Factoring the QBI Deduction into Tax Planning for Your Business

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Thanks to the Tax Cuts and Jobs Act, sole proprietors and owners of pass-through entities, such as partnerships, S corporations and, generally, limited liability companies, may be able to claim tax deductions based on their qualified business income (QBI deduction) and certain other income.

This deduction can be up to 20% of your QBI, subject to limits that apply at higher income levels. However, some tax planning strategies can increase or decrease your allowable QBI deduction for 2024. So if you’re eligible for this deduction, it’s important to consider the impact other year-end strategies will have on it before executing them. Also keep in mind that this deduction is scheduled to expire at the end of 2025 unless Congress acts to extend it.

Contact the office for help optimizing your overall tax results.

408-252-1800

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Are You Aware of the Business Credits and Other Tax Benefits Available?

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It’s a challenging time for many businesses. Therefore, any help you can get, such as tax incentives and sales tax exemptions, can make a big difference. Unfortunately, these benefits often go unclaimed because businesses don’t know about them or erroneously think they’re ineligible.

1. Statutory Incentives

Some credits are available “as of right.” That is, if your business meets the specified requirements, you just need to claim the benefit on a timely filed tax return to receive it.

State and federal tax credits and exemptions are designed as incentives for businesses to engage in certain activities or invest in specific economically distressed areas. Here are a few:

Work Opportunity Tax Credit (WOTC). The WOTC is a federal credit ranging from $2,400 to $9,600 per eligible new hire from certain disadvantaged groups. Examples include convicted felons, welfare recipients, veterans and workers with disabilities. Other steps must also be taken, such as completing paperwork.

State and federal research and development tax credits. These credits may be available to an eligible business that invests in developing new products or techniques, improving processes, or developing software for internal use, regardless of size. The federal “increasing research activities” credit is generally equal to 20% of the amount by which the business increases qualified research expenditures, compared to a base amount.

The credit is available even to businesses with no income tax liability and may be carried forward to offset taxable income in future years. If eligible, a start-up company can claim the federal research credit against up to $500,000 in employer-paid payroll taxes.

Empowerment zone incentives. Certain tax breaks are available to companies that operate in federally designated, economically distressed “empowerment zones.” Tax credits may be worth up to $3,000 for each eligible employee.

Industry-based and investment credits. Many states and other jurisdictions offer tax credits and other incentives to attract certain types of businesses, such as manufacturing or film and television production. Jurisdictions may also offer investment tax credits for capital investments within their borders.

2. Discretionary Incentives

Discretionary tax breaks must be negotiated with government representatives. Typically, these incentives are intended to persuade a business to stay in or relocate to a certain state or locality.

To secure these incentives, a business must show it’ll bring benefits to the jurisdiction, such as job creation and revenue generation. Discretionary incentives may include income and payroll tax credits, property tax abatements and utility rate reductions.

3. Sales Tax Exemptions

States with sales taxes provide exemptions for some business purchases. Common exemptions include purchases by:

  • Retailers for the purpose of resale,
  • Manufacturers of equipment, raw materials or components used in the manufacturing process,
  • Specific tax-exempt entities, and
  • Agricultural businesses that buy such items as farming equipment and fuel, feed, seeds, fertilizer, and chemical sprays.

Businesses should familiarize themselves with the exemptions available where they do business and what it takes to qualify. For example, they may need to prove to the sellers that they have a resale or exemption certificate.

Don't Miss These Opportunities

Every year, a vast amount of tax credits and incentives aren’t claimed because businesses are unaware of them or erroneously believe they’re ineligible. Many more examples exist. Contact the office for help ensuring that your business receives all the tax breaks it deserves.

(408) 252-1800

Business Succession Plan and Estate Planning Should Be Inseparable

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If you’re a business owner, your company is likely your most valuable asset. To ensure it survives after you’re gone, you first need a succession plan that will provide a smooth transition of the business to one or more of your children (assuming you want to keep it in the family). In addition, you need an estate plan that effectively addresses the tax impact of transferring your ownership interests to the next generation.

Consider Who’ll Take the Reins

If you’re like many business owners, you may dream of the day you can transfer ownership to your children. A succession plan can provide a smooth transition of power when you retire and be used in the event of unexpected death before retirement.

Typically, a succession plan will outline the structure going forward and prepare for the eventual transfer of ownership interests in the business, whether through selling, gifting or a combination of the two. Make sure the plan is in writing. Identify training opportunities and special compensation arrangements for your successors. Include in the plan financial details reflecting assets, liabilities and current value, and update the plan periodically. Also, coordinate your succession plan with your estate plan.

