It’s said that ignorance is bliss, but business owners are wise to learn enough about tax law to understand how it applies to their businesses. Lack of knowledge generally doesn’t exempt you from paying taxes, a lesson many small business owners have learned the hard way. However, as the case of Richard Mathews demonstrates, it is possible to be too ignorant to intentionally evade taxes, especially when the IRS also… Read more
Early counting systems relied on tallies or counting with fingers and toes. But when you have more things to count than you have body parts, it’s hard to keep track. The Greeks used 27 letters to devise a counting system that got them to 99,999,999. These 27 letters were split into three groups of nine, with each group of nine assigned to a place value. The first nine letters were… Read more
Who doesn’t like gift cards? For the giver, it’s an easy way to show appreciation, and for the recipient, it can be an excuse to indulge in something extra that you wouldn’t ordinarily buy for yourself. But for businesses who sell them, the accounting gets complex very quickly. Under U.S. GAAP, businesses can defer the revenue until the card is actually used. But since about $1 billion of the value… Read more
Many entrepreneurs and small business owners start out as limited liability companies (LLCs) because of the ease of formation and liability protection. With a single member, tax filing is easy – just fill out Schedule C on your tax return with your income and expenses. But as your business grows, electing S-corporation status can save you on taxes. When you file as a sole proprietor on Schedule C, you pay… Read more
We all know we need to save for retirement, but if you’re in a financial bind, your IRA might be an ideal source of much-needed funds. In general, if you’re under 59½, you’ll have to pay a 10% penalty on the taxable portion of any funds you withdraw, in addition to paying income tax. But if you meet any of these nine exceptions, you won’t owe the 10% early withdrawal… Read more
Pay attention to the timing of receipt of income and payment of expenses in your business, and you can save taxes this year. If your business uses the cash method of accounting, wait until January 1 to send out your invoices. You won’t be taxed on the income until you receive payment. If your business is on the accrual method, see if you can delay shipment or providing services until… Read more
Even if your planned retirement is years or decades away, it’s never too early to start thinking about succession planning for your business. This is especially true for a sole proprietorship or a closely-held family business. Is there a family member or key employee who may be interested in taking over? They may need time and your help to learn the skills needed for the job. Do you have a… Read more
A challenge of doing business in the U.S. is the crazy quilt of tax laws we find ourselves dealing with. Each of the 50 states plus Washington, D.C. has its own unique ways of taxing businesses. An activity that’s subject to sales tax in one state may be completely tax-free in another state. Sales of tangible goods are subject to sales tax in 45 states, and each state has different… Read more
The Bipartisan Budget Act of 2015, signed into law on November 2, 2015, closed a loophole in Social Security used by a savvy few which increased their benefits by up to $10,000 to $50,000 for a couple. In general, retirees receive larger monthly benefits the longer they wait to collect. Using a tactic known as file-and-suspend, the higher-earning spouse could file for Social Security benefits at age 66, but immediately… Read more
A Simplified Employee Pension (SEP) is a great vehicle for self-employed solo professionals to save for retirement. A SEP lets you bank up to 25% of your net income, up to a max of $53,000 for 2016, and $54,000 for 2017, in your own individual retirement account. These plans are easy to set up at a bank or with your investment advisor. They can be set up as late as… Read more
Late 2015 marked the end of the annual year-end dance in Congress when the Protecting Americans from Tax Hikes (PATH) Act became law on December 18, 2015. For the first time, many popular and tax-saving provisions were finally made permanent. Section 179 expensing was permanently increased from a measly $25,000 to a generous $500,000 per year. That amount will go up every year with inflation. Bonus depreciation is also back… Read more
Since 1981, the Research and Development Tax Credit, known as the R & D Credit, has been repeatedly extended for a year or so at a time, only to lapse and be extended again. The signing of the Protecting Americans from Tax Hikes (PATH) Act on December 18, 2015 was a true game changer because this credit is now permanent and better than ever. The uncertainty about its fate is… Read more
Thanks to the PATH Act, passed by Congress at the end of 2015, you can take the Required Minimum Distribution (RMD) from your IRA by transferring up to $100,000 directly to a qualified charity. A Qualified Charitable Distribution (QCD) counts towards an IRA owner’s RMD. A QCD doesn’t increase your taxable income, and so can’t be taken as a deductible charitable contribution. This combination can save taxes over simply donating… Read more
Put as much as you can in your 401(k) now, and you benefit in at least two ways. First, you save tax now. For 2016 and 2017, you can contribute $18,000 plus an extra $6,000 if you’re over 50. This translates to a potential tax savings of $9,504 if you’re over 50 and in the highest tax bracket. Now’s the time to start figuring out how much you’ll need to… Read more
In sports, knowing the score is vital to deciding on the best game plan. In business, knowing the score is equally vital. What’s the score for a business? You find it by doing financial analysis. Financial analysis helps answer these questions: How is your business doing? Are there areas that need improvement? Are there things you’re doing better than the competition? Are your revenues keeping up with increases in your… Read more
A great tax-saving feature of S-corporations is that the net earnings are exempt from self-employment tax. But the trade-off is that S-corp shareholders are expected to take a salary that qualifies as “reasonable compensation.” Since wages are subject to payroll taxes, this is an incentive to keep salaries low and save on payroll taxes, and to boost the tax-free cash distributions. The IRS is hunting for easy sources of additional… Read more
Do you pay someone to work in your home? Maybe a nanny or a gardener? Do you control what work is done and how it’s done? If so, that person may be considered your employee in the eyes of the IRS. If you pay them over $2,000 in 2017, you’ll need to issue them a W2 and pay payroll taxes for that employee. There’s no statute of limitations for failure… Read more
If you use a part of your home for your business, the IRS lets you deduct a portion of your household expenses as a home-office deduction. For a partner in a partnership, this can simply be reported on Schedule E of your personal tax return as “unreimbursed partnership expenses.” But a shareholder in an S-corporation who owns more than 2% of the stock isn’t allowed to do that. One option… Read more
Do you have an estate plan? Everyone needs one, no matter your age. If you happen to pass on without one, your home state will make one for you, and you may not agree with how they distribute or dispose of your possessions. You likely want a say in who gets something, what they will get, and when they will get it. And you’d like this to happen with the… Read more
Almost every business reaches a point when extra cash is needed to get to the next level. A manufacturer needs $15,000 to purchase the raw materials for a big order that will bring in $30,000. Or a start-up needs funds to get off the ground. Is it better to go into debt or to offer equity in your business in exchange for the needed funds? The answer depends on your… Read more