Tax Articles

As a small business owner, tax liability is the money you owe the government when your business generates income. With changing laws and gray areas regarding deductions, exemptions, and credits, it’s no wonder small business owners rank taxes at the top of the list of the most stress-inducing aspect of business ownership. To reduce that stress, taxes shouldn’t be something to focus on only at year’s end. Use these tips on reducing your business tax year-round and see your taxes and stress level decrease!

1. Business structure

Your company’s business structure is how it is organized – it answers questions like who is in charge, how are profits distributed, and who is responsible for business debt. The most common business structures are:

• Sole proprietorships have one owner who takes all profits as personal income. The owner is personally liable for any business debts.
• Partnerships are structured like sole proprietorships but can have an unlimited number of owners.
• C corporations have unlimited shareholders who each own part of the company. Profits are distributed as dividends between them. Owners are not personally liable for business debts.
• S corporations are structured like C corporations, but the number of shareholders is capped at 100.

In addition to affecting how a business operates, business structure impacts how much a company pays in taxes. The U.S. tax code is complex and includes four main tax categories:

• Income tax – paid on profits
• Employment tax – employee Social Security and Medicare contributions
• Self-employment tax – Social Security and Medicare contributions for self-employed individuals
• Excise tax – special taxes for specific goods and services like tobacco, alcohol, etc.

IA sole proprietorship or partnership is a good idea for businesses wanting tax simplicity. For those with less than 100 owners, an S corporation might be the right fit and best tax option. Again, business structure and tax laws are complex and are best determined by a qualified, experienced accountant.

2. Net Earnings

Net earnings (i.e., net income or profit) is the gross business income minus business expenses. Regardless of the business, it begins with gross income (the income received directly by an individual, before any withholding, deductions, or taxes), and allowable expenses are deducted to arrive at net income. How this figure is calculated is dependent upon business structure.

Net earnings are used to calculate business income taxes. Again, the calculation process differs slightly for different business structures. It is best to seek a professional to help with net earnings calculations for the proper calculation and maximum legal deductions.

3. Employ a Family Member

One of the best ways for small business owners to reduce taxes is hiring a family member. The (IRS allows a variety of options for tax sheltering. For example, suppose you hire your child, as a small business owner. In that case, you will pay a lower marginal rate or eliminate the tax on the income paid to your child. Sole proprietorships are not required to pay Social Security and Medicare taxes on a child’s wages. They can also avoid Federal Unemployment Tax Act (FUTA) tax. Consult a trusted accounting professional for details about the benefits of hiring your children or even your spouse.

4. Retirement contributions

Employee retirement plans benefit employees, but they can also be good for your small business. Employer contributions to an employee retirement plan are tax-deductible. They can also carry an employer tax credit for setting up an employee retirement plan. Again, this is a task an accountant can handle for you. They can guide you on retirement plan choices based on your business’s situation, employees, and other factors.

As a small business owner, you can deduct contributions to a tax-qualified retirement account from your income taxes (except for Roth IRAs and Roth 401(k)s). Sole proprietors, members of a partnership, or LLC members can deduct from their personal income contributions to their retirement account.

As with any tax situation, consulting your trusted accounting professional is always best. They are up to date on the latest tax laws, information, and allowable deductions. By being aware of ways your small business can reduce taxes, you can bring these topics up with your accountant, discuss the best options for you, and be prepared long before tax time rolls around.

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Contact our tax professionals to learn more about how you can control tax exposure for your small business.

First time hiring an independent contractor? Here’s what you need to know about taxes.

Two months ago in this column, we explained the differences between employees and independent contractors. The IRS has strict rules that you must follow when you make this distinction because there are very different tax rules for each type of worker.

If you’re hiring an independent contractor for the first time, here’s the good news: Your income tax obligations are much simpler than they’d be if you were bringing on a new employee. You are not responsible for withholding and submitting payroll taxes to the IRS and state agencies. You simply pay the compensation that you and your worker have negotiated.

Here’s a look at the forms you and your independent contractor will need to complete.

The W-9

Independent contractors must complete a W-9 before they can get paid by you.

