either:
In addition, you may be able to claim deductions for maintaining a separate structure — such as a garage — where you store products or tools used solely for business purposes.
Notably, “regular and exclusive” use means consistently using a specific, identifiable area in your home for business. However, incidental or occasional personal use won’t necessarily disqualify you.
Why don’t people who work remotely from home as employees get tax deductions right now? Previously, people who itemized deductions could claim home office expenses as miscellaneous deductions if the arrangement was for the convenience of their employers.
However, the Tax Cuts and Jobs Act suspended miscellaneous expense deductions for 2018 through 2025. So, employees currently get no tax benefit if they work from home. On the other hand, self-employed individuals still may qualify if they meet the tax law requirements.
If you qualify, you can write off the total amount of your direct expenses and a proportionate amount of your indirect expenses based on the percentage of business use of your home.
Indirect expenses include:
Note: Mortgage interest and property taxes may already be deductible if you itemize deductions. If you claim a portion of these expenses as home office expenses, the remainder is deductible on your personal tax return. But you can’t deduct the same amount twice — once as a home office expense and again as a personal deduction.
Typically, the percentage of business use is determined by the square footage of your home office. For instance, if you have a 3,000 square-foot home and use a room with 300 square feet as your office, the applicable percentage is 10%. Alternatively, you may use any other reasonable method for determining this percentage, such as a percentage based on the number of comparably sized rooms in the home.
Keeping track of indirect expenses is time-consuming. Some taxpayers prefer to take advantage of a simplified method of deducting home office expenses. Instead of deducting actual expenses, you can claim a deduction equal to $5 per square foot for the area used as an office, up to a maximum of $1,500 for the year. Although this method takes less time than tracking actual expenses, it generally results in a significantly lower deduction.
Keep in mind that if you claim home office deductions, you may be in for a tax surprise when you sell your home.
If you eventually sell your principal residence, you may qualify for a tax exclusion of up to $250,000 of gain for single filers ($500,000 for married couples who file jointly). But you must recapture the depreciation attributable to a home office after May 6, 1997.
Don’t hesitate to contact us. We can address questions about writing off home office expenses and the tax implications when you sell your home.
© 2024
With Labor Day in the rearview mirror, it’s time to take proactive steps that may help lower your small business’s taxes for this year and next. The strategy of deferring income and accelerating deductions to minimize taxes can be effective for most businesses, as is the approach of bunching deductible expenses into this year or next to maximize their tax value.
Do you expect to be in a higher tax bracket next year? If so, then opposite strategies may produce better results. For example, you could pull income into 2024 to be taxed at lower rates, and defer deductible expenses until 2025, when they can be claimed to offset higher-taxed income.
Here are some other ideas that may help you save tax dollars if you act soon.
Make sure you make the last two estimated tax payments to avoid penalties. The third quarter payment for 2024 is due on September 16, 2024, and the fourth quarter payment is due on January 15, 2025.
Taxpayers other than corporations may be entitled to a deduction of up to 20% of their qualified business income (QBI). For 2024, if taxable income exceeds $383,900 for married couples filing jointly (half that amount for other taxpayers), the deduction may be limited based on whether the taxpayer is engaged in a service-type business (such as law, health or consulting), the amount of W-2 wages paid by the business, and/or the unadjusted basis of qualified property (such as machinery and equipment) held by the business. The limitations are phased in.
Taxpayers may be able to salvage some or all of the QBI deduction (or be subject to a smaller deduction phaseout) by deferring income or accelerating deductions to keep income under the dollar thresholds. You also may be able increase the deduction by increasing W-2 wages before year end. The rules are complex, so consult us before acting.
More small businesses are able to use the cash (rather than the accrual) method of accounting for federal tax purposes than were allowed to do so in previous years. To qualify as a small business under current law, a taxpayer must (among other requirements) satisfy a gross receipts test. For 2024, it’s satisfied if, during the three prior tax years, average annual gross receipts don’t exceed $30 million. Cash method taxpayers may find it easier to defer income by holding off on billing until next year, paying bills early or making certain prepayments.
Consider making expenditures that qualify for the Section 179 expensing option. For 2024, the expensing limit is $1.22 million, and the investment ceiling limit is $3.05 million. Expensing is generally available for most depreciable property (other than buildings) including equipment, off-the-shelf computer software, interior improvements to a building, HVAC and security systems.
The high dollar ceilings mean that many small and midsize businesses will be able to currently deduct most or all of their outlays for machinery and equipment. What’s more, the deduction isn’t prorated for the time an asset is in service during the year. Even if you place eligible property in service by the last days of 2024, you can claim a full deduction for the year.
For 2024, businesses also can generally claim a 60% bonus first-year depreciation deduction for qualified improvement property and machinery and equipment bought new or used, if purchased and placed in service this year. As with the Sec. 179 deduction, the write-off is available even if qualifying assets are only in service for a few days in 2024.
These are just some year-end strategies that may help you save taxes. Contact us to customize a plan that works for you. In addition, it’s important to stay informed about any changes that could affect your business’s taxes. In the next couple years, tax laws will be changing. Many tax breaks, including the QBI deduction, are scheduled to expire at the end of 2025. Plus, the outcome of the presidential and congressional elections could result in new or repealed tax breaks.
© 2024
Choosing the right business entity is a key decision for any business. The entity you pick can affect your tax bill, your personal liability and other issues. For many businesses, a limited liability company (LLC) is an attractive choice. It can be structured to resemble a corporation for owner liability purposes and a partnership for federal tax purposes. This duality may provide the owners with several benefits.
Like the shareholders of a corporation, the owners of an LLC (called members rather than shareholders or partners) generally aren’t liable for business debts except to the extent of their investment. Therefore, an owner can operate a business with the security of knowing that personal assets (such as a home or individual investment account) are protected from the entity’s creditors. This protection is far greater than that afforded by partnerships. In a partnership, the general partners are personally liable for the debts of the business. Even limited partners, if they actively participate in managing the business, can have personal liability.
LLC owners can elect, under the “check-the-box rules,” to have the entity treated as a partnership for federal tax purposes. This can provide crucial benefits to the owners. For example, partnership earnings aren’t subject to an entity-level tax. Instead, they “flow through” to the owners in proportion to the owners’ respective interests in the profits and are reported on the owners’ individual returns and taxed only once. To the extent the income passed through to you is qualified business income (QBI), you’ll be eligible to take the QBI deduction, subject to various limitations.
In addition, since you’re actively managing the business, you can deduct on your individual tax return your ratable shares of any losses the business generates. This, in effect, allows you to shelter other income that you (and your spouse, if you’re married) may have.
An LLC that’s taxable as a partnership can provide special allocations of tax benefits to specific partners. This can be an important reason for using an LLC over an S corporation (a form of business that provides tax treatment that’s similar to a partnership). Another reason for using an LLC over an S corporation is that LLCs aren’t subject to the restrictions the federal tax code imposes on S corporations regarding the number of owners and the types of ownership interests that may be issued. (For example, an S corp can’t have more than 100 shareholders and can only have one class of stock.)
To sum up, an LLC can give you protection from creditors while providing the benefits of taxation as a partnership. Be aware that the LLC structure is allowed by state statute, and states may use different regulations. Contact us to discuss in more detail how use of an LLC or another option might benefit you and the other owners.
© 2024
Partnerships are often used for business and investment activities. So are multi-member LLCs that are treated as partnerships for tax purposes. A major reason is that these entities offer federal income tax advantages, the most important of which is pass-through taxation. They also must follow some special and sometimes complicated federal income tax rules.
A partnership is governed by a partnership agreement, which specifies the rights and obligations of the entity and its partners. Similarly, an LLC is governed by an operating agreement, which specifies the rights and obligations of the entity and its members. These governing documents should address certain tax-related issues. Here are some key points when creating partnership and LLC governing documents.
The tax numbers of a partnership are allocated to the partners. The entity issues an annual Schedule K-1 to each partner to report his or her share of the partnership’s tax numbers for the year. The partnership itself doesn’t pay federal income tax. This arrangement is called pass-through taxation, because the tax numbers from the partnership’s operations are passed through to the partners who then take them into account on their own tax returns (Form 1040 for individual partners).
Partners can deduct partnership losses passed through to them, subject to various federal income tax limitations such as the passive loss rules.
Partnerships are allowed to make special tax allocations. This is an allocation of partnership loss, deduction, income or gain among the partners that’s disproportionate to the partners’ overall ownership interests. The best measure of a partner’s overall ownership interest is the partner’s stated interest in the entity’s distributions and capital, as specified in the partnership agreement. An example of a special tax allocation is when a 50% high-tax-bracket partner is allocated 80% of the partnership’s depreciation deductions while the 50% low-tax-bracket partner is allocated only 20% of the depreciation deductions.
Any special tax allocations should be set forth in the partnership agreement. However, to make valid special tax allocations, you must comply with complicated rules in IRS regulations.
Partners must recognize taxable income for their allocations of partnership income and gains — whether those income and gains are distributed as cash to the partners or not. Therefore, a common partnership agreement provision is one that calls for the partnership to make cash distributions to help partners cover their partnership-related tax liabilities. Of course, those liabilities will vary, depending on the partners’ specific tax circumstances. The partnership agreement should specify the protocols that will be used to calculate distributions intended to help cover partnership-related tax bills.
For instance, the protocol for long-term capital gains might call for distributions equal to 15% or 20% of each partner’s allocation of the gains.
Such distributions may be paid out in early April of each year to help cover partners’ tax liabilities from their allocations of income and gains from the previous year.
Contact us for assistance
When putting together a partnership or LLC deal, tax issues should be addressed in the agreement. Contact us to be involved in the process.
© 2024
Get ready: The upcoming presidential and congressional elections may significantly alter the tax landscape for businesses in the United States. The reason has to do with a tax law that’s scheduled to expire in about 17 months and how politicians in Washington would like to handle it.
The Tax Cuts and Jobs Act (TCJA), which generally took effect in 2018, made extensive changes to small business taxes. Many of its provisions are set to expire on December 31, 2025.
As we get closer to the law sunsetting, you may be concerned about the future federal tax bill of your business. The impact isn’t clear because the Democrats and Republicans have different views about how to approach the various provisions in the TCJA.
The TCJA cut the maximum corporate tax rate from 35% to 21%. It also lowered rates for individual taxpayers involved in noncorporate pass-through entities, including S corporations and partnerships, as well as from sole proprietorships. The highest rate today is 37%, down from 39.6% before the TCJA became effective.
But while the individual rate cuts expire in 2025, the law made the corporate tax cut “permanent.” (In other words, there’s no scheduled expiration date. However, tax legislation could still raise or lower the corporate tax rate.)
In addition to lowering rates, the TCJA affects tax law in many other ways. For small business owners, one of the most significant changes is the potential expiration of the Section 199A qualified business income (QBI) deduction. This is the write-off for up to 20% of QBI from noncorporate entities.
Another of the expiring TCJA business provisions is the gradual phaseout of first-year bonus depreciation. Under the TCJA,100% bonus depreciation was available for qualified new and used property that was placed in service in calendar year 2022. It was reduced to 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026 and 0% in 2027.
The outcome of the presidential election in three months, as well as the balance of power in Congress, will determine the TCJA’s future. Here are four potential outcomes:
How your tax bill will be affected in 2026 will partially depend on which one of these outcomes actually happens and whether your tax bill went down or up when the TCJA became effective years ago. That was based on a number of factors including your business income, your filing status, where you live (the SALT limitation negatively affects taxpayers in certain states), and whether you have children or other dependents.
Your tax situation will also be affected by who wins the presidential election and who controls Congress because Democrats and Republicans have competing visions about how to proceed. Keep in mind that tax proposals can become law only if tax legislation passes both houses of Congress and is signed by the President (or there are enough votes in Congress to override a presidential veto).
Look to the future
As the TCJA provisions get closer to expiring, and the election gets settled, it’s important to know what might change and what tax-wise moves you can make if the law does change. We can answer any questions you have and you can count on us to keep you informed about the latest news.
© 2024
Most businesses have websites today. Despite their widespread use, the IRS hasn’t issued formal guidance on when website costs can be deducted.
But there are established rules that generally apply to the deductibility of business expenses and provide business taxpayers launching a website with some guidance about proper treatment. In addition, businesses can turn to IRS guidance on software costs. Here are some answers to questions you may have.
Let’s start with the hardware you may need to operate a website. The costs fall under the standard rules for depreciable equipment. Specifically, for 2024, once these assets are operating, you can deduct 60% of the cost in the first year they’re placed in service. This favorable treatment is allowed under the first-year bonus depreciation break.
Note: The bonus depreciation rate was 100% for property placed in service in 2022 and was reduced to 80% in 2023, 60% in 2024 and it will continue to decrease until it’s fully phased out in 2027 (unless Congress acts to extend or increase it).
Alternatively, you may be able to deduct all or most of these costs in the year the assets are placed in service under the Section 179 first-year depreciation deduction privilege. However, Sec. 179 deductions are subject to several limitations.
For tax years beginning in 2024, the maximum Sec. 179 deduction is $1.22 million, subject to a phaseout rule. Under the rule, the deduction is phased out if more than a specified amount ($3.05 million in 2024) of qualified property is placed in service during the year.
There’s also a taxable income limit. Under it, your Sec. 179 deduction can’t exceed your business taxable income. In other words, Sec. 179 deductions can’t create or increase an overall tax loss. However, any Sec. 179 deduction amount that you can’t immediately deduct is carried forward and can be deducted in later years (to the extent permitted by the applicable limits).
Similar rules apply to purchased off-the-shelf software. However, software license fees are treated differently from purchased software costs for tax purposes. Payments for leased or licensed software used for your website are currently deductible as ordinary and necessary business expenses.
If, instead of being purchased, the website is designed in-house by the taxpayer launching it (or designed by a contractor who isn’t at risk if the software doesn’t perform), bonus depreciation applies to the extent described above. If bonus depreciation doesn’t apply, the taxpayer can either:
Deduct the development costs in the year paid or incurred, or
Choose one of several alternative amortization periods over which to deduct the costs.
Generally, the only allowable treatment will be to amortize the costs over the five-year period beginning with the midpoint of the tax year in which the expenditures are paid or incurred.
If your website is primarily for advertising, you can currently deduct internal website software development costs as ordinary and necessary business expenses.
Some companies hire third parties to set up and run their websites. In general, payments to third parties are currently deductible as ordinary and necessary business expenses.
What about expenses before business begins?
Start-up expenses can include website development costs. Up to $5,000 of otherwise deductible expenses that are incurred before your business commences can generally be deducted in the year business commences. However, if your start-up expenses exceed $50,000, the $5,000 current deduction limit starts to be chipped away. Above this amount, you must capitalize some, or all, of your start-up expenses and amortize them over 60 months, starting with the month that business commences.
We can help
We can determine the appropriate tax treatment of website costs. Contact us if you want more information.
© 2024
While many facets of the economy have improved this year, the rising cost of living and other economic factors have caused many businesses to close their doors. If this is your situation, we can help you, including taking care of various tax responsibilities.
To start with, a business must file a final federal income tax return and some other related forms for the year it closes its doors. The type of return that must be filed depends on the type of business you have. For example:
If you have employees, you must pay them final wages and compensation owed, make final federal tax deposits and report employment taxes. Failure to withhold or deposit employee income, Social Security and Medicare taxes can result in full personal liability for what’s known as the Trust Fund Recovery Penalty.
If you’ve paid any contractors at least $600 during the calendar year in which you close your business, you must report those payments on Form 1099-NEC, “Nonemployee Compensation.”
If your business has a retirement plan for employees, you’ll generally need to terminate the plan and distribute benefits to participants. There are detailed notice, funding, timing and filing requirements that must be met when terminating a plan. There are also complex requirements related to flexible spending accounts, Health Savings Accounts, and other programs for employees.
We can assist you with many other complicated tax issues related to closing your business, including debt cancellation, use of net operating losses, freeing up any remaining passive activity losses, depreciation recapture, and possible bankruptcy issues.
You also must cancel your Employer Identification Number (EIN) and close your IRS business account. In addition, you need to keep business records for a certain amount of time.
If your business is unable to pay all the taxes it owes, we can explain the available payment options to you. Contact us to discuss these responsibilities and get answers to any questions.
© 2024
Navigating a financial audit can be daunting, but with the right preparation and understanding, it can become a manageable and beneficial process. Financial audits help ensure the accuracy of your financial records and compliance with regulations and can reveal areas for improvement within your business operations.
A financial audit is a thorough examination of your financial records and transactions conducted by an external entity. Its primary purpose is to verify the accuracy and completeness of your financial statements and ensure compliance with accounting standards and regulations. Various factors, including routine procedures, discrepancies in financial reports, or random selection, can trigger audits.
Engaging in a financial audit offers several significant benefits beyond mere compliance. Here are some key advantages:
Preparation is crucial for a smooth audit experience. Here are some steps to help you prepare effectively:
Once the audit begins, there are several best practices to follow:
After completing the audit, you will receive a report detailing the findings. Here’s what to do next:
Navigating the complexities of financial audits can be challenging, especially with varying regulations and standards. Consulting with a CPA or financial advisor is essential for tailored advice and support. They can help you understand the audit process, prepare effectively, and implement necessary changes to enhance financial management.
While financial audits can seem intimidating, proper preparation and a proactive approach can turn them into valuable opportunities for business improvement. By understanding the process, preparing thoroughly, and seeking professional guidance, you can confidently navigate audits and ensure your business remains compliant and financially healthy. Contact your CPA or financial advisor for more detailed advice tailored to your situation.
Are you buying a business that will have one or more co-owners? Or do you already own one fitting that description? If so, consider installing a buy-sell agreement. A well-drafted agreement can do these valuable things:
There are two basic types of buy-sell agreements: Cross-purchase agreements and redemption agreements (sometimes called liquidation agreements).
A cross-purchase agreement is a contract between you and the other co-owners. Under the agreement, a withdrawing co-owner’s ownership interest must be purchased by the remaining co-owners if a triggering event, such as a death or disability, occurs.
A redemption agreement is a contract between the business entity and its co-owners (including you). Under the agreement, a withdrawing co-owner’s ownership interest must be purchased by the entity if a triggering event occurs.
