Growing your business with a new partner: Here are some tax considerations
There are several financial and legal implications when adding a new partner to a partnership. Here’s an example to illustrate: You and your partners are planning to admit a new partner. The new partner will acquire a one-third interest in the partnership by making a cash contribution to the business. Assume that your basis in […]
Pay attention to the tax rules if you turn a hobby into a business
Many people dream of turning a hobby into a business. You probably won’t have any tax problems if your new business is profitable over a certain period of time. But what if the venture consistently generates losses (deductions exceed income) and you claim them on your tax return? In an audit, the IRS may say it’s a hobby (an activity not engaged in for profit) rather than a business. Then you can’t deduct losses. There are 2 ways to avoid the hobby loss rules: 1) Show a profit in at least 3 out of 5 consecutive years (2 out of 7 years for certain horse businesses). 2) Run the venture in a way that shows you intend to turn it into a profit maker rather than a hobby. Contact us to learn more.
When partners pay expenses related to the business
It’s not unusual for a partner to incur expenses related to the partnership’s business. This is especially likely to occur in service partnerships such as an architecture or law firm. When a partner can be reimbursed for business expenses under a partnership agreement or standard operating procedures, the partner should turn them in for reimbursement. Otherwise, the partner can’t deduct the expenses on his or her tax return. On the partnership side, the business should have a written firm policy that clearly states what will and won’t be reimbursed, including home office expenses if applicable. (This applies to members of LLCs that are treated as partnerships for federal tax purposes.)
Health care self-insurance and stop-loss coverage: What business owners need to know
When businesses decide to sponsor a health insurance plan for employees, they can either buy a plan from an insurer (“fully insured”) or design, fund and manage their own plan (“self-insured”). The latter option, commonly known as “self-insurance,” offers greater control of claims and potential cost savings. But it also requires you to buy stop-loss coverage to guard against substantial unexpected or catastrophic claims. Stop-loss coverage kicks in once an individual claim and, if the self-insured policy is so designed, annual aggregate claims reach a contracted threshold known as the “attachment point.” Setting the right attachment point can be tricky. Contact us for assistance.
Watch out for “income in respect of a decedent” issues when receiving an inheritance
Most people appreciate inheritances. But in some cases, they may turn out to be too good to be true. “Income in respect of a decedent” (IRD) may create a surprise tax bill for those inheriting certain types of property. Fortunately, there may be ways to minimize the IRD tax bite. For the most part, property you inherit isn’t included in your income for tax purposes. Items that are IRD, however, do have to be included, although you may also be entitled to a deduction on account of them. One common IRD item is the decedent’s last paycheck, received after death. Other common IRD items include pension benefits and amounts in a decedent’s IRA at death. Contact us if you have questions.
When businesses may want to take a contrary approach with income and deductions
In general, businesses want to delay taxable income into future years and accelerate deductions into the current year. But they sometimes want to do the opposite. One reason might be future tax law changes that will raise tax rates. Another reason may be because you expect a pass-through entity to pay taxes at higher rates in the future. There are ways to accelerate income into the current year and delay deductions to later years. For example, sell appreciated assets that have capital gains this year rather than waiting until a future year. Or depreciate assets over several years rather than claiming big first-year Section 179 deductions or bonus depreciation deductions. Contact us for help.
Why some businesses choose to execute a pivot strategy
Under a pivot strategy, a company consciously changes its strategic focus in a series of carefully considered and executed moves. Five common situations often prompt a pivot: 1) Financial distress; valid financial statements and projections may point to the need for a major change. 2) Lack of identity; streamlining operations to focus primarily on one profitable product or service could pay off. 3) Weak demand; sometimes the market tells you when to pivot. 4) Tougher competition; if a disrupter or major player has upended the playing field, a pivot can put you back in the game. 5) Change of heart; Maybe you have a new vision you want to pursue. Contact us for help with strategic planning.
The pros and cons of turning your home into a rental
If you’re buying a new home, you may have considered keeping your current home and renting it out. This carries potential tax benefits and pitfalls. You’re generally treated as a landlord once you begin renting your home. That means you must report rental income on your tax return, but are entitled to deductions for utilities, incidental repairs, depreciation and other expenses. However, you could forfeit a big tax break if you sell the home at a profit. You can generally escape tax on up to $250,000 ($500,000 for married joint filers) of gain on the sale of a principal home. But to qualify, you must use the home as your principal residence for at least two of the five years before the sale.
Don’t have a tax-favored retirement plan? Set one up now
If your business doesn’t already have a retirement plan, it might be a good time to take the plunge. If you’re self-employed and set up a SEP-IRA, you can contribute up to 20% of self-employment earnings, with a maximum contribution of $69,000 for 2024 (up from $66,000 for 2023). If you’re employed by your own corporation, up to 25% of your salary can be contributed to your account, with a maximum contribution of $69,000 for 2024. If you’re in the 32% federal income tax bracket, making a maximum contribution could cut your federal tax bill for 2024 by $22,080 (32% × $69,000). In addition to a SEP, there are other retirement plan options. We can provide information on the best one for you.
7 common payroll risks for small to midsize businesses
If your company is well-established, you may not pay much attention to your payroll system so long as it’s running smoothly. But don’t get complacent. Here are six risks to be aware of: 1) Inaccurate recordkeeping; the FLSA requires companies to maintain employee-earnings records for at least three years. 2) Employee misclassification; be sure to know the latest rules regarding gig workers. 3) Manual processes; human error can happen. 4) Privacy violations; hackers are out there! 5) Internal fraud; segregate payroll duties as much as possible. 6) Tax and legal compliance. Contact us for help conducting a payroll audit, reviewing your payroll costs and managing your tax obligations.
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