Where employees have to fill out a Form W-4 form to get paid by their employers, independent contractors are required to enter tax-related data on a Form W-9. This is a very simple document, requiring only the taxpayer’s:

• Name, address, and business name (if different).
• Business entity type (sole proprietor, partnership, LLC, etc.).
• Taxpayer Identification Number (TIN). This will most likely be your contractor’s social security number, though in rare cases, it may be an employer identification number (EIN).
• Signature and date signed.

You or your independent contractor can print out a copy of the W-9 here. He or she can either send you a completed paper copy or scan it and email it to you. As the employer, you’ll use this information to report your independent contractor’s annual income. The IRS advises you to keep this form for four years in case it has questions at a later time.

Form 1099-NEC

Before tax year 2020, nonemployee compensation was reported in Box 7 of the Form 1099-MISC. Now, though, there is a separate form for it: the Form 1099-NEC. If you paid someone who is not your employee $600 or more during the tax year, you must complete this form. You’ll need to submit one copy to the IRS, one to state taxing agencies, and one to the contractor by January 31 of the year following the year the income was earned.

You’ll need several copies of the 1099-NEC for distribution.

In addition to the taxpayer’s name, address, and TIN, and your TIN (account number is optional), you must include the following information on the Form 1099-NEC:

• Box 1 should contain the total that you paid the independent contractor during the tax year (nonemployee compensation)
• If the Box 2 is checked, it signifies that you sold $5,000 or more in consumer products to the contractor for resale, on a buy-sell, a deposit-commission, or other basis. The contractor should report income from these sales on the Form 1040’s Schedule C.
• Box 3 is not currently being used by the IRS.
• If you withheld federal income tax from the contractor’s payments, as is required when he or she does not supply a TIN, you must report it in Box 4.
• Boxes 5-7 would only be used if you withheld state income tax.

You can see an example of the Form 1099-NEC here, but you can’t just print or scan and email all of the copies needed. Copy A goes to the IRS, and the other copies go to state tax departments and the independent contractor. You must have an official IRS version of Copy A because it needs to be scanned by the agency. The other copies can be downloaded and printed.

The Form 1099-NECs that you send to the IRS must be accompanied by Form 1096, Annual Summary and Transmittal of U.S. Information Returns. We’ll tell you more about acquiring and preparing all of these forms as the deadline for the 2021 tax year gets closer. Your relationship with your independent contractor should be fairly uncomplicated where taxes are concerned. But if you’re dealing with a situation that causes you to question your handling of it, please let us help. We can also advise you on your classification of your new hire (independent contractor vs. employee), a distinction that the IRS takes very seriously. As always, we’re available to help with year-round tax planning and eventual preparation and filing.

Eligible small employers who provide health care coverage to their employees can receive a Small Business Health Care Tax Credit from the Federal government. Here’s what you need to know about who qualifies and how to take advantage of the credit.

What is the Small Business Health Care Tax Credit?

Small business owners make numerous decisions about employee benefits. For example, the type of benefits offered can entice the most desirable candidates to apply for their company’s positions. The right type of benefits can also boost employee retention. An excellent employee benefit to consider is health insurance. If that’s a perk being offered, the small business health care tax credit is a feature of the Affordable Care Act (ACA) that may be of interest. The tax credit is limited to employers with less than 25 employees, and it operates as a sliding-scale credit based on the size of the employer. The larger the employer, the smaller the tax credit. The maximum credit is 50 percent of premiums paid (35 percent for tax-exempt employers).

Qualifying small employers can take advantage of the small business health care tax credit for two consecutive tax years providing the business owes no taxes during those years. The credit can also be carried forward or back to other tax years. Any excess amount paid for health insurance premiums over the allowable credit can be claimed as a business expense.

Who qualifies for the Small Business Health Care Tax Credit?

As mentioned above, the small business health care tax credit is for small employers with fewer than 25 full-time equivalent employees (FTE). Note that the FTE concept is based on hours worked rather than the actual number of employees.

Other qualifications include that:

The employer pays less than $50,000 a year per FTE in average wages. Determining FTEs and average annual wages should be done by your qualified tax preparer, CPA, or via guidance from the Internal Revenue Service (IRS).