You and the other co-owners specify the triggering events you want to include in your agreement. You’ll certainly want to include obvious events like death, disability and attainment of a stated retirement age. You can also include other events that you deem appropriate, such as divorce.
Make sure your buy-sell agreement stipulates an acceptable method for valuing the business ownership interests. Common valuation methods include using a fixed per-share price, an appraised fair market value figure, or a formula that sets the selling price as a multiple of earnings or cash flow.
Also ensure the agreement specifies how amounts will be paid out to withdrawing co-owners or their heirs under various triggering events.
The death of a co-owner is perhaps the most common, and catastrophic, triggering event. You can use life insurance policies to form the financial backbone of your buy-sell agreement.
In the simplest case of a cross-purchase agreement between two co-owners, each co-owner purchases a life insurance policy on the other. If one co-owner dies, the surviving co-owner collects the insurance death benefit proceeds and uses them to buy out the deceased co-owner’s interest from the estate, surviving spouse or other heir(s). The insurance death benefit proceeds are free of any federal income tax, so long as the surviving co-owner is the original purchaser of the policy on the other co-owner.
However, a seemingly simple cross-purchase arrangement between more than two co-owners can get complicated, because each co-owner must buy life insurance policies on all the other co-owners. In this scenario, you may want to use a trust or partnership to buy and maintain one policy on each co-owner. Then, if a co-owner dies, the trust or partnership collects the death benefit proceeds tax-free and distributes the cash to the remaining co-owners. They then use the money to fund their buyout obligations under the cross-purchase agreement.
To fund a redemption buy-sell agreement, the business entity itself buys policies on the lives of all co-owners and then uses the death benefit proceeds buy out deceased co-owners.
Specify in your agreement that any buyout that isn’t funded with insurance death benefit proceeds will be paid out under a multi-year installment payment arrangement. This gives you (and any remaining co-owners) some breathing room to come up with the cash needed to fulfill your buyout obligation.
If you’re like many business co-owners, the value of your share of the business comprises a big percentage of your estate. Having a buy-sell agreement ensures that your ownership interest can be sold by your heir(s) under terms that you approved when you set it up. Also, the price set by a properly drafted agreement establishes the value of your ownership interest for federal estate tax purposes, thus avoiding possible IRS hassles.
As a co-owner of a valuable business, having a well-drafted buy-sell agreement in place is pretty much a no-brainer. It provides financial protection to you and your heir(s) as well as to your co-owners and their heirs. The agreement also avoids hassles with the IRS over estate taxes.
Buy-sell agreements aren’t DIY projects. Contact us about setting one up.
© 2024
As a business owner, the Profit & Loss (P&L) report is one of your most vital tools. This financial statement gives a window into your business, revealing how your money is generated and spent. The main goal of the P&L report is to understand how your business has earned a net profit or incurred a loss and how to adjust your strategy accordingly. Love it or hate it, the P&L report is your company’s scorecard – and if you can read it well, it can guide your company toward sustainable growth.
P&L reports track a business’s revenue and expenses over a specific period, usually prepared monthly or quarterly. By showing a business’s net profit (or loss), the P&L report indicates the effectiveness of a company’s operations and sales strategy. This insight is crucial for making informed decisions and steering your business toward financial health.
The main categories found in a P&L report include:
These categories are divided into three main sections: revenues, COGS, and operational expenses. Each line item on a P&L falls under either a revenue or an expense account, collectively determining the bottom line.
Understanding the different types of profit presented in a P&L report can provide deeper insights into your business’s financial health.
A company’s gross margin represents its profit before operating expenses. The gross margin reflects the core profitability of a company before overhead costs and shows the financial success of a product or service. It is also used to calculate the gross margin ratio, which is found by dividing the gross margin by total revenue. This ratio allows you to compare similar companies and the industry to determine relative profitability.
Gross Margin = Revenue – COGS
A high gross margin indicates that a company retains a significant portion of revenue as profit after accounting for the cost of goods sold. This can indicate efficient production processes and strong pricing strategies.
EBITDA (Earnings Before Interest, Tax, Depreciation, & Amortization) resembles free cash flow for most businesses. A company can see potential available cash by adding back interest, tax, and depreciation expenses to earnings. Since depreciation and amortization are non-cash items, they do not impact the health of a business’s cash flow. Therefore, EBITDA is an excellent metric for gauging cash flow in your P&L report.
EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization
This metric helps business owners and investors understand a company’s true operational performance without the effects of capital structure, tax rates, and non-cash accounting decisions.
Net profit is the ultimate measure of a business’s profitability. It is calculated by taking a company’s revenue and subtracting COGS and all operational expenses. The result is net profit, which shows the business’s overall financial success.
Net Profit = Revenue – (COGS + Operational Expenses + SG&A + Interest + Taxes)
Net profit is a critical indicator of the business’s ability to generate earnings after all expenses, which directly affects the company’s long-term sustainability and growth potential.
While creating your P&L report, it’s crucial to distinguish between an income statement and a balance sheet. Although different, they complement each other to provide a comprehensive financial picture. An income statement shows how profitable a business is over a given period, while a balance sheet provides a snapshot of assets and liabilities. These documents offer a complete view of your company’s financial health.
Understanding an organization’s P&L report is essential for analyzing profitability and growth. The basic equations underlying these reports are straightforward, and their organization is consistent across different businesses. By mastering the P&L report, you can make informed decisions that drive your business toward sustainable growth.
If you own a closely held corporation, you can borrow funds from your business at rates that are lower than those charged by a bank. But it’s important to avoid certain risks and charge an adequate interest rate.
Interest rates have increased over the last couple years. As a result, shareholders may decide to take loans from their corporations rather than pay higher interest rates on bank loans. In general, the IRS expects closely held corporations to charge interest on related-party loans, including loans to shareholders, at rates that at least equal applicable federal rates (AFRs). Otherwise, adverse tax results can be triggered. Fortunately, the AFRs are lower than the rates charged by commercial lenders.
It can be advantageous to borrow money from your closely held corporation to pay personal expenses. These expenses may include your child’s college tuition, home improvements, a new car or high-interest credit card debt. But avoid these two key risks:
1. Not Creating a Legitimate Loan. When borrowing money from your corporation, it’s important to establish a bona fide borrower-lender relationship. Otherwise, the IRS could reclassify the loan proceeds as additional compensation. This reclassification would result in an income tax bill for you and payroll tax for you and your corporation. (However, the business would be allowed to deduct the amount treated as compensation and the corporation’s share of related payroll taxes.)
Alternatively, the IRS might claim that you received a taxable dividend if your company is a C corporation. That would trigger taxable income for you with no offsetting deduction for your business.
Draft a formal written loan agreement that establishes your unconditional promise to repay the corporation a fixed amount under an installment repayment schedule or on demand by the corporation. Take other steps such as documenting the terms of the loan in your corporate minutes.
2. Not Charging Adequate Interest. The minimum interest rate your business should charge to avoid triggering the complicated and generally unfavorable “below-market loan rules” is the IRS-approved AFR. (There’s an exception to the below-market loan rules if the aggregate loans from a corporation to a shareholder are $10,000 or less.)
The IRS publishes AFRs monthly based on market conditions. For loans made in July 2024, the AFRs are:
These annual rates assume monthly compounding of interest. The AFR that applies to a loan depends on whether it’s a demand or term loan. The distinction is important. A demand loan is payable in full at any time upon notice and demand by the corporation. A term loan is any borrowing arrangement that isn’t a demand loan. The AFR for a term loan depends on the term of the loan, and the same rate applies for the entire term.
Suppose you borrow $100,000 from your corporation with the principal to be repaid in installments over 10 years. This is a term loan of over nine years, so the AFR in July would be 4.52% compounded monthly for 10 years. The corporation must report the loan interest as taxable income.
On the other hand, if the loan document gives your corporation the right to demand full repayment at any time, it’s a demand loan. Then, the AFR is based on a blended average of monthly short-term AFRs for the year. If rates go up, you must pay more interest to stay clear of the below-market loan rules. If rates go down, you’ll pay a lower interest rate.
Term loans for more than nine years are smarter from a tax perspective than short-term or demand loans because they lock in current AFRs. If rates drop, a high-rate term loan can be repaid early and your corporation can enter into a new loan agreement at the lower rate.
Shareholder loans can be complicated, especially if the loan charges interest below the AFR, the shareholder stops making payments or the corporation has more than one shareholder. Contact us about how to proceed in your situation.
© 2024
Navigating the complexities of business ownership requires a keen understanding of financial planning. A comprehensive financial plan is more than just a set of documents; it’s a roadmap that guides your business through the ever-changing landscape of commerce, helping to steer day-to-day decisions and long-term strategies.
Efficient cash management is foundational to a business’s financial health. A robust financial plan helps you establish budgets that accommodate short-term operational needs while aligning with long-term financial goals. This dual focus prevents common pitfalls such as inadequate cash reserves to make payroll or take advantage of supplier bulk purchase discounts.
It’s easy to get caught up in the immediacy of daily business challenges. However, a forward-looking financial plan shifts some of your focus to the future, enabling you to make informed investments in your business’s growth. This might involve expanding your physical space, investing in new technology, or enhancing your marketing efforts to outpace competitors.
Through financial planning, businesses can identify critical expenditures that yield immediate improvements in efficiency and profitability. This prioritization helps allocate resources more effectively, ensuring that investments are made in areas that provide the most significant returns, thereby enhancing the overall financial stability of the business.
A well-crafted financial plan allows business owners to set quantifiable targets and measure actual performance against these benchmarks. This ongoing evaluation helps recognize successful initiatives and identify areas needing adjustment. For instance, an increase in advertising spending should correlate with an uptick in sales, providing a clear picture of your marketing strategies’ effectiveness.
A detailed financial plan is invaluable in scenarios where external financing is required. Lenders and investors are more likely to engage with businesses that demonstrate a clear understanding of their financial trajectory and the capability to manage finances effectively. A solid financial plan enhances your credibility and increases the likelihood of securing the necessary funding.
Financial planning is crucial in risk management, effectively preparing businesses to handle uncertainties. Whether it’s an economic downturn or a sudden market shift, a financial plan helps you navigate potential challenges without jeopardizing your business’s stability.
While the benefits of financial planning are vast, the complexity of creating and implementing an effective plan suggests the importance of professional guidance. Partnering with a Certified Public Accountant (CPA) who understands your business sector can provide you with insights and strategies tailored to your specific needs. These professionals help refine your financial plan to ensure that it meets current regulatory and economic conditions and positions your business for success in the future.
In sum, a strategic financial plan is not just about keeping your business afloat; it’s about setting the stage for prosperity and growth. It empowers you to make smarter decisions, optimize cash flow, and achieve your business aspirations with confidence.
Choosing the right business entity has many implications, including the amount of your tax bill. The most common business structures are sole proprietorships, partnerships, limited liability companies, C corporations and S corporations.
In some cases, a business may decide to switch from one entity type to another. Although S corporations can provide substantial tax benefits over C corporations in some circumstances, there are potentially costly tax issues that you should assess before making the decision to convert from a C corporation to an S corporation.
Here are four considerations:
1. LIFO inventories. C corporations that use last-in, first-out (LIFO) inventories must pay tax on the benefits they derived by using LIFO if they convert to S corporations. The tax can be spread over four years. This cost must be weighed against the potential tax gains from converting to S status.
2. Built-in gains tax. Although S corporations generally aren’t subject to tax, those that were formerly C corporations are taxed on built-in gains (such as appreciated property) that the C corporation has when the S election becomes effective, if those gains are recognized within five years after the conversion. This is generally unfavorable, although there are situations where the S election still can produce a better tax result despite the built-in gains tax.
3. Passive income. S corporations that were formerly C corporations are subject to a special tax. It kicks in if their passive investment income (including dividends, interest, rents, royalties, and stock sale gains) exceeds 25% of their gross receipts, and the S corporation has accumulated earnings and profits carried over from its C corporation years. If that tax is owed for three consecutive years, the corporation’s election to be an S corporation terminates. You can avoid the tax by distributing the accumulated earnings and profits, which would be taxable to shareholders. Or you might want to avoid the tax by limiting the amount of passive income.
4. Unused losses. If your C corporation has unused net operating losses, they can’t be used to offset its income as an S corporation and can’t be passed through to shareholders. If the losses can’t be carried back to an earlier C corporation year, it will be necessary to weigh the cost of giving up the losses against the tax savings expected to be generated by the switch to S status.
These are only some of the factors to consider when switching a business from C to S status. For example, shareholder-employees of S corporations can’t get all the tax-free fringe benefits that are available as a C corporation. And there may be issues for shareholders who have outstanding loans from their qualified plans. These factors must be taken into account in order to understand the implications of converting from C to S status.
If you’re interested in an entity conversion, contact us. We can explain what your options are, how they’ll affect your tax bill and some possible strategies you can use to minimize taxes.
© 2024
Let’s say you plan to use a C corporation to operate a newly acquired business or you have an existing C corporation that needs more capital. You should know that the federal tax code treats corporate debt more favorably than corporate equity. So for shareholders of closely held C corporations, it can be a tax-smart move to include in the corporation’s capital structure:
Let’s review some basics. The top individual federal income tax rate is currently 37%. The top individual federal rate on net long-term capital gains and qualified dividends is currently 20%. On top of this, higher-income individuals may also owe the 3.8% net investment income tax on all or part of their investment income, which includes capital gains, dividends and interest.
On the corporate side, the Tax Cuts and Jobs Act (TCJA) established a flat 21% federal income tax rate on taxable income recognized by C corporations.
The non-tax advantage of using third-party debt financing for a C corporation acquisition or to supply additional capital is that shareholders don’t need to commit as much of their own money.
Even when shareholders can afford to cover the entire cost with their own money, tax considerations may make doing so inadvisable. That’s because a shareholder generally can’t withdraw all or part of a corporate equity investment without worrying about the threat of double taxation. This occurs when the corporation pays tax on its profits and the shareholders pay tax again when the profits are distributed as dividends.
When third-party debt is used in a corporation’s capital structure, it becomes less likely that shareholders will need to be paid taxable dividends because they’ll have less money tied up in the business. The corporate cash flow can be used to pay off the corporate debt, at which point the shareholders will own 100% of the corporation with a smaller investment on their part.
If your entire interest in a successful C corporation is in the form of equity, double taxation can arise if you want to withdraw some of your investment. But if you include owner debt (money you loan to the corporation) in the capital structure, you have a built-in mechanism for withdrawing that part of your investment tax-free. That’s because the loan principal repayments made to you are tax-free. Of course, you must include the interest payments in your taxable income. But the corporation will get an offsetting interest expense deduction — unless an interest expense limitation rule applies, which is unlikely for a small to medium-sized company.
An unfavorable TCJA change imposed a limit on interest deductions for affected businesses. However, for 2024, a corporation with average annual gross receipts of $30 million or less for the three previous tax years is exempt from the limit.
Let’s say you plan to use your solely owned C corporation to buy the assets of an existing business. You plan to fund the entire $5 million cost with your own money — in a $2 million contribution to the corporation’s capital (a stock investment), plus a $3 million loan to the corporation.
This capital structure allows you to recover $3 million of your investment as tax-free repayments of corporate debt principal. The interest payments allow you to receive additional cash from the corporation. The interest is taxable to you but can be deducted by the corporation, as long as the limitation explained earlier doesn’t apply.
This illustrates the potential federal income tax advantages of including debt in the capital structure of a C corporation. Contact us to explain the relevant details and project the tax savings.
© 2024
There are several financial and legal implications when adding a new partner to a partnership. Here’s an example to illustrate: You and your partners are planning to admit a new partner. The new partner will acquire a one-third interest in the partnership by making a cash contribution to the business. Assume that your basis in your partnership interests is sufficient so that the decrease in your portions of the partnership’s liabilities because of the new partner’s entry won’t reduce your basis to zero.
Although adding a new partner may appear to be simple, it’s important to plan the new person’s entry properly to avoid various tax problems. Here are two issues to consider:
The upshot of these rules is that the new partner must be allocated a portion of the depreciation equal to his or her share of the depreciable property based on current fair market value. This will reduce the amount of depreciation that can be taken by the current partners. The other outcome is that the built-in gain or loss on the partnership assets must be allocated to the current partners when the partnership assets are sold. The rules that apply in this area are complex, and the partnership may have to adopt special accounting procedures to cope with the relevant requirements.
Follow Your Basis
When adding a partner or making other changes, a partner’s basis in his or her interest can undergo frequent adjustment. It’s important to keep proper track of your basis because it can have an impact on these areas:
Contact us if you’d like assistance in dealing with these issues or any other issues that may arise in connection with your partnership.
© 2024
Businesses usually want to delay recognition of taxable income into future years and accelerate deductions into the current year. But when is it wise to do the opposite? And why would you want to?
One reason might be tax law changes that raise tax rates. The Biden administration has proposed raising the corporate federal income tax rate from its current flat 21% to 28%. Another reason may be because you expect your noncorporate pass-through entity business to pay taxes at higher rates in the future and the pass-through income will be taxed on your personal return. There have also been discussions in Washington about raising individual federal income tax rates.
If you believe your business income could be subject to tax rate increases, you might want to accelerate income recognition into the current tax year to benefit from the current lower tax rates. At the same time, you may want to postpone deductions into a later tax year, when rates are higher and the deductions will be more beneficial.
Consider these options if you want to accelerate revenue recognition into the current tax year:
Consider the following actions to postpone deductions into a higher-rate tax year, which will maximize their value:
Contact us to discuss the best tax planning actions in the light of your business’s unique tax situation.
© 2024
Navigating the realm of capital gains and optimizing tax outcomes require strategic thinking and informed decision-making. Understanding and employing effective capital gains tax strategies is crucial for businesses contemplating asset sales or long-term investments. However, it’s important to note that every business situation is unique, and leveraging the expertise of a Certified Public Accountant (CPA) is advisable for tailored tax planning and advice.
