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Pamela Avraham

Avoid Paying Corporate Income Tax Rates with an S Corporation

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One reason small business owners like the S corporation tax structure is because profits generally aren’t taxed at the corporate level.

Tax Savings

They “pass through” and are taxed only once to the individual shareholders. S corporation shareholders also can take money out of the company free of federal employment and self-employment taxes. But only up to a point.

Put Yourself on the Payroll

It can be tempting for S corporation owner/employees to underpay themselves to keep employment taxes low and then supplement their income with distributions or other payments that aren’t subject to employment taxes.

But the IRS is on the lookout for owners reporting low or no income. So if you’re an owner/employee, make sure your compensation is “reasonable” for the services you provide. If it isn’t, the IRS may reclassify your “other” compensation as salary and assess a stiff penalty (100% of the unpaid taxes) for failure to remit payroll taxes.

Comparable Is Key

There is no set definition of reasonable compensation. However, you can be reasonably certain that such factors as your duties and responsibilities, how much time and effort you put into your business, and how much training and experience you’ve had should be included when determining your compensation. To get an idea of how much similar businesses are paying for comparable services, you can go to www.bls.gov, a website with salary information hosted by the U.S. Bureau of Labor Statistics.

The topic of S corporation compensation has become an IRS audit issue. Avoid problems by paying yourself a reasonable salary.

For more help with individual or business taxes, connect with us today. Our team can help you with all your tax issues, large and small.

An S Corporation Loss Equals a Personal Tax Deduction

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Business owners aren’t in business to lose money. So there’s not much to like about a nonprofitable year. For a shareholder in an S corporation, however, a down year can have an upside

Tax Savings

–– the corporate loss may give rise to a personal tax deduction.

Standing between an S shareholder and the loss deduction is

a tricky tax computation known as “adjusted basis.” Under the tax law, a shareholder’s loss deduction is limited to the shareholder’s adjusted basis in his/her corporate stock and in any debt the company owes the shareholder.

What is adjusted basis, anyway? Essentially, it’s a figure that tracks the shareholder’s investment in the company for tax purposes. The basis number changes every year to account for any money flowing between the company and the shareholder — distributions, capital contributions, loans, and loan repayments — as well as for the shareholder’s allocated share of corporate income or loss.

If a net operating loss is anticipated for the year, S shareholders should find out whether they will have enough basis to benefit from the projected loss deduction. If not, it may be possible to increase basis by making a contribution to capital or by loaning the company money before year-end.  Our tax professionals can offer guidance so that the transaction will pass IRS muster.

Home Office Tax Tips

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Working from home can potentially deliver some attractive tax advantages.

Your New Home Office!

If you qualify for the home office deduction, you can deduct all direct expenses and part of your indirect expenses involved in working from home.

Direct expenses are costs that apply only to your home office. The cost of painting your home office is an example of a direct expense. Indirect expenses are costs that benefit your entire home, such as rent, deductible mortgage interest, real estate taxes, and homeowner’s insurance. You can deduct only the business portion of your indirect expenses.

What Space Can Qualify?

Your home office could be a room in your home, a portion of a room in your home, or a separate building next to your home that you use to conduct business activities. To qualify for the deduction, that part of your home must be one of the following:

Your principal place of business. This requires you to show that you use part of your home exclusively and regularly as the principal place of business for your trade or business.

A place where you meet clients, customers, or patients. Your home office may qualify if you use it exclusively and regularly to meet with clients, customers, or patients in the normal course of your trade or business.

A separate, unattached structure used in connection with your trade or business. A shed or unattached garage might qualify for the home office deduction if it is a place that you use regularly and exclusively in connection with your trade or business.

A place where you store inventory or product samples. You must use the space on a regular basis (but not necessarily exclusively) for the storage of inventory or product samples used in your trade or business of selling products at retail or wholesale.

Note: If you set aside a room in your home as your home office and you also use the room as a guest bedroom or den, then you won’t meet the “exclusive use” test.

Simplified Option

If you prefer not to keep track of your expenses, there’s a simplified method that allows qualifying taxpayers to deduct $5 for each square foot of office space, up to a maximum of 300 square feet.

Inherited an IRA? Look Before you Leap!