The employer offers a qualified health plan to employees through a Small Business Health Options Program Marketplace (SHOP).

The employer pays at least 50 percent of the employee’s premium cost. (Not family or dependent premium cost.)

What about Tax-exempt Organizations?

Tax-exempt organizations are also eligible for the small business health care tax credit. In this case, the credit is refundable to the extent that it does not exceed income tax withholdings or Medicare tax liability. Refunds to tax-exempt organizations are reduced by the current fiscal year sequestration rate. For an explanation of sequestration and how it impacts the small business health care tax credit, consult your tax advisor or accountant.

How do small businesses take advantage of the Small Business Health Care Tax Credit?

To claim the small business health care tax credit, the IRS requires Form 8941 (Credit for Small Employer Health Insurance Premiums) to be filled out and submitted. For small businesses, the amount should be included as part of the general business credit on the company’s federal tax return. The amount should be included on Form 990-T (Exempt Organization Business Income Tax Return) for tax-exempt organizations. Note: this form must be filed for a tax-exempt organization to claim the small business health care tax credit, even if the business does not typically file that form.

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Small business owners may find that offering perks like health insurance aren’t beyond their economic reach with incentives like this. As always, a trusted tax professional is the place to turn regarding this and other tax credits for small businesses.

Call us at 631-474-2500 now to discuss how we can formulate an effective tax strategy for you or your business. You can also request your free consultation online.

Created by the TCJA in 2017, opportunity zones are designed to help economically distressed areas by encouraging investments. This article contains an introduction to the complex details of how these zones work.

The IRS describes an opportunity zone as “an economically-distressed community where new investments, under certain conditions, may be eligible for preferential tax treatment.” How does a community become an opportunity zone? Localities qualify as opportunity zones when they’ve been nominated by their states. Then, the Secretary of the U.S. Treasury certifies the nomination. The Treasury Secretary delegates authority to the IRS.

The Tax Cuts and Jobs Act added opportunity zones to the tax code. The IRS says opportunity zones are new, although there have been other provisions in the past to help communities in need with tax incentives to spur business.

The new wrinkle is how opportunity zones are designed to stimulate economic development via tax benefits for investors.

• A Qualified Opportunity Fund is an investment vehicle set up as a partnership or corporation for investing in eligible property located in a qualified opportunity zone. A limited liability company that chooses to be treated either as a partnership or corporation for federal tax purposes can organize as a QOF.
• Investors can defer taxes on any prior gains invested in a QOF until whichever is earlier: the date the QOF investment is sold or exchanged or Dec. 31, 2026.
• If the QOF investment is held longer than five years, there is a 10 percent exclusion of the deferred gain.
• If the QOF investment is held for more than seven years, there is a 15 percent exclusion of the deferred gain.
• If the QOF investment is held for at least 10 years, the investor is eligible for an increase in basis on the investment equal to its fair market value on the date that the QOF investment is sold or exchanged.
• You don’t have to live, work or have a business in an opportunity zone to get the tax benefits. But you do need to invest a recognized gain in a QOF and elect to defer the tax on that gain.
• To become a QOF, an eligible corporation or partnership self-certifies by filing Form 8996, Qualified Opportunity Fund, with its federal income tax return.

The first set of opportunity zones covers parts of 18 states and was designated on April 9, 2018. Since then, there have been opportunity zones added to parts of all 50 states, the District of Columbia and five U.S. territories. More details are available on the U.S. Treasury website. Or see the IRS website for more information

Request a free consultation through our website now and we’ll contact you set up an appointment.

Slow paying customers, seasonal revenue variations, an unexpected downturn in sales, higher expenses — any number of business conditions can contribute to a cash flow crunch. If you own a small business, you may find the suggestions that follow helpful in minimizing cash flow problems.

Billing and collections. Your employees need to work with clear guidelines. If you don’t have a standardized process for billing and collections, make it a priority to develop one. Consider sending invoices electronically instead of by mail. And encourage customers to pay via electronic funds transfer rather than by check. If you don’t offer a discount for timely payment, consider adding one to your payment terms.

