Author: dsauder

Preface: If your business is a retailer, or say wholesaler, inventory is part of every revenue transaction and invoice. Managing that inventory is vital to accurate financials. Say, how is your flock? Did you count some inventory today?

Don’t Neglect the Flock

Credit: Jake Dietz, CPA

How much inventory do you have on hand? Does it even matter? Inventory is products that you have for sale, or will manufacture into products for sale. Depending on the business it can be a minimal or a very significant value. Determining how much inventory is on hand can be tracked perpetually or periodically, but this blog address periodic systems. Under the periodic system of inventory tracking, purchases may be listed under cost of goods sold, but then inventory is counted from time to time and adjustments made to inventory and cost of goods sold. Counting inventory improves the accuracy of the financial statements, provides opportunity to find obsolete items, and provides opportunity to indicate potential theft or fraud.

Why Count Your Inventory?

1. One reason to track inventory is to see the financial condition of your company. Inventory can be crucial to your profit and loss statement because inventory is deducted after it is sold. For example, suppose your inventory decreased by $20,000, but the inventory balance has not been adjusted. In this scenario, cost of goods sold would then be understated by $20,000 which overstates gross profit by $20,000. Reporting accurate inventory and cost of goods sold may allow you and your accountant to make wiser financial decisions.
2. Another reason to count inventory is to find items that are obsolete. If the item is obsolete, perhaps it should be sold at a discount. Clearing obsolete items from the floor may make room for more necessary items or make it easier to find the more necessary items. Locating obsolete items may reveal opportunity for improvement in purchasing. If you find significant amounts of obsolete items every time you count, then perhaps purchasing should be adjusted.
3. A third reason to count inventory is that it may give clues if inventory fraud or theft is occurring. It can be hard to detect inventory fraud or theft in a periodic system, but especially scrutinize a low count if you recently purchased that item. For example, suppose that last week you purchased 50 widgets, and this week there are only 20 widgets when you count. What happened to the other 30 widgets? If your sales records show you sold 30, then there may be no problem. If your sales records show that you sold 5, then what happened to the other 25 widgets? One cause for inventory shrinkage could be that it was inadvertently not charged to the customer. An example of this would be a company that both sells products and provides repair services. Perhaps inventory was used as part of the repair services but the customer was never charged. It is also possible that inventory was stolen. Is inventory easily accessed from the road, and is it easy to carry off? Was the inventory never delivered? Could someone come at night and easily put it on a truck? Or could it be stuffed into pockets or purses?

Adding It Up

Although counting inventory may not be as fun (it’s tedious, time-consuming, 101, 102 and 103) as buying it, it can provide you with better financial statements and reveal opportunities for improvement with purchasing and inventory controls. Proverbs exhorts us to be “diligent to know the state of thy flocks, and look well to thy herds.” This exhortation can also apply to inventory.

How much inventory does your business really have?

Preface: This blog highlights the realistic feasibility study of Ironville Bicycle Seats, LLC entrepreneurs turning required Pennsylvania income tax payments into charitable contributions funding K-12 education.

Pennsylvania EITC Allows Tax Payments on Businesses to Fund K-12 Schools

Credits: Jake Dietz, CPA

Many people do not like paying taxes. Some people, however, would cheerfully donate to a good school that shared their values. Fortunately, the Pennsylvania Educational Improvement Tax Credit (EITC) allows qualifying businesses to get a 75%-100% tax credit against various PA taxes on eligible donations to qualifying organizations.

What businesses qualify? Businesses must be authorized to do business in PA to qualify for the credit. The credit offsets PA corporate net income tax, PA personal income tax for Single Member LLC’s and pass-through entities, and various other less common taxes. For pass-through entities, REV-1123 can be filed to pass the credit down to the partners to claim on their personal tax returns. It does not offset sales tax or payroll taxes. Sole proprietorships do not qualify for the credit. If your business structure does not qualify, or if you have partners that do not want to make contributions, then you might consider creating a special purpose firm to make contributions under the Tax Reform Code of 1971.