Ensure Key Estate Planning Documents Are in Place

A comprehensive estate plan should be supported by several key documents, starting with a basic will. A will specifies how your assets will be distributed to designated beneficiaries and meets other objectives. Without a will or having assets otherwise titled, your business and other assets will be distributed under the prevailing state law, regardless of your wishes.

A financial power of attorney (POA) appoints someone to manage your affairs in case you become incapacitated and allows this “attorney-in-fact” to conduct business transactions. (Other important documents include health care powers of attorney and advanced directives.)

Make Use of Tax Breaks

If you own significant business assets, consider taking maximum advantage of currently available federal estate tax breaks. These include the unlimited marital deduction and the federal gift and estate tax exemption, which in 2024 shields up to $13.61 million. Some states also impose their own state estate or inheritance taxes.

You may be able to minimize federal and state taxes by using trusts or setting up a family limited partnership (FLP). With a tax-favored FLP, assets are removed from your taxable estate and limited partner interests can be gifted to loved ones, often at a discounted value.

Bypass Potential Family Conflicts

As you develop your succession and estate plans, you may face family challenges. Unfortunately, elevating one child to run the business and leaving another out, or giving someone a secondary role, may create hard feelings.

One estate planning strategy is to attempt to even things out. For example, let’s say that you own a business valued at $5 million and you have $5 million in other assets. You might give $5 million in business assets to the child who’s taking the helm of your business and give other assets worth $5 million to the child who isn’t active (or is less active) in the business.

Relax and Enjoy a Smooth Transition

There’s no universal plan for family business succession. What’s right depends on your circumstances and goals. Contact the office for help.

(408) 252-1800

What Expenses Can’t Be Written Off by Your Business?

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If you check the Internal Revenue Code, you may be surprised to find that most business deductions aren’t specifically listed there. For example, the tax law doesn’t explicitly state that you can deduct office supplies and certain other expenses. Some expenses are detailed in the tax code, but the general rule is contained in the first sentence of Section 162, which states you can write off “all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.”

Basic Definitions

In general, an expense is ordinary if it’s considered common or customary in the particular trade or business. For example, insurance premiums to protect a store would be an ordinary business expense in the retail industry.

A necessary expense is one that’s helpful or appropriate. For example, a car dealership may purchase an automatic defibrillator. It may not be necessary for the business operation, but it might be helpful if an employee or customer suffers a heart attack. It’s possible for an ordinary expense to be unnecessary. But to be deductible, an expense must be ordinary and necessary.

A deductible amount must be reasonable in relation to the benefit expected. For example, if you’re attempting to land a $3,000 deal, a $65 lunch with the potential client should be OK with the IRS. (The Tax Cuts and Jobs Act eliminated most deductions for entertainment expenses but retained a 50% deduction for business meals.)

How the Courts May View Expenses

The deductibility of some expenses is clear, while others are more complicated. Not surprisingly, the IRS and courts don’t always agree with taxpayers about what is ordinary and necessary. To illustrate, here are three recent U.S. Tax Court cases in which specific taxpayer deductions were disallowed:

  1. A married couple owned an engineering firm. For two tax years, they claimed depreciation of $76,264 on three vehicles, but didn’t provide required details, including each vehicle’s ownership, cost and useful life. They claimed $34,197 in mileage deductions and provided receipts and mileage logs, but the court found they didn’t show related business purposes. The court also found the mileage claimed included commuting costs, which can’t be written off. The court disallowed these deductions and assessed taxes and penalties. (TC Memo 2023-39)
  2. The court ruled that a married couple wasn’t entitled to business tax deductions because the husband’s consulting company failed to show that it was engaged in a trade or business. In fact, invoices produced by the consulting company predated its incorporation. And the court ruled that even if the expenses were legitimate, they weren’t properly substantiated. (TC Memo 2023-80)
  3. A physician specializing in gene therapy deducted legal expenses of $360,295 for two years on Schedule C of his joint tax returns. The court found that most of the legal fees were to defend the husband against personal conduct issues. The court denied the deduction for personal legal expenses but allowed a deduction for $13,000 for business-related legal expenses. (TC Memo 2023-42)

These cases and others should show the importance of maintaining careful, detailed records. Make sure that only business costs are claimed.

Proceed with Caution!

