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Form 1120S Tax Return for S CorpsAn S corporation is a pass-through entity that is treated very much like a partnership for federal income tax purposes. As a result, all income is passed through to shareholders and taxed at their individual tax rates. However, unlike a C corporation, an S corporation’s income is taxable to the shareholders when it is earned whether or not the corporation distributes the income. Because an S corporation has a unique tax structure that directly impacts shareholders, it is important for to understand the S corporation distribution and loss limitations, as well as how and when items of income and expense are taxed, before developing an overall tax plan.

In addition, some S corporation income and expense items are subject to special rules and separate identification for tax purposes. Examples of separately stated items that could affect a shareholder’s tax liability include charitable contributions, capital gains, Sec. 179 expense deductions, foreign taxes, and net income or loss related to rental real estate activities.

These items, as well as income and losses, are passed through to the shareholder on a pro rata basis, which means that the amount passed through to each shareholder is dependent upon that shareholder’s stock ownership percentage. However, a shareholder’s portion of the losses and deductions may only be used to offset income from other sources to the extent that the total does not exceed the basis of the shareholder’s stock and the basis of any debt owed to the shareholder by the corporation. The S corporation losses and deductions are also subject to the passive-activity rules.

Other key points to consider when developing a comprehensive tax strategy include:

  •  the availability of the Code Sec. 179 deduction at the corporate and shareholder level;
  • reporting requirements for the domestic production activities deduction;
  • the tax treatment of fringe benefits;
  • below-market loans between shareholders and S corporations; and
  • IRS scrutiny of distributions to shareholders who have not received compensation.

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

 

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Tax Consequences for Self-Employed Individuals

Owning your own business can be very rewarding, both personally and financially. Being the sole decision-maker for this important undertaking can also be overwhelming. Business owners have many choices to make, and these decisions involve tax consequences that are not always foreseen. We can help you minimize your overall tax burden by identifying and maximizing business deductions, providing guidance on substantiation of expenses, and exploring tax planning alternatives that are uniquely available to the self-employed.

Some frequently overlooked business expenses that you may be able to deduct include moving expenses, costs of travel away from home, entertainment expenses, and expenses related to a home office. Code Sec. 179 expense allowances on the purchase of new equipment can provide a significant deduction. In addition, there are multiple benefits when you employ your spouse, child, or other family member in the business.

There are some risks involved in adopting tax positions related to operating a business as an independent contractor. For example, the distinction between employee and independent contractor is an issue the IRS subjects to special scrutiny. As a self-employed individual, you must comply with these rules for yourself or for any workers that you hire. If you are an employer, you must withhold income and employment taxes from an employee’s income. However, if your workers are independent contractors, you are only required to report payments of $600 or more on a Form 1099-MISC, Miscellaneous Income. Failing to make the right classification, however, could result in additional taxes, interest and penalties.

The IRS offers an amnesty program called the Voluntary Classification Settlement Program (VCSP) to encourage employers to reclassify their workers as employees for employment tax purposes for future tax periods. Under the VCSP, employers are allowed to prospectively treat the workers as employees at a cost that is 10 percent of what is normally owed in a worker misclassification situation.

Complex rules and calculations are involved in many of the planning opportunities that are available to you. We will be happy to review your overall tax scenario in order to maximize your tax savings. Please contact our office at your earliest convenience to make an appointment.

 

 

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We know that you have worked hard for your money and would like to reap the benefits to the greatest extent possible. Your ultimate goal is to sustain a successful wealth-building strategy while avoiding unnecessary and expensive tax consequences. We are interested in helping you achieve these objectives.

For the last few years, there has been talk of major tax reform that would place an increased tax burden on higher income individuals. Some budget proposals include revenue raisers with increased taxes on high-income individuals and new taxes on foreign earnings of U.S. multinational firms. The so-called “Buffet Rule,” which would impose a minimum tax rate of 30 percent on adjusted gross income (AGI) over $1 million, is again being touted as an option, along with another increase in the top effective capital gains and dividends rate.

