The Truth About a Corporation: It’s Here!

corporation

The business entity that is commonly heard about is the corporation. A corporation is a separate legal entity from its shareholders. Also, many of the same legal rights and obligations apply to corporations as to people. They are able to sign contracts, make loans and take loans, sue and be sued, hire staff, possess assets, and pay taxes.

There are mainly two types of corporation. Let’s learn about them in greater detail below.

C-Corporation

A C-Corporation is an independent legal entity from its owners. One has to pay an annual fee and file corporate forms with the state.

All the assets and money a corporation generates are owned by it. Moreover, it has to establish separate corporate bank accounts and records.

overview of corporation

Corporations must pay local, state, and sometimes federal taxes. Most firms need to register with the IRS as well as state and local tax authorities. Although a tax ID number is necessary for any company with employees, corporations are the only ones who must obtain one.

Moreover, this business entity needs to pay income tax on their profits, unlike sole proprietors and partnerships. When a corp. produces a profit, there is a tax. Again, there is a tax when the company gives dividends to shareholders on their personal tax returns.

Owners of shares who are also workers must pay income tax on their wages. Also, the owner and employee equally split the Social Security and Medicare taxes. However this is typically a deductible business expense for the employer.

One has to submit articles of incorporation to the state in order to create a corporation, usually through the Secretary of State’s office.

S-Corporation

An S-Corporation is a company with the IRS’s Subchapter S designation.

One has to submit articles of incorporation to the state in order to create a corporation, usually through the Secretary of State’s office. You must first incorporate a business as a corporation in the state where its headquarters are before regarding it as an S corp.

Because its revenues and losses can pass through to the owner’s personal tax return, an S-corp differs from a C-corp. As a result, the company is not taxed directly. Only stockholders are subject to tax. There is a capping on losses at the tax basis of the shareholder. The company can give investors salaries, profit distributions, or a combination of salaries and payments.

Control & Operation

A corp. has bylaws (operating regulations) to clarify and establish the laws that govern the organization.

Shareholders must approve articles of incorporation, mergers, and business dissolution. Also, they  choose the directors. Directors are in charge of making important choices, like choosing the company’s officers.

Investment

A C-Corp may issue different classes of stock and bonds, subject to applicable state and federal securities laws and regulations.

An S-Corp may issue up to 100 shareholders with one class of stock.

Transferability & Continuity

Both C-Corp and S-Corp exist forever even if one or more owners pass away. Once can transfer ownership by the sale of shares. 

Legal Liability

Shareholders’ responsibility is often limited to the amount they invested in the business, but management is frequently personally accountable.

Payroll Taxes and Compensation Taxes

Income and Social Security taxes deducted from shareholder employees’ paychecks.

Corporation Advantages & Disadvantages

advantages of corporation

Advantages of C-Corporation

  • Personal liability for stockholders is minimal
  • Easy to add investors and transfer ownership
  • There is permanent continuation

Disadvantages of C-Corporation

  • Different tax returns are necessary
  • There may be two taxes on net income.
  • More expensive to install and maintain

Advantages of S-Corporation

  • Personal liability for stockholders is minimal
  • Taxation on business net income is just like shareholders’ individual income

Disadvantages of S-Corporation

  • Different tax returns are necessary
  • Limitations on adding more investors
  • Distribution of net income based on ownership proportion

Takeaway

A corporation, thus, provides much liberty. The company’s debts are not the owners’ responsibility. Additionally, a corporation is able to borrow funds, file lawsuits, and possess property.

If you need help regarding managing the taxes of a corporation, Dogra CPA LLC is here for you. All our accounting and tax services are geared to drive success.

Best Tips on Partnership Business You’ll Find Today

partnership business overview

best tips on partnership business you'll find today

Chetan Dogra

Written by Chetan Dogra, CPA

Earlier, we learned about the simplest form of business structure – the sole proprietorship in Is Sole Proprietorship Right for You? Find Out in this Guide. Now, let us check out the legal entity where business owner(s) act as a collective in managing the company – a partnership.

Partnership Overview

A general partnership is not a separate legal entity from its owners. In this respect, it is much like a sole proprietorship.

Also, a sole proprietorship has only one owner, whereas a partnership has two or more owners. Now, this is the main distinction between the two types of businesses.

partnership business overview

Owners may request withdrawals. If the partnership so directs, they can also request guaranteed payments. Moreover, owners make quarterly tax payments.

Although a written agreement is recommended (and necessary in some places), you can initiate it orally.

At present, many states have laws governing limited liability partnerships (LLPs) that place restrictions on the owners’ responsibility. Also, they deal with issues like profit-loss ratios, business choices, the addition and removal of partners, and operating conditions.

Internal Revenue Service (IRS) monitoring of you and your company may increase as a result of certain partnership allocation models.

Additionally, you must register your business with your state in order to form a partnership. Typically, this is done through the Secretary of State’s office.

Control & Operation in Partnership Business

General Partnership

If a partnership agreement doesn’t state differently, general partners have an equal share of management rights and control.

Generally, control and responsibilities can be specified in a written partnership agreement.

Limited Partnership

The general partners oversee and manage the company’s operations.

Also, liabilities of partners are restricted to their investment

Investment in Partnership Business

Unless otherwise specified in the partnership agreement, all partners have an equal ownership interest in all company assets and liabilities.

Now, ownership percentages can vary according to the number of partners and the written agreement. Notably, the agreement should include details of how a departing partner will be compensated for part ownership upon leaving, passing away, or retiring.

Business Partnership Transferability & Continuity

Unless the agreement allows for the continuance of the business by the remaining partners, the partnership dissolves if a general partner passes away or quits the partnership.

Legal Liability in Partnership Business

No matter which general partner incurs a liability, all general partners are equally responsible for it.

However, limited partners are only accountable for their portion of the investment.

Taxes on Payroll and Compensation

On their portion of self-employment income from the partnership (whether or not disbursed), general partners are subject to self-employment taxes.

But for limited partners, self-employment taxes are not applicable.

liability in partnership business

Advantages & Disadvantages of Partnership Business

Advantages

  • Ownership not confined to one individual
  • One level of net income tax
  • The distribution of income and expenses may not correlate with ownership percentage

Disadvantages

  • Personal culpability is uncapped
  • Each partner is liable in law for the commercial conduct of the other partners.
  • Different tax returns are necessary
partnership business pros and cons

Takeaway in Business Partnerships

If you want to be in the driver’s seat of your business and oversee everything, then Sole Proprietorship is the business model for you. You will be the sole person controlling and owning your business in this legal structure. It is easy to form too.

A partnership is great is you want to share the business responsibilities and liabilities with one or more partner. But if you are looking for maximum protection from personal liability in business, a corporation could be the answer. Watch out for our next blog Corporation that discusses all the various aspects of a corporation.

Is Sole Proprietorship Right for You? Find Out in this Guide

guide to a sole proprietorship

Is Sole Proprietorship Right for You? Find Out in this Guide

Chetan Dogra

Written by Chetan Dogra, CPA

When it comes to business entity, a sole proprietorship is the most straightforward legal framework for any firm.

Sole Proprietorship Overview

Here, you, the owner, are still legally a part of the company. (By default, your legal name serves as the legal business name.)

sole proprietorship overview

By establishing a “doing business as” (DBA) name, you can establish a business name that is distinct from your own. Furthermore, one must typically register DBAs with the county clerk or secretary of state in most states.

Owners are free to withdraw cash at any time from the company. Additionally, they must pay their estimated taxes on a quarterly basis.

Creating a sole proprietorship could be as simple as opening a business bank account. Also, certain states and localities could demand that you obtain a license or permit.

Control & Operation

Only one individual controls the entity. Moreover, all responsibility belongs to the owner.

Investments

In a sole proprietorship, outside investments are not allowed.

Transferability & Continuity

The business continues until the owner leaves the company or dies. It is possible to freely transfer assets and liabilities by selling all or some of the assets.

Legal Liability

The personal liability of a solo proprietorship is uncapped.

Taxes on Payroll and Compensation

In a sole proprietorship, self-employment taxes must be paid as a part of the quarterly estimated tax payments.

sole proprietorship legal liability

Advantages & Disadvantages of Sole Proprietorship

Advantages

  • Cheap to start and easy to operate
  • One level of net income tax
  • No individual tax return

Disadvantages

  • Uncapped personal responsibility
  • Just one person is permitted to own

Takeaway

If you want to be in the driver’s seat of your business and oversee everything, then Sole Proprietorship is the business model for you. You will be the sole person controlling and owning your business in this legal structure. It is easy to form too.

However, not everyone is comfortable handling all business matters on their own. For those who want to share the responsibilities with someone, a Partnership could be the right business entity. Find out about it in our next blog Best Tips on Partnership Business You’ll Find Today.

How to Make an Exit Plan with Powerful Accounting Services

powerful accounting services for exit planning

In the previous blog, we looked into exit planning and some of the common errors business owners can make in navigating the process. We Need to Talk About Exit Planning. It’s A Necessary Evil. lists how some points on how to negotiate treacherous terrain. Now, accounting services can help in making your exit as smooth as possible.

The most crucial success factors for an owner selling the company he has worked so hard to develop and expand are as follows.

Factors for Exit Plan Success: Discuss These with Your Accounting Services Provider

1. Be specific about your post-exit goals

What sort of money will you require to support those activities? How much did you spend each month before to leaving? What current sources of income do you have? How can you make the most of those resources? When someone moves on to another company venture, their income schedule—for example, whether they get paid monthly—might not vary significantly. No matter how generous the funds are, going into retirement can be a difficult financial transition for some people because they won’t be receiving a monthly paycheck. People who are well-prepared work with their tax and financial consultants to create a strategy they can stick to. This could entail figuring out the ideal frequency and sum to withdraw from retirement accounts.

accounting services post business exit plan

2. Share those objectives with your accounting services advisors

If you sold your company, you would have (hopefully) a sizeable sum of money, which would probably make up a sizeable chunk of your retirement savings. Utilize your reliable counsel. Utilize their expertise to improve your financial situation because you have them for a reason. Share your objectives with them, ask them for suggestions on how to improve your money, and then decide on a strategy you feel confident executing. Then, as they carry out that strategy, try to keep out of their path.