Capital gains typically arise from selling an asset at a price higher than its purchase price. For small to medium-sized businesses, these gains can manifest in several common scenarios:
One fundamental strategy to manage capital gains involves the consideration of asset-holding periods. Long-term capital gains, typically from assets held for more than a year, are taxed at a lower rate than short-term gains from assets sold within a year of purchase. Planning the sale of assets to qualify for long-term capital gains tax rates can result in considerable tax savings.
Investing in designated Opportunity Zones offers another avenue for capital gains tax advantages. These investments encourage economic development in low-income areas, providing tax benefits such as deferral of capital gains taxes, potential reduction of the taxable amount, and, if held for at least 10 years, elimination of taxes on future appreciation of the Opportunity Zone investment. This strategy supports tax optimization and contributes to meaningful social impact.
For real estate investments, 1031 exchanges present a valuable strategy for deferring capital gains taxes. By reinvesting the proceeds from the sale of real estate into another property, businesses can defer the recognition of capital gains, thereby postponing tax liabilities. This tool is particularly useful for real estate investors looking to reinvest and grow their portfolios without the immediate tax burden.
The timing of asset sales and investments is crucial in managing capital gains and associated taxes. Monitoring market conditions and projecting future tax rate changes can guide strategic decision-making. Selling assets in a year when the business expects lower overall income may result in a lower tax rate on capital gains. Conversely, delaying asset sales or accelerating investment expenses can defer tax liabilities and improve cash flow in the short term.
Given the complexity of tax laws and the uniqueness of each business scenario, consulting with a CPA is invaluable. Tax professionals can provide personalized advice, ensuring compliance while optimizing tax strategies tailored to the business’s goals and circumstances. They can offer insights into current tax regulations, potential legislative changes, and their implications for your business strategy.
Managing capital gains effectively requires a multifaceted approach, incorporating strategic planning, understanding tax laws, and timely decision-making. Employing strategies such as optimizing asset holding periods, investing in Opportunity Zones, leveraging 1031 exchanges, and carefully timing asset sales can significantly impact a business’s tax liabilities and financial growth. Remember, each business’s situation is distinct, and professional advice from a CPA is essential to successfully navigate the complexities of capital gains tax planning.
Here are some of the key tax-related deadlines that apply to businesses and other employers during the second quarter of 2024. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.
© 2024
With lease accounting standards ASC 842 and IFRS 16 in place for several years, private businesses have navigated a significant shift in how lease obligations are reported on the balance sheet. Now is an opportune moment to assess the practical impacts of these changes on companies and explore the latest updates to these standards.
Previously, operating leases were conveniently tucked away in the footnotes of financial statements. They take center stage on the balance sheet as both a right-of-use asset and a lease liability. This accounting makeover affects a company’s debt-to-equity ratio, working capital, and financial health. Suddenly, businesses have seen their liabilities swell, presenting a new challenge to stakeholders interpreting balance sheet health.
Upon implementation, private companies had to start recognizing nearly all leases on the balance sheet, recording them as right-of-use assets with a corresponding liability. For many, this was a departure from past practices, necessitating a meticulous review of contracts and commitments that had been, until then, off the books.
The lease liability reflects the present value of future lease payments, significantly affecting reported debt levels. Concurrently, the right-of-use asset has to be depreciated over the lease term, impacting the balance sheet and the income statement. The net result? Increased assets and liabilities can skew financial ratios and potentially trip debt covenants.
The most immediate challenge was the data-intensive requirements of the new standards. Companies needed to gather extensive details on every lease, a process often marred by decentralized data and varying documentation quality. Accounting complexity skyrocketed, especially in recognizing and measuring lease components and understanding the impact on financial covenants.
Yet, there are opportunities amidst these challenges. The enhanced transparency can improve stakeholder trust and provide a clearer picture of long-term financial commitments. It also allows for more strategic decision-making regarding leasing versus buying and can even catalyze renegotiating terms with lessors.
Accounting bodies have responded to the feedback from the business community with amendments aimed at simplifying certain aspects of lease accounting. For example, recent updates offer practical expedients on the reassessment of lease terms, providing relief for businesses grappling with the administrative burden of the standards.
Additionally, the standard-setters have addressed the intricacies of lease modifications, especially pertinent in the evolving business landscape shaped by the global pandemic. These amendments aim to reduce complexity and facilitate a smoother adaptation to the new lease accounting reality.
The balance sheet is now more than a historical document; it’s a strategic tool, and lease accounting plays a significant role. Companies must consider the balance sheet implications in their business strategies, particularly concerning credit availability and asset management.
The elevated importance of lease accounting in financial reporting and the enhanced balance sheet transparency calls for businesses to maintain a sharper focus on lease management. It emphasizes the need for integrated systems that can handle the recording, tracking, and reporting of lease elements efficiently and accurately.
Lease accounting under ASC 842 and IFRS 16 presents a new frontier in financial reporting. The impact on balance sheets has been profound, with significant implications for business strategy and financial planning. As the landscape evolves with recent updates, businesses must proactively dialogue with financial advisors or CPAs. Professional guidance is crucial in navigating these complexities, ensuring compliance, and optimizing strategic decisions to leverage these accounting changes effectively.
If you want to withdraw cash from your closely held corporation at a low tax cost, the easiest way is to distribute cash as a dividend. However, a dividend distribution isn’t tax efficient since it’s taxable to you to the extent of your corporation’s “earnings and profits,” but it’s not deductible by the corporation.
Thankfully, there are some alternative methods that may allow you to withdraw cash from a corporation while avoiding dividend treatment. Here are five possible options:
1. Salary. Reasonable compensation that you, or family members, receive for services rendered to the corporation is deductible by the business. However, it’s also taxable to the recipient(s). The same rule applies to any compensation (in the form of rent) that you receive from the corporation for the use of property. In either case, the amount of compensation must be reasonable in relation to the services rendered or the value of the property provided. If it’s excessive, the excess will be nondeductible and treated as a corporate distribution.
2. Fringe benefits. Consider obtaining the equivalent of a cash withdrawal in fringe benefits that are deductible by the corporation and not taxable to you. Examples are life insurance, certain medical benefits, disability insurance and dependent care. Most of these benefits are tax-free only if provided on a nondiscriminatory basis to other employees of the corporation. You can also establish a salary reduction plan that allows you (and other employees) to take a portion of your compensation as nontaxable benefits, rather than as taxable compensation.
3. Capital repayments. To the extent that you’ve capitalized the corporation with debt, including amounts that you’ve advanced to the business, the corporation can repay the debt without the repayment being treated as a dividend. Additionally, interest paid on the debt can be deducted by the corporation. This assumes that the debt has been properly documented with terms that characterize debt and that the corporation doesn’t have an excessively high debt-to-equity ratio. If not, the “debt” repayment may be taxed as a dividend. If you make cash contributions to the corporation in the future, consider structuring them as debt to facilitate later withdrawals on a tax-advantaged basis.
4. Loans. You may withdraw cash from the corporation tax-free by borrowing money from it. However, to avoid having the loan characterized as a corporate distribution, it should be properly documented in a loan agreement or a note and be made on terms that are comparable to those on which an unrelated third party would lend money to you. This should include a provision for interest and principal. All interest and principal payments should be made when required under the loan terms. Also, consider the effect of the corporation’s receipt of interest income.
5. Property sales. You can withdraw cash from the corporation by selling property to it. However, certain sales should be avoided. For example, you shouldn’t sell property to a more than 50% owned corporation at a loss, since the loss will be disallowed. And you shouldn’t sell depreciable property to a more than 50% owned corporation at a gain, since the gain will be treated as ordinary income, rather than capital gain. A sale should be on terms that are comparable to those on which an unrelated third party would purchase the property. You may need to obtain an independent appraisal to establish the property’s value.
If you’re interested in discussing any of these ideas, contact us. We can help you get the maximum out of your corporation at the minimum tax cost.
© 2024
The Employee Retention Credit (ERC) Voluntary Disclosure Program is a program introduced by the Internal Revenue Service in response to certain businesses claiming the ERC improperly or failing to claim it when they were eligible. The ERC was introduced as part of the CARES Act in 2020 and was aimed at providing financial relief to businesses affected by the COVID-19 pandemic.
Under the ERC, eligible employers could receive a refundable tax credit against employment taxes for qualified wages paid to employees. However, there were specific criteria and limitations for eligibility, and some businesses may have erroneously claimed the credit or failed to claim it when they were eligible.
The Voluntary Disclosure Program allows these businesses to come forward voluntarily to correct any errors or omissions related to claiming the ERC. By participating in the program, businesses could potentially avoid penalties or other enforcement actions that might otherwise be imposed for incorrect claims or noncompliance with ERC requirements. Eligible taxpayers can repay only 80% of the gross amount of the credit erroneously claimed while retaining the remaining 20% (IRS Announcement 2024-3). Taxpayers that repay the 80% of their ERC are deemed to have made a full repayment.
Taxpayers participating in the Voluntary Disclosure Program must file Form 15434 (Application for ERC Voluntary Disclosure Program) on or before March 22, 2024 and be submitted thru the IRS Document Upload Tool: www.irs.gov/help/irs-document-upload-tool
Participation in the program typically involves disclosing the relevant information to the IRS and working to rectify any discrepancies or issues with ERC claims. The specifics of the program, including eligibility criteria and procedures for participation, would be determined by the IRS and outlined in official guidance.
Businesses considering participation in such a program should consult with tax professionals or legal advisors familiar with ERC regulations and IRS procedures to ensure compliance and to understand the potential benefits and implications of voluntary disclosure. For complete information, including eligibility and processing, please visit: www.irs.gov/coronavirus/frequently-asked-questions-about-the-employee-retention-credit-voluntary-disclosure-program
In the landscape of financial planning and tax optimization, Qualified Charitable Distributions (QCDs) stand out as a powerful mechanism for individuals looking to enhance their philanthropic impact while optimizing their tax situation. This article delves into the core of QCDs, providing insights into how they can serve as a strategic tool in your charitable giving and financial planning.
Qualified Charitable Distributions allow individuals aged 70½ or older to directly donate up to $100,000 from their Individual Retirement Accounts (IRAs) to a qualified charity, tax-free. This unique provision supports your philanthropic endeavors and offers a tax-efficient way to meet Required Minimum Distributions (RMDs), particularly for those aged 73 and above. QCDs differ from regular IRA distributions, which is typically taxable, by excluding these donations from your taxable income, thus achieving the dual objective of aiding charitable causes and reducing your tax liability.
QCDs embody the essence of strategic giving, allowing you to see the impact of your generosity firsthand. This proactive approach to philanthropy provides a more immediate and gratifying experience compared to traditional legacy giving. With the onset of charity-focused events early in the year, it’s an opportune time to consider QCDs as a key element of your giving strategy.
Effective tax planning is a crucial element of sound financial management. Utilizing QCDs can significantly improve the tax efficiency of your charitable contributions. By transferring funds directly from your IRA to a charity, the donation does not count as taxable income, therefore not only advancing your charitable objectives but also potentially reducing your overall tax burden. This can be especially beneficial in light of increased standard deductions, which may diminish the tax advantages of itemized deductions for many taxpayers.
To fully benefit from QCDs, accurately navigating associated regulations is essential. You must be at least 70½ years old at the time of the distribution and the donation must go directly to a qualifying charity, excluding private foundations and donor-advised funds. The annual limit for QCDs is $100,000 per individual, with recent updates allowing for inflation adjustments. Ensuring that your IRA trustee correctly processes the QCD is required for it to qualify for tax-free treatment.
Opting to donate your RMD through a QCD enables you to embody your philanthropic values, creating a legacy of support and impact. This strategy provides the satisfaction of contributing to worthy causes and smartly aligns with your tax planning, potentially influencing various tax considerations such as Social Security taxation and Medicare premiums.
Leveraging Qualified Charitable Distributions within your philanthropic and financial strategy can offer substantial rewards. QCDs enable impactful contributions to the community and present an intelligent way to manage your tax obligations. Consulting with your financial advisor and tax professional is advised to ensure that your charitable giving initiatives are well integrated with your overall financial objectives. By incorporating QCDs into your planning, you can achieve a fulfilling balance between meaningful giving and prudent financial management.
To ensure that this strategy aligns with your overall financial goals and tax situation, it is crucial to seek the advice of your CPA or certified financial planner. They can provide personalized guidance to determine if QCDs are the right choice for you.
Understanding and implementing the proper accounting method is a cornerstone for financial clarity and operational success. As a business owner, choosing between cash-basis and accrual accounting methods affects how you report financial transactions. This article delves into the essence of these accounting methods, their significance, and how to discern which is most conducive to your business’s growth and fiscal management.
Accounting methods are the backbone of financial record-keeping, providing a structured approach to tracking financial transactions and maintaining accurate financial records. The primary objective is to depict an organization’s financial performance and position. Understanding the nuances of each accounting method helps business owners make informed decisions, manage tax obligations effectively, and forecast future growth with precision.
Cash-basis accounting, renowned for its simplicity, only records income and expenses when cash is exchanged. This method offers a straightforward perspective on cash flow, allowing small business owners to ascertain their financial standing at any given moment easily. However, its simplicity comes at the cost of a comprehensive view, as it doesn’t account for pending receivables or payables, potentially skewing the real financial health of the business. Small enterprises, particularly those without inventory or complex financial obligations, often find cash-basis accounting advantageous for its direct reflection of cash on hand and ease of management.
In contrast, accrual accounting provides a more detailed financial picture by recording transactions when they are incurred, irrespective of cash movement. This method is essential for businesses that engage in credit transactions, carry inventory, or require a detailed understanding of their financial status for decision-making and strategic planning. Accrual accounting enables business owners to anticipate future revenues and expenses, offering insights into the company’s long-term financial trajectory. While it necessitates a more meticulous record-keeping process, its benefits in providing a complete financial overview are undeniable.
The choice between cash-basis and accrual accounting hinges on several factors, including the size of your business, regulatory requirements, and strategic financial planning needs. The IRS mandates accrual accounting for businesses surpassing $26 million in gross receipts over a three-year average, underscoring its relevance for larger enterprises. Additionally, businesses aiming for growth or those engaging in complex financial activities may find accrual accounting more suitable due to its in-depth financial insights and forecasting capabilities.
For small businesses, particularly those at the threshold of significant growth or with plans to scale, starting with accrual accounting can lay a solid foundation for future financial management needs. Conversely, cash-basis accounting may suffice for businesses with simpler transactions and those seeking straightforward financial tracking.
Businesses looking for a middle ground may consider modified cash-basis accounting, which combines elements of both methods. This hybrid approach allows for recording short-term cash transactions and long-term financial activities, offering flexibility and a balanced view of a business’s financial health.
In choosing the right accounting method for your business, being well-informed cannot be overstated. Whether cash-basis or accrual accounting is better depends on your business’s specific needs, regulatory requirements, and growth aspirations. Remember, this decision is about compliance, strategic financial planning, and management. Given the complexities involved, it’s advisable to seek the guidance of a Certified Public Accountant (CPA). A CPA can offer personalized advice, ensuring your accounting method aligns with your business goals and paves the way for sustainable growth. Making this critical decision with professional insight allows you to navigate your business toward financial clarity and success.
When launching a small business, many entrepreneurs start out as sole proprietors. If you’re launching a venture as a sole proprietorship, you need to understand the tax issues involved. Here are nine considerations:
Contact us if you want additional information regarding the tax aspects of your business, or if you have questions about reporting or recordkeeping requirements.
© 2024
A new year marks a fresh start for businesses, offering a chance to enhance financial management practices and unlock opportunities for growth and success. As a business owner, improving your financial management can open doors to many possibilities. This article will explore essential tips for leveraging accounting software, particularly QuickBooks, to boost your financial oversight and operational efficiency in 2024.
One of the foundational steps in effective financial management is regular account reconciliation. This involves ensuring that your QuickBooks accounts align accurately with your bank statements. Regular reconciliations allow you to identify and rectify any discrepancies that may arise swiftly. This practice maintains the integrity of your financial records and provides you with a clear understanding of your business’s financial health.
QuickBooks’ class and location tracking feature can be a game-changer for businesses with multiple departments or product lines. This tool offers deeper insights into the profitability and expenses of various segments within your business. By categorizing transactions according to classes or locations, you can make more informed decisions and allocate resources more effectively.
Repetitive financial tasks, such as monthly subscriptions or rent payments, can be automated through QuickBooks and other accounting software. Setting up recurring transactions saves time and ensures consistency and accuracy in your financial records. This feature eliminates the risk of missing essential payments and helps you maintain a seamless financial workflow.
In today’s fast-paced business environment, mobility is crucial. Most cloud-based accounting software, including QuickBooks, offers mobile apps that allow you to manage your finances on the go. Whether you need to track expenses, send invoices, or access financial data from anywhere, these mobile apps provide convenience and flexibility. This accessibility ensures that you always stay in control of your finances.
Modern accounting software systems offer advanced reporting capabilities that provide valuable insights into your business finances. QuickBooks, for example, offers customizable reports, including cash flow statements and profit and loss reports. Here are four essential reports to consider running:
Maintaining a healthy cash flow is essential for business sustainability. Regularly monitoring your accounts receivable and payable in QuickBooks, with the help of the reports mentioned earlier, will ensure that you stay on top of overdue payments and effectively manage your bills. This proactive approach is key to maintaining financial stability.
Consider further integrating your accounting software with other business tools to enhance your financial management. Integration can streamline workflows, improve data accuracy, and enhance business efficiency. For example, integrating with Customer Relationship Management (CRM) systems can provide a holistic view of your business operations, helping you better understand customer interactions and needs.
By implementing these features and strategies, you can elevate your financial management practices, gain deeper insights into your business operations, and make well-informed decisions that drive your business forward. As you embark on this journey in 2024, remember that effective financial management is the cornerstone of business success, and with the right tools and practices, you can achieve your growth and profitability goals.
As part of the SECURE 2.0 law, there’s a new benefit option for employees facing emergencies. It’s called a pension-linked emergency savings account (PLESA) and the provision authorizing it became effective for plan years beginning January 1, 2024. The IRS recently released guidance about the accounts (in Notice 2024-22) and the U.S. Department of Labor (DOL) published some frequently asked questions to help employers, plan sponsors, participants and others understand them.