The donor must give to an approved organization to get the credit. Pennsylvania’s Department of Community and Economic Development lists many organizations that can receive these donations. Faith Builders Scholarship Services is one of these organizations, and they will even file the application electronically for you. They pass the donation on to the school of your choice, less a 5% administrative fee. Before choosing a school, however, check with the school to make sure that they are willing to accept the donation.

How much is the credit worth? Generally, EITC donors receive 75% of the contribution as a credit up to $750,000, but it is increased to 90%, still subject to the $750,000 cap, if you agree to a two-year commitment to give. For Pre-Kindergarten Scholarship organizations, the credit is 100% for the first $10,000, and then 90% above that but not exceeding $200,000.

When to file varies depending on the situation. May 15 is the earliest date businesses who have fulfilled a 2-year commitment and want to make a new commitment can file, as well as businesses in the middle of a 2-year commitment. On July 3, 2017, any business can file.

Let’s look at an example of how this could work. Suppose Reuben and Justin are both 50% members in Ironville Bicycle Seats, LLC. They ask their CPA what their normal PA personal income tax liabilities are, and he tells them that they both averaged a $3,000 liability for each of the last two years. They decide to estimate their future liabilities on the low side to avoid having an unusable credit. They agree to aim for a $1,800 credit per person each year. They therefore make a 2-year commitment from the LLC to give $4,000 to Faith Builders Scholarship Services, and have the money passed on to their local church school. They fill out the information and give it to Faith Builders, who electronically files the application at the right time. Since it is a 2-year commitment, 90% of the donation, or $3,600 per year, is available as a credit. Their CPA can file REV-1123 to pass an $1,800 credit down to both Reuben and Justin each year to be used on their personal income tax returns. The LLC wrote a check to Faith Builders, Faith Builders wrote a check to the church school, and therefore Reuben and Justin transfer required PA tax payments to fund education. The money never touched the state’s coffers, and Christian education was funded.

If you run an eligible business, pay personal income taxes, and like Reuben and Justin, cheerfully give to Christian education, you may want to consider the EITC, too. The EITC allows business owners to give to K-12 education, with a tax credit that pays Pennsylvania taxes on business revenues. For more details, contact your CPA today.

 

Preface: Proper preparation is always good advice. Are you preparing to excel? A SWOT analysis can help you achieve entrepreneurial success more easily with less stress.

SWOT Analysis for the Aspiring Entrepreneurs

Credits: Jake Dietz, CPA

Should I become an entrepreneur and start a business? If you are asking that question, then there are many things to consider. This article will not delve into all of them, but recommends that the aspiring entrepreneur conduct a personal SWOT analysis to examine Strengths, Weaknesses, Opportunities, and Threats.

First, strengths are your characteristics that can help you. Some strengths that you might possess include a good work ethic, discipline, integrity, experience, and good hand-eye coordination. What would give you a competitive advantage? What internal strengths would help you run this business successfully?

Along with your strengths, consider your weaknesses. Weaknesses are your characteristics that may harm you. It may be painful to recognize your own weaknesses, but it also may be extremely beneficial. If you know your weaknesses, then you may be able to avoid long-term harm by avoiding certain situations, or by minimizing your weaknesses in certain situations. For example, assume that you are terrified of heights and cannot work long hours in the heat without fainting. Perhaps you should not start a roofing business. On the other hand, sometimes a weakness can be mitigated. Maybe you are weak at analyzing financial data. If that is the case, then you may want to team up with a talented CPA who can assist you with the financial analytics.

Strengths and weaknesses are internal, so a good knowledge of yourself is crucial to understanding them. Unfortunately, it can be hard to truly know yourself and analyze yourself honestly. Consider asking one or more trusted people who know you well to help with the process.

In addition to analyzing your internal strengths and weakness, it is also valuable to consider external opportunities and threats. What are the opportunities in the industry? For example, suppose you want to become a residential homebuilder. An opportunity could be that your township revised its zoning laws to allow more houses to be built. Another opportunity could be a growing population of a certain demographic group that wants your product or service. For example, if you want to start a home healthcare business, then a growing population of senior citizens could be an opportunity.