3. Defend your interests

Make sure your contracts are written so that your rights are safeguarded in the event that the buyer fails to uphold his end of the transaction. The last thing you want to do is put your nest egg in jeopardy by failing to complete everything correctly. Review all agreements with your lawyer, CPA, and other consultants to make sure you will receive what you expect from the deal.

Questions You May Ask Your Accounting Services Provider

Business owners want to know what to expect when they are about to sell or exit their company and embark on the next adventure, whether it is retirement or another business endeavor. Here are a few typical and significant factors:

1. How much is my company worth?

Your CPA and a business broker can provide an answer to this query if your company has annual sales between $5 million and $15 million. Ask your CPA if hiring a business valuation specialist makes sense when revenue exceeds $20 million.

due diligence in business exit plan

2. Why is the buyer interrogating me so intrusively?

You are aware that a commercial transaction requires due diligence. However, it could seem as though the purchasers are criticizing your child with all of their probing questions. It is essential to maintain some emotional (and even physical) distance during this time. During negotiations, losing your cool can more quickly put an end to the contract.

Making Your Business Successful

A few essentials can assist you in nurturing your business so that it can go to the next step, regardless of which stage it is in or if it is spanning many phases.

1. Be sincere with yourself when it comes to your future aspirations.

Start with the end in mind, even if your business is just getting off the ground.

2. Make an investment in the accounting infrastructure that suits the size and stage of your company.

Employ internal and external accounting resources with the knowledge required to serve your company today and in the future, and implement the software. Hire those with a strategic mindset.

future aspirations post business exit plan

3. Find a reliable account services consultant to serve as a sounding board.

Everybody needs a confidante they can talk to about their aspirations and thoughts with. A business owner who keeps to himself is merely being untruthful to himself.

4. Act consciously.

It is vital to plan ahead and carry it out correctly. Make a plan for yourself, then stick to it. Without a clear path, it is impossible to reach your destination.

5. Don't try to handle everything by yourself.

Smart business owners use a team of professionals to assist them present their company in the best possible light since they are aware that they cannot be an expert in every field.

Dogra CPA LLC Accounting Services Can Help

At Dogra CPA LLC, we have the resources and expertise you need to handle your exit planning. We know that as a business owner, you are busy running the day-to-day affairs. But when you want to make a smooth exit from your current business, our experts are here to walk you through.

accounting services for business exit
CPA Advisor

By Chetan Dogra

We need to talk about exit planning. It’s a necessary evil.

exit planning

We need to talk about exit planning. It's a necessary evil.

Chetan Dogra

Written by Chetan Dogra, CPA

You’ve at last succeeded and now it’s time for exit planning. Your baby is all grown up and prepared for you to move on after decades of care and investment. Maybe getting older is making you slow down and think about living a new kind of lifestyle. Or perhaps you simply feel ready to take on the next assignment. Success will hinge on negotiating some treacherous terrain in any case.

Typical Errors & Pitfalls in Exit Planning

1. Overestimating your business value

Overestimating the value of the company is the largest error owners make when planning their leave. 

exit plan
raising the business price in exit plan

It’s normal to place a great value on those extended evenings spent second-guessing every choice. However, placing an excessively high value on the company may prevent you from finding the ideal buyer when you do decide to sell.

On the other hand, after business valuation some business owners deceive themselves into believing they are willing to sell at a particular price, but when they receive an offer, the price increases. The owner has not been completely honest with herself about whether she is actually prepared to leave the company, which is what is at play in this situation.

2. Not fully accounting for the tax effects of a sale

You may receive a sizeable sum of money through the sale of your company – money that is sizeable and taxed.  It takes some careful planning to keep more of it for you and yours and lose less of it to Uncle Sam. Planning should ideally begin a few years before you sell so you and your tax advisors have enough time to establish and implement a tax strategy that yields the best results. This could involve taking into account things like built-in gains taxes, which might work in your favor or end up costing you literally millions more in taxes than you had anticipated.

3. Allowing financial planning to lapse after exit planning

After closing your firm, avoid the error of neglecting your finances or tax status. Through investments, estate planning, and careful handling of retirement account contributions or distributions when the time comes, many people have significant tax savings options. The money you have worked so hard to achieve can continue to work for you with a little advance forethought. Even after you sell your company, keep up your annual or biannual meetings with your CPA, investment advisors, etc. to fully take advantage of the opportunities in areas like trust planning, gift planning, philanthropic plans, retirement account strategies, etc.

But there is a way to overcome these mistakes and keep things on track when exiting your business. Stay tuned for our next blog How to Make An Exit Plan with Powerful Accounting Services to find out.

Best Accounting Services Tips for Business Growth

Accounting services can help in more ways than one when it comes to business growth.

Earlier, we learnt the common errors in accounting errors entrepreneurs make when growing a business. When caught up in the flurry of meeting new targets, it’s easy to commit these errors unknowingly. If you haven’t already, feel free to check out Avoid These 5 Mistakes Most  Firms Make in Business Growth!

Now, let us look at what to watch out for to drive towards success. As a startup owner, no matter how fast the growth, you want to keep certain factors in mind to make it big.

Factors for Success - How Accounting Services Creates A Difference

success in business accounting

1. Having Comparative Information

One of the most critical elements for a company’s success is information. Smart organizations regularly compare their operations against peers and rivals in addition to having a strong accounting system that provides you with up-to-date information on growth and profitability.

2. Watching Your KPIs

How does your company’s debt-to-equity ratio compare to that of other companies in your sector of a similar size? Are your profit margins moving in the same direction as the industry, or in a different direction?

Watching these key performance indicators (KPIs) might give early warnings of the need to cut costs or make other course corrections if the business isn’t expanding quickly enough.

3. Implementing a Tax Strategy

More investment is frequently required for growth, and creating and implementing a sound tax strategy can assist in reducing the cost of that investment. Businesses that invest in new facilities, capital equipment, R&D, and the hire of key personnel can reduce their tax obligations through careful tax planning. For instance, under the Section 179 tax deduction, companies that own a sizable amount of capital equipment can realize sizable tax savings. You can reduce the costs associated with actions that enhance products or business processes by claiming the appropriate tax credits, such as research and development tax credits. Planning for prospective taxes, such built-in gains, can also offer excellent chances for financial savings. The main lesson here is: If you know where to look, you may frequently make significant discounts.

Commonly Asked Questions

Owners of growing enterprises face new challenges and decision-making points, such as how to increase capital for expansion and maintain an ideal cash flow. The following inquiries are at the top of their priority lists:

1. What happens to my money?

Many business owners observe revenue coming in but are unsure of the precise expenditures being made with it. It might be used to pay for a variety of costs, including as taxes, operating costs, equipment, payroll, etc. You can get the response to this query from your company’s accounting software and financial records. A monthly cash flow statement will provide you a clear view of your entire cash revenue and expenses. Track your income and expenses carefully using your accounting tools. This will enable you to pinpoint areas in need of modifications and development.

2. What can I do to please my banker?

Lenders don’t want to see a big discrepancy between the top line and the bottom line, even if the capital expenses eating up your income statement are entirely justified. Those lenders might require the assurance provided by financial statements that have been prepared or reviewed by unbiased accountants.

3. Is the liquidity of my business acceptable?

The response to this query varies by sector and type of enterprise, but it is essential to the functioning of your organization. 

If your liquidity is poor, you could not have enough cash and liquid assets to cover your unpaid debts. This sector contains subtleties like accounts receivable and inventories that may strengthen a precarious liquidity position. To prevent shocks, keep an eye on cash flow levels on a regular monthly or biweekly basis. Regularly check in with your Controller and/or CFO to see if any adjustments are necessary.

If you’re unaware of how your firm compares to its competitors in the industry, expert third party sources like Dogra CPA can help.

help for accounting services in business growth
CPA Advisor

By Chetan Dogra

Avoid These 5 Mistakes Most Firms Make in Business Growth!

mistakes in business growth

Avoid these 5 mistakes most firms make in business growth!

Chetan Dogra

Written by Chetan Dogra, CPA

In terms of business growth, your company is currently expanding like a plant. The future is beginning to take on a clearer appearance now that those trying first few years are behind you. You have a workforce with well-defined responsibilities, and you are finally starting to make some money.

You’re searching for chances to grow your company into new markets or additional service offerings. You are beginning to use financing from bank lenders or investors because these opportunities demand capital expenditures that exceed your company’s existing resources. 

Additional, more specialized internal resources are needed due to the complexity of accounting (a controller, a CFO, someone to handle accounts payable and receivable, etc.). A review or even an statutory audit may be required by invested parties.

Typical Errors & Pitfalls in Business Growth

1. No clear vision

Of course, failing to have a clear vision for what the company will look like in the future is one of the most frequent blunders made throughout the growth phase.

2. Trying to grow quickly

Trying to develop too quickly is one of the mistakes that growing businesses make most frequently. They overestimate their ability to service their debt by making too optimistic volume predictions. To finance the operational requirements of expansion, cash must be realistically allocated, and a balance must be established.

3. Poor choice for funds usage due to overestimating resources

Owners who overestimate their financial resources may make poor choices, such as using company funds to support their personal lifestyle. Setting this precedent is not a good idea, particularly for owners who want to sell the business.

4. Insufficient understanding of business health due to inadequate accounting systems

Due to inadequate accounting assistance or information systems, business owners frequently lack the knowledge necessary to understand the true financial health of their company. Similar to how children outgrow their clothes, a growing company requires the proper level and type of accounting help.

 The individual who managed the accounting department for a $10 million organization may not be the same bookkeeper who kept your books in order when your business was just starting out. How will you go where you need to go if your accounting department isn’t equipped to identify possible problem areas and business opportunities early?

5. No succession planning

Though succession planning may not come to mind when your business is growing, it is very important to consider. Will you pass the company on to a relative or a key employee? Will you prepare it for sale to a private equity firm or third party? Business owners who don’t think deeply about these important issues may be passing up chances to make adjustments that would better position their company to reach their desired objectives.

The key to overcoming these errors is to be mindful of certain factors. What are they? We will explore them in our next blog Best Accounting Services Tips for Business Growth

no succession planning

Easy Business Accounting Tips to Help Your Startup: It’s Here!

startup business accounting

easy business accounting tips to help your startup: it's here!