The DOL defines PLESAs as “short-term savings accounts established and maintained within a defined contribution plan.” Employers with 401(k), 403(b) and 457(b) plans can opt to offer PLESAs to non-highly compensated employees. For 2024, a participant who earned $150,000 or more in 2023 is a highly compensated employee.
Here are some more details of this new type of account:
A participant in a PLESA doesn’t need to prove that he or she is experiencing an emergency before making a withdrawal from an account. The DOL states that “withdrawals are made at the discretion of the participant.”
These are just the basic details of PLESAs. Contact us if you have questions about these or other fringe benefits and their tax implications.
© 2024
Operating your small business as a Qualified Small Business Corporation (QSBC) could be a tax-wise idea.
QSBCs are the same as garden-variety C corporations for tax and legal purposes — except QSBC shareholders are potentially eligible to exclude from federal income tax 100% of their stock sale gains. That translates into a 0% federal income tax rate on QSBC stock sale profits! However, you must meet several requirements set forth in Section 1202 of the Internal Revenue Code, and not all shares meet the tax-law description of QSBC stock. Finally, there are limitations on the amount of QSBC stock sale gain that you can exclude in any one tax year (but they’re unlikely to apply).
The 100% federal income tax gain exclusion is only available for sales of QSBC shares that were acquired on or after September 28, 2010.
If you currently operate as a sole proprietorship, single-member LLC treated as a sole proprietorship, partnership or multi-member LLC treated as a partnership, you’ll have to incorporate the business and issue yourself shares to attain QSBC status.
Important: The act of incorporating a business shouldn’t be taken lightly. We can help you evaluate the pros and cons of taking this step.
Here are some more rules and requirements:
The Tax Cuts and Jobs Act made a flat 21% corporate federal income tax rate permanent, assuming no backtracking by Congress. So, if you own shares in a profitable QSBC and you eventually sell them when you’re eligible for the 100% gain exclusion break, the 21% corporate rate could be all the income tax that’s ever owed to Uncle Sam.
Before concluding that you can operate your business as a QSBC, consult with us. We’ve summarized the most important eligibility rules here, but there are more. The 100% federal income tax stock sale gain exclusion break and the flat 21% corporate federal income tax rate are two strong incentives for eligible small businesses to operate as QSBCs.
© 2024
The optional standard mileage rate used to calculate the deductible cost of operating an automobile for business will be going up by 1.5 cents per mile in 2024. The IRS recently announced that the cents-per-mile rate for the business use of a car, van, pickup or panel truck will be 67 cents (up from 65.5 cents for 2023).
The increased tax deduction partly reflects the price of gasoline, which is about the same as it was a year ago. On December 21, 2023, the national average price of a gallon of regular gas was $3.12, compared with $3.10 a year earlier, according to AAA Gas Prices.
Businesses can generally deduct the actual expenses attributable to business use of vehicles. These include gas, tires, oil, repairs, insurance, licenses and vehicle registration fees. In addition, you can claim a depreciation allowance for the vehicle. However, in many cases, certain limits apply to depreciation write-offs on vehicles that don’t apply to other types of business assets.
The cents-per-mile rate is helpful if you don’t want to keep track of actual vehicle-related expenses. However, you still must record certain information, such as the mileage for each business trip, the date and the destination.
The standard rate is also used by businesses that reimburse employees for business use of their personal vehicles. These reimbursements can help attract and retain employees who drive their personal vehicles for business purposes. Why? Under current law, employees can’t deduct unreimbursed employee business expenses, such as business mileage, on their own income tax returns.
If you use the cents-per-mile rate, keep in mind that you must comply with various rules. If you don’t comply, reimbursements to employees could be considered taxable wages to them.
The business cents-per-mile rate is adjusted annually. It’s based on an annual study commissioned by the IRS about the fixed and variable costs of operating a vehicle, such as gas, maintenance, repairs and depreciation. Occasionally, if there’s a substantial change in average gas prices, the IRS will change the rate midyear.
There are cases when you can’t use the cents-per-mile rate. In some situations, it depends on how you’ve claimed deductions for the same vehicle in the past. In other situations, it hinges on if the vehicle is new to your business this year or whether you want to take advantage of certain first-year depreciation tax breaks on it.
As you can see, there are many factors to consider in deciding whether to use the standard mileage rate to deduct business vehicle expenses. We can help if you have questions about tracking and claiming such expenses in 2024 — or claiming 2023 expenses on your 2023 tax return.
© 2023
We’ve closed another year marked by economic uncertainties, and one constant remains—the potential to enhance your company’s financial health by strategically managing your tax obligations. Below, we outline practical and timely strategies tailored for business owners looking to navigate the intricate landscape of tax planning.
The Tax Cuts and Jobs Act (TCJA) imposed a $10,000 cap on federal income tax deductions for state and local taxes (SALT). Over 30 states, including California, have implemented “workaround” measures benefiting PTE owners to counter this. These provisions allow partnerships, LLCs, and S corporations to pay entity-level state tax, providing owners with corresponding benefits, such as tax credits or deductions. This strategy lets your business bypass the SALT limit, resulting in potential federal business expense deductions.
Cash balance retirement plans are making a comeback, especially for businesses with high-earning individuals who consistently hit their 401(k) limits. These plans offer a unique fusion of defined contribution and defined benefit plans, allowing businesses to claim substantial deductions for contributions.
Remember, under the original SECURE Act, businesses have until their federal filing deadline (including extensions) to set up a cash balance plan. But here’s the practical insight: it takes some time to get everything in order—documents, contribution calculations, and administrative tasks. So, it’s wise to kickstart the process sooner rather than later.
This strategy helps secure your financial future and offers a valuable tax advantage for your business.
Are you using the cash method for income tax reporting? Consider accelerating year-end deductions in December and deferring income until January to optimize your 2023 income. For instance, pay bills and employee bonuses for 2023 before year-end and stock up on supplies to accelerate deductions. Conversely, if higher profits are anticipated in the upcoming year, consider the opposite approach—accelerate income and postpone deductions to maximize their value. Consider the impact on your Qualified Business Income (QBI) deduction, especially if your business operates as a pass-through entity.
A cornerstone of the 2017 tax reform, the QBI deduction for pass-through entities allows owners to claim up to 20% of their QBI, subject to specific limitations. Manage your taxable income wisely, as accelerated depreciation and certain tax breaks tied to taxable income can affect your QBI and subsequent deductions.
Seize the opportunity for first-year bonus depreciation for qualified property acquired and placed in service in 2023. While the benefit gradually diminishes, it remains at 80% for this tax year. Prioritize using IRC Section 179 expensing election for asset purchases, enabling you to deduct 100% of the purchase price for eligible assets. Be aware of the $1.16 million maximum deduction and plan strategically to maximize this tax-saving tool.
Explore the 100% federal income tax gain exclusion for eligible sales of Qualified Small Business Corporation (QSBC) stock acquired after September 27, 2010. Hold QSBC shares for over five years to qualify for the gain exclusion. Planning is crucial to secure this exclusion privilege.
Employing family members can be a strategic move to reduce overall tax liability. Deduct wages and benefits, including medical benefits, paid to family employees, reducing self-employment tax liability. Wages paid to children under 18 are not subject to federal employment taxes, providing potential tax savings.
Remember, seemingly minor tax decisions may have significant consequences. Please consult with us to ensure your business makes informed year-end tax planning moves that align with your goals.
As the end of the tax year approaches, it’s essential to consider strategies to minimize your 2023 federal tax liability. The current landscape presents challenges with market volatility, persistent high-interest rates, and notable adjustments to retirement planning regulations. Despite this uncertainty, there is still an opportunity to implement year-end tax planning techniques to reduce your tax bill. Whether you are contemplating investment decisions, charitable contributions, or estate planning, there are practical strategies to optimize your tax plan.
With a standard deduction of $13,850 for single filers, $27,700 for married couples filing jointly, and $20,800 for heads of households in 2023, assessing your itemized deductions is crucial. Consider strategically timing your itemized deduction items by “bunching” them to exceed the standard deduction every other year. This approach can help lower your tax bill this year, and in the following year, you can take advantage of the increased standard deduction to account for inflation.
Potential candidates for itemized deductions include:
It’s worth noting the possibility of future changes to the value of itemized deductions, emphasizing the importance of maximizing these deductions while current regulations permit.
Effectively managing your investment portfolio can influence your tax liability. Consider the strategic sale of appreciated securities held for over 12 months in 2023, leveraging the favorable 15% federal income tax rate on long-term capital gains. It’s crucial to remember that this rate can increase to 20% for individuals with higher income levels. Equally important is evaluating stocks valued below your initial investment (tax basis). Realizing capital losses this year could offset various gains, including short-term capital gains taxed at ordinary income rates. Always be aware of the wash sale rules before reacquiring recently sold or purchased stocks. This approach allows you to navigate the complexities of the market while optimizing your tax position.
Embrace unique avenues for philanthropy tailored to your preferences:
Safeguard a portion or all of your retirement savings from potential tax rate increases by converting traditional IRAs into Roth accounts. While you’ll incur taxes on the conversion as if it were a traditional IRA distribution, this approach is most beneficial when anticipating remaining in the same or higher tax bracket during retirement. Notably, the current tax impact from conversion may be a small price to pay for evading potentially higher future tax rates on post-conversion earnings. Additionally, the flexibility exists to convert varying amounts over several years, allowing you to tailor the strategy to your circumstances.
If concerns arise about a potentially taxable estate, leverage the annual gift tax exclusion as an effortless method to reduce your taxable estate. In 2023, seize the opportunity to make annual exclusion gifts up to $17,000 per donee, with no limitations on the number of donees. The joint annual exclusion gift limit for couples reaches $34,000 per donee. These tax-free gifts don’t impact your lifetime gifting exemption, providing an effective means to manage your estate’s tax implications.
Homeowners investing in energy-efficient improvements can claim an Energy Efficient Home Improvement Credit, covering up to 30% of qualified expenses, capped at $1,200 annually for energy property costs and an additional $2,000 for qualified heat pumps. Ensure compliance with energy.gov guidelines to include expenses related to doors, windows, air conditioning, and insulation materials. Additionally, explore Residential Clean Energy Credits for qualifying expenses related to solar and alternative energy sources, offering potential tax advantages for environmentally conscious choices.
Given the $10,000 limitation on state and local tax deductions for individuals, assess the advantages of participating in the Pass-Through Entity (PTE) tax regime. Many states allow pass-through entities to pay and deduct the full state taxes on behalf of partners/shareholders. If you receive substantial income from a partnership or S corporation, consider engaging in the PTE tax regime when recommended by the entity representative. Alternatively, if you hold a significant stake in a pass-through entity not currently electing this option, it’s worthwhile to explore whether participating makes sense for your overall tax strategy.
Strengthen your financial foundation and simultaneously impact your tax liabilities by directing funds into your 401(k) or IRA. Capitalize on valuable tax advantages, including tax-deferred growth and potential deductions. For the tax year 2023, individuals can contribute up to $22,500 to their 401(k), with an additional $7,500 catch-up contribution for those aged 50 or older. Traditional IRA contributions are capped at $6,500, with a $1,000 catch-up provision for individuals over 50. Remember to make contributions by April 15, 2024, to qualify for the 2023 tax year. This proactive approach allows you to fortify your financial future while making a meaningful impact on your tax obligations.
Taking a proactive approach to tax planning can yield significant benefits for your next tax bill. Strategically assessing your financial landscape and implementing these practical tips can help you navigate the complexities of the 2023 tax year.
Every business owner should have an exit strategy that helps recoup the maximum amount for his or her investment. Understanding the tax implications of a business sale will help you plan for — and, in some cases, reduce — the tax impact. One option is to sell your business to a third party. Here are some considerations to help ensure the transition is as smooth as possible.
Start by obtaining a professional valuation of your business to give you an idea of what the business is currently worth. The valuation process also will help you understand what factors drive the value of your business and identify any weaknesses that reduce its value.
Once you’ve received a valuation, you can make changes to enhance the business’s value and potentially increase the selling price. For example, if the valuator finds that the business relies too heavily on your management skills, bringing in new management talent may make the business more valuable to a prospective buyer.
A valuation can also reveal concentration risks. For instance, if a significant portion of your business is concentrated in a handful of customers or one geographical area, you could take steps to diversify your customer base.
Corporate sellers generally prefer selling stock rather than assets. That’s because the profit on a stock sale is generally taxable at more favorable long-term capital gains rates, while asset sales generate a combination of capital gains and ordinary income. For a business with large amounts of depreciated machinery and equipment, asset sales can generate significant ordinary income in the form of depreciation recapture. (Note: The tax rate on recaptured depreciation of certain real estate is capped at 25%.)
In addition, if your company is a C corporation, an asset sale can trigger double taxation: once at the corporate level and a second time when the proceeds are distributed to shareholders as a dividend. In a stock sale, the buyer acquires the stock directly from the shareholders, so there’s no corporate-level tax.
Buyers, on the other hand, almost always prefer to buy assets, especially for equipment-intensive businesses, such as manufacturers. Acquiring assets provides the buyer with a fresh tax basis in the assets for depreciation purposes and allows the buyer to avoid assuming the seller’s liabilities.
Given the significant advantages of buying assets, most buyers are reluctant to purchase stock. But even in an asset sale, there are strategies for a seller to employ to minimize the tax hit. One strategy is to negotiate a favorable allocation of the purchase price. Although tax rules require the purchase price allocation to be reasonable in light of the assets’ market values, the IRS will generally respect an allocation agreed on by unrelated parties.
As a seller, you’ll want to allocate as much of the price as possible to assets that generate capital gains, such as goodwill and certain other intangible assets. The buyer will prefer allocations to assets eligible for accelerated depreciation, such as machinery and equipment. However, depreciable assets are likely to generate ordinary income for the seller.
Allocating a portion of the purchase price to goodwill can be a good compromise between the parties’ conflicting interests. Sellers enjoy capital gains treatment while buyers can generally amortize goodwill over 15 years for tax purposes.
If your company is a C corporation, establishing that a portion of goodwill is attributable to personal goodwill — that is, goodwill associated with the reputations of the individual owners rather than the enterprise — can be particularly advantageous. That’s because payments for personal goodwill are made directly to the shareholders, avoiding double taxation.
You may need to take certain steps to transfer personal goodwill to the buyer. This may include executing an employment or consulting agreement that defines your responsibility for ensuring that the buyer enjoys the benefits of your ability to attract and retain customers. Buyers may want a noncompete agreement. These are common in private business sales and can help protect the buyer from competition from the seller after the deal closes.
Different strategies can help you enhance your business’s value and minimize taxes, but they may take some time to put into place. Whatever your exit strategy, the earlier you start planning, the better.
An employee stock ownership plan (ESOP) might be a viable exit strategy if your business is organized as a corporation and you’re not interested in leaving it to your family or selling to an outsider. An ESOP creates a market for your stock, allowing you to cash out of the business and transfer control to the next generation of owners gradually.
An ESOP is a qualified retirement plan that invests in the company’s stock. Benefits to business owners include the ability to:
ESOPs also provide significant tax benefits to the company, including tax deductions for contributions to the ESOP to cover stock purchases and (in the case of a leveraged ESOP) loan payments. S corporations may avoid taxes on income passed through to shares held by the ESOP.
But there are some downsides, too. For example, ESOPs are subject to many of the same rules and restrictions as 401(k) and other employer-sponsored plans. And they can involve significant administrative costs, including annual appraisals of the company’s stock. Contact your tax advisor to discuss if an ESOP is right for your business.
© 2023
Gaining a competitive edge in today’s market requires more than understanding one’s financials. It requires using financial metrics strategically to enhance business success. The Profit Margin Ratio is a crucial financial metric that predicts future viability and competitiveness.
Profit margins allow businesses to identify operational efficiencies or deficiencies. It’s not about the total dollars earned. This ratio reveals what percentage of sales remains after covering the costs, providing a clear view of profitability.
Profit Margin Ratios come in 3 types: Gross, Operating, and Net. Each offers unique insights:
For example, with $1 million in revenue, a company’s Gross Profit Margin at a direct cost of $600,000 is 40%. If operating expenses are $200,000, the Operating Margin drops to 20%, and after $100,000 in additional expenses, the Net Profit Margin is 10%.
With these metrics, businesses can pinpoint where to cut costs or where to invest, ensuring sustained growth and profitability.
By monitoring these margins, you can drive improved profitability, effective cost management, and enhanced operational efficiency. They can act as a warning flag to help identify areas to look into when things might not be right. For instance, while a strong Gross Profit Margin alongside a weak Net Profit Margin might show excessive administrative costs; conversely, a weak Gross Profit Margin with a strong Net Profit Margin could signal the need for pricing adjustments to better align with costs, both of which can guide you to specific improvements.
Here are 5 steps you can take to implement profit margin analysis into your business:
Mastering Profit Margin Ratios equips you with the foresight to shape your business’s future. This financial mastery is a map guiding you toward sustainable growth and success. Embrace these insights, and with precision and the right tools, your business is on track to reach its fullest potential.
The Social Security Administration recently announced that the wage base for computing Social Security tax will increase to $168,600 for 2024 (up from $160,200 for 2023). Wages and self-employment income above this threshold aren’t subject to Social Security tax.
The Federal Insurance Contributions Act (FICA) imposes two taxes on employers, employees and self-employed workers — one for Old Age, Survivors and Disability Insurance, which is commonly known as the Social Security tax, and the other for Hospital Insurance, which is commonly known as the Medicare tax.
There’s a maximum amount of compensation subject to the Social Security tax, but no maximum for Medicare tax. For 2024, the FICA tax rate for employers will be 7.65% — 6.2% for Social Security and 1.45% for Medicare (the same as in 2023).
For 2024, an employee will pay:
For 2024, the self-employment tax imposed on self-employed people will be:
You may have questions if an employee who works for your business has a second job. That employee would have taxes withheld from two different employers. Can the employee ask you to stop withholding Social Security tax once he or she reaches the wage base threshold? The answer is no. Each employer must withhold Social Security taxes from the individual’s wages, even if the combined withholding exceeds the maximum amount that can be imposed for the year. Fortunately, the employee will get a credit on his or her tax return for any excess withheld.