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If you inherit a traditional individual retirement account (IRA), you also may inherit a large income-tax burden. How you choose to receive the money will be a

Do Not Pass GO without a Consultation

big factor. If you don’t need the money right away, there are ways you can defer or spread out the tax burden.

When You Are the Surviving Spouse

If you are the deceased IRA owner’s surviving spouse and beneficiary, you have several ways to defer income taxes on the money. One way is to roll over the inherited IRA into your own new or existing IRA. A rollover allows the assets to continue to grow tax deferred until you reach age 70½. Then, annual IRA withdrawals become mandatory.

When You Are Not the Surviving Spouse

The IRA distribution rules differ when you aren’t the spouse. But you can still spread out the tax burden. One option may be for you to receive annual distributions from the IRA based on your life expectancy. This will spread out the distributions — and the taxes — over a number of years. The younger you are, the longer you can stretch out the payments, and the longer the money can stay in the account and benefit from potential tax-deferred growth. This particular option is not available if the account had no designated beneficiary.

Inherited IRAs are subject to potential risks, such as tax law changes and the impact of inflation.

Give us a call before you make any moves, so we can help you determine the right course of action for you.

Tax Ramifications of Inheriting your Spouse’s IRA

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No one wants to think about losing a spouse, but it’s good to understand how finances work when one does. For example, inheriting an IRA from your spouse can get complicated. Consider the following points.

Age is important

It generally makes sense to roll over an IRA inherited from a spouse to your own IRA if you’re age 59½ or older when you inherit it. Why? You can withdraw money from your IRA if you need to without worrying about the 10% early withdrawal penalty. And the rules for taking annual minimum distributions from the IRA won’t apply until you turn age 70½.

If you’re younger than age 59½, you may be better off setting up an inherited IRA in your deceased spouse’s name. Withdrawals from an inherited IRA aren’t subject to the 10% early withdrawal penalty regardless of the beneficiary’s age.

With an inherited IRA, most beneficiaries must take required minimum distributions every year based on their life expectancies (generally starting the year after the IRA owner dies). However, with an IRA inherited from a spouse who dies before age 70½, the surviving spouse can postpone taking required minimum distributions until the year the deceased spouse would have turned age 70½.

In either scenario, withdrawals will be subject to federal (and possibly state) income tax unless they’re qualified Roth IRA distributions.

Look at the big picture

Before making any decisions, meet with one of our financial professionals to review your overall financial situation. For example, maybe you’d be better off spending life insurance proceeds than taking money from an IRA prematurely.  Also, we work together with your investment advisor to review how the IRA assets are invested in terms of your financial needs and overall investment program.

To learn more about tax rules and regulations, give us a call today. Our knowledgeable and trained staff is here to help.

Still Time to Save on 2018 Estate and Trust Income Taxes

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  Distribute by March 6, 2019 to Reduce High Estate & Trust Income Taxes 

Tax Savings for Estates and Trusts

If you are the executor of an estate or the trustee of a trust, you should know that egregiously high income tax rates apply to estates and trusts at very low levels of income.  Despite the new tax act, in 2018, for estates and trusts, a 37% income tax rate as well as the 3.8% Net Investment Income (NII) tax kicks in at $12,500 of income. That’s not very high.   For example, let’s say an estate has income of $212,500. The tax on the $200,000 (income in excess of the $12,500 threshold), at 40% equals a tax of $80,000. Ouch! 

Help! Is there any hope?

Yes, the estate and trust only pays tax on what’s not distributed. Distributions lower the income tax for the trust and at the same time increase the recipient’s personal income tax. However, individuals do not pay the highest rates unless they are wealthy. In our example, if there are four beneficiaries and each receives $50,000 (one-fourth of the $200,000) many individuals will only pay 10% – 24% on that $50,000 instead of 40%.  Potential tax saving could range from $32,000 to $60,000 depending on the individual tax bracket of each beneficiary.

Is there anything I can do?

It’s not too late. There’s a rule allowing distributions made in the first 65 days of the next year to be treated as if made in the preceding year. A special election must be made on the Fiduciary Income Tax Return.  This year’s deadline is          March 6, 2019. Executors and trustees should act soon to take advantage of this opportunity for substantial tax savings.

Please contact us for assistance with making distributions or any other tax related questions about managing a trust or estate.