Chetan Dogra

Like raising children, a business requires a lot of care and attention and this is where business accounting can help. As your startup company expands, it will experience its fair share of scraped knees, head injuries, and heartbreaks. You must consider the larger picture and have the information you need to make the best option in order to respond to these momentary setbacks effectively.

Business Accounting in the Startup Stage

Starting off with the proper accounting procedures puts startup companies in a better position to enter the growth stage more rapidly since they are given a steady diet of timely, accurate, and comprehensive financial information.

Think of John Casey’s early 2013 opening of the chain of fitness centers known as Toned & Fit. Toned & Fit grew to a $1 million company with a 25% gross profit margin in just one year. Casey established two additional sites in 2014, each of which was equally successful as the first, building on the success of the initial studio. He is thinking about expanding farther right now.

What variables made Toned & Fit such a smashing success?

  • He laid a strong platform for future development. Casey would not have known if he could afford to open those new locations or if they qualified for the bank financing to get them up and operating without accurate, timely, and comprehensive financial information.
  • Regular examinations by reliable consultants. An accounting counsel who has “been there, done that” may help you avoid the start-up stage mistakes that can send less-prepared enterprises to the emergency department, just like a good pediatrician can.
    With the end in mind, he began. Casey realized he would need to set the stage by running numerous sites successfully if he wanted to position his business to sell to a major franchisor.
formula for success in business accounting
  • He chose accountants who would help him succeed. Casey was aware that in order to achieve his company objectives, he would need to possess advanced accounting and tax knowledge. He chose an accounting company that had a track record of assisting startups like his to succeed.

Commonly Asked Questions in Startup Business Accounting

1. Which legal form is ideal for my company?

The most important question to address right now is this one. In order to choose the best business entity type, you must weigh your desire to shelter income from taxes against your requirement for liability protection. 

questions in business accounting

Your particular situation will determine the answer to this query.

2. How do I go about forming a partnership with another company?

Before approaching the other party, this question needs to be asked and the response provided. Joint ventures and partnerships are excellent ways to gain access to additional resources (such as engineering know-how, tools, and facilities), but they can also have unanticipated tax repercussions.

3. Who are the advisors I should be collaborating with?

A child needs a village to be raised, as the proverb goes. To achieve wholesome growth, a successful firm depends on accounting, legal, banking, insurance, and other financial experts. 

Accountants are frequently in a great position to refer business owners to other top-notch service providers.

If you are in the initial stages of your business and want to set it up for growth, we can help. Our team of experts can learn about your firm and help to put your best business foot forward.

business accounting services

Startup Business Accounting: Do You Need It?

business accounting in startups

Startup Business Accounting: Do You Need It?

2023

Chetan Dogra

Written by Chetan Dogra, CPA

You most likely still vividly recall the day your company was founded. After years of employment with a bigger organization, you were weary of having your suggestions for more effective procedures ignored. Or perhaps you discovered that you had built up a clientele that was willing to pay you for your area of expertise.

Now this is where you are. You’ve got your first clients and are getting paid to perform what you excel at and like after months of worrying and planning. No more putting in your time and effort on tasks that don’t excite you. No more red tape or bureaucracy. Finally, your future is in your hands.

Typical Errors & Pitfalls

Well, there might be a few things you didn’t consider. You probably didn’t start your company with the intention of becoming an accountant, but you may not be aware of the fact that accounting is a key indicator of a successful company. How can you be sure that you’re actually making money if you don’t keep track of your debits and credits?

worried about business accounting

Yes, you have income, but if you haven’t paid your estimated taxes, you might discover in April that your first year was actually a loss. It’s simple to forget that Uncle Sam expects his two pieces on a quarterly basis when you have a W-2 employment because your company handles your tax payments.

1. Not keeping track of compliance deadlines

Compliance deadlines are like jumping into a flowing river. When you have newly opened your firm, federal, state, and local deadlines may be approaching in three months or three days. If you haven’t prepared for such payments, the due dates will pass without your knowledge. Then your tax obligation will grow alarmingly quickly.

Perhaps you haven’t worked in a W-2 environment before. Maybe you already run a successful business, but you’re now trying your hand in a different sector. There is a temptation to think of accounting as being “one size fits all.” But just like every child is unique, so are every industry and type of business. If experienced business “parents” want to set up this specific business for long-term success, they will certainly need to go over some preconceived preconceptions.

2. Not selecting the right business entity

Business owners need to make a careful choice of their entity type. Every company needs to do an unbiased evaluation of the trade-off between legal protection and tax minimization. 

For instance, in the oil and gas industry, you can only receive the more immediate tax benefits if you put yourself in a position where you could be held liable, such as through a general partnership. On the other hand, a limited liability corporation (LLC) can be a better choice for a real estate endeavor.

How you wish to recompense yourself as an owner and how taxes are levied are important factors to take into account when choosing an entity from a tax standpoint. For instance, using a C corporation tax structure will result in “double taxation” (net profits taxed at the entity level; personal income taxed at the individual level). This is in contrast to S corporations, single member LLCs, or partnerships where net profits are “passed-through” to the owners’ personal returns and tax is applied at the individual level. As an owner, it’s crucial to understand how the IRS taxes different income distributions from profits in comparison to W-2 salaries.

If there are any legal repercussions from leaving a prior company, some entity types offer more protection. This is crucial if a non-compete clause is in effect. For business owners who plan to sell their company soon, other entity types are preferable. The improper entity type can have substantial long-term repercussions, which is just one of the reasons consulting with tax and legal professionals is crucial throughout the startup phase.

3. Not having the right business accounting support

The two largest mistakes that new business owners make are omitting to put up accounting systems and failing to hire the appropriate degree of accounting support. The owner might believe he can handle everything himself. After all, accounting should be fairly straightforward. On one side are debits and on the other are credits. Done and finished.

Wait a minute. Consider first asking a few questions to yourself. Do you know how to build up your chart of accounts to both satisfy Uncle Sam and capture the level of transaction detail you require for your personal decision-making? Do you know all the month-end responsibilities your company must fulfil in order to generate the data you need to make strategic decisions?

Perhaps you spent the time and money necessary to set up those accounting procedures, but you don’t follow them consistently. Who has time for bookkeeping when you’re so busy recruiting clients, starting projects, and delivering invoices?

upset man

But think about the issues involved. You’ve invested all you’ve got into this company, including startup capital and personal guarantees for loans. Failure is not an option, but real performance must be understood clearly in order to succeed. Does “success” mean gaining 50 new clients or $50,000 in revenue? These are infinitely trickier to pin down. Sound business decisions are based on accurate, timely, and comprehensive financial data, therefore failing to establish the processes that generate such data could be stifling your company’s potential growth.

However, there are subtle ways in which accounting services can help in the startup stage. We will find out about that in the next blog Easy Business Accounting Tips to Help Your Startup: It’s Here!

business accounting services

Important Considerations Before Filing a 2021 Tax Return

tax considerations

Important Considerations Before Filing a 2021 Tax Return

2023

Chetan Dogra

Written by Chetan Dogra, CPA

It’s time for IT filing and tax returns again. So pull up your socks and get ready. Now that the 2022 tax season is open, taxpayers should pay attention to the following important information before filing their 2021 tax returns.

What to Keep in Mind for Tax Returns

Don’t File Before Ready

Taxpayers should not file late, but also should not file prematurely. Those who file before they have all the required tax reporting documents risk making a mistake that could lead to losing a deduction, credit, or delayed processing due to an error.

Get These Important Tax Return Docs

Taxpayers should wait to file until they have all their supporting income statements, including but not limited to:

  1. Forms W-2 from employer(s)
  2. Forms 1099 from banks, issuing agencies and other payers including unemployment compensation, dividends and distributions from a pension, annuity or retirement plan
  3. Form 1099-K, 1099-Misc, W-2 or other income statement if they worked in the gig economy
  4. Form 1099-INT if they received interest payments
  5. Other income documents and records reporting virtual or crypto currency transactions
  6. Form 1095-A, Health Insurance Marketplace Statement, to reconcile advance Premium Tax Credits for Marketplace coverage
  7. Letter 6419, 2021 Total advance Child Tax Credit Payments to reconcile advance Child Tax Credit payments
  8. Letter 6475, 2021 Economic Impact Payment, to determine eligibility to claim the Recovery Rebate Credit.

Use IRS Account Online

Taxpayers can use their IRS Online Account to securely access information about their federal tax accounts, including their estimated tax payments, refunds, total economic impact payments, child tax credit payments and much more.

Why Should You E-File Your Federal Tax Return?

Are you still doing your IT filing on paper? If so, consider e-filing your tax returns. The benefits are plenty. Let’s delve into them deeper.

Complete & Accurate

This is the best way to file a tax return that’s accurate and complete. It’s because the tax software does the entire math for you, in turn, helping you avoid mistakes.

Greater Safety

online tax return

IRS e-file meets all stringent guidelines and uses the advanced encryption technology. It a reassuring fact that the IRS has safely and securely processed over 1.2 billion e-filed individual tax returns since the beginning of the program.

Faster Tax Refunds

E-filing usually brings a faster refund. The reason is simple. There is nothing to mail and your tax return is less likely to have errors, which take a longer time to process. Did you know that the IRS issues most refunds in less than 21 days? Well, believe it because it’s true! The speediest way to get your refund is to combine online filing with direct deposit into your bank account.

Convenience of Payment Options

If you owe taxes, you can do an online IT filing early and set an automatic payment date on or before April 15, the due date. And the best part is that you can choose your convenient payment option. That’s right. You can pay by debit or credit card, check or money order. If you want, you can even electronically transfer funds from your bank account.

Online IRS Tax Return is Easy

You can e-file your federal tax return through IRS Free File. This is a free tax preparation program that’s available only at the IRS. Alternatively, you can use commercial tax software or request your accountant to e-file your return. 

tax return payment options

If you qualify for the IRS Volunteer Income Tax Assistance and Tax Counseling for the Elderly, your online IT filing will be done for free.

Why File a Tax Return This Year

Last, individuals who are not required to file a tax return this year are encouraged to do so to claim potentially tax credits such as the recovery rebate credit, child tax credit, earned income tax credit, and others.