Do you have questions about payroll tax filing or payments? Contact us. We’ll help ensure you stay in compliance.
© 2023
In an era of growing environmental awareness and the push for sustainable living, homeowners are more interested than ever in upgrading their living spaces to be energy-efficient. However, it’s not just about saving the planet—it’s also about saving money. The U.S. government, recognizing the importance of these measures, has provided an enticing incentive: The Energy-Efficient Home Improvement Credit. Here’s everything you need to know about this tax relief opportunity.
The Energy-Efficient Home Improvement Credit is an initiative by the IRS designed to encourage homeowners to make eco-friendly home upgrades. If you have made any qualifying energy-efficient improvements to your home since January 1, 2023, you may be eligible for this credit, where the savings could be substantial.
The first step in determining eligibility is determining what improvements qualify. The following energy-efficient improvements, when in line with requirements set on energy.gov, can make you eligible for the credit:
Once you have determined which improvements qualify, you might wonder what the savings could be if you claimed the credit. The potential savings can be significant. Here’s a breakdown:
The silver lining? There is no lifetime dollar limit on this credit. If you make eligible improvements annually, you can claim the maximum amount every year until 2033.
If you use your home for business, there are special considerations where you could be eligible to claim a percentage of the credit, even 100%.
If this applies to you, it is best to talk with an accountant about the most beneficial use of this credit.
Here are some essential pointers to keep in mind:
While making your home more energy-efficient is a commendable step toward sustainability, it also offers financial benefits. The Energy-Efficient Home Improvement Credit is an avenue worth exploring for homeowners. By staying informed and making timely upgrades, you can contribute to a greener planet and enjoy tangible tax savings.
Are you wondering if your energy-efficient choices will qualify for this tax credit? Hamilton Tharp is here to help. Reach out to us, and let’s map out a greener, cost-efficient future for your home.
For more details and regular updates, keep an eye on Hamilton Tharp’s insights on tax savings and financial strategies.
In business, where every decision can tip the scales of success or failure, a robust financial strategy is imperative. Enter Financial Planning & Analysis (FP&A) – an often underappreciated yet pivotal function that can revolutionize how businesses plan, analyze, and project their financial future.
What exactly is FP&A? At its core, FP&A serves as the bridge between strategic planning and its execution. It’s the analytical arm of the finance department, scrutinizing past performances and forecasting future trends. While traditional accounting looks backward, detailing where a company has been, FP&A looks forward, charting where it’s headed. It complements the accounting function by bringing an analytical and predictive dimension to the table. Together, they provide a holistic view of a company’s financial health.
FP&A is more than a tool reserved for accountants or financial experts. It’s an invaluable financial guide that acts as a compass for every entrepreneur and project manager. This financial guide offers:
By analyzing financial trends, FP&A drives strategic direction, ensures profitable revenues, and assists in budgeting and forecasting. It’s no wonder that businesses integrating FP&A report a 30% increase in forecast accuracy.
The business world is in constant flux. The days of static annual reviews have been left behind. With rapidly changing market dynamics, agility in financial planning isn’t a luxury—it’s a necessity. This fluid approach ensures that businesses remain proactive, ready to seize opportunities or avoid impending challenges.
Steps to Seamlessly Integrate FP&A in Project Planning
By understanding the nuances of FP&A and weaving it into business processes, companies can make informed decisions, minimize risks, and amplify profitability. In the unpredictable world of modern commerce, FP&A stands as a trusted compass, guiding firms towards a brighter future.
Inheritance brings its own set of challenges. Within the vast world of financial legacies, inherited Individual Retirement Accounts (IRAs) stand out thanks to their annual withdrawal requirements, also known as Required Minimum Distributions (RMDs). With these RMDs comes the caveat of taxation. However, when the Secure Act of 2019 was introduced, it brought clarity and confusion, mainly by introducing new beneficiary categories.
The Secure Act ushered in three beneficiary categories, each with distinct withdrawal rules:
Many beneficiaries, particularly NEDBs, found these rules intricate. The real task was classifying themselves correctly and adhering to the associated RMD rules to avoid tax penalties.
In response to the confusion stemming from the Secure Act’s implementation, the IRS released Notice 2022-53 in October 2022. For those beneficiaries whose original IRA owner had begun their RMDs, they must commence their own RMDs in the year following the owner’s passing. Furthermore, the complete balance should be dispensed by the 10th year after the owner’s death.
Recognizing the challenges arising from the Secure Act, the IRS also waived penalties for NEDBs who missed RMDs in 2021 and 2022 to show its commitment to assist during these regulatory transitions.
Things to remember:
To navigate the inherited IRA terrain confidently, beneficiaries should:
Although financial regulations seem intimidating, beneficiaries can efficiently manage their inherited IRAs with the right guidance and proactive approach. By understanding their specific obligations under the Secure Act and seeking expert advice, beneficiaries can comply with regulations and make informed decisions that honor their inheritances and bolster their financial futures.
The SECURE 2.0 law, which was enacted last year, contains wide-ranging changes to retirement plans. One provision in the law is that eligible employers will soon be able to provide more help to staff members facing emergencies. This will be done through what the law calls “pension-linked emergency savings accounts.”
Effective for plan years beginning January 1, 2024, SECURE 2.0 permits a plan sponsor to amend its 401(k), 403(b) or government 457(b) plan to offer emergency savings accounts that are connected to the plan.
If a retirement plan participant withdraws money from an employer plan before reaching age 59½, a 10% additional tax or penalty generally applies unless an exception exists. This is on top of the ordinary tax that may be due.
The goal of these emergency accounts is to encourage employees to save for retirement while still providing access to their savings if emergencies arise. Under current law, there are specific exceptions when employees can withdraw money from their accounts without paying the additional 10% penalty but they don’t include all of the emergencies that an individual may face. For example, while participants can take penalty-free distributions to pay eligible medical expenses, they can’t take them for car repairs.
Here are some features of pension-linked emergency savings accounts:
In addition to these accounts, SECURE 2.0 adds a new exception for certain retirement plan distributions used for emergency expenses, which are defined as unforeseeable or immediate financial needs relating to personal or family emergencies. Only one distribution of up to $1,000 is permitted a year, and a taxpayer has the option to repay the distribution within three years. This provision is effective for distributions beginning January 1, 2024.
In addition to what is outlined here, other rules apply to pension-linked emergency savings accounts. The IRS is likely to issue additional guidance in the next few months. Be aware that plan sponsors don’t have to offer these accounts and many employers may find that they need more time to establish them before 2024. Or they may decide there are too many administrative hurdles to clear. Contact us with questions.
© 2023
As a business owner, your goal is to ensure your venture thrives and prospers. An essential aspect of this journey involves maintaining a clear, accurate financial perspective that allows you to make informed decisions. But what happens when accounting errors creep into this clear vision? These unintentional mistakes can significantly hinder your business’s growth and profitability.
By understanding these errors, their implications, and ways to prevent them, you can maintain the financial health of your organization and keep your business on a growth trajectory. This article delves into common accounting errors that impede business growth and how to avoid them.
Accounting errors are unintentional inaccuracies in your financial books. These can be clerical mistakes or incorrect applications of accounting principles, ranging from duplicate entries to record omissions. While they may seem minor, these errors can lead to significant financial discrepancies, skew your business’s financial health perception, and potentially impede growth.
Several common types of accounting errors can negatively affect your business. Let’s look at a few of the common errors, and what the effects could be:
Common Errors |
|
|
Error of Original Entry |
when an incorrect amount is posted to an account, which could result in skewed financial reports and affect your decision-making. |
|
Errors of Duplication |
lead to incorrect perceptions of expenses. |
| Errors of Omission | could cause under-reporting of your liabilities or income. |
| Errors of Entry Reversal | where debits are recorded as credits and vice versa, can affect your understanding of financial position and performance. |
| Errors of Principle | which involve misapplication of accounting principles, can lead to misclassification of your expenses or assets. |
| Error of Commission | happens when an entry is posted correctly to an account but incorrectly to a subsidiary account, creating confusion and mismanagement of client accounts or vendor payments. |
|
Compensating Errors |
where one error offsets another, can mask actual problems, leading to potential financial crises. |
Recognizing and rectifying accounting errors in your business operations holds immense value. For example:
Perhaps most critically, it safeguards your business against potential financial crises by unmasking issues that may otherwise be hidden. Proactively identifying and addressing accounting errors is a proactive step toward financial accuracy, operational efficiency, and sustainable business growth.
Now that we understand the potential pitfalls, let’s focus on how you can prevent these errors from stunting your business’s growth.
While keeping these errors at bay may seem challenging, remember that every step toward error-free accounting is a step toward your business’s sustainable growth.
Accounting errors can be more than a mere annoyance. They can obscure the financial health of your business, leading to misinformed decisions and hindering growth. By understanding and preventing these errors, you safeguard your financial records and gain reliable insights to propel your business forward. Remember, an accurate financial perspective is key to informed decision-making and, ultimately, the success of your venture.
If you operate your small business as a sole proprietorship, you may have thought about forming a limited liability company (LLC) to protect your assets. Or maybe you’re launching a new business and want to know your options for setting it up. Here are the basics of operating as an LLC and why it might be a good choice for your business.
An LLC is a bit of a hybrid entity because it can be structured to resemble a corporation for owner liability purposes and a partnership for federal tax purposes. This duality may provide the owners with the best of both worlds.
Like the shareholders of a corporation, the owners of an LLC (called “members” rather than shareholders or partners) generally aren’t liable for the debts of the business except to the extent of their investment. Thus, the owners can operate the business with the security of knowing that their personal assets are protected from the entity’s creditors. This protection is much greater than that afforded by partnerships. In a partnership, the general partners are personally liable for the debts of the business. Even limited partners, if they actively participate in managing the business, can have personal liability.
The owners of an LLC can elect under the “check-the-box” rules to have the entity treated as a partnership for federal tax purposes. This can provide a number of benefits to the owners. For example, partnership earnings aren’t subject to an entity-level tax. Instead, they “flow through” to the owners, in proportion to the owners’ respective interests in profits, and are reported on the owners’ individual returns and taxed only once.
To the extent the income passed through to you is qualified business income, you’ll be eligible to take the Section 199A pass-through deduction, subject to various limitations. (However, keep in mind that the pass-through deduction is temporary. It’s available through 2025, unless Congress acts to extend it.)
In addition, since you’re actively managing the business, you can deduct on your individual tax return your ratable shares of any losses the business generates. This, in effect, allows you to shelter other income that you (and your spouse, if you’re married) may have.
An LLC that’s taxable as a partnership can provide special allocations of tax benefits to specific partners. This can be a notable reason for using an LLC over an S corporation (a form of business that provides tax treatment that’s similar to a partnership). Another reason for using an LLC over an S corp is that LLCs aren’t subject to the restrictions the federal tax code imposes on S corps regarding the number of owners and the types of ownership interests that may be issued.
In conclusion, an LLC can give you corporate-like protection from creditors while providing the benefits of taxation as a partnership. For these reasons, you may want to consider operating your business as an LLC. Contact us to discuss in more detail how an LLC might be an appropriate choice for you and the other owners.
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If you play a major role in a closely held corporation, you may sometimes spend money on corporate expenses personally. These costs may end up being nondeductible both by an officer and the corporation unless the correct steps are taken. This issue is more likely to happen with a financially troubled corporation.
In general, you can’t deduct an expense you incur on behalf of your corporation, even if it’s a legitimate “trade or business” expense and even if the corporation is financially troubled. This is because a taxpayer can only deduct expenses that are his own. And since your corporation’s legal existence as a separate entity must be respected, the corporation’s costs aren’t yours and thus can’t be deducted even if you pay them.
To make matters worse, the corporation won’t generally be able to deduct them either because it didn’t pay them itself. Accordingly, be advised that it shouldn’t be a practice of your corporation’s officers or major shareholders to cover corporate costs.
On the other hand, if a corporate executive incurs costs that relate to an essential part of his or her duties as an executive, they may be deductible as ordinary and necessary expenses related to his or her “trade or business” of being an executive. If you wish to set up an arrangement providing payments to you and safeguarding their deductibility, a provision should be included in your employment contract with the corporation stating the types of expenses which are part of your duties and authorizing you to incur them. For example, you may be authorized to attend out-of-town business conferences on the corporation’s behalf at your personal expense.
Alternatively, to avoid the complete loss of any deductions by both yourself and the corporation, an arrangement should be in place under which the corporation reimburses you for the expenses you incur. Turn the receipts over to the corporation and use an expense reimbursement claim form or system. This will at least allow the corporation to deduct the amount of the reimbursement.
Contact us if you’d like assistance or would like to discuss these issues further.
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If you own an unincorporated small business, you probably don’t like the size of your self-employment (SE) tax bills. No wonder!
For 2023, the SE tax is imposed at the painfully high rate of 15.3% on the first $160,200 of net SE income. This includes 12.4% for Social Security tax and 2.9% for Medicare tax. The $160,200 Social Security tax ceiling is up from the $147,000 ceiling for 2022, and it’s only going to get worse in future years, thanks to inflation. Above the Social Security tax ceiling, the Medicare tax component of the SE tax continues at a 2.9% rate before increasing to 3.8% at higher levels of net SE income thanks to the 0.9% additional Medicare tax, on all income.
For wages paid in 2023 to an S corporation employee, including an employee who also happens to be a shareholder, the FICA tax wage withholding rate is 7.65% on the first $160,200 of wages: 6.2% for Social Security tax and 1.45% for Medicare tax. Above $160,200, the FICA tax wage withholding rate drops to 1.45% because the Social Security tax component is no longer imposed. But the 1.45% Medicare tax wage withholding hits compensation no matter how much you earn, and the rate increases to 2.35% at higher compensation levels thanks to the 0.9% additional Medicare tax.
An S corporation employer makes matching payments except for the 0.9% Additional Medicare tax, which only falls on the employee. Therefore, the combined employee and employer FICA tax rate for the Social Security tax is 12.4%, and the combined rate for the Medicare tax is 2.9%, increasing to 3.8% at higher compensation levels — same as the corresponding SE tax rates.
Note: In this article, we’ll refer to the Social Security and Medicare taxes collectively as federal employment taxes whether paid as SE tax for self-employed folks or FICA tax for employees.
While wages paid to an S corporation shareholder-employee get hit with federal employment taxes, any remaining S corp taxable income that’s passed through to the employee-shareholder is exempt from federal employment taxes. The same is true for cash distributions paid out to a shareholder-employee. Since passed-through S corporation taxable income increases the tax basis of a shareholder-employee’s stock, distributions of corporate cash flow are usually free from federal income tax.
In appropriate circumstances, an S corp can follow the tax-saving strategy of paying modest, but justifiable, salaries to shareholder-employees. At the same time, it can pay out most or all of the remaining corporate cash flow in the form of federal-employment-tax-free shareholder distributions. In contrast, an owner’s share of net taxable income from a sole proprietorship, partnership and LLC (treated as a partnership for tax purposes) is generally subject to the full ravages of the SE tax.
Running your business as an S corporation and paying modest salaries to the shareholder-employee(s) may mean reduced capacity to make deductible contributions to tax-favored retirement accounts. For example, if an S corporation maintains a SEP, the maximum annual deductible contribution for a shareholder-employee is limited to 25% of salary. So the lower the salary, the lower the maximum contribution. However, if the S corp sets up a 401(k) plan, paying modest salaries generally won’t preclude generous contributions.
Converting an unincorporated business into an S corporation has other legal and tax implications. It’s a big decision. We can explain all the issues.
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If you own or manage a business with employees, there’s a harsh tax penalty that you could be at risk for paying personally. The Trust Fund Recovery Penalty (TFRP) applies to Social Security and income taxes that are withheld by a business from its employees’ wages.
The TFRP is dangerous because it applies to a broad range of actions and to a wide range of people involved in a business.
Here are some answers to questions about the penalty:
What actions are penalized? The TFRP applies to any willful failure to collect, or truthfully account for, and pay over taxes required to be withheld from employees’ wages.
Why is it so harsh? Taxes are considered the government’s property. The IRS explains that Social Security and income taxes “are called trust fund taxes because you actually hold the employee’s money in trust until you make a federal tax deposit in that amount.”
The penalty is sometimes called the “100% penalty” because the person found liable is personally penalized 100% of the taxes due. The amounts the IRS seeks are usually substantial and the IRS is aggressive in enforcing the penalty.
Who’s at risk? The penalty can be imposed on anyone “responsible” for collecting and paying tax. This has been broadly defined to include a corporation’s officers, directors and shareholders, a partnership’s partners and any employee with related duties. In some circumstances, voluntary board members of tax-exempt organizations have been subject to this penalty. In other cases, responsibility has been extended to professional advisors and family members close to the business.
According to the IRS, responsibility is a matter of status, duty and authority. Anyone with the power to see that taxes are (or aren’t) paid may be responsible. There’s often more than one responsible person in a business, but each is at risk for the entire penalty. You may not be directly involved with the payroll tax withholding process in your business. But if you learn of a failure to pay withheld taxes and have the power to pay them, you become a responsible person. Although taxpayers held liable can sue other responsible people for contribution, this action must be taken entirely on their own after the TFRP is paid.
What’s considered willful? There doesn’t have to be an overt intent to evade taxes. Simply paying bills or obtaining supplies instead of paying over withheld taxes is willful behavior. And just because you delegate responsibilities to someone else doesn’t necessarily mean you’re off the hook. Failing to do the job yourself can be treated as willful.
Here are two cases that illustrate the risks.
Under no circumstances should you “borrow” from withheld amounts. All funds withheld should be paid over to the government on time. Contact us with any questions.
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As a small business owner, every decision you make can significantly impact your business’s financial health and profitability. Among your numerous choices, selecting the right accounting method for your business stands out for its importance. The accounting method you opt for shapes your business’s bookkeeping practices, affects your financial reporting, tax liabilities, and profitability, and influences your future decisions. This article aims to demystify the two primary accounting methods – cash and accrual accounting, helping you understand their implications and selecting the most appropriate one for your business’s needs.
At the core of accounting lie two main methods: cash-based and accrual-based accounting. Each approach has pros and cons and varies in suitability depending on your business’s size, scale, and nature.