If an expense seems like it’s not normal in your industry or could be considered personal or extravagant, proceed with caution. Contact the office with questions about deductibility and proper documentation.

408-252-1800

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Does the Corporate Transparency Act Apply to Your Business?

On March 1, 2024, the U.S. District Court for the Northern District of Alabama ruled that the CTA is unconstitutional. Does that mean that businesses no longer need to comply? Not necessarily. The federal government filed an appeal on March 11, 2024, in the U.S. Court of Appeals for the 11th Circuit. That same day, FinCEN announced that the law’s requirements are still in effect for those not involved in the court case.

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What to Do if Your Business’s Data Security Is Breached

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Most businesses store sensitive information about employees and customers, such as names, addresses, Social Security numbers (SSNs), banking information and more. If lost or stolen, this data could put individuals at risk for identity theft and other types of damage.

What should you do if this happens to your business? The IRS recommends these steps to take:

  1. If a breach could pose harm to a person or business, notify local police and report the potential risk of identity theft.
  2. If a breach includes names and SSNs or could affect other businesses, contact the major credit bureaus and notify the businesses.
  3. If the breach puts individuals at risk, notify those individuals so they can take steps to mitigate the misuse of their data, including checking out the IRS Taxpayer Guide to Identity Theft.

For that Guide and more, click here: https://www.irs.gov/identity-theft-fraud-scams/has-your-business-become-the-victim-of-a-data-security-breach

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The Advantages of Hiring Your Minor Children for Summer Jobs

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If you’re a small-business owner and you hire your children this summer, you may be able to secure tax breaks and other nontax benefits. The kids can gain bona fide on-the-job experience, save for college and learn how to manage money. You may be able to shift some of your high-taxed income into tax-free or low-taxed income, and, depending on the situation, you may realize payroll tax savings. Perhaps best of all, your kids will spend time with you.

A Legitimate Job and Tax Savings, Too

If you hire your child, you’ll get a business tax deduction for employee wage expenses. In turn, the deduction reduces your federal income tax bill and possibly your self-employment tax bill and your state income tax bill if they apply. However, for the wages to be a deductible business expense, the work performed by the child must be legitimate and the child’s pay must be reasonable.

Let’s say you operate as a sole proprietor in the 37% tax bracket. You hire your 16-year-old daughter to help with office work full-time during the summer and part-time in the fall. She earns $10,000 during 2024 and doesn’t have any other earnings.

You save $3,700 (37% of $10,000) in income taxes at no tax cost to your daughter. That’s because she can use her $14,600 standard deduction for 2024 to completely shelter her earnings.

Your family’s taxes are lower even if your daughter’s earnings exceed her standard deduction. Why? The unsheltered earnings will be taxed to her beginning at a rate of 10% instead of being taxed at your higher rate.

Reduced Payroll Taxes

If your business isn’t incorporated and certain conditions are met, your child’s wages are exempt from Social Security, Medicare and federal unemployment taxes. Your child must be under age 18 for this to apply (or under age 21 for the federal unemployment tax exemption). Contact the office to learn how this works.

Be aware that there’s no payroll tax exemption for employing your child if your business is incorporated or is a partnership that includes nonparent partners. And payments for the services of your child are subject to income tax withholding, regardless of age, no matter what type of entity you operate.

Extra Time to Make Your Child’s Retirement Garden Grow

An early start on saving for retirement can be key to building wealth. A child who earns income from a job can contribute to a traditional IRA or a Roth IRA and begin funding a nest egg. For the 2024 tax year, a working child can contribute the lesser of his or her earned income or $7,000 to a traditional or Roth IRA. And the money may be tapped penalty-free for certain eligible reasons, such as paying education costs and making a down payment of up to $10,000 on a first home.

What if your business has a retirement plan? Depending on its terms, your child may qualify to begin earning retirement benefits that can grow for many decades.

The Importance of Accurate Records

Hiring your child can be a tax-smart idea. Be sure to keep the same records (such as timesheets and job descriptions) as you would for other employees to substantiate the hours worked and duties performed. Also issue your child a Form W-2. Contact the office with questions about how these rules apply to your situation.

408-252-1800

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3 Ways Your Business Can Uncover Cost Cuts

Every business wants to cut costs, but it isn’t easy. We’re talking about clear and substantial ways to lower expenses, thereby strengthening cash flow and giving you a better shot at strong profitability.

Obvious places to slash costs (such as wages, benefits and overhead) often aren’t viable options because the very stability of your operation may depend on them. But there might be other ways to lower expenses if you dig deeply enough. Here are three possibilities.