Expert CPAs for Your IT Filing

At Dogra CPA LLC, we have experienced CPAs to take care of your tax returns timely and efficiently. Whether you are a business owner or individual and no matter at what stage in life you are positioned, we can help.

2021 YEAR-END TAX PLANNING FOR BUSINESSES

2021 YEAR-END TAX PLANNING FOR BUSINESSES

November 12, 2021

Chetan Dogra

Written by Chetan Dogra, CPA

As we start to wrap up 2021, its important to check in with your tax and financial plans. This year likely brought challenges and disruptions that significantly impacted your personal and financial situation –– a continued global pandemic, several significant natural disasters, new tax laws and political shifts. Now is the time to take a closer look at your current tax strategies to make sure they are still meeting your needs and take any last-minute steps that could save you money. Here’s a look at some issues to consider as we approach year-end:

Key tax considerations from recent tax legislation

Many tax provisions were implemented under the American Rescue Plan Act that was enacted in March 2021. This act aimed to help individuals and businesses deal with the COVID-19 pandemic and its ongoing economic disruption. Also, some tax provisions were passed late in December 2020 that will impact this filing season. Below is a summary of the highlights in recent tax law changes to help you plan.

Employee retention credit (ERC)

The ERC encourages businesses to keep employees on their payroll during the pandemic. The ERC is a refundable payroll tax credit that may be claimed by eligible employers who pay qualified wages to qualifying employees. Changes were made with legislation to allow businesses to qualify for both Paycheck Protection Program (PPP) loans and the ERC. See if these programs could benefit you.

Family and sick leave credits

The American Rescue Plan Act extended the family and sick leave credits to Sept. 30, 2021. These credits are intended to compensate employers and self-employed people for coronavirus-related paid sick and family and medical leave.

Small Business Administration (SBA) loans

Though the PPP ended on May 31, 2021, existing borrowers may be eligible for PPP loan forgiveness. Even though the PPP loan forgiveness is not taxable for federal purposes, there may be state implications. There are also other COVID-19 relief measures offered through the SBA.  

Other tax matters to note:

Business meals

There is a 100% deduction (rather than the prior 50%) for expenses paid for food or beverages provided by a restaurant. This provision is effective for expenses incurred after Dec. 31, 2020 and expires at the end of 2022.

Purchases of property and equipment

With tax-favorable options available to businesses, many purchases can be completely written off in the year they are placed in service. Plus, there are tax-favorable rules that permit qualified improvement property to qualify for 15-year depreciation and, therefore, also be eligible for 100% first-year bonus depreciation. Let us help you receive the best tax treatment.

Net operating losses

If you have significant losses from 2018 to 2020, you may be able to carry those losses back up to five years, which can significantly impact a prior year where there was a tax liability.

Methods of accounting

More businesses can use the cash method of accounting. This can be helpful for cashflow purposes and is generally easier to apply than the accrual method of accounting. There are qualifications that must be met, but we can help you
understand if your business would benefit.

Retirement plans

Have you revisited your company’s retirement plan lately? Take a look at the many retirement savings options to make sure that you are taking advantage of tax deductions as well as providing opportunities for owners and employees to save for retirement.

Looming potential legislation

With potential tax changes looming as Congress debates proposals in President Biden’s “Build Back Better” agenda, there remains uncertainty in how this will impact taxpayers. As legislation continues to evolve, and if it passes, we’ll contact you to discuss how changes impact your tax and financial plan.

Year-end planning equals fewer surprises

There are many other opportunities to discuss as year-end approaches. And, many times, there may be strategies such as deferral or acceleration of income, prepayment or deferral of expenses, etc., that can help you save taxes and strengthen your financial position.

Whether it’s working toward a business succession plan or getting answers to your tax and financial planning questions, we’re here for you. Please contact our office today at 646.477.9369 to set up your year-end review. As always, planning ahead can help you minimize your tax bill and position you for greater success.

 

2021 YEAR-END TAX PLANNING FOR INDIVIDUALS

2021 YEAR-END TAX PLANNING FOR INDIVIDUALS

November 12, 2021

Chetan Dogra

Written by Chetan Dogra, CPA

As we wrap up 2021, it’s important to take a closer look at your tax and financial plans. This year likely brought challenges and disruptions that significantly impacted your personal and financial situation –– a continued global pandemic, several significant natural disasters, new tax laws and political shifts. Now is the time to take a closer look at your current tax strategies to make sure they are still meeting your needs and take any last-minute steps that could save you money. Here’s a look at some issues to consider as we approach year-end:

Key tax considerations from recent tax legislation

Many tax provisions were implemented under the American Rescue Plan Act that was enacted in March 2021. This act aimed to help individuals and businesses deal with the COVID-19 pandemic and its ongoing economic disruption. Also, some tax provisions were passed late in December 2020 that will impact this filing season. Below is a summary of the highlights in recent tax law changes to help you plan.

 

Economic impact payments (EIPs)

The American Rescue Plan Act created a new round of EIPs that were sent to qualifying individuals. As with last year’s stimulus payments, the EIPs were set up as advance payments of a recovery rebate tax credit. If you qualified for EIPs, you should have received these payments already. However, if the IRS owes you more, this additional amount will be captured and claimed on your 2021 income tax return and we can help you plan for any modification now. 

If you received an EIP as an advance payment, you should receive a letter from the IRS. Keep this for record-keeping purposes to help us determine any potential adjustment.

Child tax credit

As part of the American Rescue Plan Act, there were many important changes to the child tax credit, such as the credit:

·       Amount has increased for certain taxpayers

·       Is fully refundable (meaning taxpayers will receive a refund of the credit even if they don’t owe the IRS)

·       May be partially received in monthly payments

·       Is applicable to children age 17 and younger

 

The IRS began paying half of the credit in advance monthly payments beginning in July –– some taxpayers chose to opt out of the advance payments, and some may have complexities that require additional analysis. We’ll be here to help you navigate any questions to make sure you get the best benefit for your family.

Charitable contribution deductions

Individuals who do not itemize their deductions can take a deduction of up to $300 ($600 for joint filers). Such contributions must be made in cash and made to qualified organizations. Taxpayers who itemize can continue to deduct qualifying donations. In addition, taxpayers can claim a charitable deduction up to 100% of their adjusted gross income (AGI) in 2021 (up from 60%). There are many tax planning strategies we can discuss with you in this area.

Required minimum distributions (RMDs)

RMDs are the minimum amount you must annually withdraw from your retirement accounts (e.g., 401(k) or IRA) if you meet certain criteria. For 2021, you must take a distribution if you are age 72 by the end of the year (or age 70½ if you reach that age before Jan. 1, 2020). Planning ahead to determine the tax consequences of RMDs is important, especially for those who are in their first year of RMDs.

Unemployment compensation

Another thing to note that’s different in 2021 is the treatment of unemployment compensation. There is no exclusion from income. The $10,200 income tax exclusion that a taxpayer may have received in 2020 is no longer available in 2021. We can help you plan for any potential impacts of this change.

State tax obligations related to teleworking arrangements

The pandemic has spawned changes in how people work, and more people are permanently working from home (i.e., teleworking). Such remote working arrangements could potentially have tax implications that should be considered by you and your employer.

Virtual currency transactions are becoming more common.

There are many different types of virtual currencies, such as Bitcoin, Ethereum and non-fungible tokens (NFTs). The sale or exchange of virtual currencies, the use of such currencies to pay for goods or services, or holding such currencies as an investment, generally has tax impacts. We can help you understand those consequences. 

Additional tax and retirement planning considerations

We recommend you review your retirement situation at least annually. That includes making the most of tax-advantaged retirement saving options, such as traditional IRAs, Roth IRAs and company retirement plans. It’s also advisable to take advantage of health savings accounts (HSAs) that can help you reduce your taxes and save for your future. We can help you determine whether you’re on target to reach your retirement goals.

Here are a few more tax and financial planning items to discuss with us:

·        Let us know about any major changes in your life such as marriages or divorces, births or deaths in the family, job or employment changes, starting a business and significant expenditures (real estate purchases, college tuition payments, etc.).

·        Consider tax benefits related to using capital losses to offset realized gains –– and move any gains to the lowest tax brackets, if possible.

 

·        Make sure you’re appropriately planning for estate and gift tax purposes. There is an annual exclusion for gifts ($15,000 per donee, $30,000 for married couples) to help save on potential future estate taxes.

 

·         Consider Sec. 529 plans to help save for education; there can be income tax benefits to do so, and we can help you with any questions.

 

·         Consider any updates needed to insurance policies or beneficiary designations.

 

·         Discuss tax consequences of converting traditional IRAs to Roth IRAs.

 

·         Let’s review withholding and estimated tax payments and assess any liquidity needs.

Looming potential tax legislation

With potential tax changes looming as Congress debates proposals in President Biden’s “Build Back Better” agenda, there remains uncertainty in how this will impact taxpayers. As legislation continues to evolve, and if it passes, we’ll contact you to discuss how changes impact your tax and financial plan.

Year-end planning equals fewer surprises

There are many other opportunities to discuss as year-end approaches. And, many times, there may be strategies such as deferral or acceleration of income, prepayment or deferral of expenses, etc., that can help you save taxes and strengthen your financial position.

Whether it’s working toward retirement or getting answers to your tax and financial planning questions, we’re here for you. As always, planning ahead can help you minimize your tax bill and position you for greater success.

Tax Alert: Changes to the Employee Retention Credit (ERC)- PPP Loan Recipients Now Eligible for the Credit

The (COVID-19) stimulus package signed into law by President Trump on Dec. 27 contains significant enhancements to the employee retention tax credit enacted under the CARES Act. The stimulus package clarifies that wages paid with PPP loans that are not forgiven may be qualified wages for ERC purposes retroactively. Previously, PPP loan recipients were not eligible for the employee retention credit (ERC).

Period of Credit Availability

Qualified wages paid after March 12, 2020 and before July 1, 2021 (extended to first two quarters of 2021)

Maximum Credit Amount

A potential to receive a maximum tax credit of $14,000 ($7,000 for EACH of the first two quarters of 2021) per employer for first two quarters of 2021

A potential to receive a maximum tax credit of $5,000 per employer for wages paid after March 12, 2020 to December 31, 2020 – will require to amend 2020 941 returns

The wages paid with PPP loans that are forgiven are not eligible for the employee retention credit. 