Cash-Based Accounting: This method, characterized by simplicity and straightforwardness, records transactions only when cash is received or paid. It provides a clear picture of your actual cash flow, making it an ideal choice for small businesses, sole proprietors, or companies operating without inventory or on a purely cash basis. However, it’s worth noting that while this method helps you monitor your cash inflows and outflows closely, it might not offer a comprehensive overview of your financial health since it doesn’t account for outstanding receivables or payables.
Accrual-Based Accounting: Though more complex, this method provides a comprehensive picture of your financial status. Accrual-based accounting records income and expenses as earned or incurred, regardless of the actual cash transaction’s timing. It accounts for receivables, payables, assets, and liabilities, offering a real-time snapshot of your business’s financial status. This method benefits larger companies dealing with inventory, credit transactions, or businesses that are required to comply with Generally Accepted Accounting Principles (GAAP). However, it may seem overwhelming for small businesses due to its complexity and the resources required to maintain detailed records.
Deciding between cash-based and accrual-based accounting requires careful consideration of several key factors:
Remember, choosing an accounting method is not merely about understanding numbers; it’s about using this understanding to make informed decisions that align with your business’s financial goals. By selecting the right accounting method – cash or accrual – you can gain valuable insights into your business’s financial health and make decisions that steer your business toward a profitable future. The right choice will empower you, equipping you with the financial clarity necessary to successfully navigate your business’s financial landscape.
Here are some of the key tax-related deadlines affecting businesses and other employers during the third quarter of 2023. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.
July 31
August 10
September 15
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When managing a business, KPIs can help provide insight into the business’s current health and past health. But what if you could use the data available to predict what KPIs will be in the future based on certain business decisions? With data science and machine learning, predictive analytics can be a reality for your business.
In recent years, Artificial Intelligence (AI) and the amount of information available have grown exponentially, making integrating newer technologies into your business seem daunting or expensive, but it doesn’t have to be. AI uses data available to predict the outcomes of different business decisions on different levels. With the right models, AI can predict current customer preferences to help drive product development and forecast future demand.
As a CFO or business owner, you may find some hang-ups incorporating data science into your business strategy and reporting. With many other aspects of the business pulling your focus, you might find you’re continually attaching the label “later” to the project. Even if it’s not front of mind, it is an important task that could help you make better business decisions. In addition, the cost and time associated with implementing forward-thinking KPIs into strategy aren’t as expensive as you might think because jumping right in with a complete overhaul of your KPI dashboard and reporting programs is unnecessary. Getting started can be simplified by following the below steps.
While it may seem intuitive to give the data scientists and IT team cart blanche in implementing the AI programs, telling them to do what they do best, it’s essential to include the people who know your prospective client the best, as they are better versed in what questions to ask to get the answers they need to improve strategy. Look to your marketing, business development, and revenue teams to help guide this direction.
Implementing new predictive data science into your business strategy can be a massive, time-consuming task. Start by identifying the most critical KPIs and working with data to help move those numbers. Once you’ve identified your metrics, check if other businesses have tracked those metrics previously. There’s likely a framework you can follow instead of starting from scratch with data like transactional information, web analytics, and social media, saving you time.
Most marketing teams share similar challenges and goals when obtaining new clients. Focus on how your team measures ROI regarding acquisition, retention, and engagement and use that to generate future predictions. From there, analyze clients by predicting their lifetime value a few days after acquisition, then again at 7, 14, 30, and 180 days.
Once you have started to look at predictive insights to impact core KPIs, continue to look toward the future instead of falling back into habits of reviewing a snapshot of the past. Doing so will allow you to make decisions on which types of clients to focus on and where to invest your marketing and business development resources.
Embracing the recent advances in data science can help more efficiently direct your business’s time and resources to tasks that will improve your business’s performance.
As we approach the halfway point of 2023, it’s the perfect opportunity to evaluate your business tax planning and determine ways to decrease your tax burden. Employing the right strategies can reduce your taxes, optimize your cash flow, and enhance your long-term financial success.
In this article, we’ll introduce three tax strategies for 2023: Roth IRA conversions, tax loss harvesting, and year-round charitable giving. By familiarizing yourself with these tactics and how they can benefit your enterprise, you can make well-informed decisions and capitalize on available tax savings. Let’s dive into these tax-saving concepts and explore the options available for your business.
Roth IRA conversions effectively transform a portion of your traditional IRA into a tax-free asset that can provide you with cash distributions in your retirement years. Converting a portion of your traditional IRA can save you taxes at a potentially lower marginal tax rate and create a tax-free asset that can serve as a mechanism for tax redistribution during retirement. Even better, consider using this strategy as a future legacy asset for your beneficiaries.
By converting to a Roth IRA, you can ensure your desired assets are passed onto your loved ones.
Tax loss harvesting is a strategy that involves taking advantage of market volatility to generate a tax asset using captured capital losses. These losses can be used to offset future capital gains, and any remaining losses can be used to offset gains in subsequent years. Another effective strategy involves pairing these losses with qualified opportunity zones, which can further reduce your tax liabilities.
Investors who suffered losses due to the steep decline of the cryptocurrency and stock markets can benefit from this approach. The recent market downturn could also lead more investors to opportunity zone funds, presenting an excellent opportunity to maximize tax benefits.
End-of-year charitable donations have long been a go-to for taxpayers seeking tax deductions. However, there are benefits to giving year-round, especially when combined with investments.
For example, investors with appreciated securities in a taxable account can use these securities to fulfill their philanthropic goals. This strategy allows for a fair market value deduction without having to pay taxes on the capital gain. It’s a practical way to donate without sacrificing your end-of-the-year cash or check donation.
Charitable remainder trusts offer another means of donating to worthwhile causes and taking advantage of tax breaks. Although the lower interest rates over the last few years have cooled investor interest in these trusts, the benefits of using these trusts become increasingly clear as rates rise.
Don’t wait until the end of the year to give back. Consider these charitable giving strategies to boost your philanthropic impact and build a better future.
Remember, it’s essential to review your tax planning regularly to take advantage of available opportunities and ensure you’re putting your assets to their best use. With these actionable takeaways, you can start making informed decisions today and set your business up for long-term financial success.
The IRS recently released guidance providing the 2024 inflation-adjusted amounts for Health Savings Accounts (HSAs).
An HSA is a trust created or organized exclusively for the purpose of paying the “qualified medical expenses” of an “account beneficiary.” An HSA can only be established for the benefit of an “eligible individual” who is covered under a “high-deductible health plan.” In addition, a participant can’t be enrolled in Medicare or have other health coverage (exceptions include dental, vision, long-term care, accident and specific disease insurance).
Within specified dollar limits, an above-the-line tax deduction is allowed for an individual’s contributions to an HSA. This annual contribution limitation and the annual deductible and out-of-pocket expenses under the tax code are adjusted annually for inflation.
In Revenue Procedure 2023-23, the IRS released the 2024 inflation-adjusted figures for contributions to HSAs, which are as follows:
Annual contribution limitation. For calendar year 2024, the annual contribution limitation for an individual with self-only coverage under an HDHP will be $4,150. For an individual with family coverage, the amount will be $8,300. This is up from $3,850 and $7,750, respectively, in 2023.
There is an additional $1,000 “catch-up” contribution amount for those age 55 and older in 2024 (and 2023).
High-deductible health plan defined. For calendar year 2024, an HDHP will be a health plan with an annual deductible that isn’t less than $1,600 for self-only coverage or $3,200 for family coverage (up from $1,500 and $3,000, respectively, in 2023). In addition, annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) won’t be able to exceed $8,050 for self-only coverage or $16,100 for family coverage (up from $7,500 and $15,000, respectively, in 2023).
There are a variety of benefits to HSAs. Contributions to the accounts are made on a pre-tax basis. The money can accumulate tax-free year after year and can be withdrawn tax-free to pay for a variety of medical expenses such as doctor visits, prescriptions, chiropractic care and premiums for long-term care insurance. In addition, an HSA is “portable.” It stays with an account holder if he or she changes employers or leaves the workforce. Contact your employee benefits and tax advisors if you have questions about HSAs at your business.
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As a business owner, you understand the importance of making the right decisions and keeping your finances to survive. When you want to thrive, however, you need the kind of insight and experience that will drive strategy and deliver results. The sharp financial perspective of a CFO can make a world of difference in a company’s success, but hiring one isn’t always feasible or affordable. Enter the Chief Financial Officer consultant. A CFO consultant can assess your financial situation, market nuances, and industry outlook to bring the big picture into focus. Keep reading to learn how the perspective of a CFO can benefit your business.
While you may think of a CFO as another accountant or finance-focused person, the reality is much more complex. The best CFOs are responsible for many essential business tasks and decisions, which business owners may need more time or knowledge to focus on. The role of the CFO means looking at the past to find the best ways to drive the present into the future the organization wants. They work with budgets, forecasts, vendor relationships, tax strategy, compliance, succession planning, and more to guide other leaders toward a unified goal.
When you bring a CFO on full-time, they look for ways to save costs and drive additional financial growth for the organization. Some of the ways they do this are by working with the following:
Working with an outsourced Chief Financial Officer provides a level of expertise based on experience with other clients who are either within your industry or have been through similar situations. This experience allows them to provide scalable knowledge and assistance without the hours of research a business owner or manager may have to complete for the same results. The CFO is focused on the larger picture and understands which details will make a difference in the future of the business.
The cost of bringing on a full-time CFO is unrealistic for many businesses, but that doesn’t mean they need to go without a CFO perspective. CFO consultants, or outsourced CFOs, provide the value of a CFO without being cost-prohibitive. Many businesses that work with an outsourced CFO experience cost-savings or revenue growth that either makes up for or outpaces the outlay for the consulting service.
Whether you’ve hit a wall or feel like your business could be doing so much more, there are many reasons to seek an outsider’s perspective. Don’t leave this critical task to just anyone; work with someone who has experience directing businesses through important decisions. They can help you face strategic challenges, deliberate on new avenues of growth, or convert decisions into action.
If you’re ready to bring in the expertise of a CFO, contact our professionals here.
If you’re the owner of an incorporated business, you know there’s a tax advantage to taking money out of a C corporation as compensation rather than as dividends. The reason: A corporation can deduct the salaries and bonuses that it pays executives, but not dividend payments. Therefore, if funds are paid as dividends, they’re taxed twice, once to the corporation and once to the recipient. Money paid out as compensation is only taxed once — to the employee who receives it.
However, there are limits to how much money you can take out of the corporation this way. Under tax law, compensation can be deducted only to the extent that it’s reasonable. Any unreasonable portion isn’t deductible and, if paid to a shareholder, may be taxed as if it were a dividend. Keep in mind that the IRS is generally more interested in unreasonable compensation payments made to someone “related” to a corporation, such as a shareholder-employee or a member of a shareholder’s family.
There’s no simple way to determine what’s reasonable. If the IRS audits your tax return, it will examine the amount that similar companies would pay for comparable services under similar circumstances. Factors that are taken into account include the employee’s duties and the amount of time spent on those duties, as well as the employee’s skills, expertise and compensation history. Other factors that may be reviewed are the complexities of the business and its gross and net income.
There are four steps you can take to make it more likely that the compensation you earn will be considered “reasonable,” and therefore deductible by your corporation:
You can avoid problems and challenges by planning ahead. Contact us if you have questions or concerns about your situation.
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Fraud. Scam. Phishing. Regardless of what you call these illicit activities, it’s important to protect yourself against the bad players that take advantage of weaknesses for their gain. Not only is it inconvenient, but there’s often a financial cost when you’re a victim of fraud.
The IRS releases an annual ‘Dirty Dozen’ list featuring the top taxpayer scams for the coming year. The list is certainly not exhaustive of every potential pitfall out there, but it is an excellent place to start educating yourself (and your team if you’re a business owner). Here’s a summary of the 2023 IRS Dirty Dozen.
Employer Retention Credit Promoters: Businesses have been targeted by companies claiming to help them submit tax returns and adjustments to take maximum advantage of the Employee Retention Credit (ERC). These promoters collect a fee for preparation services, which is often tied to the value of the proposed credit. Usually, the targeted businesses don’t qualify for the credit, so when the adjustment claim is either rejected by the IRS or found to be incorrect during an audit, the business is out the funds paid to the promoter, as well as any monies received from the ERC they were not eligible for and potential IRS fees.
Phishing and Smishing Scams: Emails, texts, phone calls. These are all popular channels for scammers trying to obtain sensitive information from taxpayers by lying and saying they work for the IRS. Please remember that the IRS will always initiate contact with taxpayers by mail.
Online Account Assistance: The IRS Online Account tool provides helpful information to taxpayers. Scammers are using this as an opportunity to learn social security numbers and other sensitive information by calling and offering to help taxpayer set up their online accounts. This can lead to identity theft and a big headache for taxpayers trying to sort everything out.
Fuel Tax Credit Promoters: Like the Employee Retention Credit promotors, Fuel Tax Credit promoters claim that the taxpayer is qualified for the credit when they may not be. These scammers usually charge a big fee to assist the taxpayer in submitting these claims.
Fake Charity Scams: Major disasters like hurricanes, floods, and wildfires can lead to an increase in counterfeit charities to dupe taxpayers. When these disasters occur, people want to help those affected. Scammers take advantage of this generosity by using fake charities as a front for stealing money and private information. Be sure to take the time to thoroughly research any organization before donating.
Shady Tax Preparers: Common warning signs of a shady tax preparer include charging a fee based on the size of the refund or refusing to sign the form as a preparer as required by law. Make sure you’re using a trusted and knowledgeable tax preparer.
Social Media Trends: While this may seem unsurprising to most, it bears repeating – you can’t always trust what you hear on the internet. Social media can circulate misinformation quickly, including ‘hacks’ for getting a bigger tax refund. These trends usually involve lying on tax forms or creating false income. The IRS reminds taxpayers that falsifying tax documents is illegal and penalties are involved.
Spearphishing Email Scams: Bad players have been sending email requests to tax preparers, and payroll and human resources teams to try and gain sensitive client and employee data like W-2 information. These requests can look like they’re from a potential new client, and the scammers then use the data they collect to submit a series of false tax refund filings and collect on the tax returns. Businesses can protect themselves with these cybersecurity tips.
Offer in Compromise Mills: Promoters target taxpayers that owe the IRS money by offering to settle their debts with the IRS at a steep discount for a fee. Many times, the targeted taxpayers don’t meet the technical requirements to obtain an offer, meaning they still owe the IRS the same amount and are paying excessive fees to these companies. Taxpayers can check their eligibility for an Offer in Compromise using this free IRS tool.
Charitable Remainder Annuity Trust Schemes: Promoters can misuse Charitable Remainder Annuity Trusts and monetized installment sales by misapplying the rules, leaving filers vulnerable. These types of schemes are often targeted at wealthy taxpayers.
Tax Avoidance Schemes: The IRS warns taxpayers to be wary of anyone claiming to reduce their taxes owed drastically or even to nothing. This could include micro-captive insurance arrangements, international accounts, and syndicated conservation easements.
Be diligent with your information, teach your employees how to recognize scams, and be sure to discuss any changes in tax strategy with your trusted tax professional. If anyone contacts you with a claim that seems too good to be true, it probably is.
California taxpayers should note the changes made to these tax laws over the last several months. Here’s an overview of what you may have missed:
California law requires holders of unclaimed property to attempt to notify owners of the property regularly, to keep records of the property and to turn over the property to the State Controller’s Office after the appropriate dormancy period. Unclaimed property could be:
Under California Assembly Bill 466, the dormancy period has been set to one year for payroll accounts and three years for Securities, Accounts Receivable and Payable, and Disbursements. The law also requires businesses to review their books and records annually to determine if they have any unclaimed property to report. Keep in mind, businesses must also complete the following reporting requirements:
In addition, the State of California identifies the following filling and reporting deadlines:
Personal property owners in California will receive annual assessments and tax bills for the personal property based on their county or local jurisdiction laws. In order to stay in compliance with tax laws, keep these points in mind:
The Tax Cuts and Jobs Act limited the state tax deduction for personal income in pass-through entities to $10,000. In California, pass-through entities pay tax, and the PTE owns remain taxable on the distributive shares of income. However, the owners receive a tax credit for a share of the PTE tax. The nonrefundable tax credit can be carried forward for up to 5 years.
In order to qualify as a pass-through entity, the election must be made annually and consented to by each owner to the pass-through entity. Payments of more than $1,000 or 50% of the prior year PTE tax are due by June 15 of the current tax year, with the remaining due on March 15 of the following year. This is effective for tax years beginning January 1, 2021 or later and before January 1, 2026.
The following are business taxes that business owners should be aware of for San Francisco and Los Angeles.
In late 2022 and early 2023, California issued qualified taxpayers a total of $9.2 billion in refunds of tax overpayments, called the Middle Class Tax Refund. The State of California noted these payments are not liable for state taxes previously. In February, the IRS determined that it will not challenge the tax treatment of these payments on 2022 tax filings, citing their general welfare and disaster relief exception.
Due to historically high rain, snow, and flooding in much of California, the IRS is offering disaster relief assistance in the form of due date extensions on required tax filings and payments. The new deadline for tax payments due from January through October is October 16, 2023. This includes:
For more information on the counties qualified for tax relief and what payments have been extended, please visit the IRS press release or call our team.
If you’re thinking about setting up a retirement plan for yourself and your employees, but you’re worried about the financial commitment and administrative burdens involved, there are a couple of options to consider. Let’s take a look at a “simplified employee pension” (SEP) or a “savings incentive match plan for employees” (SIMPLE).
SEPs are intended as an attractive alternative to “qualified” retirement plans, particularly for small businesses. The features that are appealing include the relative ease of administration and the discretion that you, as the employer, are permitted in deciding whether or not to make annual contributions.
If you don’t already have a qualified retirement plan, you can set up a SEP simply by using the IRS model SEP, Form 5305-SEP. By adopting and implementing this model SEP, which doesn’t have to be filed with the IRS, you’ll have satisfied the SEP requirements. This means that as the employer, you’ll get a current income tax deduction for contributions you make on behalf of your employees. Your employees won’t be taxed when the contributions are made but will be taxed later when distributions are made, usually at retirement. Depending on your needs, an individually-designed SEP — instead of the model SEP — may be appropriate for you.
