Tax Articles

The world of disability coverage can be confusing for business owners. Click through to learn more about what disability coverage is, and what your options are as an employer.

As an employer, you want to offer fair coverage to all your valued employees. After all, if someone is injured or ill, you want to be sure they aren’t worrying about their job while they recover. That’s where several types of disability insurance as well as federal and state programs come into play. Each offers specific coverage for different reasons.

Short-Term and Long-Term Disability

Both short-term and long-term disability coverage refer to optional insurance policies offered to employees. Only employers can purchase short-term coverage, but anyone can buy long-term disability, and some employers offer it. Short-term coverage must be exhausted before long-term coverage kicks in and covers the rest of someone’s time out from work.

Most policies require that an employee’s personal, vacation and sick time are exhausted before short-term disability coverage begins. Short-term disability insurance typically covers several weeks of time off due to an accident or illness. After that, long-term covers the remainder. Long-term is usually a span of several months or more when someone is recovering from a serious illness or injury and cannot work.

Both short-term and long-term disability are considered optional insurance that many employers choose to offer as part of their benefits package. Short-term disability is paid for by the employer. Long-term may be paid in whole or part by the employer, employee or both.

Should You Offer Disability Benefits?

In the past, many companies paid entirely for disability benefits. These were included as part of an employee’s benefits package. Today, many companies are offering long-term disability as an optional benefit. Employees are either enrolled automatically and must opt out, or they can choose to enroll with weekly payroll deductions.

Offering long-term disability to your staff may be a smart idea. It’s an added perk that makes your company’s benefits package all the more attractive when wooing star candidates away from competitors, and it usually doesn’t cost much.

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.

When you are self-employed, your business profits are taxed to you at federal rates as high as 39.6%. Add self-employment taxes of 15.3% of the first $118,500 of your net self-employment earnings plus 2.9% of any earnings over that amount. Then there’s an additional 0.9% Medicare surtax on earnings in excess of $200,000 ($250,000 if married filing jointly). At tax rates like these, it pays to take steps to reduce your tax burden.

Step One: Deduct Business Expenses

Be sure you have an organized system for recording your expenses. To be deductible, a business expense must be “ordinary” (common and accepted in your trade or business) and “necessary” (helpful and appropriate for your trade or business). Since personal expenses are generally not deductible, it’s smart to have a separate business bank account and use a separate credit card for business purchases.

Step Two: Deduct Health Insurance Premiums

You may qualify to deduct premiums paid for medical, dental, and qualified long-term care insurance coverage for you, your spouse, and your dependents.* The coverage may include children who haven’t reached age 27 by the end of the year, even if you don’t claim them as dependents on your tax return.

Unlike health insurance premiums paid for employees, the self-employed health insurance deduction won’t save you self-employment taxes. However, it will lower your taxable income. You must meet certain requirements to qualify for the deduction.

Step Three: Deduct Retirement Plan Contributions

Funding a retirement plan can also save you significant tax dollars. Within limits, plan contributions will be tax deductible.** Several types of plans may be suitable for you as a self-employed taxpayer, including a simplified employee pension (SEP) plan, a savings incentive match plan (SIMPLE), or a solo (individual) 401(k) plan. Each plan has specific features and requirements that you will want to weigh carefully before making a choice.

Don’t deal with tax issues on your own. Call us right now to find out how we can provide you with the answers you need.

Are you an individual or business owner who’s interested in lowering your tax burden? Call Newton Sankey & Co. at 631-474-2500 and ask to speak to a tax accountant now or request a consultation online and we’ll contact you.

* Dollar limits apply to the deduction for long-term care insurance premiums.

** Although deductible for income-tax purposes, contributions to your own retirement plan account do not reduce earnings subject to self-employment taxes.

Crowdfunding — or funding a project through the online contributions of many different backers — is becoming increasingly popular. If you are considering raising crowdfunding revenue or contributing to a crowdfunding campaign, you will need to address the many tax issues that can arise.

Background

While crowdfunding was initially used by artists and others to raise money for projects that were unlikely to turn a profit, others have begun to see crowdfunding as an alternative to venture capital. Depending on the project, those who contribute may receive nothing of value, a reward of nominal value (such as a T-shirt or tickets to an event), or perhaps even an ownership/equity interest in the enterprise.

Is It Income?

In an “information letter” released in 2016,¹ the IRS stated that crowdfunding revenues will generally be treated as income unless they are:

• Loans that must be repaid
• Capital contributed to an entity in exchange for an equity interest in the entity
• Gifts made out of detached generosity without any “quid pro quo”

The IRS noted that the facts and circumstances of each case will determine how the revenue is to be characterized and added that “crowdfunding revenues must generally be included in income to the extent they are for services rendered or are gains from the sale of property.”

Frequently, the IRS learns of the activity because crowdfunding entrepreneurs have used a third-party payment network to process the contributions. Where transactions during the year exceed a specific threshold — gross payments in excess of $20,000 and more than 200 transactions — that third party is required to send Form 1099-K (Payment Card and Third-Party Network Transactions) to the recipient and the IRS. Payments that do not meet the threshold are still potentially taxable.

If It’s Income

“Ordinary and necessary” business expenses are generally tax deductible, but deductions for expenses are limited if the IRS deems the activity a hobby rather than a trade or business. Generally, the IRS applies a “facts and circumstances” test to determine if you have a profit-making motive, which is necessary for a trade or business.