Eligibility Requirements for the Credit

Business operations that are either suspended by a COVID-19 lockdown order or experienced more than 20% drop (50% drop for 2020) in gross receipts for a quarter in 2021 compare to same quarter in 2019 will be eligible for the credit.

A company with 500 (100 for 2020) or fewer employees in 2021 will be eligible for the credit, even if employees are working.

More updates will follow as soon!

2020 Year-End Tax Planning for Businesses

2020 Year-End Tax Planning for Businesses

November 27, 2020

Chetan Dogra

Written by Chetan Dogra, CPA, CVA 

We can all agree that 2020 is unlike any other year. As we consider tax-planning strategies for the year end, major uncertainty continues concerning the severity of the pandemic and length of the economic recovery. Although Congress passed two major pieces of legislation in response to the health and economic impact of the coronavirus pandemic, it remains unclear if additional relief is forthcoming. 

In addition, some regularly expiring tax provisions are due to expire again at the end of 2020. In the meantime, the IRS continues to release significant guidance on provisions of the Tax Cuts and Jobs Act. As such, each business should consider the unique challenges and possible opportunities that this year presents.

COVID Relief

In addition to providing resources to the health community to help contain and combat the virus, the Families First Coronavirus Response Act offered employees and self-employed individuals affected by the pandemic with guaranteed paid sick leave. Provisions of the Coronavirus Aid, Relief and Economic Security (CARES) Act also included numerous tax benefits for businesses. Here are highlights for tax planning consideration at 2020 year-end:

  • The Paycheck Protection Program (PPP). Under the Cares Act, a recipient of a covered loan can receive forgiveness of indebtedness on a PPP loan in an amount equal to the sum of payments made for qualified expenses. According to IRS guidance, the business expenses related to forgivable PPP loans are not deductible. However, lawmakers state that this was not their intent. Congress will need to address the deductibility of these expenses in future legislation to clearly make these expenses deductible.
  • Employee Retention Credits. The employee retention credit is designed to encourage businesses to keep employees on their payroll and is available for qualified wages paid through the end of 2020. This credit is very similar to the paid leave credits granted to employers under the Families First Coronavirus Response Act with some changes to the requirements. Most significantly, neither the employee nor the employer has to be directly impacted by the infection. Employers can reduce their required deposits of payroll taxes withheld from employees’ wages by the amount of the credit or request an advance of the employee retention credit. Eligible employers may use the employee retention credit with other relief such as payroll tax deferral which may affect deposits and advances.
  • Deferred Payroll Tax Payments. Payroll taxes due from the period beginning on March 27, 2020 and ending on December 31, 2020, can be deferred. The total payroll taxes incurred by employers, and 50 percent of payroll taxes incurred by self-employed persons qualify for the deferral. Half of the deferred payroll taxes are due on December 31, 2021, with the remainder due on December 31, 2022.
  • Executive Memorandum on Withholding. President Trump has authorized employers to defer the withholding of the employee’s share of Social Security taxes through the end of 2020. However, unless Congress forgives the repayment of these taxes, they will have to be repaid in the first quarter of 2021. It is unclear as to how the deferred tax would be collected from individuals who are no longer employed when the taxes come due. Employers that are concerned with the administration and collection of the deferred taxes continue to withhold the taxes from their employees.

Tax Cuts and Jobs Act modified under the CARES Act

Several tax provisions under the Tax Cuts and Jobs Act were modified by the CARES Act for 2020 and earlier years providing opportunities to amend prior year returns. A 15-year recovery period is retroactively assigned to qualified improvement property placed in service after December 31, 2017 allowing the property to be depreciated over 15 years or, alternatively to qualify for 100 percent bonus depreciation.

Net operating losses (NOLs) arising in tax years beginning in 2018, 2019, and 2020 now have a five-year carryback period with an unlimited carryforward period and are not limited to 80 percent of taxable income.

The business interest deduction limit increased from 30 to 50 percent of the taxpayer’s adjusted taxable income for the 2019 and 2020 tax years with special rules for partners and partnerships.

The limitation on the deduction of excess business losses for noncorporate taxpayers does not apply for tax years beginning in 2018, 2019, and 2020.

Corporations can accelerate the recovery of refundable AMT credits which allows corporations to claim a refund immediately and obtain additional cash flow during the COVID-19 emergency.

Expiring Provisions

Taxpayers might consider taking advantage of the following tax benefits in 2020 before they expire. In some cases, these benefits were retroactively applied. In which case, it may be useful to amend prior year’s returns if the savings are significant enough.

  • The Work Opportunity Credit terminates for wages paid to workers that begin work for an employer after December 31, 2020.
  • A deduction is allowed for all or part of the cost of energy efficient commercial building property (i.e., certain major energy-savings improvements made to domestic commercial buildings) placed in service after December 31, 2017 and before January 1, 2020.
  • A three-year extension of the energy-efficient homes credit is available to eligible contractors for new homes manufactured after December 31, 2017 through December 31, 2020.

Summary

There is no one size fits all for tax planning and any strategy may have unintended consequences if the taxpayer’s situation is not evaluated holistically considering changing landscape. Traditional methods for postponing income and accelerating deductions may not be the best option if tax rates rise after an election year. 

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IRS Confirms PPP Loan Forgiveness is Taxable in 2020

Earlier this year, the IRS issued Notice 2020-32 which stated that expenses funded with a Paycheck Protection Program (PPP) loan that is forgiven are not deductible for tax purposes under rules designed to prevent a double tax benefit. A much-debated question since the issuance of that notice is whether a taxpayer that received a PPP loan and paid otherwise deductible expenses can deduct those expenses in the tax year in which the expenses were paid or incurred if, at the end of that tax year, the taxpayer has not received a determination of forgiveness of the loan or not yet applied for forgiveness.

On November 18, the IRS issued Rev. Rul. 2020-27 answering that question: A taxpayer that receives a PPP loan and paid or incurred otherwise deductible expenses related to that loan may not deduct those expenses in the tax year those expenses were paid or incurred if, at the end of that tax year, the taxpayer reasonably expects to receive forgiveness of the PPP loan, even if the taxpayer has not submitted an application for forgiveness of the loan by the end of such tax year.

The IRS presented two scenarios in the revenue ruling as examples. In both scenarios, the borrower pays expenses such as payroll and mortgage interest that would qualify under the CARES Act as eligible PPP expenditures and the borrower satisfies all of the requirements for the loan to be forgiven. In the first scenario, the borrower applies for forgiveness in November 2020 but has not received notice of forgiveness by year-end. In the second scenario, the borrower does not plan to apply for forgiveness until 2021. In both cases, the IRS explained that the taxpayers could not deduct expenses funded with the PPP loans because there was a reasonable expectation of forgiveness.

The IRS also released Rev. Proc. 2020-51 to provide a safe harbor rule for PPP loan borrowers where the forgiveness has been denied in full or in part.  In such case, the taxpayer would be permitted (pursuant to the provisions in the Rev. Proc.) to take a tax deduction for those otherwise eligible expenses on an original return, an amended return, or an administrative adjustment request.

Rev. Rul. 2020-27 provides much-needed guidance to taxpayers that were considering delaying the filing of forgiveness applications in order to secure deductions in a current-year tax return or taxpayers that had filed a forgiveness application but were uncertain about how to file their tax returns.


Steer clear of the Trust Fund Recovery Penalty

Steer clear of the Trust Fund Recovery Penalty

November 25, 2017

Chetan Dogra

Written by Chetan Dogra, CPA

If you own or manage a business with employees, you may be at risk for a severe tax penalty. It’s called the “Trust Fund Recovery Penalty” because it applies to the Social Security and income taxes required to be withheld by a business from its employees’ wages.

 

Because the taxes are considered property of the government, the employer holds them in “trust” on the government’s behalf until they’re paid over. The penalty is also sometimes called the “100% penalty” because the person liable and responsible for the taxes will be penalized 100% of the taxes due. Accordingly, the amounts IRS seeks when the penalty is applied are usually substantial, and IRS is very aggressive in enforcing the penalty.

Far-reaching penalty

The Trust Fund Recovery Penalty is one of the more dangerous tax penalties as it applies to a broad range of actions and to a wide range of people involved in a business.

This article lists a few answers to questions about the penalty so you can safely stay clear of it.

Which actions are penalized? The Trust Fund Recovery Penalty holds over any willful failure to collect, or truthfully account for, and pay over Social Security and income taxes required to be withheld from employees’ wages.

Who is at risk? The penalty can be imposed on anyone “responsible” for collection and payment of the tax. This has been broadly defined to include a corporation’s officers, directors and shareholders under a duty to collect and pay the tax as well as a partnership’s partners, or any employee of the business with such a duty. Even voluntary board members of tax-exempt organizations, who are generally exempt from responsibility, can be subject to this penalty under certain circumstances. In addition, in certain cases, responsibility has been extended to family members close to the business, and to attorneys and accountants.

IRS says responsibility is a matter of status, duty and authority. Those with the power to see that the 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. Although a taxpayer held liable can proceed with civil action against other responsible people for contribution, this is an action he or she must take entirely on his or her own after he or she pays the penalty. It isn’t part of the IRS collection process.

Here’s how broadly the net can be cast: It is possible that you may not be directly involved with the payroll tax withholding process in your business; however if you learn of a failure to pay over withheld taxes and have the power to pay them but instead make payments to creditors and others, you become a responsible person.

What’s considered “willful?” For actions to be willful, they don’t have to include a patent intent to evade taxes. Merely bending to business pressures and paying bills or obtaining supplies instead of paying over withheld taxes that are due the government is willful behavior. Additionally, just because you delegate responsibilities to someone else doesn’t necessarily mean you’re off the hook. Your negligence regarding taking care of the job yourself can be treated as the willful element.

Avoiding the penalty

You should uniformly never allow any failure to withhold and any “borrowing” from withheld amounts — regardless of the circumstances. All funds withheld are required to also be paid over to the government. Feel free to contact us for information about the penalty and making tax payments.

