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BUSINESS FORUM

Retirement Plans – One Size Doesn’t Fit All

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Retirement plans offer significant tax advantages to small business owners. Here is an overview of several types of plans available to small businesses, their features and restrictions. 

SEP- Simplified Employee Pension Plan– Contributions are made by the employer only, up to the lesser of 25% of employee’s compensation or $66,000 for 2023. Employees are immediately 100% vested. No loans are permitted. Withdrawals permitted anytime. Primary advantage is how simple a SEP is to administer. No need for annual IRS filing. Required Minimum Distributions (RMDs) must be withdrawn by April 1 of the year you reach age 73.

SIMPLE IRA Plans– Employees may defer income and make salary contributions. For 2023, employees may contribute up to $15,500, $19,000 if age 50 or older. If employee contributes, employers must match employee’s contribution up to 3% of his compensation. If employee doesn’t contribute, employers must make a contribution of 2% of employee’s compensation. Employees are immediately 100% vested in employer’s contribution. Loans are not permitted. Withdrawals permitted anytime. No need for annual IRS filing. RMDs must be withdrawn by April 1 of the year you reach age 73. 

401(k) Plans– Employees may make elective deferrals up to $22,500 in 2023, $30,000 if age 50 or older. Employer may make contributions to employee’s accounts. Total employer and employee contributions are limited to lesser of 100% of employee’s compensation or $66,000 in 2023, $73,500 if age 50 or older. Employees vest per plan terms. Loans may be allowed. Withdrawals may be permitted for hardships. Annual IRS filings are required. RMDs must be withdrawn by April 1 of the year you reach age 73. In contrast to a SEP or SIMPLE IRA, if you are still working, you may wait until retirement to withdraw RMDs.  

No one plan fits all. Owners need to weigh many factors. Companies with high employee turnover may not want immediate vesting. How simple is the plan to administer? Do you want the employees to contribute to the plan? Do you want to enable loans? Do employees want ability to make withdrawals? 

Which plan is suitable for your firm? Contact your tax advisor at Urbach & Avraham, CPAs. We can review your company’s goals to evaluate which plan best meets your needs.

 

 

Living, Working or Investing in Multiple States

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Taxpayers on the Go!

NY Filers Taxpayers who live, work or have real-estate in NY must file a NY resident or non-resident return. They may benefit from itemizing deductions for NY even if they can’t itemize for the IRS. The NY threshold to itemize is substantially lower than the federal threshold, making it easier to itemize for NY. The US standard deduction in 2021 for married filing joint was $25,100 and $27,800 for married seniors. In contrast, the 2021 NY standard deduction for married couples and married seniors was only $16,050.

Additionally, several deductions are allowed on the NY return which are disallowed or limited on the federal return. Your steep NJ real estate taxes are limited to a $10,000 deduction on the US return but are not limited on the NY return! A deduction up to $10,000 is allowed for college tuition for each eligible student.

These deductions are allowed for NY subject to 2% of your federal adjusted gross income:

  1. Unreimbursed employee expenses
  2. Tax preparation fees
  3. Investment/brokerage fees

Real estate in other states? Have a loss from real estate in other states? There are several reasons why one should file a non-resident return even when there is a loss in that state.

  1. The non-resident state may require that a return be filed based on gross receipts of the real estate investments, even when there is a net loss.
  2. The non-resident state may allow loss carryforwards. These losses will offset future rental income from the property. Upon the sale of the property, the losses will reduce the capital gain.

Credit on the resident return for taxes paid to other states Frequently overlooked!

  1. Make sure that sources of income/loss are correctly grouped on the resident return which may differ greatly from the IRS. This determines the credit for taxes paid to other states.
  2. The credit on the resident return for other jurisdictions should also include taxes paid to other cities, such as Philadelphia.

When filing in non-resident states, review the tax saving options which could be substantial. Your Google search isn’t a substitute for our years of experience with multi-state tax returns. Contact one of our tax professionals for guidance at (732) 777-1158 or  info@ua-cpas.com.

 

Unfiled tax returns?

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“Better late than never” applies when it comes to filing income tax returns.