Although it is uncertain when or if tax reform will be enacted, it is wise to weigh your options carefully with higher tax rates looming on the horizon. Higher income individuals like you must carefully structure your financial transactions in order to minimize your tax burden.

Some of the issues that may impact your tax planning strategy for 2016 include:

  • your marginal tax rate;
  • personal exemption and itemized deduction phaseouts;
  • additional 0.9 percent Medicare tax on wages and self-employment income over threshold amounts;
  • net investment income tax of 3.8 percent for taxpayers with modified AGI exceeding threshold amounts;
  • a capital gain rate of 20 percent for taxpayers in the highest tax bracket;
  • gain exclusion for small business stock acquired in 2016 or later and held for more than 5 years;
  • foreign account disclosure and reporting requirements and related enforcement penalties;
  • in-service rollovers to designated Roth accounts without the imposition of a 10-percent additional tax on early distributions;
  • IRA distributions to charity of up to $100,000;
  • strict rules about deducting passive activity losses (PALs); and
  • alternative minimum tax (AMT).

As you can see, the more complex issues faced by higher-income individuals create a challenging planning environment for the 2016 tax filing season. We would like to meet with you to discuss the options that are best suited to meet your personal financial goals while minimizing your tax liability. Please contact our office at your earliest convenience to make an appointment.

 

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Tax Savings for Charitable Donations

Significant tax savings can be achieved through a properly planned program of gifts to charity. Although a contribution may be motivated by humanitarian reasons, it is nevertheless wise to take the tax considerations into account when making a contribution. Charitable giving can be divided into two general categories. First, there are donations that are made on a regular basis and involve relatively small amounts. Second, there is the large extraordinary donation often associated with estate planning. Different planning concepts govern each type of donation.

Individuals, such as you, who make charitable contributions, should take into consideration a number of factors when making the decision as to when and how much to contribute, including the deduction-limitation rules. Generally, the amount that you may deduct in a tax year cannot exceed 50% of your adjusted gross income. (Fortunately, the amount in excess of the limitation can be carried forward five years). However, lower percentages apply when donations are made to certain donees, when the contribution consists of capital gain property, and when contributions are made “for the use of” a donee rather than “to” a donee.

The IRS requires that contributions of $250 or more must be substantiated in order to be deductible. The burden is placed on you, as the donor, to request written substantiation because a canceled check may not be sufficient to support a deduction. The amount of the contribution is fully deductible whether it is paid by cash, check or credit card. However, a charitable deduction cannot be based on a mere pledge to pay. The pledge must actually be paid before the end of the year in which the deduction is claimed.

A charitable deduction is not allowed to the extent that you receive a benefit for the contribution, such as admission to a charity ball, banquet, show or sporting event.  In such cases, payments qualify for the deduction only to the extent they exceed the fair market value of the privileges or other benefits received. In addition, no charitable deduction may be claimed for travel expenses, including meals and lodging, if there is a significant element of personal pleasure, recreation or vacation present in the travel.

A deduction is not allowed for the value of services contributed to the charitable organization. However, if you are active in such organizations, you should be aware that out-of-pocket expenses incurred while performing volunteer services are deductible as a charitable contribution. If you use your auto, you may also be able to deduct the standard mileage allowance of 14 cents per mile.

Noncash contributions present a unique set of planning opportunities. There are special rules for the donation of cars, boats, and planes if the claimed value exceeds $500. If you have appreciated assets, you may want to consider donating the asset rather than selling and donating the proceeds. Using this approach allows you to avoid the capital gains tax that results from selling the asset. In addition, the deduction amount is for the fair market value of the asset at the time of the donation, regardless of your basis. There are additional limitations and elections that must be considered when donating assets instead of cash, including the need for an appraisal.