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COVID-19-related leave donation programs now eligible for tax relief

COVID-19-related leave donation packs now eligible for tax relief

November 25, 2017

Chetan Dogra

Written by Chetan Dogra, CPA

The IRS recently announced special tax relief for leave-based donation programs set up by employers to aid those directly affected by the COVID-19 pandemic. Under such programs, an employer can allow its employees to give up vacation, sick or personal leave in exchange for a cash contribution by the employer to a qualified charitable organization.


Two issues addressed:

 

Conventionally, leave-based charitable donations must be included within the donating employee’s income. Additionally, the opportunity to elect such contributions usually raises the concern that eligible employees may be taxed on income that could have been donated as the ability to donate triggers “constructive receipt.” Take a look at how 2020-46 addresses both tax issues.

Firstly, cash payments that employers make to qualified tax-exempt organizations to exchange for vacation, sick or personal leave that their employees elect to make do without won’t constitute income to the employees if the payments are:

1) Made before January 1, 2021, and

2) Purposed towards the relief of victims of the COVID-19 pandemic in the affected geographic areas.

These areas cover all 50 states, the District of Columbia, Puerto Rico and four other U.S. territories. Said payments need not be included in Box 1, 3 or 5 of the employee’s Form W-2.

Secondly, the sheer opportunity to make a leave donation won’t result in constructive receipt of income for employees. However, electing employees may not deduct the value of the donated leave on their income tax returns. Deductions by electing employees would result in “double-dipping,” as the donated leave will already have been excluded from their income. Employers will be permitted to deduct the contributions either as charitable contributions or as trade or business expenses, should the applicable requirements be met.

A different kind of relief:

Tax relief for leave donations has generally become normalized. However, this version differs in its description of the employer’s deduction by expressly stating — rather than implying — that the employer may rely on either the deduction for charitable contributions or the business expense deduction (again, provided applicable requirements are met). Feel free to contact us for further information.

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What qualifies as a “coronavirus-related distribution” from a retirement plan?

As potentially heard, the Coronavirus Aid, Relief and Economic Security (CARES) Act allows for “qualified” people to obtain certain “coronavirus-related distributions” from their retirement plans without the necessity of paying tax.

So how does someone qualify? Rather, what’s a coronavirus-related distribution?

Early distribution basics

Generally, withdrawing money from an IRA or eligible retirement plan before you reach age 59½, necessitates a 10% early withdrawal tax in addition to any tax you may owe on the income from the withdrawal. This rule, however, exists with several exceptions. For example, if you become totally and permanently disabled or if you use the money to pay qualified higher education costs or medical expenses, you don’t owe the additional 10% tax.

New exception

In virtue of the CARES Act, you are able to take up to $100,000 in coronavirus-related distributions made from an eligible retirement plan between January 1 and December 30, 2020. These coronavirus-related distributions are not subject to the 10% additional tax that otherwise would generally apply to distributions made before you reach age 59½.

More so, a coronavirus-related distribution can be included in income in installments over a period of three years, and you have an additional three years to repay it to an IRA or plan. If you recontribute the distribution back into your IRA or plan within three years of the withdrawal date, you are able to treat the withdrawal and later recontribution as a totally tax-free rollover.

In new guidance (Notice 2020-50) the IRS spells out who qualifies to take a coronavirus-related distribution. A qualified individual is someone who:

  • Is diagnosed (or whose spouse or dependent is diagnosed) with COVID-19 after taking a test approved for administration by the Centers for Disease Control and Prevention (including a test authorized under the Federal Food, Drug, and Cosmetic Act); or
  • Experiences adverse financial consequences or ramifications as a result of certain events. To qualify under this test, the individual (or his or her spouse or member of his or her household sharing his or her principal residence) must:
    • Be quarantined, be furloughed or laid off, or have work hours reduced due to COVID-19;
    • Be rendered unable to work due to a lack of childcare due to COVID-19;
    • Experience a business that he or she owns or operates due to COVID-19 shut down or have reduced hours;
    • Have pay or self-employment income reduced because of COVID-19; or
    • Have a job offer rescinded or start date for a job delayed due to COVID-19.

Favorable rules

As you can see, the rules allow many people — though not everybody — to take retirement plan distributions under the new exception. If you decide to take advantage of it, be sure to keep good records to show that you qualify. Be careful: You’ll be taxed on the coronavirus-related distribution amount that you don’t recontribute within the three-year window; however, you won’t have to worry about owing the 10% early withdrawal penalty if you’re under 59½. Other rules and restrictions may potentially apply. Contact us if you have questions or need assistance.

If you’re selling your home, don’t forget about taxes


Conventionally, spring and summer are popular times for selling a home. Unfortunately, the COVID-19 crisis has resulted in a slowdown in sales. The National Association of Realtors (NAR) reports that existing home sales in April decreased year-over-year, 17.2% from a year ago. One bit of good news is that home prices are up. The median existing-home price in April was $286,800, up 7.4% from April 2019, by word of the NAR.

If you’re planning to sell your home this year, it’s a good time to review the tax considerations.

Some gain is excluded

If you’re selling your principal residence, and you meet certain requirements, you are able to exclude up to $250,000 ($500,000 for joint filers) of gain. Gain that is sufficient for the exclusion is also excluded from the 3.8% net investment income tax.

To be eligible for the exclusion, you must meet these tests:

  • The ownership test. You must have owned the property for at least two years during the five-year period ending on the sale date; or
  • The use test. You must have used the property as a principal residence for at least two years during the same five-year period. (Periods of ownership and use don’t need to overlap.)

In addition, you can’t use the exclusion more than once every two years.

Larger gains

What if you have more than $250,000/$500,000 of profit when selling your home? Any gain that isn’t sufficient for the exclusion generally will be taxed at your long-term capital gains rate, provided you have owned the home for at least a year. If you didn’t, the gain will be considered short term and subject to your ordinary-income rate, which could be more than double your long-term rate.

Here are two other tax considerations when selling a home:

  1. Keep track of your basis. To support an accurate and precise tax basis, be sure to maintain complete records, including information on your original cost and later on improvements, reduced by any casualty losses and depreciation claimed based on business use.
  2. Be aware that you can’t deduct a loss. If you sell your principal residence at a loss, it isn’t generally deductible. But if a portion of your home is rented out or used exclusively for your business, the loss that can be traced back to that part may be deductible.

If you’re selling a second home (for example, a beach house), it won’t be appropriate for the gain exclusion. However, if it qualifies as a rental property, it can be considered a business asset, and you may be able to defer tax on any gains through an installment sale or a Section 1031 like-kind exchange. In addition, you may be able to deduct a loss.

For many people, their homes are their most valuable asset. So before selling yours, make sure you are fully aware of the tax implications. We can help you plan ahead to lessen taxes and answer any questions you have about your home sale.

How to treat business start-up expenses on your tax return?

startupexpenses

While the COVID-19 crisis has devastated many existing businesses, the pandemic has also created opportunities for entrepreneurs to launch new businesses. For example, some businesses are being launched online to provide products and services to people staying at home.

Entrepreneurs often don’t know that many expenses incurred by start-ups can’t be currently deducted. You should be aware that the way you handle some of your initial expenses can make a large difference in your tax bill.

How expenses must be handled

If you’re starting or planning a new enterprise, keep these key points in mind:

  • Start-up costs include those incurred or paid while creating an active trade or business — or investigating the creation or acquisition of one.
  • Under the Internal Revenue Code, taxpayers can elect to deduct up to $5,000 of business start-up and $5,000 of organizational costs in the year the business begins. As you know, $5,000 doesn’t get you very far today! And the $5,000 deduction is reduced dollar-for-dollar by the amount by which your total start-up or organizational costs exceed $50,000. Any remaining costs must be amortized over 180 months on a straight-line basis.
  • No deductions or amortization deductions are allowed until the year when “active conduct” of your new business begins. Generally, that means the year when the business has all the pieces in place to begin earning revenue. To determine if a taxpayer meets this test, the IRS and courts generally ask questions such as: Did the taxpayer undertake the activity intending to earn a profit? Was the taxpayer regularly and actively involved? Did the activity actually begin?

Expenses that qualify

In general, start-up expenses include all amounts you spend to:

  • Investigate the creation or acquisition of a business,
  • Create a business, or
  • Engage in a for-profit activity in anticipation of that activity becoming an active business.

To be eligible for the election, an expense also must be one that would be deductible if it were incurred after a business began. One example is money you spend analyzing potential markets for a new product or service.

To qualify as an “organization expense,” the expenditure must be related to creating a corporation or partnership. Some examples of organization expenses are legal and accounting fees for services related to organizing a new business and filing fees paid to the state of incorporation.

Thinking ahead 

If you have start-up expenses that you’d like to deduct this year, you need to decide whether to take the elections described above. Recordkeeping is critical. Contact us about your start-up plans. We can help with the tax and other aspects of your new business.

Tax Alert: How to Avoid Taxpayer ID Theft and Tax Scams

Tax Scam

Tax Alert: How to Avoid Taxpayer ID Theft and Tax Scams

January 7, 2018

Chetan Dogra

Written by Chetan Dogra, CPA

The tax filing season is right around the corner, which means its prime-time for tax scammers. The IRS warns taxpayers to be aware of scams that could target your money or identity. The IRS says it has seen a surge in phone tax scams over the last few years. Since 2013 over 5000 victims have paid over 26 million dollars as a result of a tax scam. The phishing and malware scams are up by 400%.

Most scammers pretend to be from the IRS and demand immediate payment of tax debts under the threat of seizing everything under victim’s name including bank accounts, property, and travel access. The scammers further escalate the fear by threatening to arrest and action of criminal proceeding. The objective is to pressure the victim to pay over the phone immediately either by credit card or bank account.

Here is how to protect yourself from tax scams:

A phone call or an email would not be the first method of contact from the IRS about a tax collection problem. The IRS will never solicit personal information and hound you for money without sending you a written tax notice in the mail. So if you receive a call from someone who is pretending as IRS agent and asks you to verify your personal information and demands immediate payment against the tax debt, don’t trust the caller and disconnect the phone right-way. Hackers have been known to make a lookalike that they are calling from a government agency and use fake caller IDs.

Call the IRS directly if you receive a threatening email or phone call asking for personal information and money wire. Do not click on the links in emails from people you don’t know and never submit personal information through forms embedded in personal emails. 

Also be aware that the IRS never asks for credit or debit card numbers over the phone and sends unsolicited emails or calls to anyone threatening arrest, lawsuits or prison time.