A threat is an external item that could harm your potential venture. Threats may include legal, economic, and other hazards. For example, if you wanted to start a residential construction company right after a housing bubble popped then you may be facing a major threat.

Opportunities and threats are external to you, so they may require some outside research. Reading can be a great way to learn some of this information. Business publications, trade publications, and even your local newspaper can provide helpful information. Also, consider talking with your librarian. Your library may have access to business databases, publications, and references that will be useful to you. You also may want to talk with experienced people in the industry in which you are considering starting out as an entrepreneur. Do they know of any good opportunities to seize or threats to avoid?

The factors going into a decision about entrepreneurship may be many, but remember to include a SWOT analysis in the decision process. It might steer you away from a disastrous decision. Alternatively, you may still make the decision to enter that field but be better prepared to use your strengths to seize certain opportunities and to take measures to minimize the risks from weaknesses and threats. Feel free to contact your CPA if you would like to talk about becoming an entrepreneur.

Preface: Dependent exemptions are not always addend, addend = sum. This blog presents ideas to minimize taxes for certain individual taxpayer situations.

Who Is my Dependent?

Credits: Jake Dietz, CPA

Whom can I claim on my tax return as a dependent? Perhaps you find yourself asking this question when preparing your tax information to give to your accountant. Some situations are very clear and common, but other situations take more work and research to determine. The IRS has detailed instructions, and this article will examine generally some of the qualifications but will not delve into all the complexities. To claim someone as a dependent on your tax return, they must either be your qualifying child or qualifying relative.

Qualifying Child

A qualifying child is generally your child or sibling, or a descendant of your child or sibling. The qualifying child must have been either under age 19, under age 24 and a student, or disabled. The child cannot have paid more than half the cost to support themselves. Generally, the child must have lived with you more than half the year. There are also some other considerations before the child can be considered your dependent, including if you could be claimed by another person, and if the child were married.

There is no income limitation for a qualifying child. You could have a 17-year-old child living at home making more money than his parents, but the child could still qualify if he did not pay more than half the cost to support himself.

Qualifying Relative

Someone who does not fit the requirements to be a qualifying child might be your qualifying relative. Qualifying relatives could be your children along with their descendants, your siblings along with their children, your parents along with their siblings and ancestors, in-laws, stepparents, stepsiblings, or an unrelated person who lived with you all year. Generally, you must provide more than half their support. The qualifying relative also must have made less than $4,050 in most situations.

First, let’s look at housing for these relatives that might qualify. They do not have to live with you, although they may live with you. For example, let’s suppose your elderly aunt lives in a house rent-free on your second farm. If she makes less than $4,050 and you provide over half her support, then you may be able to include her as a dependent.

Another scenario that you may encounter is an elderly father who would be a qualifying relative, except 3 of his children take turns providing for him. No one provides over half his support. In this case, there can be an agreement signed where one of the children can claim him.

Another interesting example of a qualifying relative would be someone who is not related to you but lives with you all year if you provide over half her support. Suppose there is an elderly lady in the community who has no income and no family to provide for her. You invite her into your home to live, and you provide for her. If she lives with you all year, then she may be your qualifying relative.

There is also an exception to the $4,050 rule for people with disabilities. If the person has a disability but earns more than $4,050 at a workplace for people with disabilities, then the $4,050 income test may be waived for that income.

As we examine scenarios and some of the rules that go into determining who is a dependent on your tax return, it may become obvious that this decision can take some careful analysis. This article is general in nature and only explores some of the qualifications. Please consult with an accountant about your specific circumstances before making a final decision.

 

Preface: An LLC with more than one member can be taxed as a partnership, but this brings up an interesting question regarding self-employment tax. Who is a limited partner in an LLC for purposes of the SE tax exemption? The Internal Revenue Code and related regulations do not say.