Large contributions require special tax-planning considerations. First, you must determine whether or not it is advisable to make a contribution during your lifetime or at death. Thus, your income and prospective estate tax brackets must be considered. You should take into consideration the income tax deduction limitations mentioned above, and the fact that there are no limitations for estate tax charitable contribution deductions. Second, you should consider whether you can afford the gift, not only in the current year, but in future years as well. This requires an analysis of the financial needs of you and your family, which may indicate that some form of deferred charitable giving is appropriate.

We can assist you with your short-term and long-term charitable giving plans and answer any questions you may have regarding your overall tax plan. Please call our office at your earliest convenience to arrange an appointment.

 

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buying a house for tax planning

Buying a home is the single most valuable investment most families make, and home ownership offers tax breaks that make it the foundation for your overall tax planning. The tax law provides numerous incentives to home ownership, including the following:

  • Buying, rather than renting, replaces nondeductible rent with deductible mortgage interest.
  • Taxpayers can deduct an unlimited amount of property tax they pay on any number of residences.
  • Homeowners can exclude up to $250,000 of gain ($500,000 for married couples filing jointly and certain surviving spouses) from taxable income when they sell.
  • There is no penalty for an early withdrawal from an IRA for a “first-time” homebuyer for up to $10,000 so long as the proceeds are used for acquisition of a home.
  • Self-employed individuals may deduct expenses for a portion of the home used for business. A simplified optional method for claiming a home office deduction is now available.
  • Energy credits are available for environmentally friendly and ecologically responsible home-related expenditures.

Unless retroactively extended by Congress, the following home-friendly provisions are not available in 2015:

  • The exclusion from gross income for discharges of qualified principal residence indebtedness,  and
  • The mortgage premium insurance deduction.

You may benefit from a close review of these provisions, particularly if you are considering transactions involving your home, including selling, refinancing, or renting. Many home ownership tax benefits also apply to a second home. We would like to assist you with home ownership as it applies to your overall tax plan. Please call our offices at your earliest convenience to arrange an appointment.

 

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Retirement Savings lock box

In recent years, many tax-favored options have become available to self-employed individuals to provide for their retirement. Tax planning for retirement can include deductible contributions to a Keogh plan, traditional or Roth IRA, SEP plan, SIMPLE plan or a one-person 401(k) plan. You may wish to consider implementing one of these plans for yourself and/or your employees to benefit from a current tax year deduction and accumulate tax-deferred retirement savings.

Each of these plans has advantages and disadvantages, and some may not be applicable to your situation. For example, a sole-owner 401(k) retirement plan allows a contribution for you as both an employer and as an employee. Therefore, a sole-owner 401(k) plan may provide for the largest deductible contribution. However, a sole-owner 401(k) is not available to the self-employed with employees other than a spouse or relative. As an alternative, a Keogh plan provides more flexibility, but is more complicated to maintain than a SEP or SIMPLE plan and may have additional administrative costs. Ultimately, the choice of savings vehicle will depend on factors related to your business and your retirement needs. Regardless of which plan you qualify for or what your retirement needs are, it is important to begin planning now for your retirement.

Please call our office to arrange an appointment. We will be happy to discuss the various retirement plan options and how they might apply to your business. 

 

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Now is a good time to review and evaluate your retirement savings. The tax code provides significant incentives for individuals to make contributions to retirement savings and plans, including traditional and Roth IRA’s, as well as to employer sponsored qualified and non-qualified plans, including qualified 401(k) plans. A saver’s credit also may be available for investors in certain tax brackets, which further enhances overall savings. The tax law is designed to make it easier for individuals to save for retirement even in these difficult economic times.

Tax incentives can include deductibility of contributions, tax deferral on growth of assets in the plan, and potential distribution free of tax, varying on the investment vehicle chosen. The choice of investment that may be best for you depends upon your individual tax and overall financial situation. Regardless of the type of contribution, any contribution should be made as early in the year as possible. If this approach is followed consistently over the years, the benefits will be far greater than contributions made at the last minute.