Another pain-point for the taxpayers and the IRS is tax related identity theft.

According to the IRS, tax-related identity theft occurs when someone’s stolen Social Security number is used for filing a tax return claiming a fraudulent refund. Identity thieves are known for using stolen Social Security number to file a false return early in the year. The victims of identify theft are unaware that anything is wrong until they try filing a tax return and find out someone already filed a return with their Social Security number.

One way criminals steal Social Security number is by calling or emailing potential victims or, more recently by hacking into online systems of tax return preparers or other third parties.  

The takeaway

If anyone believes they’re the target of an ID theft scam, the IRS recommends reporting the incident to the Treasury Inspector General for Tax Administration at 1-800-366-4484 and contacting the Federal Trade Commission through the FTC Complaint Assistant link.  Forward emails you think come from scammers to phishing@irs.gov.

 Let’s talk

For a deeper discussion on how to avoid tax scams, please contact our office at 646.477.9369.

These tax tips have been prepared for informational purposes only and should not be relied on for tax, legal or accounting advice.

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Cut Your Tax Bill: 10 Things To Do Before Jan. 1

tax break

Cut Your Tax Bill: 10 Things To Do Before Jan. 1

December 27, 2017

Chetan Dogra

Written by Chetan Dogra, CPA

As the end of the year is approaching and the tax reform is finally done, 2017 will be the last year to take advantage of some key tax breaks before they get disappear. In present scenario, the phrase-use it or lose it-is indeed TRUE. Below are some smart tax moves to consider if you want a tax cut on your 2017 tax return.

State and local taxes

One of the casualties of the new tax reform, starting tax year 2018, is that individuals can only deduct up to $10,000 for any combination of state and local income taxes, property taxes, and sales taxes. The move is widely viewed as a HAMMER to states such as New York, New Jersey, and California. Although prepaying 2018 state and local income taxes cannot be taken as a deduction, prepaying fourth quarter 2017 state and local income taxes this December, including any tax you expect to owe when you file your tax return in April, may still be advisable.

If you have no state income tax deduction in 2017, consider claiming the sales tax deduction. Tracking sales tax paid throughout the year can be very tedious job though; therefore, the other option available is to use calculated formula provided by the IRS to deduct sales tax in 2017. 

Property taxes

Many jurisdictions charge property taxes in multiple installments, with payment due dates often spanning two calendar years. One tax saving strategy could be to prepay the first-half property tax payment of 2018 before the year-end, 2017. However, If you are trying to make property tax payments for the 2018 tax year that haven’t even been determined or billed yet, it’s likely not deductible. If you are one of them who pay property taxes out of escrow, you will have to coordinate with your bank or the mortgage company. Also be careful, if you prepay your 2018 property taxes, you might be giving up any right to contest your property valuation. 

Finally, before you pull the trigger to pay your state and local taxes, make sure you check with your accountant whether you owe the Alternative Minimum Tax (AMT) in 2017, then prepaying your property taxes probably won’t help you because the AMT requires you to add back all of your state and local taxes and recalculate your tax bill, so the benefit of prepaying goes away. 

Home equity loan interest

Prepaying home equity loan interest if possible may be advisable as that deduction will no longer be available next year. In some cases, paying off home equity debt and using the interest tracing rules to establish investment debt might be a more tax effective way to borrow. 

Charitable donations

Do you feel it’s about time to give a little more to your religious or a qualified institution. If so, get it done by year’s end. It helps reduce your income this year when tax rates are higher. Plus, you might not end up itemizing next year since the standard deduction is nearly doubling. 

Miscellaneous itemized deductions

Deductions for miscellaneous itemized deductions subject to the two percent floor (including tax preparation fees, investment expenses, and un-reimbursed business expenses) will all be gone in 2018.Taxpayers who have significant miscellaneous deductions may consider prepaying these expenses. 

Get rid of the losers in your portfolio

Losses on investments are deductible against gains, reducing the amount of tax you’ll pay on winning investments that you’ve sold during the year. To claim your loss, you need to sell the losing stock by December 31, and then make sure not to buy it back within 30 days. Even if you don’t have gains on other investments, up to $3,000 in capital losses is available for offsetting other types of income. 

Delay income until 2018 if possible           

If you are a small-business owner, there is an advantage to delay income until January 2018 when the tax rates are lower, especially. So if you are following some customers or clients to pay the bill sent a while ago, you might want to wait until January 2018. In addition to lower tax rates, small business owners get a generous benefit starting next year of being able to deduct 20 percent of their business income tax-free. How exactly to accomplish this depends on the accounting method that you use in your business and a host of other issues, so make sure to consult your accountant to decide exactly how to implement an income-deferral strategy.

Full fixed asset expensing

100% expensing is allowed for qualified property acquired and placed in service after September 27, 2017, and before January 1, 2023. The “new property” requirement is removed and replaced with a taxpayer’s first-use rule. It appears you can save significant taxes by closing deals before the end of the year, because this is one of the few provisions that is retroactive. 

Max-out your retirement

If you have a 401(k) or other employer-sponsored retirement plan, making sure you contribute maximum amount as possible into your account to cut your taxes. The general maximum you can set aside for most plans is up to $18,000 in wages, with those who are 50 or older getting to save an additional $6,000 if they choose. Unlike IRAs, 401(k) contributions must be completed by December. 31, 2017.

Make sure you’re not going to owe a tax penalty

Last but not least, it’s important to estimate your taxes and make sure that you’ve had enough money withheld to avoid any penalties. The general rule is that if you’ve had at least 100% of your prior-year tax liability withheld, or 90% of what you’ll end up owing this year, you won’t owe a penalty. But other requirements apply to high-income taxpayers. If you’re short, then boosting your income tax withholding from your paycheck can be the best way to remedy the situation. 

The takeaway

As the new law generally will take effect almost immediately (January 1, 2018),taxpayers should not delay in determining how the new tax provisions will affect them and what planning should be done to take advantage of the favorable provisions and to minimize the negative effect of the unfavorable ones.

 Let’s talk

For a deeper discussion on how tax reform may affect you, please contact our office at 646.477.9369.

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First Glimpse Of The Final Tax Bill

Final Tax Bill

First Glimpse Of The Final Tax Bill

December 22, 2017

Chetan Dogra

Written by Chetan Dogra, CPA

President Trump signed the tax overhaul bill on Friday, December 22, 2017. Under the new tax laws, there are significant tax breaks and which will require businesses and individuals to reassess their long-term tax strategies beginning with the 2018 tax year as well as consider immediate year-end tax planning strategies for the few remaining days of 2017. Here is the outline of the new tax laws.

Pass-Through Entities Tax

New law: The owners, partners and shareholders of S-corporations, LLCs and partnerships – who pay their share of the business’ taxes through their individual tax returns- can deduct 20% of their income tax free. However, the benefit is temporary and will expire after 2025. The 20% deduction would be prohibited for anyone in a service business including accounting firms, law firms, investment offices, and doctors unless their taxable income is less than $315,000 if married ($157,500 if single). 

Current law: Pass-through businesses, which include partnerships, limited liability companies, S corporations and sole proprietorship, pass their income to their owners, who pay tax at their individual rates.

Pain point: Owner or partner salary in a pass-through business would be subject to ordinary income tax rates.

C Corporation Tax

New law: As expected, starting January 1, 2018, C Corporation tax rate will fall from 35% to 21%. The bill would also eliminate the alternative minimum tax on C corporations as well.

Current law: Maximum 35 % tax on C Corporation.

New law: Profits that big corporation are holding overseas would be repatriated at a rate 15.5% on cash assets and 8% on non-cash assets.

Current law:  Corporation can defer taxes on those foreign earnings until they bring them back to the U.S.

Obamacare

New law: Beginning in 2019, Americans would no longer be required by law to buy health insurance or pay a penalty if they don’t buy it.

Current law: An individual who fails to buy health insurance must pay penalties of $695 (higher for families) or 2.5 percent of their household income – whichever is higher, but capped at the national average cost.

Individual Income Tax

New law: The final bill will keep the current seven tax brackets for individual income taxes, but the rates for each will be lower. The final rates will be 10%, 12%, 22%, 24%, 32%, 35%, and 37%.

Current law: Seven tax brackets, starting at 10 percent and reaching 39.6 percent for incomes above $418,401 for singles and $470,701 for married, joint filers.

Standard Deduction and Personal Exemptions

New law: For single filers, the bill increases the standard deduction to $12,000 and married couples filing jointly it increases to $24,000. The final bill has eliminated personal exemption for yourself, your spouse and each of your dependents.

Current law: $6,350 standard deduction for single taxpayers and $12,700 for married couples, filing jointly. Also, personal exemptions of $4,050 is allowed for each family member.

Medical Expense Deduction

Current law: Qualified medical expenses that exceed 10 percent of the taxpayer’s adjusted gross income are deductible.

New law: Qualified medical expenses that exceed 7.5% percent of the taxpayer’s adjusted gross income are deductible for 2017 and 2018.

Individual State and Local Tax Deductions

New law: Individuals can deduct no more than $10,000 worth of the deductions, which could include a combination of property taxes and either sales or income taxes. The move is widely viewed as a hammer to states such as New York, New Jersey and California.

Current law: Individuals can deduct the state and local taxes they pay, but the value is subject to certain limits for high earners.

Comment: Two days back, I was excited with the news that the final bill will preserve the state and local income tax deduction. However, I had no clue that GOP would combine all state taxes deductions.

Mortgage Interest Deduction

New law: If you take out a new mortgage on a first or second home you would only be allowed to deduct the interest on debt up to $750,000, down from $1 million today. Homeowners who already have a mortgage would be unaffected by the change. The bill would no longer allow a deduction for the interest on home equity loans. Currently that’s allowed on loans up to $100,000.

Current law: Deductible mortgage interest is capped at loans of $1 million. In addition, interest on home equity loans can be deducted on loans up to $100,000.

Child Tax Credit

New law: The child tax credit would be doubled to $2,000 for children under 17. It also would be made available to high earners who are making up to $400,000 for married couples ($200,000 single parents).

Current law: A $1,000 credit for each child under 17. The credit begins phasing out for couples earning more than $110,000.