New Businesses

Favorable deduction rules may be available for certain types of expenses incurred in starting a new business. If eligible, the business may elect to expense up to $5,000 of those costs (subject to phaseout) in the year the business becomes active, with the remainder of the start-up expenditures deducted ratably over a 180-month period.

For Contributors

Campaign contributors should not assume that their gifts qualify as tax-deductible charitable contributions. Tax-deductible contributions must meet certain requirements, including that they be made to a qualified charitable organization. If gifts are made to an individual or nonqualified organization, you will generally need to file a gift tax return for gifts to any one recipient that exceed the gift tax annual exclusion ($15,000 for 2018).

These are just some of the potential tax issues that may arise. Consult your tax advisor regarding your specific situation.

Are you an individual or business owner who’s interested in lowering your tax burden? Call Newton Sankey & Co. at 631-474-2500 and ask to speak to a tax accountant now or request a consultation online and we’ll contact you.

Source/Disclaimer:

¹Information Letter 2016-0036

Any employer reimbursing its employees for business-related expenses should consider whether the reimbursement arrangement meets the IRS’s requirements for an accountable plan. Having an accountable plan that meets tax law requirements can provide tax advantages.

Business Connection

Each expense reimbursed under an accountable plan must have a business connection. This means that the expense must be allowable as a deduction and paid or incurred by the employee while performing services as an employee.

Other Requirements

Employees must adequately account for their expenses and return any excess reimbursements or allowances within a reasonable period of time. The meaning of reasonable period of time depends on the facts and circumstances, but the IRS has provided several safe harbors.

Substantiation of an expense within 60 days after it is paid or incurred will be deemed reasonable, as will the return of an advance within 120 days. Alternatively, an employer may provide its employees with periodic statements (at least quarterly) that require them to either account for or return any advances within 120 days of the statement.

Tax Effects

Expense reimbursements made under an accountable plan that meets the requirements are not included in an employee’s wages and are not subject to federal income or employment taxes. This can be a tax saver for both the employer and the employee.

If no accountable plan is in place, amounts paid to the employee count as taxable wages. The employee can potentially deduct the expenses, but only if the employee itemizes deductions rather than claims the standard deduction. The employee’s deduction for employee business expenses and other miscellaneous expenses is limited to the amount that exceeds 2% of adjusted gross income.

Call Newton Sankey & Co. 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.

The most recent tax reform law effectively reduces taxes for many small businesses. It also creates some new complications. Here are the highlights.

Corporate tax rates are cut.

The graduated corporate tax structure has been replaced by a flat rate of 21%. This represents a significant rollback for corporations in the former top 35% bracket. Of particular note to owners of closely-held C corporations: the new law repeals the corporate alternative minimum tax and makes the simpler cash method of accounting available to more corporations.

Owners of “pass-through” entities gain a new deduction.

The legislation creates a new deduction for 20% of business pass-through income. This deduction is available to owners of almost any type of trade or business whose taxable income does not exceed $315,000 (joint return) or $157,500 (other returns). Above those amounts, the deduction is generally limited to the greater of:

• 50% of W-2 wages paid by the trade or business, or
• The sum of 25% of W-2 wages paid plus 2.5% of the original cost of tangible, depreciable assets used in the business.

When the business has more than one owner, the owners use their allocated shares of wages and assets in computing the limitations.

Different restrictions apply to individuals in certain service businesses (e.g., law, medicine, and accounting). For those individuals, the ability to take the deduction is reduced with taxable income between $157,500 and $207,500 ($315,000 and $415,000 on a joint return) and is unavailable once taxable income reaches the top of the applicable range.

The taxable income thresholds will be adjusted for inflation after 2018, and the 20% deduction is scheduled to expire after the 2025 tax year.

Depreciation and expensing provisions are more generous.

• Bonus depreciation percentage increases from 50% to 100%. Businesses may deduct the full cost of qualifying property acquired and placed in service after September 27, 2017, and before January 1, 2023 (before January 1, 2024 for certain property). Unlike under prior law, the property does not have to be new — used property can also qualify. Starting in 2023 (2024 for certain property), the deduction is gradually scaled back, and it sunsets after 2026.
• Section 179 expensing limit increases from $500,000 to $1 million. The law doubles the annual expensing limit and raises the investment threshold over which the deduction begins to phase out to $2.5 million. These new limits will be adjusted for inflation after 2018. The new law also makes the Section 179 expensing election available for more types of property, including certain improvements to nonresidential real property.
• Auto depreciation limits increase more than threefold. The new annual caps are generally effective for business autos placed in service after 2017.

Other changes could have an impact.

• The deduction for business entertainment expenses is repealed, effective for expenses paid or incurred after 2017.
• The costs of certain employer-provided transportation fringe benefits, such as transit passes, are no longer deductible, also effective for expenses paid or incurred after 2017.
• For the 2018 and 2019 tax years, employers that provide paid family and medical leave may claim a credit for a portion of the expense (requirements apply).
• The domestic production activities deduction is repealed, effective for 2018 and later tax years.

These are just highlights of some of the changes included in the Tax Cuts and Jobs Act of 2017. Please consult a qualified tax advisor for more detailed information about how the law’s provisions may apply to your business and personal tax situation.

Are you an individual or business owner who’s interested in lowering your tax burden? Call Newton Sankey & Co. at 631-474-2500 and ask to speak to a tax accountant now or request a consultation online and we’ll contact you.

Source/Disclaimer:

This communication is not intended to be tax advice and should not be treated as such. You should contact your tax professional to discuss your specific situation.