Please call our office to discuss your retirement savings situation and strategy. The rules applicable to the types of investment vary and can be complex. We will be happy to help you maximize your tax benefit and overall savings. 

 

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Currently, the likelihood of your business being involved in a worker classification or employment tax audit is increased because the IRS is aggressively attempting to reduce the “tax gap,” which is the annual shortfall between taxes owed and taxes paid.

Because the existing worker classification rules are complex and ambiguous, much uncertainty surrounds their interpretation and application. The lack of a single, definitive test for classifying workers as either employees or independent contractors contributes significantly to the worker classification problem.

FOR ENTITIES WHO PAID INDEPENDENT CONTRACTORS

Therefore, understanding the difference between an employee and an independent contractor is very important. If you are an employer, you are required to withhold and contribute a matching amount of FICA and Medicare taxes from your employee’s income. However, if your workers are independent contractors, you are only required to report payments of $600 or more on a Form 1099-MISC (Miscellaneous Income). Failing to make the right classification could cost you money.

If you have workers who make substantial financial investments in tools, equipment, or a place to work, or undertake some entrepreneurial risks, they are probably independent contractors. However, when you control and direct the workers who perform services for you as to the end result and how it will be accomplished, you are probably involved in an employer-employee relationship.

Unless there is a reasonable basis for treating your employees as independent contractors, failing to withhold income and employment taxes from their wages can result in severe penalties and interest, in addition to the back taxes owed. Of course, penalties for intentional worker misclassifications are harsher than they are for inadvertent mistakes.

Your benefit plan may also be in jeopardy if any eligible employees have been misclassified as independent contractors. Since these employees have been excluded from plan participation, your retirement plan may lose its tax-favored status. The problem is compounded when excluded employees seek restitution for lost benefits not only due to their exclusion from the benefit plan, but also for health coverage and other employee benefits.

The IRS offers an amnesty program to eligible employers that have misclassified workers. This program, called the Voluntary Classification Settlement Program (VCSP), allows employers that are currently treating their workers (or a class or group of workers) as independent contractors or other nonemployees to prospectively treat the workers as employees, at a cost that is 10 percent of what would normally be owed in a worker misclassification situation. In addition, a safe harbor rule known as “Section 530” provides relief from employment tax obligations with regard to workers, even though those workers may be common-law employees, if certain requirements are met.

Since the potential liability is considerable, we feel that it would be beneficial for you to verify that your workers are properly classified. If misclassifications are discovered, we can help you minimize your exposure through use of Section 530 relief or the VCSP.

It is also important to review your employment tax records and procedures to ensure that they are in compliance with IRS guidelines, especially in the event of an audit. Please contact our office at your earliest convenience to make an appointment.

FOR ENTITIES WHO PAID STATUTORY NONEMPLOYEES

As you probably know, compensation paid to certain workers considered nonemployees is not subject to income tax withholding, FICA or FUTA taxes. Generally, qualified real estate agents and direct sellers are considered statutory nonemployees. For nonemployee classification purposes:

  • Qualified real estate agents must be salespersons (or the person who recruits, trains or supervises salespersons); licensed real estate agents; and compensated based upon their sales or other output, rather than the number of hours they worked.
  • Direct sellers must sell or solicit the sale of consumer products to a customer, or to a buyer for resale, in the home or other non-permanent retail establishment. Workers who perform services related to the delivery or distribution of newspapers or shopping news are also considered direct sellers.

Since your business currently employs statutory nonemployees, we feel that it would be beneficial for you to verify that your workers are properly classified. If misclassifications are discovered, we can help you minimize your exposure through use of Section 530 relief or the Voluntary Classification Settlement Program (VCSP).

It is also important to review your employment tax records and procedures to ensure that they are in compliance with IRS guidelines, especially in the event of an audit. Please contact our office at your earliest convenience to make an appointment.