Estate Tax

New law: You can inherit up to $22 million tax-free. The estate tax would remain part of the U.S. tax code, but far fewer families will pay it. Now first $11 million ($22 million for married couples) that people inherit in property, stocks and other assets won’t be taxed.

Current law: You pay 40 percent tax on estates worth more than $5.49 million for individuals and $10.98 million for couples.

What’s not going away?

The new law keeps in place the student loan deduction and and the graduate student tuition waivers.

Retirement accounts such as 401(k) plans stay the same. No changes to the tax-free amounts people are allowed to put into 401(k)s, IRAs and Roth IRAs.

Fewer families will have to pay the individual AMT. The House wanted to eliminate the AMT entirely, but in the end, the final GOP tax plan increases the threshold levels to $70,300 for singles and to $109,400 for married couples.

We can assist you in identifying and maximizing the potential tax savings. Please call our office to arrange an appointment.

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Disclaimer of Liability:
Our firm, DOGRA CPA LLC, provides the information in this article for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for
consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation.

2017 Year-End Tax Tips Maximize Business Deductions

2017 Year-End Tax Tips: Maximize Business Deductions

November 25, 2017

Chetan Dogra

Written by Chetan Dogra, CPA

As 2017 year-end approaches, each business should consider the many opportunities that might be lost if year-end tax planning is not explored. Among the reasons why year-end tax planning toward the end of 2017 may be particularly fruitful are the following:

One major tax deduction for many businesses is bonus depreciation. Property placed in service in 2017 is eligible for bonus depreciation at a 50% rate. The rate is reduced to 40% in 2018 and 30% in 2019. Bonus depreciation expires after 2019. Talk of full expensing under Trump’s tax reform also belongs in this mix.

The IRS issued guidance in early 2017 explaining how a qualifying small business may elect to claim a payroll tax credit of up to $250,000 in lieu of the research credit. This election is useful to a business with no income tax liability against which to claim the research credit.
Several year-end strategies involving both business expense deductions for vehicles and the fringe-benefit use of vehicles by employees require an awareness of certain rules to leverage maximum deductions.

These are just some of the considerations that can yield tax savings for your business as year-end 2017 approaches.

Trend: Approximately 2.5 million taxpayers are now earning income each month from temporary contracts and engagements now called as GIG economy. Participation continues to swell and is expected to double by 2020. IRS is reportedly stepping up its audit coverage of taxpayers working in the “GIG” economy. I will cover more on it in coming posts.

Keep in mind that everyone’s tax situation is different, and tax rules can be complex. These tax tips have been prepared for informational purposes only and should not be relied on for tax, legal or accounting advice.

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Year-End Tax Tips – Best Retirement Plans

Retirement Plan Options

Year-End Tax Tips – Best Retirement Plans

November 25, 2017

Chetan Dogra

Written by Chetan Dogra, CPA

I frequently get this question: My son started a business 10 years ago and contributed to a regular IRA in the beginning (we discussed IRAs in the last post). Three years ago, he incorporated the company and they don’t have a 401(k) yet. What’s his best option for retirement and year-end savings right now?

Here is my take:

Solo 401K – Combined tax free contributions $54,000, or $60,000 you are 50 or older
Best for: A sole proprietor who wants to maximize contributions to a tax-deferred retirement plan. But it’s only available if you work for yourself and your only employee is your spouse, so it’s not the best plan for small businesses with expansion plans.

SEP – Max deduction lower of $54,000 or 20% of your adjusted net earnings
,Best for: High-income business owners who want to maximize contributions through an uncomplicated plan with low fees. SEPs also work well for small-business owners with mostly low-paid, high-turnover employees.

Simple IRA – Max deduction $12,500 ($15,500 for 50 or older) plus employer contribution
Best for: Someone with self-employment income particularly from consulting or freelance work of $30,000 or less. There’s no percentage-of-income limit, but actual dollar limits are much lower than for other plans.

401K – Tax benefit and contribution rules are  same as solo 401K
Best for: The 401(k) is the most ideal choice for small and big businesses. It helps you attract and retain the best employees, but also may save on taxes.

Defined Benefit Plan
Best for: Although not as commonly used as in the past, a traditional defined benefit pension plan can be ideal for older business owners who wish to accumulate benefits faster than may be possible with other types of plans. Benefits are typically based on average pay and length of service (subject to annual limits).

Contributions for all the above mentioned plans are tax-deductible and earnings are tax-deferred. You’ll pay taxes and, usually, a 10% penalty on early withdrawals.

Remember with these plains, you have saved tax on your seed, but you will owe tax on your harvest and may not be a good choice if you are not in a lower tax bracket in retirement.

Keep in mind that everyone’s tax situation is different, and tax rules can be complex. These tax tips have been prepared for informational purposes only and should not be relied on for tax, legal or accounting advice.

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Year-End Tax Tips – Retirement Plans

Retirement Plans

You can reap significant tax savings with Retirement Plans . IRS offers a number of tax-advantaged alternatives to help you save on taxes at the year-end.

Traditional IRAs. You may be able to reduce your taxable income by $5,500 ($6,500 if you will be age 50 or older at any time in 2017) by contributing to a traditional IRA. You generally won’t pay tax on deductible contributions or earnings until you withdraw the money in retirement, allowing your money to grow tax deferred. Certain income restrictions limit (or eliminate) the deduction

Roth IRAs.  With a Roth IRA, you don’t receive an income tax deduction for your contribution, but your withdrawals are tax-free. Typically a Roth IRA is the best choice if your tax bracket is relatively low. Although contributions are not tax deductible, earnings are tax-deferred and withdrawals are tax-free Note that certain restrictions apply to tax-free withdrawals.

Traditional or Roth which is a better option – lets dig in!

You may prefer a traditional IRA if:
You are in a high tax bracket, qualify for a IRA deduction, and could use the tax deferral on current income.
You anticipate being in a lower tax bracket in retirement.
You (or your spouse) do not contribute to an employer-sponsored retirement plan.

You may prefer a Roth IRA if:
You desire federal tax-free withdrawals in retirement.
You anticipate being in a higher tax bracket in retirement.
You wish to avoid required minimum distributions and bequeath a large portion of your IRA to heirs.
You are still many years away from retirement.

If you are self-employed, own a business, or have access to employer-sponsored retirement plans there are better opportunities available which will cover in next post.

Keep in mind that everyone’s tax situation is different, and tax rules can be complex. These tax tips have been prepared for informational purposes only and should not be relied on for tax, legal or accounting advice.

2017 Year-End Tax Tips – Timing Strategy

Tax Timing Strategy

Timing, and the smart use of timing rules to accelerate and defer certain income or deductions, is the linchpin of year-end tax planning. For example, timing year-end bonuses or year-end tax payments, or timing sales of investment properties to maximize capital gains benefits should be considered.

So, too, sometimes fairly sophisticated like-kind exchange, installment sale or placed-in-service rules for business or investment properties come into play. Like-kind exchange or installment sale of property is used to defer the payment of a capital gain on the sale of property or other investments. The placed-in-service date is important for tax planning purposes at  year end because optimally chosen placed-in-service dates can accelerate depreciation deductions and make available any additional deductions or tax credits.

In other situations, however, implementation of more basic concepts is just as useful. For example, taxpayers can write a check or can charge an item by credit card and treat these actions as payments. It often does not matter for tax purposes when the recipient receives a check mailed by the payer, when a bank honors the check, or when the taxpayer pays the credit card bill, as long as done or delivered  in due course.

Bunching strategies: Certain items are deductible only to the extent they exceed an adjusted gross income (AGI) floor; for example, aggregate miscellaneous itemized deductions are deductible only to the extent they exceed two percent of the taxpayer’s AGI. Thus, year-end and new-year tax planning might consider ways to bunch AGI sensitive expenditures in a single year, so that particular deductions exceed their applicable floors and the taxpayer’s total itemized deductions exceed the standard deduction.

Keep in mind that everyone’s tax situation is different, and tax rules can be complex. These tax tips have been prepared for informational purposes only and should not be relied on for tax, legal or accounting advice

Tax Planning Basics

tax planning

Tax planning is a process of looking at various tax options in order to eliminate or reduce taxes. There are countless tax planning strategies available to a small business owner or an individual. However, regardless of how simple or complex a tax strategy is, it will based on or more of the following techniques:

Choose the optimum form of business entity structures – such as LLC, Partnership, Corporation, or S Corporation. There are different tax benefits available under each type of entity structure.

Shift income from a high tax rate taxpayer, such as you, to a lower rate tax payer, such as your child or other family members.

Structure a transaction so that the money you receive is classified as capital gain or tax exempt.

Plan to take advantage of all available deductions and credits, both business and personal.

Accelerate expenses into the current year and postpone receipt of income into the next year. This strategy is based on controlling the timing of the tax liability.

Find the lowest tax jurisdiction for yourself and your business. The goal is to move profits from a high tax country/state to a low or no tax country/state.

All strategies I discussed above are used year-around. Now that you have an overview of how tax planning works. In next post, I will cover how we can use some tax strategies before the year-end.

Keep in mind that everyone’s tax situation is different, and tax rules can be complex. These tax tips have been prepared for informational purposes only and should not be relied on for tax, legal or accounting advice.

2017 Year-End Tax Tips – Life Cycle Changes

tax life-cycle changes

2017 Year-end strategies will become clearer over the coming days as provisions in the Trump/GOP’s tax plan are negotiated for final passage. In the meantime, savvy taxpayers looking to minimize tax liability may want to start with the basics. That is to consider personal circumstances that changed during 2017 as well as what may change in 2018. These are called life cycle changes.

Changes in your personal and financial circumstances – marriage, divorce, a newborn, a change in employment, casualty losses, retirement, large inheritance, investment and business successes and downturns – should all be noted for possible consideration as part of overall year-end tax planning. A newborn, for example, may not only entitle the proud parents to a dependency exemption, but also a child tax credit and possible child care credit as well. Also, as with any life-cycle change, your tax return for this year may look entirely different from what it looked like for 2016. Accounting for that difference now, before year-end 2017 closes, should be an integral part of your year-end planning.

Keep in mind that everyone’s tax situation is different, and tax rules can be complex. These tax tips has been prepared for informational purposes only and should not be relied on for tax, legal or accounting advice.