Month: November 2017

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2017 Year-End Tax Tips Maximize Business Deductions

Tax Tips

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
Tax Tips

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.

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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

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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.

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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.