1. Study Your Suppliers

Many companies find that just a few suppliers account for the bulk of their spending. By identifying these vendors and consolidating spending with them, you may be able to put yourself in a stronger position to negotiate volume discounts. This may also help to streamline the purchasing process.

On a related note, how well do you know your suppliers? It might be a good idea to conduct a supplier audit. This involves collecting key data regarding a supplier’s performance to manage quality control and ensure you’re getting an acceptable return on investment.

2. Go Green

Operating an environmentally friendly company is generally a good idea, and it might save you money. Instead of purchasing brand-new computers and office equipment, you may find refurbished items at substantial savings that still fully meet your business’s needs. And when you no longer need certain equipment and office furniture, consider selling it to a liquidator or dealer. You’ll not only make some money, but also free up the space you’re using to store and maintain them.

In addition, if you own the property on which you operate, research energy-efficient upgrades to the HVAC and lighting systems. Naturally, there will be an initial cost outlay, but over the long term, you may lower your energy costs. You might also qualify for tax credits for installing certain items.

3. Explore Outsourcing and Tech Upgrades

Many business owners try to economize by doing everything in-house, from accounting to payroll to HR. But if the staffing and expertise just aren’t there, these companies often suffer losses because of mistakes, mismanagement and wasted time. Although you’ll incur costs when outsourcing, the time and labor it saves you could end up being a net gain.

Carefully chosen and implemented technology upgrades can serve a similar purpose. Many products on the market today are so robust and fully featured that upgrading to them may be almost comparable to outsourcing. The same may be true with a customer relationship management system that can help generate sales leads and allow you to focus on your most profitable existing customers. Again, there will be an initial cost that could eventually lower your cost of doing business.

Snip, Snip, Snip

Lowering expenses is difficult, but keeping an eye out for ways to do it is important, especially now that inflation is a major factor in the economic landscape. Please contact the office for help identifying and lowering your company’s most “cuttable” costs.

408-252-1800

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Is Your Business Closing? Here Are Your Final Tax Responsibilities

Businesses shut down for many reasons. Examples include an owner’s retirement, a lease expiration, staffing shortages, partner conflicts and increased supply costs. If you’ve decided to close your business, you might need assistance with some steps in the process, including handling various tax obligations.

Tax Return and Forms

A final income tax return and related forms must be filed for the year of closing. The correct return to file depends on the type of business.

Here’s a rundown of the requirements.

Sole proprietorships:

You must file the usual Schedule C, “Profit or Loss from Business,” with your individual return for the year of closing. You may also need to report self-employment tax.

Partnerships:

A partnership must file Form 1065, “U.S. Return of Partnership Income,” for the year of closing and report capital gains and losses on Schedule D. Indicate that this is the final return and do the same on Schedules K-1, “Partner’s Share of Income, Deductions, Credits, etc.”

All corporations:

Form 966, “Corporate Dissolution or Liquidation,” must be filed if you adopt a resolution or plan to dissolve a corporation or liquidate any of its stock.

C corporations:

File Form 1120, “U.S. Corporate Income Tax Return,” for the year of closing. Report capital gains and losses on Schedule D. Indicate this is the final return.

S corporations:

File Form 1120-S, “U.S. Income Tax Return for an S Corporation” for the year of closing. Report capital gains and losses on Schedule D. The “final return” box must be checked on Schedule K-1.

All businesses:

If you sell your business, other forms may need to be filed to report the sales.

Worker-Related Duties

Businesses with employees must pay the final wages and compensation owed, make final federal tax deposits and report employment taxes. Failure to withhold or deposit all employment taxes due can result in severe penalties.

Generally, payments of $600 or more to contractors during the calendar year of closure must be reported on Form 1099-NEC, “Nonemployee Compensation.”

More Tax Issues to Consider

The list of tax issues related to closing a business is long and often complex, and you may need to be guided through the steps. For example, a business that has an employee retirement plan will need to terminate the plan and distribute the benefits to participants. Flexible Spending Accounts and Health Savings Accounts must also be terminated.

There may be debt cancellation issues to wrestle with. Other possibilities include dealing with net operating losses, passive activity losses, depreciation recapture and possible bankruptcy issues.

You need to be aware of how long to retain business records. And finally, you may need to know how to navigate payment options if your business is unable to pay the remaining taxes owed.

Closing a business typically brings up a lot of questions. Contact the office for answers.

408-252-1800

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