Expense management. Know when bills are due. As often as possible, pay suppliers within the period that allows you to take advantage of any prompt-payment incentives. Remember that foregoing a discount in order to pay later is essentially financing your purchase.

Take another look at your costs for ongoing goods and services, including telecommunications, shipping and delivery, utilities, etc. If you or your employees travel frequently for in-person meetings, consider holding more web conferences to reduce costs.

Inventory. Focus on inventory management, if applicable, to avoid tying up cash unnecessarily. Determine the minimum quantities you need to keep on hand to promptly serve customers. Systematically track inventory levels to avoid overbuying.

Debt management. Consider how you use credit. Before you commit to financing, compare terms from more than one lender and keep the amount to a manageable level. For flexibility, consider establishing a line of credit if you do not already have one. You will be charged interest only on the amount drawn from the credit line.

Control taxes. Make sure you are taking advantage of available tax breaks, such as the Section 179 deduction for equipment purchases, to limit taxes.

Develop a cash flow budget. Projecting monthly or weekly cash inflows and outflows gives you a critical snapshot of your business’s cash position and shows whether you’ll have enough cash on hand to meet your company’s needs.

Don’t get left behind. Contact us today to discover how we can help you keep your business on the right track. Don’t wait, give us a call today.

Having a qualified default investment alternative relieves you and plan fiduciaries of certain liabilities. Click through to enhance 401(k) plans by providing investments with potential for long-term growth regardless of how engaged employees are.

You want your retirement plan to attract and retain key personnel, lower overall costs, and contain appropriate and competitive investments. When coming up with the lineup, you may choose a QDIA as a safe-harbor option. A QDIA is an investment fund or option designated as a default fund for investment contributions when employees fail to make an election.

Developed by the Pension Protection Act of 2006, QDIAs seek to increase participation through automatic enrollment but can be applied to any participant enrolled in your plan who hasn’t confirmed any investment choices.

A QDIA, if properly selected and implemented, provides you and your plan sponsors with protective relief regardless of the investment outcome of the fund. Some firms see it as a silver bullet to increase plan participation while keeping owners and sponsors better protected.

QDIAs must meet the Employee Retirement Income Security Act’s criteria for protective relief, which includes, but may not be limited to, the following:

• Providing employees opportunities to move assets out of a QDIA just as they do with other plan options.
• Giving plan participants all relevant materials.
• Making sure special communication is provided 30 days in advance of a potential investment in a QDIA.
• Giving participants annual notices describing the circumstances under which their assets may be invested in a QDIA as well as how elective investments are made on their behalf.
• Giving participants the opportunity to direct their own investments regardless of whether they do so.
• Providing participants with a full description of the QDIA, including fees, expenses, investment objectives and risk/return profile.

Know the details

When an employee contributes money to a 401(k) account but hasn’t made an investment election, the funds are automatically invested into a QDIA. The plan fiduciary — you or the 401(k) manager — is responsible for selecting the QDIA.

All 401(k) plans should have a QDIA so that you and employees aren’t saving without investment elections. Plans with automatic enrollment always need a QDIA, but other situations occur that also result in the need for QDIAs, such as:

• Employer contributions on behalf of an employee who isn’t contributing.
• Incomplete enrollment forms.
• Beneficiary or alternative payee balances.
• A qualified domestic relations order is in force.
• Removal of investment options.
• 401(k) rollovers.
• Missing persons.

There are four types of QDIAs:

1. A product with a mix of investments that takes into account the individual’s age or retirement date — like target date funds.
2. An investment service that provides an asset mix based on an employee’s current contributions and existing plan options and that takes into account the individual’s age or retirement date — like a managed account.
3. A product with a mix of investments that accounts for the demographic characteristics of all employees, rather than each individual — like a balanced fund.
4. A short-term, low-risk, low-return product for capital preservation for only the first 120 days of participation — like a money market fund.

A QDIA protects your employees from missing out on potential long-term growth when they don’t make an investment selection. It simplifies investment decision-making by selecting the 401(k) investments for them — money will automatically be invested in long-term retirement savings.

Call us at 631-474-2500 now to discuss how we can formulate an effective tax strategy for you or your business. You can also request your free consultation online.