When you set up a SEP for yourself and your employees, you’ll make deductible contributions to each employee’s IRA, called a SEP-IRA, which must be IRS-approved. The maximum amount of deductible contributions that you can make to an employee’s SEP-IRA, and that he or she can exclude from income, is the lesser of: 25% of compensation and $66,000 for 2023. The deduction for your contributions to employees’ SEP-IRAs isn’t limited by the deduction ceiling applicable to an individual’s own contribution to a regular IRA. Your employees control their individual IRAs and IRA investments, the earnings on which are tax-free.
There are other requirements you’ll have to meet to be eligible to set up a SEP. Essentially, all regular employees must elect to participate in the program, and contributions can’t discriminate in favor of the highly compensated employees. But these requirements are minor compared to the bookkeeping and other administrative burdens connected with traditional qualified pension and profit-sharing plans.
The detailed records that traditional plans must maintain to comply with the complex nondiscrimination regulations aren’t required for SEPs. And employers aren’t required to file annual reports with IRS, which, for a pension plan, could require the services of an actuary. The required recordkeeping can be done by a trustee of the SEP-IRAs — usually a bank or mutual fund.
Another option for a business with 100 or fewer employees is a “savings incentive match plan for employees” (SIMPLE). Under these plans, a “SIMPLE IRA” is established for each eligible employee, with the employer making matching contributions based on contributions elected by participating employees under a qualified salary reduction arrangement. The SIMPLE plan is also subject to much less stringent requirements than traditional qualified retirement plans. Or, an employer can adopt a “simple” 401(k) plan, with similar features to a SIMPLE plan, and automatic passage of the otherwise complex nondiscrimination test for 401(k) plans.
For 2023, SIMPLE deferrals are up to $15,500 plus an additional $3,500 catch-up contributions for employees ages 50 and older.
Contact us for more information or to discuss any other aspect of your retirement planning.
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If you’re starting a business with some partners and wondering what type of entity to form, an S corporation may be the most suitable form of business for your new venture. Here are some of the reasons why.
A big benefit of an S corporation over a partnership is that as S corporation shareholders, you won’t be personally liable for corporate debts. In order to receive this protection, it’s important that:
If you expect that the business will incur losses in its early years, an S corporation is preferable to a C corporation from a tax standpoint. Shareholders in a C corporation generally get no tax benefit from such losses. In contrast, as S corporation shareholders, each of you can deduct your percentage share of losses on your personal tax return to the extent of your basis in the stock and in any loans you made to the entity. Losses that can’t be deducted because they exceed your basis are carried forward and can be deducted by you in the future when there’s sufficient basis.
Once the S corporation begins to earn profits, the income will be taxed directly to you whether or not it’s distributed. It will be reported on your individual tax return and be aggregated with income from other sources. Your share of the S corporation’s income won’t be subject to self-employment tax, but your wages will be subject to Social Security taxes. To the extent the income is passed through to you as qualified business income (QBI), you’ll be eligible to take the 20% pass-through deduction, subject to various limitations.
Note: Unless Congress acts to extend it, the QBI deduction is scheduled to expire after 2025.
If you’re planning to provide fringe benefits such as health and life insurance, you should be aware that the costs of providing such benefits to a more than 2% shareholder are deductible by the entity but are taxable to the recipient.
Also, be aware that the S corporation could inadvertently lose its S status if you or your partners transfer stock to an ineligible shareholder, such as another corporation, a partnership, or a nonresident alien. If the S election was terminated, the corporation would become a taxable entity. You would not be able to deduct any losses, and earnings could be subject to double taxation — once at the corporate level and again when distributed to you. In order to protect against this risk, it’s a good idea for each shareholder to sign an agreement promising not to make any transfers that would jeopardize the S election.
Before finalizing your choice of entity, consult with us. We can answer any questions you have and assist in launching your new venture.
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The new lease accounting methods have been an important topic for businesses over the last few years. Determining if an enforceable lease exists is an integral part of Topic 842 that affects how and what gets reported under these lease accounting methods. Compliance for certain leases is being simplified for organizations that fall under common control arrangements, such as parent organizations and subsidiaries. The Financial Accounting Standards Board voted to enact the following changes when the update to Topic 842 is released.
The FASB has voted to adopt the proposed November update as written for nonprofit organizations and private entities under common control. This update would simplify the compliance approach for these organizations by allowing them to use written terms and conditions to help determine if an enforceable lease arrangement is in place. This workaround is expected to be welcomed by smaller organizations, as the complex analysis for lease agreements can be costly and take time.
The FASB allows this method under their ‘practical expedient’ policy. However, please note practical expedience cannot be used in the absence of written terms and conditions.
For properties under a common control lease, changes to the current standards are being made to account for improvements made to the property. Under the new rule, the cost of improvements should amortize over the ‘useful life’ of the improvements. This should be scheduled out regardless of lease terms if the common control lease group uses the property throughout the lease. Previously, improvements could only be amortized over the terms of the lease. This change applies to public, private, and nonprofit organizations.
Moving forward, you may need to change how your organization handles leases in common control groups. Do not act on these changes until the FASB formally releases the update, which is expected by the end of March 2023.
Lease accounting standards can be complex and confusing. For guidance on setting up your firm’s lease accounting system or auditing the current system in place, please get in touch with our knowledgeable team members today.
In our rapidly evolving information era, new rules and regulations pressure businesses to consolidate their financial reporting process. But depending on your financial system, running these reports can require extensive manual work, exposing your reporting to user errors. While many businesses have turned to enterprise resource planning (ERP) automation, a recent article claims less than half of companies’ automation initiatives are currently meeting their objectives. Combine these factors with a lack of workflow coordination, data inconsistencies, and feeble post-close review, and you have a recipe for disaster.
Organizations and CFOs often encounter problems with data quality management, missing skills and resources, support of the executive suite, and a lack of clear processes. If your company is spending more and more time on the financial close process, it is probably time to upgrade to a more agile approach. Start with these steps to improve your financial close process and streamline reporting.
Is your organization fully utilizing the features available in your current financial system? Evaluate software utilization, potential overlap, areas of overcomplexity, and poor standardization processes. A thorough review of your current system’s capabilities will help you understand what’s possible and introduce efficiencies to your organization.
The primary purpose of an enterprise resource planning (ERP) or financial management system is to provide a central database of all system applications. Robust database systems are key to modern finance departments but aren’t always ready to scale. Companies can fill the gaps in their current system with add-on point solutions or robotic process automation (RPA) but should be aware of cost, maintenance, and security implications. Plugging the gap will likely require a more strategic approach. Our professionals can help you orchestrate and implement process transformation that works with your systems and your business.
Poor-quality data can act as a stopgap. Make the time to understand the purpose of the data used in the business, where the numbers come from, and their relationships with other metrics. To reduce these speed bumps along the way:
Change is well and good, but progress will stall if you don’t have the support of the executive team or the people who will be implementing the change. Make certain the proposed changes align with the organization’s strategy. Then, align the people to the processes and each other. Organizations need to be able to pivot quickly. With buy-in from the correct individuals, you can shift your organization toward the future when regulatory updates arise or gaps are exposed.
Use these steps to build a technological infrastructure that allows for change and drives data efficiency. If you need recommendations on streamlining your financial reporting processes, contact our team of advisors today!
Under tax law, businesses can generally deduct advertising and marketing expenses that help keep existing customers and bring in new ones. This valuable tax deduction can help businesses cut their taxes.
However, in order to be deductible, advertising and marketing expenses must be “ordinary and necessary.” As one taxpayer recently learned in U.S. Tax Court, not all expenses are eligible. An ordinary expense is one that’s common and accepted in the industry. And a necessary expense is one that’s helpful and appropriate for the business.
According to the IRS, here are some advertising expenses that are usually deductible:
An attorney deducted his car-racing expenses and claimed they were advertising for his personal injury law practice. He contended that his racing expenses, totaling over $303,000 for six tax years, were deductible as advertising because the car he raced was sponsored by his law firm.
The IRS denied the deductions and argued that the attorney’s car racing wasn’t an ordinary and necessary expense paid or incurred while carrying on his business of practicing law. The Tax Court agreed with the IRS.
When making an ordinary and necessary determination for an expense, most courts look to the taxpayer’s primary motive for incurring the expense and whether there’s a “proximate” relationship between the expense and the taxpayer’s occupation. In this case, the taxpayer’s car-racing expenses were neither necessary nor common for a law practice, so there was no “proximate” relationship between the expense and the taxpayer’s occupation. And, while the taxpayer said his primary motive for incurring the expense was to advertise his law business, he never raced in the state where his primary law practice was located, and he never actually got any legal business from his car-racing activity.
The court noted that the car “sat in his garage” after he returned to the area where his law practice was located. The court added that even if the taxpayer raced in that area, “we would not find his expenses to be legitimate advertising expenses. His name and a decal for his law firm appeared in relatively small print” on his car.
This form of “signage,” the court stated, “is at the opposite end of the spectrum from (say) a billboard or a newspaper ad. Indeed, every driver’s name typically appeared on his or her racing car.” (TC Memo 2023-18)
There are no deductions allowed for personal expenses or hobbies. But as explained above, you can deduct ordinary and necessary advertising and marketing expenses in a bona fide business. The key to protecting your deductions is to keep meticulous records to substantiate them. Contact us with questions about your situation.
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With a recession on the horizon – or already here, depending on who you talk to – employees are feeling the sting of inflation, and employers are feeling the financial pinch from decreased consumer buying power and increased caution in spending. Traditionally, layoffs are one of the first options to save money, which harms productivity and employee morale in the long run. In today’s economic climate and tight labor market, CFOs have much to consider and a unique opportunity.
Americans are awful at using vacation hours. Even with lucrative time off policies, paid time off (PTO) hours can sit in a bank waiting to be used or cashed in when an employee leaves the company. The standard has been a tiered benefits package based on years of service with the organization. While the quality depends on the package, what’s true across the board is not every person will use every benefit. According to recent studies, women and persons of color are far less likely to use all their PTO. Furthermore, female team members are more likely to value an emergency fund than their male counterparts. Translation: your company is probably paying for benefits your employees may not use or value.
More and more companies are using convertible benefits to create flexibility and increase utilization, maximizing the employees’ value and balancing company’s cost.
Convertible benefits increase employee satisfaction. Approximately 80% of employees are not actively engaged, costing the company funds in productivity waste and increasing the likelihood of turnover.
Convertible benefits create an inclusive and attractive work culture. When recruiting new team members, studies show a diverse workforce is a key factor for many job seekers. A flexible benefits package can help attract talent from a range of backgrounds.
A convertible benefit program does not have to be complex. Employees should be able to use their PTO or trade it in for cash contributed to a retirement account or money to create an emergency fund. Younger team members may want to convert unused PTO into payments toward their student loans. The goal is to give the team options, listen to their feedback, and adjust where you can. For assistance reviewing your human capital costs and ideas on avoiding layoffs and salary reductions, please get in touch with our trusted team of professionals.
Merger and acquisition activity dropped dramatically last year due to rising interest rates and a slowing economy. The total value of M&A transactions in North America in 2022 was down 41.4% from 2021, according to S&P Global Market Intelligence.
But some analysts expect 2023 to see increased M&A activity in certain industries. If you’re considering buying or selling a business, it’s important to understand the tax implications.
Under current tax law, a transaction can basically be structured in two ways:
1. Stock (or ownership interest). A buyer can directly purchase a seller’s ownership interest if the target business is operated as a C or S corporation, a partnership, or a limited liability company (LLC) that’s treated as a partnership for tax purposes.
The current 21% corporate federal income tax rate makes buying the stock of a C corporation somewhat more attractive. That’s because the corporation will pay less tax and generate more after-tax income. Plus, any built-in gains from appreciated corporate assets will be taxed at a lower rate when they’re eventually sold.
The current individual federal tax rates have also made ownership interests in S corporations, partnerships, and LLCs more attractive. Reason: The passed-through income from these entities also is taxed at lower rates on a buyer’s personal tax return. However, individual rate cuts are scheduled to expire at the end of 2025.
2. Assets. A buyer can also purchase the assets of a business. This may happen if a buyer only wants specific assets or product lines. And it’s the only option if the target business is a sole proprietorship or a single-member LLC that’s treated as a sole proprietorship for tax purposes.
What buyers want
For several reasons, buyers usually prefer to buy assets rather than ownership interests. In general, a buyer’s primary goal is to generate enough cash flow from an acquired business to pay any acquisition debt and provide an acceptable return on the investment. Therefore, buyers are concerned about limiting exposure to undisclosed and unknown liabilities and minimizing taxes after a transaction closes.
A buyer can step up (or increase) the tax basis of purchased assets to reflect the purchase price. Stepped-up basis lowers taxable gains when certain assets, such as receivables and inventory, are sold or converted into cash. It also increases depreciation and amortization deductions for qualifying assets.
In general, sellers prefer stock sales for tax and nontax reasons. One of their objectives is to minimize the tax bill from a sale. That can usually be achieved by selling their ownership interests in a business (corporate stock, or partnership or LLC interests) as opposed to selling assets.
With a sale of stock or other ownership interest, liabilities generally transfer to the buyer, and any gain on sale is generally treated as lower-taxed long-term capital gain (assuming the ownership interest has been held for more than one year).
Be aware that other issues, such as employee benefits, can also cause tax issues in M&A transactions. Buying or selling a business may be the largest transaction you’ll ever make, so it’s important to seek professional assistance before finalizing a deal. After a transaction is complete, it may be too late to get the best tax results. Contact us about how to proceed.
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A business owner’s plate is quite full, if not overflowing, from the day-to-day operations to the background necessities like marketing and financial activities. The reality is it’s difficult to do everything and be everyone for your business. Working with an outsourced Chief Financial Officer, or vCFO, could be the right move for your business in 2023, and here is why.
Time management is crucial to the success of a business. Trying to handle financial risk assessments, financial reporting, record keeping, and even financial planning often diverts time away from other critical tasks. A vCFO will use their expertise and resources to complete financial tasks quickly and accurately, allowing you to redirect hours to other business functions.
As a business owner, you know your product or service and all the nuances inside and out. Customers pay you for your product, service, and expertise. When you outsource a CFO, you will gain access to decision support, new ideas, and an experienced perspective.
A vCFO can help with decision-making, financial ratio, cost-benefit, and pricing analyses. Or they can provide an outside perspective on future business moves you’re considering and ask the hard questions you may be afraid to ask.
Hiring a full-time CFO is either cost prohibitive or unrealistic if there isn’t 40 hours’ worth of work. Outsourcing allows businesses to pay only for the hours and tasks they need allowing the business to save money.
Getting bogged down in the minute details of running a business can cause business owners to miss the bigger picture and make it harder to shift when the winds of change come blowing in. Outsourcing financial tasks to an expert frees up time for the business owner to step back and see what opportunities and roadblocks may lie ahead. They can also be a sounding board and provide insight into the different directions you are considering.
Maybe your business finances need to be straightened out, you need help making heads or tails of the numbers, or your business isn’t bringing in the revenue you’d expect even with new customers and increasing sales. Outsourced CFOs bring a wealth of experience to the table that helps business owners by providing expert guidance through these scenarios. And, if you need to raise capital or investigate business loans, the outsourced CFO can also assist with those tasks.
There will come a time when the right move is moving on from the business. This could mean retirement or finding new opportunities elsewhere. Experienced CFOs can guide you through the various options and help you select the options that align best with your goals.
Are you ready to discuss what an outsourced CFO can do for your business? Reach out to our knowledgeable professionals to set up a time to discuss your goals and how you plan to get there.
Here are some of the key tax-related deadlines affecting businesses and other employers during the first quarter of 2023. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. If you have questions about filing requirements, contact us. We can ensure you’re meeting all applicable deadlines.
Give annual information statements to recipients of certain payments you made during 2022. You can use the appropriate version of Form 1099 or other information return. Form 1099 can be issued electronically with the consent of the recipient. This due date applies only to the following types of payments:
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How much can you and your employees contribute to your 401(k)s next year — or other retirement plans? In Notice 2022-55, the IRS recently announced cost-of-living adjustments that apply to the dollar limitations for pensions, as well as other qualified retirement plans for 2023. The amounts increased more than they have in recent years due to inflation.
The 2023 contribution limit for employees who participate in 401(k) plans will increase to $22,500 (up from $20,500 in 2022). This contribution amount also applies to 403(b) plans, most 457 plans and the federal government’s Thrift Savings Plan.
The catch-up contribution limit for employees age 50 and over who participate in 401(k) plans and the other plans mentioned above will increase to $7,500 (up from $6,500 in 2022). Therefore, participants in 401(k) plans (and the others listed above) who are 50 and older can contribute up to $30,000 in 2023.
The limitation for defined contribution plans, including a Simplified Employee Pension (SEP) plan, will increase from $61,000 to $66,000. To participate in a SEP, an eligible employee must receive at least a certain amount of compensation for the year. That amount will increase in 2023 to $750 (from $650 for 2022).
Deferrals to a SIMPLE plan will increase to $15,500 in 2023 (up from $14,000 in 2022). The catch-up contribution limit for employees age 50 and over who participate in SIMPLE plans will increase to $3,500 in 2023, up from $3,000.
The IRS also announced that in 2023:
The 2023 limit on annual contributions to an individual IRA will increase to $6,500 (up from $6,000 for 2022). The IRA catch-up contribution limit for individuals age 50 and older isn’t subject to an annual cost-of-living adjustment and will remain $1,000.
Current high inflation rates will make it easier for you and your employees to save much more in your retirement plans in 2023. The contribution amounts will be a great deal higher next year than they’ve been in recent years. Contact us if you have questions about your tax-advantaged retirement plan or if you want to explore other retirement plan options.
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Companies that wish to reduce their tax bills or increase their refunds shouldn’t overlook the fuel tax credit. It’s available for federal tax paid on fuel used for nontaxable purposes.
The federal fuel tax, which is used to fund highway and road maintenance programs, is collected from buyers of gasoline, undyed diesel fuel, and undyed kerosene. (Dyed fuels, which are limited to off-road use, are exempt from the tax.)