LLCs and Limited Partner SE Classification Taxation

Credits: Jake Dietz, CPA

Do you get a K-1 from an LLC every year that lists various types of income? Perhaps it also lists self-employment income, which may or may not include all the income on the K-1. This article looks specifically at reporting self-employment income on the distributive share of income for LLC’s taxed as a partnership.

First, let’s look at how partners in a partnership get taxed. Partnerships are pass-through entities for federal tax purposes. The partners of the partnership receive a K-1 allocating to them a share of the partnership’s activity, and then the partner files their personal tax return using information on the K-1. Because partnership items pass-through to the partners, a partner may pay tax on income he never personally received. For example, suppose Samuel is a 50% general partner and received $45,000 for his services to the partnership, which he helps manage. These payments are called guaranteed payments and can be deducted by the partnership. After all expenses were deducted, including the guaranteed payments, the partnership made $20,000 of net income, which it kept in the partnership for future use. Samuel would be subject to income tax on the $45,000 he received as guaranteed payments plus the 50% distributive share of the $20,000 partnership net income, or $10,000. If Samuel is not exempt from self-employment (SE) tax, then he must pay SE tax on the $45,000 guaranteed payments and the $10,000 distributive share.

How would Samuel be taxed if he were a 25% limited partner? Assume Samuel is a limited partner, and he worked for a few days to earn $500 in guaranteed payments. His distributive share of the partnership net income is $5,000. In this scenario, the full $5,500 would be subject to income tax, but only the $500 of guaranteed payments would be subject to SE tax. Why is the $5,000 not subject to SE tax? The Internal Revenue Code in §1402(a)(13) specifically exempts the distributive share (in this example $5,000) of a limited partner’s income from SE tax.

An LLC with more than one member can be taxed as a partnership, but this brings up an interesting question regarding self-employment tax. Who is a limited partner in an LLC for purposes of the SE tax exemption? The Internal Revenue Code and related regulations do not say.

The tax court, however, ruled in Castigliola, T.C. Memo. 2017-62. We can look to this court ruling for guidance. The court considered whether the LLC members were “functionally equivalent to that of a limited partner in a limited partnership.” The court noted that “limited partners typically lack management power but enjoy immunity from liability for debts of the partnership.” The court also noted that the LLC in the case was member-managed. No LLC operating agreement existed that limited the members’ management. Furthermore, the facts indicated that the LLC members participated in management. They were therefore not functionally equivalent to limited partners. The court also noted that “Because there must be at least one partner who is in control of the business, there must be at least one general partner.”

What can we learn from this ruling? If all the LLC members participate in management, then the LLC should probably report the distributive share of income as subject to SE tax, as well as the guaranteed payments. Although the LLC members may enjoy immunity from partnership debts, they should not expect to enjoy SE tax exemption on their distributive share of income if they help manage the LLC.

If the equivalent of limited partners exist in the LLC, then there should be documentation to substantiate the facts. Is there a written operating agreement that supports the argument that they function as limited partners? Is there any other evidence to support or contradict the limited partner claim? There should also be evidence indicating that at least one other member functions as a general partner.

This article is general in nature and should not be considered tax or legal advice. If you have questions on the specifics of an LLC of which you are a member, please contact this office.

Preface: Form 4029 Exemptions from FICA taxes can result in a tax landmine of penalties and back tax assessments in certain circumstances. Appropriate application of the tax code can minimize risks. What is permitted and what is not according to the IRS tax code?

What Affect Does Form 4029 Have on Partnerships and Sole Proprietorships?

Credits: Jake Dietz, CPA

Do you want to avoid paying Social Security and Medicare taxes by taking advantage of your form 4029 exemption? If so, entity type and ownership play important roles in avoiding these taxes. Even valid exemptions do not apply in certain situations. This blog addresses how form 4029 affects payroll taxes for sole proprietorships, partnerships, LLCs taxed as one of the previous two options, and corporations. Entity type and ownership play important roles in Social Security and Medicare tax avoidance.