Here’s what you should know. 

Maybe you didn‘t get your 1040 done in time in a previous year and figured you couldn’t still file your income taxes. Or you thought you owed money that you didn’t have. The IRS knows that people file late sometimes, and it has systems in place to deal with that.

It’s absolutely critical that you file every year, for a variety of very good reasons. Failure to file means that you might:

  • Incur interest and penalties.
  • Lose a refund (you can claim a refund for up to three years after the return due date).
  • Reduce your Social Security benefits. If you’re self-employed and don’t file, you will not be credited for income that year.
  • May not qualify for credit and lending opportunities.
  • Certain professional licenses (CPA, legal) may be revoked in some states.
  • May be prohibited from serving in public office

Extenuating circumstances? Don’t Panic!

Were you or a family member extremely ill or disabled? Did you suffer severe hardships due to natural disasters? If you didn’t file because of hardships, we at Urbach & Avraham, CPAs can assist you in requesting an abatement from the IRS of penalties imposed due to the late filing.

File It ASAP

As soon as you realize you have a past-due tax return, you should prepare and file it.

If you can’t pay what you owe when you file, you can ask for an additional 60-120 days to fulfill your financial obligation. If that’s not enough time and/or you’re going to need to pay in installments, you can apply for an IRS Payment Plan.

What If You Don’t File?

The IRS may file a substitute return for you. If this happens, you may not get all of the deductions and credits that you should. We advise you to still file a tax return that includes everything, even if the IRS already prepared a substitute return. The IRS usually adjusts the return they created to reflect credits, deductions, and exemptions when they’re made aware of them.

The IRS will notify you if they file a substitute return. If you don’t’ file or submit a petition to Tax Court, the IRS will proceed with its proposed assessment, which will trigger a tax bill. Failure to pay it will result in your account going into the collection process. This can include the filing of a federal tax lien or a levy on your bank account or wages. If you continue to ignore the bill, you may be subject to additional penalties and/or criminal prosecution.

If prior year information is required, we can assist you in obtaining IRS transcripts. These transcripts provide all sources of payors of wages, interest, dividends, pensions and proceeds from sale of securities and real estate.

On Your Mark, Get Set, File!

Any correspondence from the IRS can create anxiety, as can realizing you missed a tax deadline. At Urbach & Avraham, CPAS, we encourage you to contact us if you’re concerned about a return you didn’t file. We can help you understand what your options are and how to proceed. We can assist you in abating penalties and obtaining IRS Transcripts if necessary. We can also help with tax planning throughout the year, so you don’t have to deal with a past-due return again.

 

Sole Proprietor vs S-Corporation     

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Converting from Sole Proprietor to Sub-S has both tax savings and risks. Review them before making the move.  The structure you choose affects how your business is taxed and the degree to which you can be personally liable. Here’s a comparison of these two popular business structures.

Sole Proprietor This is a classic structure for single-owner businesses. No separate business entity is formed. A sole proprietorship does not limit liability, but insurance may be purchased. You report your business income and expenses on your personal income tax return (Schedule C of Form 1040). Net earnings the business generates are subject to both self-employment taxes and income taxes. Sole proprietors may have employees but don’t take paychecks themselves.
S-Corporation A corporation is a separate legal entity that files its own corporate income tax returns. Shareholders generally are protected from personal liability but can be held responsible for repaying any business debts they’ve personally guaranteed. If you make a “Subchapter S” election, shareholders will be taxed individually on their share of corporate income. This S-Corporation structure generally avoids federal income taxes at the corporate level.
Are there additional costs to being an S- Corporation? The switch from a Schedule C to an S-corporation increases the costs of doing business. Here are some of the additional expenses:
• Minimum state taxes
• Accounting fees for preparation of separate corporate tax return
• Payroll servicing costs -if business had no employees as a Schedule C, the owner now is required to receive a salary
• Unemployment tax on owner’s salary, in NJ is almost $1,000

Are there any tax savings? The tax you save is the steep 15.3% self-employment (SE) tax. You pay it on the entire sole proprietor earnings. You only pay the SE tax on the salary portion of your S-Corp earnings. For example, if there is net income of $142,800 (the Social Security max wage base for 2021) and you pay yourself a salary of $50,000, it saves you 15.3% of the difference or approximately $14,000. The greater the difference between your wages and net income, the greater the savings of the SE tax.