But purchasers of taxable fuel may use it for nontaxable purposes. For example, construction businesses often use gasoline, undyed diesel fuel or undyed kerosene to run off-road vehicles and construction equipment, such as front loaders, bulldozers, cranes, power saws, air compressors, generators and heaters.
As of this writing, a federal fuel tax holiday has been proposed. But even if it’s signed into law (check with your tax advisor for the latest information), businesses can benefit from the fuel tax credit for months the holiday isn’t in effect.
Currently, the federal tax on gasoline is $0.184 per gallon, and the federal tax on diesel fuel and kerosene is $0.244 per gallon. Calculating the fuel tax credit is simply a matter of multiplying the number of gallons used for nontaxable purposes during the year by the applicable rate.
So, for instance, a company that uses 7,500 gallons of gasoline and 15,000 gallons of undyed diesel fuel to operate off-road vehicles and equipment is entitled to a $5,040 credit (7,500 x $0.184) + (15,000 x $0.244).
This may not seem like a large number, but it can add up over the years. And remember, a tax credit reduces your tax liability dollar for dollar. That’s much more valuable than a deduction, which reduces only your taxable income.
Keep in mind, though, that fuel tax credits are includable in your company’s taxable income. That’s because the full amount of the fuel purchases was previously deducted as business expenses, and you can’t claim a deduction and a credit on the same expense.
You can claim the credit by filing Form 4136, “Credit for Federal Tax Paid on Fuels,” with your tax return. If you don’t want to wait until the end of the year to recoup fuel taxes, you can file Form 8849, “Claim for Refund of Excise Taxes,” to obtain periodic refunds.
Alternatively, if your business files Form 720, “Quarterly Federal Excise Tax Return,” you can claim fuel tax credits against your excise tax liability.
No one likes to pay taxes they don’t owe, but if you forgo fuel tax credits, that’s exactly what you’re doing. Given the minimal burden involved in claiming these credits — it’s just a matter of tracking your nontaxable fuel uses and filing a form — there’s really no reason not to do so.
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Many companies are eligible for tax write-offs for certain equipment purchases and building improvements. These write-offs can do wonders for a business’s cash flow, but whether to claim them isn’t always an easy decision. In some cases, there are advantages to following the regular depreciation rules. So it’s critical to look at the big picture and develop a strategy that aligns with your company’s overall tax-planning objectives.
Taxpayers can elect to claim 100% bonus depreciation or Section 179 expensing to deduct the full cost of eligible property up front in the year it’s placed in service. Alternatively, they may spread depreciation deductions over several years or decades, depending on how the tax code classifies the property.
Under the Tax Cuts and Jobs Act (TCJA), 100% bonus depreciation is available for property placed in service through 2022. Without further legislation, bonus depreciation will be phased down to 80% for property placed in service in 2023, 60% in 2024, 40% in 2025, and 20% in 2026; then, after 2026, bonus depreciation will no longer be available. (For certain property with longer production periods, these reductions are delayed by one year. For example, 80% bonus depreciation will apply to long-production-period property placed in service in 2024.)
In March 2020, a technical correction made by the CARES Act expanded the availability of bonus depreciation. Under the correction, qualified improvement property (QIP), which includes many interior improvements to commercial buildings, is eligible for 100% bonus depreciation not only following the phaseout schedule through 2026 but also retroactively to 2018. So, taxpayers that placed QIP in service in 2018 and 2019 may have an opportunity to claim bonus depreciation by amending their returns for those years. If bonus depreciation isn’t claimed, QIP is generally depreciable on a straight-line basis over 15 years.
Sec. 179 also allows taxpayers to fully deduct the cost of eligible property, but the maximum deduction in a given year is $1 million (adjusted for inflation to $1.08 million for 2022), and the deduction is gradually phased out once a taxpayer’s qualifying expenditures exceed $2.5 million (adjusted for inflation to $2.7 million for 2022).
While 100% first-year bonus depreciation or Sec. 179 expensing can significantly lower your company’s taxable income, it’s not always a smart move. Here are three examples of situations where it may be preferable to forgo bonus depreciation or Sec. 179 expensing:
You’re planning to sell QIP. If you’ve invested heavily in building improvements that are eligible for bonus depreciation as QIP and you plan to sell the building in the near future, you may be stepping into a tax trap by claiming the QIP write-off. That’s because your gain on the sale — up to the amount of bonus depreciation or Sec. 179 deductions you’ve claimed — will be treated as “recaptured” depreciation that’s taxable at ordinary-income tax rates as high as 37%. On the other hand, if you deduct the cost of QIP under regular depreciation rules (generally, over 15 years), any long-term gain attributable to those deductions will be taxable at a top rate of 25% upon the building’s sale.
You’re eligible for the Sec. 199A “pass-through” deduction. This deduction allows eligible business owners to deduct up to 20% of their qualified business income (QBI) from certain pass-through entities, such as partnerships, limited liability companies and S corporations, as well as sole proprietorships. The deduction, which is available through 2025 under the TCJA, can’t exceed 20% of an owner’s taxable income, excluding net capital gains. (Several other restrictions apply.)
Claiming bonus depreciation or Sec. 179 deductions reduces your QBI, which may deprive you of an opportunity to maximize the 199A deduction. And since the 199A deduction is scheduled to expire in 2025, it makes sense to take advantage of it while you can.
Your depreciation deductions may be more valuable in the future. The value of a deduction is based on its ability to reduce your tax bill. If you think your tax rate will go up in the coming years, either because you believe Congress will increase rates or you expect to be in a higher bracket, depreciation write-offs may be worth more in future years than they are now.
Keep in mind that forgoing bonus depreciation or Sec. 179 deductions only affects the timing of those deductions. You’ll still have an opportunity to write off the full cost of eligible assets; it will just be over a longer time period. Your tax advisor can analyze how these write-offs interact with other tax benefits and help you determine the optimal strategy for your situation.
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No one needs to remind business owners that the cost of employee health care benefits keeps going up. One way to provide some of these benefits is through an employer-sponsored Health Savings Account (HSA). For eligible individuals, an HSA offers a tax-advantaged way to set aside funds (or have their employers do so) to meet future medical needs. Here are the key tax benefits:
To be eligible for an HSA, an individual must be covered by a “high deductible health plan.” For 2023, a “high deductible health plan” will be one with an annual deductible of at least $1,500 for self-only coverage or at least $3,000 for family coverage. (These amounts in 2022 were $1,400 and $2,800, respectively.) For self-only coverage, the 2023 limit on deductible contributions will be $3,850 (up from $3,650 in 2022). For family coverage, the 2023 limit on deductible contributions will be $7,750 (up from $7,300 in 2022). Additionally, annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits for 2023 will not be able to exceed $7,500 for self-only coverage or $15,000 for family coverage (up from $7,050 and $14,100, respectively, in 2022).
An individual (and the individual’s covered spouse, as well) who has reached age 55 before the close of the tax year (and is an eligible HSA contributor) may make additional “catch-up” contributions for 2023 of up to $1,000 (unchanged from the 2022 amount).
If an employer contributes to the HSA of an eligible individual, the employer’s contribution is treated as employer-provided coverage for medical expenses under an accident or health plan. It’s also excludable from an employee’s gross income up to the deduction limitation. Funds can be built up for years because there’s no “use-it-or-lose-it” provision. An employer that decides to make contributions on its employees’ behalf must generally make comparable contributions to the HSAs of all comparable participating employees for that calendar year. If the employer doesn’t make comparable contributions, the employer is subject to a 35% tax on the aggregate amount contributed by the employer to HSAs for that period.
HSA withdrawals (or distributions) can be made to pay for qualified medical expenses, which generally means expenses that would qualify for the medical expense itemized deduction. Among these expenses are doctors’ visits, prescriptions, chiropractic care, and premiums for long-term care insurance.
If funds are withdrawn from the HSA for other reasons, the withdrawal is taxable. Additionally, an extra 20% tax will apply to the withdrawal unless it’s made after reaching age 65 or in the event of death or disability.
HSAs offer a flexible option for providing health care coverage, and they may be an attractive benefit for your business. But the rules are somewhat complex. Contact us if you have questions or would like to discuss offering HSAs to your employees.
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If you need to hire, be aware of a valuable tax credit for employers hiring individuals from one or more targeted groups. The Work Opportunity Tax Credit (WOTC) is generally worth $2,400 for each eligible employee but can be worth more — in some cases, much more.
Generally, an employer is eligible for the credit only for qualified wages paid to members of a targeted group. These groups are:
Employers of all sizes are eligible to claim the WOTC. This includes both taxable and certain tax-exempt employers located in the United States and in some U.S. territories. Taxable employers can claim the WOTC against income taxes. However, eligible tax-exempt employers can claim the WOTC only against payroll taxes and only for wages paid to members of the qualified veteran targeted group.
Many additional conditions must be fulfilled before employers can qualify for the credit. Each employee must have completed a minimum of 120 hours of service for the employer. Also, the credit isn’t available for employees who are related to the employer or who previously worked for the employer.
WOTC amounts differ for specific employees. The maximum credit available for the first year’s wages generally is $2,400 for each employee, or $4,000 for a recipient of long-term family assistance. In addition, for those receiving long-term family assistance, there’s a 50% credit for up to $10,000 of second-year wages. The maximum credit available over two years for these employees is $9,000 ($4,000 for Year 1 and $5,000 for Year 2).
For some veterans, the maximum WOTC is higher: $4,800 for certain disabled veterans, $5,600 for certain unemployed veterans, and $9,600 for certain veterans who are both disabled and unemployed.
For summer youth employees, the wages must be paid for services performed during any 90-day period between May 1 and September 15. The maximum WOTC credit available for summer youth is $1,200 per employee.
Additional rules and requirements apply. For example, you must obtain certification that an employee is a target group member from the appropriate State Workforce Agency before you can claim the credit. The certification generally must be requested within 28 days after the employee begins work. And in limited circumstances, the rules may prohibit the credit or require an allocation of it.
Nevertheless, for most employers that hire from targeted groups, the credit can be valuable. Contact your tax advisor with questions or for more information about your situation.
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Throughout the year, the Federal Emergency Management Agency (FEMA) will designate incidents that adversely affect residents in the affected areas as disasters. This FEMA designation puts relief efforts in motion, both short and long-term.
While immediate needs like food, water, and shelter are at the top of the list, long-term efforts, like relief options through the IRS, aim to help those affected get back on their feet.
In the past, the Senate was required to vote every time the IRS wanted to grant disaster relief provisions to FEMA-designated disaster areas. Now, the IRS can give disaster relief by extending deadlines for “certain time-sensitive acts.” This includes filing returns and paying taxes during the disaster period. For example, affected taxpayers usually receive a tax refund more quickly by “claiming losses related to the disaster on the tax return for the previous year.”
While in some areas of the country, disaster preparedness feels more like a what-if scenario, other parts of the country are all-too-familiar with preparing for floods, wildfires, and tornados. The IRS recommends:
Suppose you or your business have gone through a natural disaster, and you cannot access your original tax documents. In that case, the IRS recommends the following resources for obtaining important financial information when you are ready:
The IRS keeps a list of current and past disaster relief offered on its website. Some of the more recent disaster-related tax relief programs include:
We recommend talking with your tax advisor and visiting the IRS Disaster Relief Website for a comprehensive list.
Even though the overall IRS audit rate is currently low historically, it’s expected to increase as a result of provisions in the Inflation Reduction Act signed into law in August. So it’s more important than ever for taxpayers to follow the rules to minimize their chances of being subject to an audit. How can you reduce your audit chances? Watch for these 10 red flags that can trigger IRS scrutiny:
Of course, this isn’t the end of the list. There are many other potential audit triggers, depending on a taxpayer’s particular situation. Also, keep in mind that some audits are done on a random basis. So even if you have no common triggers on your return, you still could be subject to an audit (though the chances are lower).
With proper tax reporting and professional help, you can reduce the likelihood of triggering an audit. And if you still end up being subject to one, proper documentation can help you withstand it with little or no negative consequences.
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Businesses can provide benefits to employees that don’t cost them much or anything at all. However, in some cases, employees may have to pay tax on the value of these benefits.
Here are examples of two types of benefits which employees generally can exclude from income:
However, many fringe benefits are taxable, meaning they’re included in the employees’ wages and reported on Form W-2. Unless an exception applies, these benefits are subject to federal income tax withholding, Social Security (unless the employee has already reached the year’s wage base limit) and Medicare.
The line between taxable and nontaxable fringe benefits may not be clear. As illustrated in one recent case, some taxpayers get into trouble if they cross too far over the line.
A retired airline pilot received free stand-by airline tickets from his former employer for himself, his spouse, his daughter, and two other adult relatives. The value of the tickets provided to the adult relatives was valued $5,478. The airline reported this amount as income paid to the retired pilot on Form 1099-MISC, which it filed with the IRS. The taxpayer and his spouse filed a joint tax return for the year in question but didn’t include the value of the free tickets in gross income.
The IRS determined that the couple was required to include the value of the airline tickets provided to their adult relatives in their gross income. The retired pilot argued the value of the tickets should be excluded as a de minimis fringe.
The U.S. Tax Court agreed with the IRS that the taxpayers were required to include in gross income the value of airline tickets provided to their adult relatives. The value, the court stated, didn’t qualify for exclusion as a no-additional-cost service because the adult relatives weren’t the taxpayers’ dependent children. In addition, the value wasn’t excludable under the tax code as a de minimis fringe benefit “because the tickets had a value high enough that accounting for their provision was not unreasonable or administratively impracticable.” (TC Memo 2022-36)
You may be able to exclude from wages the value of certain fringe benefits that your business provides to employees. But the requirements are strict. If you have questions about the tax implications of fringe benefits, contact us.
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You and your small business are likely to incur a variety of local transportation costs each year. There are various tax implications for these expenses.
First, what is “local transportation?” It refers to travel in which you aren’t away from your tax home (the city or general area in which your main place of business is located) long enough to require sleep or rest. Different rules apply if you’re away from your tax home for significantly more than an ordinary workday and you need sleep or rest in order to do your work.
The most important feature of the local transportation rules is that your commuting costs aren’t deductible. In other words, the fare you pay or the miles you drive simply to get to work and home again are personal and not business miles. Therefore, no deduction is available. This is the case even if you work during the commute (for example, via a cell phone, or by performing business-related tasks while on the subway).
An exception applies for commuting to a temporary work location that’s outside of the metropolitan area in which you live and normally work. “Temporary,” for this purpose, means a location where your work is realistically expected to last (and does in fact last) for no more than a year.
On the other hand, once you get to the work location, the cost of any local trips you take for business purposes is a deductible business expense. So, for example, the cost of travel from your office to visit a customer or pick up supplies is deductible. Similarly, if you have two business locations, the costs of traveling between them is deductible.
If your deductible trip is by taxi or public transportation, save a receipt if possible or make a notation of the expense in a logbook. Record the date, amount spent, destination, and business purpose. If you use your own car, note miles driven instead of the amount spent. Note also any tolls paid or parking fees and keep receipts.
You’ll need to allocate your automobile expenses between business and personal use based on miles driven during the year. Proper recordkeeping is crucial in the event the IRS challenges you.
Your deduction can be computed using:
From 2018 – 2025, employees, may not deduct unreimbursed local transportation costs. That’s because “miscellaneous itemized deductions” — a category that includes employee business expenses — are suspended (not allowed) for 2018 through 2025. However, self-employed taxpayers can deduct the expenses discussed in this article. But beginning with 2026, business expenses (including unreimbursed employee auto expenses) of employees are scheduled to be deductible again, as long as the employee’s total miscellaneous itemized deductions exceed 2% of adjusted gross income.
Contact us with any questions or to discuss the matter further.
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IRS audit rates are historically low, according to a recent Government Accountability Office (GAO) report, but that’s little consolation if your return is among those selected to be examined. Plus, the IRS recently received additional funding in the Inflation Reduction Act to improve customer service, upgrade technology and increase audits of high-income taxpayers. But with proper preparation and planning, you should fare well.
From tax years 2010 to 2019, audit rates of individual tax returns decreased for all income levels, according to the GAO. On average, the audit rate for all returns decreased from 0.9% to 0.25%. IRS officials attribute this to reduced staffing as a result of decreased funding. Businesses, large corporations, and high-income individuals are more likely to be audited, but overall, all types of audits are being conducted less frequently than they were a decade ago.
There’s no 100% guarantee that you won’t be picked for an audit because some tax returns are chosen randomly. However, the best way to survive an IRS audit is to prepare in advance. On an ongoing basis, you should systematically maintain documentation — invoices, bills, canceled checks, receipts, or other proof — for all items to be reported on your tax returns. Keep all records in one place.
It also helps to know what might catch the attention of the IRS. Certain types of tax-return entries are known to involve inaccuracies, so they may lead to an audit. Here are a few examples:
Certain types of deductions may be questioned by the IRS because there are strict recordkeeping requirements for them — for example, auto and travel expense deductions. In addition, an owner-employee’s salary that’s much higher or lower than those at similar companies in his or her location may catch the IRS’s eye, especially if the business is structured as a corporation.
If you’re selected for an audit, you’ll be notified by letter. Generally, the IRS doesn’t make initial contact by phone. But if there’s no response to the letter, the agency may follow up with a call.
Many audits simply request that you mail in documentation to support certain deductions you’ve claimed. Only the strictest version, the field audit, requires meeting with one or more IRS auditors. (Note: Ignore unsolicited emails or text messages about an audit. The IRS doesn’t contact people in this manner. These are scams.)
The tax agency doesn’t demand an immediate response to a mailed notice. You’ll be informed of the discrepancies in question and given time to prepare. Collect and organize all relevant income and expense records. If anything is missing, you’ll have to reconstruct the information as accurately as possible based on other documentation.
If you’re audited, our firm can help you:
The IRS normally has three years within which to conduct an audit, and an audit probably won’t begin until a year or more after you file a return. Don’t panic if the IRS contacts you. Many audits are routine. By taking a meticulous, proactive approach to tracking, documenting and filing your company’s tax-related information, you’ll make an audit less painful and even decrease the chances you’ll be chosen in the first place.
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