First, here is a little information on Form 4029. It is the “Application for Exemption From Social Security and Medicare Taxes and Waiver of Benefits.” Approved forms allow both the employer and employee to avoid Social Security and Medicare taxes if certain conditions are met.

Sole Proprietorships and Single-Member LLC Disregarded Entities

A sole proprietorship is owned by one person and unincorporated. A single-member LLC (SMLLC) is an LLC owned by one member. It is a disregarded entity for federal tax purposes, unless an election is made to be taxed as a corporation. An SMLLC may therefore have the same federal tax treatment as its owner. Sole proprietorships and SMLLCs not taxed as corporations do not need to pay Social Security and Medicare payroll taxes for each employee with a valid form 4029 if the owner also has a valid form 4029.

For example, suppose Reuben is the sole owner of Silver Maple Furniture & Ice Cream Shop, LLC. The LLC never elected to be taxed as a corporation. The LLC hired Amos and George. Both the owner Reuben and employee Amos have form 4029s, but George does not. In the above scenario, the employer would be exempt from paying the employer portion of Social Security and Medical payroll taxes on Amos, but would have to pay those taxes on George. Amos would be exempt from paying the employee portion of Social Security and Medicare payroll taxes, but George would have to pay those taxes on his wages.

If the owner does not have a valid form 4029, then Social Security and Medicare payroll taxes are paid on all employees. This rule applies even if each employee obtained a valid form 4029.

Let’s take the example above and change the facts slightly. George (no 4029) buys the SMLLC from Reuben, and George employs Reuben (valid form 4029) and Amos (valid form 4029). In this situation, all Social Security and Medicare payroll taxes are due, since the employer does not have a valid form 4029.

Partnerships and LLCs Taxed as Partnerships

Form 4029 applies to a partnership or LLC taxed as a partnership if each member has a valid form 4029. If one member has a valid form 4029 and another member does not, then the exemption does not apply to partnership wages.

Let’s assume that Reuben (valid form 4029) decides to bring Amos (valid form 4029) into Silver Maple Furniture & Ice Cream Shop, LLC as another member. Because all the members have valid form 4029s, then each employee that has a form 4029 would also be exempt. If the LLC wanted to hire Justin (valid form 4029), then no Social Security and Medicare taxes would be due on Justin. Both the employer and George, however, would have to pay Social Security and Medicare taxes on George’s wages because he does not have a valid form 4029.

Alternatively, let’s consider what would have happened if Reuben (valid form 4029) brought George (no 4029) into the LLC instead of Amos (valid form 4029). In that situation, all Social Security and Medicare payroll taxes are due because not all the members are exempt.

Corporations

The form 4029 exemption does not apply to corporations, or to its employees. Social Security and Medicare taxes are due even if the owner and all employees each possess a valid form 4029.

Summary

For a form 4029 to take effect, all owners must have valid form 4029s, and the entity must not be a corporation. Furthermore, the exemption only applies to employees that also have a valid form 4029.

Entity type and ownership can affect Social Security and Medicare taxes, and should therefore be factors in the decision-making process. Also, an employee with a form 4029 may want to ask potential employers before accepting a job if the employer is exempt. Contact your tax accountant if you would like help exploring how form 4029 is affected by entity type and ownership.

 

Preface: Proper planning can maximize the amount of compensation a company can pay in a way that will increase its chances of being able to withstand an IRS challenge.

Taking High Compensation Without Dividend Danger

Owners of a closely held C corporation know that the company’s earnings are theoretically exposed to a double tax. Principally, earnings are first taxed to the corporation and those that are distributed to as dividends are taxed on your individual income tax return, without the company getting a deduction for the payments.

On the other hand, the company can deduct the salary it pays you. While you have to pay tax on the salary, unlike dividends, salary is taxed only once. And while dividend income is taxed at net capital gains rates (at a maximum 20 percent rate if all income exceeds a $470,700 threshold for joint filers, $418,400 for single individuals in 2017), that is an additional 15 or 20 percent that you may not otherwise have to pay with proper compensation planning. What’s more, investment income is also subject to the 3.8 percent Net Investment Income (NII) surtax if an individual’s overall income exceeds a $250,000/$200,000 level.