Both sole proprietorships and S-Corporations generally offer no difference in the calculation of income tax only the SE tax.

Any caveats? There are many considerations. Here are the main concerns:
• The IRS expects you to take a “fair” salary from your business, known as Reasonable Compensation. E.g., A solo physician or engineer with net income of $200,000 can’t justify a salary of only $50,000. Determination of reasonable compensation is complex and based on many factors. At Urbach & Avraham we make these calculations for use in business valuations in both litigation and non-litigated matters. We can assist you in determining a defensible figure should you decide to operate as a Sub-S Corporation.

More often than not, an S corporation has only one owner. This allows the owner to set salaries for employees, including his own salary. The IRS is sensitive to the potential for manipulating the tax laws in this area and is applying extra scrutiny to the salaries of S corporation owners.
• If you are injured or disabled, you can’t claim lost wages of $200,000 but rather only the W-2 wages of $50,000
• Pension contributions are only made on wages of an S-corporation, not on the net income. The lower the wages, the smaller the retirement benefits
• Your Social Security benefits are calculated on an average of 35 years of wages. The lower the wages, the lower the benefits
• Your Qualified Business Interest Deduction may decrease or increase – based on various factors

Which is suitable for my business? Schedule C or S-Corporation?
Different business entities offer different advantages. You should consider all of them and speak to a tax professional at Urbach & Avraham, CPAs to determine which advantages can help you the most given your current circumstances. You may discover, over time, as your circumstances change, so, too, does your choice of preferred business entity.

Tax Tips for Newly Married Couples

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Checklist of tax and financial items for newly married couples:

Withholding – Newly-wed couples should consider changing their withholding. They should give their employers a new Form W-4, Employee’s Withholding Allowance. If both spouses work, they may move into a higher tax bracket or be affected by the Additional Medicare Tax.

They can use the IRS withholding estimator on www.irs.gov to help complete a new Form W-4.

Name and Address Change – When a name changes through marriage, it is important to report that change to the Social Security Administration. The name on your tax return must match what is on file at the SSA. To update information, taxpayers should file Form SS-5, Application for a Social Security Card, available at www.ssa.gov . If marriage includes a change of address, one should inform the IRS by sending Form 8822, Change of Address, available at www.irs.gov.

Filing Status – Married couples can file their federal income taxes jointly or separately each year. Usually, married filing joint is more beneficial, however couples should calculate the tax both ways to see which works best. If a couple is married as of Dec. 31, they are married for the whole year for tax purposes.

Prenuptial Planning – Part of the 2017 massive tax bill was the elimination of taxable and deductible alimony—which was in the tax code since the 1940s! As a result, prenuptials were turned on their heads unless they permitted a change for tax law changes. It is wise today for the pre-nuptial agreement to allow for changes in the tax treatment of alimony. Attorneys and their clients may consider wording which triggers changes automatically in the event of substantive changes in the tax treatment of alimony. Finally, not all states with an income tax follow the federal law. State tax law needs to be considered also. Litigation Support Partner, Jeff Urbach, works closely with divorce attorneys who can assist you with pre-nuptial agreements.

Marriage after Divorce? If a couple divorces and doesn’t change their wills, NJ statute dictates the outcome. Divorce revokes any dispositions of property made between former spouses prior to divorce. Will provisions leaving property to former spouse have no effect and property passes to next beneficiary named in will. After divorce, and especially before remarriage, one should consult with an elder law attorney. We work closely with many competent estate attorneys whom we can recommend.

Retirement Accounts – If a former spouse was named as the beneficiary of a qualified retirement plan, this will remain intact despite a divorce. After divorce, and especially before remarriage, one should review the beneficiary designations of all retirement accounts.

Everyone’s tax and financial situation is different. Please contact a tax professional at Urbach & Avraham, CPAs about your tax options. Look before you leap!