by Stephen Reed | Accounting News, News, Tax, Tax Planning
As the owner of a small business, you are well aware that taxes are one of the most important topics on which to keep up to date. Making mistakes could mean a higher tax bill, and failing to properly manage your taxes could land your business in trouble. On the other hand, planning in advance, taking advantage of available deductions, and preparing your tax returns correctly can save on the amount of taxes your business is required to pay. Keep reading for tax-saving strategies to help reduce your tax bill.
Use the Qualified Business Income Deduction
The Qualified Business Income (QBI) deduction was created when the Tax Cuts and Jobs Act (TCJA) was established in 2018. With the QBI you might be eligible to deduct up to 20% from your qualifying business income if your business is a pass-through entity—a sole proprietorship, an S corporation, a partnership, or a limited liability company (LLC), where business income is passed to its shareholders, partners, or owners to report on their personal tax returns.
Limits apply to the QBI deduction based on income level and business type, so be sure to talk to your tax advisor. It’s also worth noting that the QBI deduction is set to expire in 2025.
Fund a Retirement Plan
Providing a qualified retirement plan for yourself and/or your employees can help save money on taxes. Owners of corporations can contribute up to 25% of their salary to a tax-deferred plan like a 401(k) or 403(b). Sole proprietors can contribute up to 20% of income into a tax-deferred SEP-IRA account.
Take Advantage of Tax Credits
Tax credits can be subtracted from owed business income taxes at state or federal levels. They encourage investment or provide assistance in targeted areas such as employee hiring, training, and retention; clean energy initiatives; disaster relief; and new construction, historic preservation, and disability access. The list of potential tax credits for businesses is extensive, so be sure to check with your accountant about your available options.
Take Tax Write-Offs for Qualifying Purchases
If you purchase equipment, machinery, and vehicles (and sometimes real estate) for your business, you can take tax-write-offs. The most frequently utilized types of deprecation are Section 179 deductions and bonus appreciation.
Section 179 deductions permit business owners to deduct the costs of certain assets as soon as they’re put to use, so you can deduct the entire cost of equipment in the year it is placed in service. This could allow you to pay lower taxes in the current year and still buy or lease more equipment to write off in following years.
Bonus depreciation is an added advantage for purchasing assets. The TCJA increased this tax break from 50% to 100% of the cost for assets placed in service through January 1, 2023.
Defer Income and Accelerate Expenses
Defer income by shifting some of it from this year into the next. You can do this by holding on to year-end invoices until just before the start of the new year. You likely won’t collect the payment until the first quarter of the new year, so taxes on that income won’t be paid until next year. Accelerate expenses in the fourth quarter by prepaying some expenses that aren’t due until the following year. Of course, you’ll need to determine the year in which you expect to pay the most in taxes. For instance, if you anticipate notably higher personal income next year, it may save on taxes to collect income now rather than delay it until next year.
Deduct Travel Expenses
Business travel is entirely deductible. While personal travel doesn’t hold the same advantage, you might be able to combine an acceptable business purpose with personal travel in order to maximize business travel. Keep in mind, too, that frequent flier miles earned from business travel can be applied to personal travel at a later time.
by Daniel Kittell | Accounting News, Construction, Industry - Construction, News
While Congress appropriated a total of $669 billion in loans to small businesses under the Payment Protection Program (PPP) as part of the larger CARES Act, funding was reportedly exhausted by May 5th of this year. However, there are a number of additional programs and tax provisions, discussed below, that business owners should be aware of to use in place of or jointly with PPP loans.
Section 2302 Delay of Payment of Employer Payroll Taxes
This provision, created under the CARES Act, permits employers and self-employed individuals to postpone payment of the 6.2% employer portion of the Social Security taxes. The first half would be due by December 31, 2021 and the second half would be due by December 31, 2022.
Credits and Incentives for Developing Businesses
States and local communities usually have programs and tax incentives accessible to growing companies. Small businesses, including construction firms, were hit hard during the Covid-19 pandemic, but preparing for the future is necessary as companies begin to recover. Look into possible tax credits, exemptions, and grants as methods that might assist in your business’s growth, either now or in the near future.
Section 2307 Bonus Depreciation of Qualified Improvement Property
Section 2307 of the CARES Act amended a technical error allowing businesses to directly write off costs correlated with improving facilities retroactive to January 1, 2018. The adjustment expands businesses’ access to cash, as it permits them to amend prior year returns to claim the 100% bonus depreciation for qualified improvement property. It also motivates businesses to invest in property improvements, thereby stimulating the economy.
Research and Development Tax Credits
Businesses can make use of both federal and state research and development tax credits that reward companies based on contribution to the development of new products and processes. These tax credits can be applied on both current and amended tax returns to produce refunds or credit carry forwards.
Cost Segregation Studies
Cost segregation is a vital tax planning tool that has the potential to shelter taxable income by depreciating various elements of a property at an accelerated rate. In real estate, commercial properties are depreciated over a period of 39 years. However, when a company obtains, renovates, restores, or builds real estate, it frequently overestimates the amount of 39-year real property and limits depreciation deductions. Under the Tax Cuts and Jobs Act (TCJA), business owners can take a bonus depreciation of 100% for qualified assets in the first year (as defined by a cost segregation study) instead of depreciating the assets over a longer period of time. This 100% bonus deduction is available until 2022 when it will slowly start to phase out until 2027.
by Daniel Kittell | Accounting News, Bookkeeping, IRS, News, Tax, Tax Planning - Individual, Tax Preparation - Individual
When doing your taxes, the goal is to maximize the tax credits and deductions for which you’re eligible. But tax credits are worth more than deductions with the same value, so knowing the differences between the two will help you save money on taxes.