Does this mean that the double tax can be avoided simply by increasing your salary rather than by paying dividends? No, there are two potential problems with that approach. First, the company can only deduct reasonable compensation. Second, if compensation is set at the high end of the scale and is later found to be unreasonable, the IRS can charge the owner with a constructive dividend on the unreasonable portion of the compensation.

What then can be done? Proper planning can maximize the amount of compensation the company can pay in a way that will increase its chances of being able to withstand an IRS challenge.

The basic test of reasonableness, as applied by the IRS and many courts, is whether the amount paid is analogous to that paid by employers in like businesses to equally qualified employees for similar services. In this respect, the total compensation package is examined including contributions to retirement plans and other employee benefits.

As a result, a showing of special skills may help to justify reasonableness. It also can be helpful if the individual performs different roles for the company (for example, chief executive officer and designer of a new product).

Another possible approach may be to set up a portion of an owner’s compensation to be paid as bonuses if profits meet certain levels. While the IRS has attacked such contingent compensation arrangements in family companies, some courts have upheld them where the agreement was set up when the business was started or when the amount of the future earnings was questionable, and the agreement was consistently followed during the ups and downs of the business.

Few businesses start out with the owners able or willing to pay themselves what they are really worth. Even after the business is successful, periods of economic slowdown, may force belt tightening. It is in these situations that an owner may have an opportunity to enter into a formal contract with the company calling for a share of the profits as added compensation when things improve.

If this is done it’s important to include in the corporate minutes the record showing that the owner was underpaid at the time the agreement was entered into. The minutes also should show that the contingent payment out of future profits is merely intended to provide an incentive for the owner to put forth his best efforts to build the business and to make up for the periods of underpayment.

Attention to such details when planning compensation arrangements should help the owner fend off or blunt future attacks on compensation when the business proves highly successful and substantial compensation is paid under the agreement.

Feel free to contact us if we can help you with the complex task of developing a proper compensation package for tax purposes.

 

Preface: The cost of a buy/sell agreement is miniscule compared to preventing the turmoil that can result among family members or owners when capital or equity interests are traded. Buy/sell agreements, plain and simple, make sense no matter your business. If you have a corporation, LLC or partnership – any business with more than one equity holder – you need a buy/sell agreement.

Why You Need a Buy/Sell Agreement for Your Business

Any business that has more than one equity holder needs a buy/sell agreement. A buy/sell agreement is a written contract that specifies the steps that will be taken if an equity holder wants to release his ownership.  The documented rules in a buy/sell agreement determine how values will be appraised and payment made during fragile business conditions. In addition, a buy/sell agreement can prevent other partners from selling to other individuals or competitors, such as anyone joint equity holders do not want to hold equity. Buy/sell agreements specify rules for a business entity or other owners to acquire another equity interests in specific in the event of an owner selling for retirement, death, disagreements, defaults, or incapacitation.  So you could say a buy/sell agreement is a “business will,” and prevents unfair treatment of all equity holders in delicate situations arising from the trade of of a business interest.

A buy/sell agreement is typically a legal document prepared with attorney oversight. The document contains a prearranged agreement for a sale of business interests. The agreement is not limited to 1) who can purchase a departing partner’s or shareholder’s equity interests, 2) the methodology or hybrid appraisal for determining value, or 3) events that will spark a buy/sell agreement.

In a corporation, a buy/sell may result in treasury shares, and necessitate terms for the trade value between the shareholder and the corporation. The cost of a buy/sell agreement is low compared to preventing the turmoil that can result among family members or owners when capital or equity interests are sold. Buy/sell agreements, plain and simple, make sense no matter your business. If you have a corporation, LLC or partnership, any business with more than one equity holder, you need a buy/sell agreement.