FOR ENTITIES WHO PAID STATUTORY EMPLOYEES

As you probably know, sometimes workers are specifically designated as employees by the Internal Revenue Code even if the facts do not suggest an employer-employee relationship. Generally, the following types of workers are considered statutory employees:

  • Full-time traveling or city sales representatives;
  • Agent-drivers or commission-drivers;
  • Life insurance sales representatives; and
  • Home workers.

However, there are distinct rules for each worker type, and their employment tax treatment also varies. In addition, statutory employees must personally perform substantially all of the services required under your contract. These workers cannot have a material investment in your facilities, and your relationship with them must be ongoing.

Since your business currently employs statutory employees, we feel that it would be beneficial for you to verify that your workers are properly classified. If misclassifications are discovered, we can help you minimize your exposure through use of Section 530 relief or the Voluntary Classification Settlement Program (VCSP).

It is also important to review your employment tax records and procedures, to ensure that they are in compliance with IRS guidelines especially in the event of an audit. Please contact our office at your earliest convenience to make an appointment.

 

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Now may be a good time to evaluate the expenses you incur as an employee in connection with your work. While your employer may be reimbursing you for some of these expenses, there may be others for which you are bearing the cost yet not utilizing the tax benefit. Through proper substantiation, it is possible that you may be able to obtain greater reimbursement from your employer. Alternatively, you may be entitled to deduct such expenses as miscellaneous itemized deductions.

In order to be reimbursed and/or deducted, trade or business expenses must be ordinary, necessary, and reasonable. They also must be properly substantiated. Examples of qualifying expenses include:

  • Travel, transportation, meal, or entertainment expenses
  • Safety equipment, small tools, or supplies
  • Uniforms required by your employer that are not suitable for everyday wear
  • Required protective clothing
  • Dues to professional organizations
  • Subscriptions to professional journals
  • Certain job hunting expenses
  • Certain expenses for the business use of your home
  • Computer costs
  • Work-related educational expenses

You may also benefit from a review of the business expenses related to the use of your home. If you qualify for the home office deduction, you may be able to deduct part of your home’s normal operating expenses, such as utilities and insurance. The tax-savings opportunities available to you are dependent not only on the type of work you do at home, but where in your home you perform it.

The rules for deducting these expenses, as well as substantiating your deduction, vary according to the type of expense involved. It is important to retain all records and receipts that document the time, place, and business purpose of each expense. Please call our office at your earliest convenience to schedule an appointment. 

 

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Sec 199 tax deduction, manufacturers deduction, Wilmington Accountant, Delaware CPA

The Section 199 deduction is often overlooked by business owners, perhaps because they’re not sure what it is. You may see it referred to as “the domestic production deduction,” or the “domestic production activities deduction” or “the manufacturers’ deduction.” Here are four more facts about this potentially valuable tax break:

1. It’s a weighty percentage

The deduction is worth as much as 9% of the lesser of qualified production activities income or taxable income. But it’s limited to 50% of W-2 wages paid by the taxpayer that are allocable to domestic production gross receipts.

2. It’s not only for manufacturers

Despite being sometimes called “the manufacturers’ deduction,” many other types of companies can claim the Sec. 199 deduction. Businesses engaged in activities such as construction, engineering, architecture, computer software production and agricultural processing also may be eligible.

3. It has its limits

The deduction isn’t allowed in determining net self-employment earnings and generally can’t reduce net income below zero. It can, however, be used against the alternative minimum tax.

4. It involves math

There’s no denying that calculating the deduction, which involves determining what costs are allocable to domestic production gross receipts, can get complicated. On the bright side, very small businesses can simplify the calculations by using the Small Business Simplified Overall Method. There’s also a Simplified Deduction Method for businesses whose assets are no more than $10 million, or whose average gross receipts don’t exceed $100 million.

Take action

No matter what you call it, the Sec. 199 deduction may be a way for your company to get some tax relief. Please call us for help determining whether your production activities qualify and, if so, how to calculate and claim this tax break on your 2015 return.

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