Key Difference
Both credits and deductions lower your tax bill but in different ways and with different outcomes. Tax credits lower your tax liability while tax deductions reduce your taxable income. For instance, someone who’s in the 25% tax bracket with a $100 tax credit will save $100 dollars in taxes, but if that same person has a $100 deduction, they will only save $25 in taxes (25% of $100).
Tax Credits
Tax credits are a dollar-for-dollar reduction on your tax bill, regardless of tax rate, which explains the $100 savings with a $100 tax credit in the previous example. Taking advantage of eligible tax credits after applying all deductions will help to slash your taxes due. Some of the more popular tax credits include:
- Earned Income Tax Credit (EIC or EITC)
- Child Tax Credit
- Child and Dependent Care Credit
- American Opportunity Tax Credit
- Lifetime Learning Credit
- Adoption Credit
- Saver’s Credit
- Residential Energy Tax Credit
Refundable Tax Credits vs. Non-Refundable Tax Credits
Some tax credits are refundable while others are not. When you claim a refundable tax credit that exceeds your total tax liability, the IRS will send you the difference. For example, if your tax liability is $1,000 and then you apply your EITC, which is $2,500, you would use that $2,500 to pay your liability and the remaining $1,500 would be refunded to you. By contrast, a non-refundable tax credit can reduce your federal income tax liability to zero, but any leftover balance from the credit will not be refunded.
Tax Deductions
There are two types of tax income deductions, which reduce the amount of income you’re taxed on: itemized deductions and above-the-line deductions.
Itemized Deductions
Itemized deductions are certain tax-deductible expenses that you incur throughout the year. For some taxpayers, those expenses add up to be greater than the standard deduction amount, in which case, they should itemize their tax returns rather than take the flat-dollar standard deduction. Keep in mind that if you plan to itemize, you should accurately track your spending throughout the year, and keep supporting documentation (receipts, bank statements, check stubs, insurance bills, etc.) in the instance that IRS would ask for proof.
Common itemized deductions include:
- Medical expenses
- State and local income taxes
- Property taxes
- Mortgage interest
- Charitable contributions
The standard deduction is a fixed amount that varies in consistency to your filing status. For 2019 returns, the standard deduction is:
- $12,200 for single filers and married filers filing separately
- $24,400 for married filers filing jointly
- $18,350 for heads of household
Above-the-Line Deductions
If you claim the standard deduction, you can use “above-the-line” deductions, which reduce your adjusted gross income (AGI), to lower your tax bill. Some of these deductions are:
- Health savings account (HSA) contributions
- Deductible contributions to IRAs
- The deductible portion of self-employment taxes
- Contributions to self-employed SEP-IRA, SIMPLE IRA, and other qualified plans
- Self-employment health insurance premiums
- Penalties on early savings withdrawals
Above-the-line deductions typically aren’t as valuable as tax credits, but they help to lower your AGI, which can slash your tax liability and qualify you for other tax breaks based on income limits.
by Daniel Kittell | Healthcare, News, Tax Planning, Tax Planning - Individual
Our world is filled with seemingly constant changes and developments, however, most Americans have been paying close attention to the potential changes coming out of Washington. While President Trump made many statements about how he would revamp Washington if elected, one long-awaited claim has finally been revealed: his, and the GOP’s, promise to repeal and replace Obamacare. Now that their plan has been presented to the general public, questions many are asking include, what exactly does the plan entail? And how, or will, it affect me specifically, the taxpayer? Below are several points that will attempt to identify the main differences between the GOP’s plan and Obamacare, and what that truly means for you, the taxpayer.
- Changes the Insurance Mandate
Under Obamacare, individuals and employers are required to either buy or offer coverage, or else face a fine. The GOP’s plan would do away with those penalties for both individuals and employers. However, in an attempt to prevent individuals from simply adding coverage when they need care, the GOP’s plan would permit insurance companies to enforce higher premiums on individuals who do so for the first year of their coverage.
- Changes in Medicaid
Another major difference between Obamacare and the GOP plan is how they approach Medicaid. Many who gained coverage under Obamacare did so through Medicaid provisions, including an expansion that covered those within 138% of poverty levels, as well as a federal payout to those states that expanded their coverage and insured those newly eligible. The GOP plan would eventually eliminate the expansion, only giving states extra funding for those enrolled before 2020, and provide a set amount of money to states based on their enrollment numbers in 2016, rather than providing open-ended matching for Medicaid beneficiaries.
- Changes in Age-based Premiums
While Obamacare did allow insurance companies to vary their premiums based on factors such as location, tobacco use and age, there was a 3-to-1 limit based on age. Essentially, the premium for an older individual could not be more than three times the amount charged for a younger person purchasing the same plan. The GOP would alter this limit and allow insurance companies to charge older individuals up to five times the amount of those who are younger.
- Changes in Tax Credits
The tax credits under Obamacare subsidized insurance for those using government-run insurance exchanges, providing credits based on the enrollee’s income and cost of coverage in their area. The GOP’s plan would tie credits to age and income (rather than cost of coverage), and would look to end cost-sharing subsidies. Credits would start at $2,000 for those in their 20’s and increase gradually, reaching to $4,000 for those over 60. However, these credits would only be available to individuals making $75,000 or less and households making $150,000 or less.
The GOP’s bill would still allow adults under the age of 26 to be covered under their parent’s plans, as well as maintain the provision blocking insurers from denying coverage to those with pre-existing conditions. Because the plan has significant reviews to undergo , and most likely many amendments to be made, before American’s see a final proposal, many will want to wait and see before assuming they may qualify for specific credits or that their coverage may be affected based on age or income. Though change will certainly occur, taxpayers would be advised to maintain their current coverage until the final bill is passed.
If you have any questions about how the changes to the Health Care Laws may affect you, please contact me at [email protected].