What do you need to know to talk your attorney and hold an intelligent conversation? First, you can have a redemption buy/sell agreement where your interest is traded to the business, so the other owners don’t need to pay out of their own checking account. Or, you can have a cross-purchase agreement where another equity holder has first right to purchase your interest. A cross-purchase agreement allows partners or shareholders to acquire your interest, or you to buy other equity interests.

Second, and more important, the nucleus of a buy/sell agreement ensures proper valuation of a business when there is an unanticipated pending sale of an interest. Valuation is key to a fair market sales price of an interest. Valuation of your business should occur every several years with a buy/sell agreement to ensure you have a documented benchmark history of the business value from say the basement to the peak.

At a minimum, you should value your business at the writing of a buy/sell agreement, as well as every time the buy/sell is updated. Your buy/sell should also should list specifically the method(s) the appraiser will use to calculate the business value in the marketplace, e.g. the income approach or say a market approach. Typically the most successful buy/sell valuations carefully avoid unnecessary hybrids, e.g. complex combinations of income, asset or market approaches.

In summary, A buy/sell agreement is a written document prepared with attorney oversight, that details the requirements and play rules for trades of a business interest in instances of ownership change. If you own a business interest with partners or shareholders, you need a buy/sell agreement. If you already have a buy/sell agreement, make sure it is updated when necessary. If you do not yet have a buy/sell agreement for your business, talk to your trusted advisor or CPA about obtaining one today.

 

Preface: Tax planning is an important and vital step to reducing the cost of business. But saving tax dollars isn’t the only prudent or advised consideration. Strategizing with your tax advisor to manage business costs, and plan tax advantaged operating and investing cash flows, with before and after tax dollars, will reward your business

Small Business Tax Reduction Strategies

Taxes are simply a cost of doing business. Yet, like all costs, you can manage them to your advantage. If you’ve read this far, you are an entrepreneur who appreciates the time it takes to plan the tax effect of your income. Maybe planning tax strategies is new to you. Whether it is or not, the strategies are similar year to year–deferring revenue, accelerating expenses, contributing to a retirement account, making charitable contributions, or maximizing depreciation expense. You would be wise to stick with only legal tax reduction strategies. Any other path is risky, may result in lowered business value, and is time-tested to be morally wrong. Other legal loopholes include domestic productions activities deductions for manufacturers or specific tax credits which apply to your industry.

Employee bonuses are a great strategy to reduce taxes and reinvest in your workforce. A well-compensated team will take satisfaction in their work and lessen hidden business liabilities such as employee inefficiencies. Reducing taxes can be done in many more ways.

Investing in marketing and advertising is another strategy for deferring a business tax liability. Advertising and marketing is one of the most efficient methods to defer taxes from one year to the next, or every year. An advertising campaign will help you develop your market position, and defer revenue to later periods. With the increased top line revenue from advertising, you can increase the value of your business over time, too.

Successful tax planning should line up with the business vision. For instance, does it make financial sense to purchase $150,000 of equipment solely to save on taxes? Will the new equipment reduce costs on manufacturing processes and provide a 7% IRR  in the future? Spending cash to purchase necessary equipment such as a truck, robotics, or office furniture, should result in plans for additional future cash flow, such as the development of office staff and plans for office overhead. Otherwise paying the tax at 40% still puts 60% net tax in your bank account for new working capital.

Keep in mind that debt is repaid with income, net of tax, except the interest expense.  So if you have a $150,000 line of credit, you will need to earn say $210,000 or more to repay that line of credit, without reducing working capital. Debt is leverage. If you have debt, you are better off to pay tax and resist spending excessively on fixed assets beyond what is required. With the excess cash you can accelerate the payment of debt, reduce business leverage, and increase equity (and value).

Retirement plans also defer taxes. SIMPLE-IRA’s or SEP-IRA’s are an easy way for business owners to contribute towards retirement and save on taxes. SIMPLE-IRA’s permit up to $12,500 to be contributed and SEP-IRA’s up to $53,000 for 2015. The characteristics of the IRA plans may or may not make them fit well with your business tax planning. If you’re interested, talk about it with your CPA or with a retirement advisor to decide what could work best for tax planning in your business.

