Solo business owner? There’s a 401(k) for that
If you own a successful small business with no employees, it may be time to set up a retirement plan. With a solo 401(k), the self-employed are able to make large annual deductible contributions to a tax-advantaged retirement account. For 2023, you can make an “elective deferral contribution” of up to $22,500 of your net self-employment income. If you’re 50 or older, you can make another $7,500 catch-up contribution. You can also make a separate “employer” contribution. One downside: Lots of upfront paperwork and ongoing administrative complexity. A solo 401(k) may be a good choice if you’re able to make large contributions, but there are other plans to consider. Contact us for more info.
Use an S corporation to mitigate federal employment tax bills
If you own an unincorporated small business, you know your self-employment (SE) tax bills are high. In 2023, SE tax is imposed at a rate of 15.3% on the first $160,200 of net SE income. This includes 12.4% for Social Security tax and 2.9% for Medicare tax. Above $160,200, Medicare tax continues at a 2.9% rate on all income before increasing to 3.8% at higher income levels due to the 0.9% additional Medicare tax. In some circumstances, you may want to become an S corp. to save on employment taxes You can then pay modest, but justifiable, salaries to shareholder-employees and pay out most or all remaining corporate cash flow in federal-employment-tax-free shareholder distributions.
That email or text from the IRS: It’s a scam!
“Thousands of people have lost millions of dollars and their personal information to tax scams,” according to the IRS. The scams may come in through email, text messages, telephone calls or regular mail. Criminals regularly target both individuals and businesses and often prey on the elderly. Important: The IRS will never contact you by email, text or social media channels about a tax bill or refund. Most IRS contacts are first made through regular mail. Be on guard for any suspicious messages. Don’t open attachments or click on links. Contact us if you get an email about a tax return we prepared. You can also report suspicious emails that claim to come from the IRS at phishing@irs.gov.
Starting a business? How expenses will be treated on your tax return
Government officials saw a large increase in the number of new businesses launched during the COVID-19 pandemic. And the U.S. Census Bureau reports that business applications are still increasing slightly (up 0.4% from April 2023 to May 2023). Entrepreneurs often don’t know that many start-up expenses can’t be currently deducted. Some likely have to be amortized over time. You might be able to elect to deduct up to $5,000 currently, but the deduction is reduced by the amount by which your total start-up costs exceed $50,000. You can also deduct $5,000 of the organizational costs of creating a corporation or partnership. Contact us if you have tax questions about a start-up business.
Strong billing processes are critical to healthy cash flow
Some companies look at billing mistakes as part of the “cost of doing business.” Top-performing companies, however, regularly check on their billing processes to ensure they’re as efficient, effective and accurate as possible. Be sure to listen to customer complaints and track errors so you can identify trends and implement effective solutions. Common mistakes include billing incorrect amounts and failing to apply promised discounts or special offers. For invoice-based businesses, revisit industry norms before setting payment schedules. If you haven’t already, consider sending invoices electronically and letting customers pay online. Doing so greatly speeds up payment. Contact us for help.
Inheriting stock or other assets? You’ll receive a favorable “stepped-up basis”
Are you planning your estate or have you inherited assets recently? You may not know the “basis” of assets for tax purposes. Under the current rules (known as the “step-up” rules), an heir receives a basis in inherited property equal to its date-of-death value. For example, if your grandmother paid $600 for stock in 1940 and it’s worth $1 million at her death, the basis is stepped up to $1 million for your grandmother’s heirs, and that large gain will escape federal income tax. Other rules and limits may apply. For example, in some cases, a deceased person’s executor may be able to make an alternate valuation election. Contact us for help with estate planning and taxes.
Are you married and not earning compensation? You may be able to put money in an IRA
If one spouse in a married couple doesn’t earn compensation, the couple may not be able to save as much as they need for retirement. An IRA contribution is generally only allowed if you earn compensation. But an exception exists. A spousal IRA allows a contribution for a spouse who doesn’t earn compensation. For 2023, an eligible couple can contribute $6,500 to an IRA for each spouse ($7,500 if the spouse will be 50 by the end of the year). However, if the working spouse is an active participant in an employer retirement plan, a deductible contribution can be made to the nonparticipant spouse’s IRA only if the couple’s adjusted gross income doesn’t exceed a certain threshold.
The Trust Fund Recovery Penalty: Who can it be personally assessed against?
If you own or manage a business, there’s a harsh tax penalty that you could be at risk for paying personally. The Trust Fund Recovery Penalty (TFRP) applies to any willful failure to collect and pay over Social Security and income taxes required to be withheld from employees’ wages. Taxes are considered government property and employers hold them in “trust” until they’re paid over to the IRS. The penalty is also sometimes called the “100% penalty” because the people found liable and responsible for the taxes will be penalized 100% of the taxes due. The IRS is aggressive in enforcing the TFRP and the amounts are usually substantial so never “borrow” from withheld taxes. Questions? Contact us.
Cultivate connections with a well-used CRM system
Customer relationship management (CRM) software enables businesses to gather, track, manage and analyze customer-related data in a multitude of ways. It’s designed to give staff access to comprehensive information about individuals and businesses with an established connection to your company as well as those of interest to you. But one of the potential risks of buying CRM software is that it may wind up being underused. To get an adequate return on investment, it’s essential to get everyone’s buy-in. Also provide plenty of training, both when implementing new software and when maintaining an existing system. Contact us for help measuring and managing your company’s technology costs.
The best way to survive an IRS audit is to prepare
The IRS recently released audit statistics for fiscal year 2022 and few taxpayers had their returns examined. Overall, just 0.49% of individual returns were audited. Historically, this is very low. However, even though a small percentage of returns are being audited these days, that will be little consolation if yours is one of them. Plus, the Biden administration has made it a priority to go after high-income taxpayers who don’t pay what they owe. The best way to survive an IRS audit is to prepare. On an ongoing basis, maintain documentation (invoices, bills, canceled checks, receipts, etc.) for items reported on your returns. Contact us if you receive an IRS audit letter.