Sometimes saving on taxes isn’t everything you need to think about. Are you in compliance with Obamacare? Are you in compliance with labor laws? Nondeductible penalties are an expensive way to learn about the crucial area of compliance. Are you selling your business? Businesses are often valued based on cash flow. The more net income, the more tax paid, often the more value at sale for the seller (you). Why? The business valuation is mostly based on cash flow and net income. This is to say the more tax paid (the higher the tax reported income on the tax return) the larger the gain at sale, because of the value multiple of earnings on the businesses net income.  Don’t worry. Sometimes there is an advantage to paying tax.

In summary, tax planning is important and vital to reducing the cost of business. But saving tax dollars isn’t the only consideration. Working with a tax advisor who can help you manage your business cash flows, with before and after tax dollars, will reward your business.

 

Preface: Charitable contributions require you need to be very careful and rely on professional help, to keep in compliance the IRS when giving more than say 25 dollars. The IRS is becoming increasingly aware of questionable practices and is cracking down on taxpayers who use them. If a charitable giving scheme sounds too good to be true, it probably is! 

Charitable Giving – Permissible Tax Benefits for Charitable Giving

You probably know that you can get an income tax deduction for a gift to a charity if you itemize your deductions. But there is a lot more to charitable giving. For example, you may be able to indirectly benefit a family member and a charity at the same time and still get a tax break. Or you may be able give appreciated property to a charity without being taxed on the appreciation. These benefits can be achieved, though, only if you meet various requirements including substantiation requirements, percentage limitations and other restrictions. We would like to take the opportunity to introduce you to some of these requirements and tax saving techniques.

 

First, let’s take a look at the basics: Your charitable contributions can help minimize your tax bill only if you itemize your deductions. Once you do, the amount of your savings varies depending on your tax bracket and will be greater for contributions that are also deductible for state and local income tax purposes. To get a current deduction, the charitable gift must be to a qualified organization and must not exceed certain percentage limitations.

 

You also need to substantiate your donations. Generally, a bank record or written communication from the charity indicating its name, the date of the contribution and the amount of the contribution is adequate. If these records are not kept for each donation made, no deduction is allowed. Remember, these rules apply no matter how small the donation. However, there are stricter requirements for donations of $250 or more and for donations of cars, trucks, boats, and aircraft. Additionally, appraisals are required for large gifts of property other than cash. Finally, donations of clothing and household gifts must be in good used condition or better to be deductible.

 

The amount of otherwise allowable itemized deductions is reduced for higher income taxpayers whose adjusted gross income exceeds certain threshold amounts. For 2017, the threshold amounts are $313,800 in the case of married taxpayers filing a joint return or a surviving spouse, $287,650 in the case of a head of household taxpayer, $261,500 in the case of an unmarried individual, and $156,900 in the case of married taxpayers filing separate returns. A taxpayer with AGI over the threshold amount must reduce their otherwise allowable itemized deductions by the lesser of: three percent of the amount of the taxpayer’s AGI in excess of the applicable threshold amount, as adjusted for inflation, or 80 percent of the itemized deductions otherwise allowable for the tax year.

 

Now a word about special gift-giving techniques: There are some strategies that can help minimize your tax liability. Making a gift to another individual outside of the umbrella of a charitable organization is one. For example, you can give up to $14,000 in 2017 tax-free to another individual or $28,000 for married couples making joint gifts. If larger gifts are made, use of a lifetime gift and estate tax exclusion, set at $5.49 million for 2017, might be considered. However, you need to be very careful and rely on professional help. There are a lot of scams and schemes that really push the envelope. The IRS is aware of these abusive practices and is cracking down on taxpayers who use them. If a scheme sounds too good to be true, it probably is!

 

There are other special charitable giving techniques beyond the usual gifts of cash. These include, among others, a bargain sale to a charity, a gift of a remainder interest in your residence and a transfer to a charity in exchange for an annuity.  

Please do not hesitate to contact us if you have any questions regarding the planning of charitable gift of money or property.