Is your corporation eligible for the dividends-received deduction?
There’s a valuable tax deduction available to a C corporation when it receives dividends. The “dividends-received deduction” reduces or eliminates an extra level of tax on dividends received. As a result, a corporation will typically be taxed at a lower rate on dividends than capital gains. Ordinarily, the deduction is 50% of the dividend, meaning only 50% of the dividend received is effectively subject to tax. For example, if a corporation receives a $1,000 dividend, it includes $1,000 in income, but after the $500 dividends-received deduction, its taxable income from the dividend is only $500. The tax break may be higher or lower, depending on the circumstances, and other rules apply.
Simple ways to make strategic planning a reality
The term “strategic planning” is so broad. Perhaps you and your leadership team often find yourselves overwhelmed by all the directions you could go in. Here are a few simple ways to make strategic planning a reality: 1) focus on who you already know; that is, consider developing deeper relationships with customers or partnering with other businesses, 2) dig deeper into social media to highlight specific products or services, and better familiarize the buying public with your brand and culture, and 3) reevaluate your pricing strategy, delving into possibilities such as bundling or subscriptions. Contact us for help assessing the profitability impact of your strategic planning ideas.
Social Security benefits: Do you have to pay tax on them?
If you’ve begun receiving Social Security benefits, you may wonder: Will my benefits be taxed? It depends on your other income. If you’re taxed, up to 85% of your payments could be hit with federal income tax. If you file a joint tax return and your “provisional income,” plus half your Social Security benefits, isn’t above $32,000 ($25,000 if unmarried), none of your benefits will be taxed. If it falls above those amounts, you must report a certain percentage of your benefits as income. If you know your Social Security benefits will be taxed, you can arrange to have the tax withheld from the payments. Otherwise, you may have to make estimated tax payments. Contact us for more information.
Help when needed: Apply the research credit against payroll taxes
If your small business or start-up is planning to claim the research tax credit, here’s an option. Subject to limits, you can elect to apply all or some of research tax credits that you earn against payroll taxes instead of your income tax. Many new businesses, even if they have some cash flow, or even net positive cash flow and/or a book profit, pay no income taxes and won’t for some time. Thus, there’s no amount against which business credits, including the research credit, can be applied. On the other hand, a wage-paying business, even a new one, has payroll tax liabilities. The payroll tax election is an opportunity to get immediate use out of the research credits that a business earns.
Is it a good time for a Roth conversion?
The stock market downturn has caused the value of some retirement accounts to decrease. But if you have a traditional IRA, a downturn may provide a valuable opportunity: It may allow you to convert to a Roth IRA at a lower tax cost. Roth IRA qualified withdrawals are tax free and you don’t have to begin taking RMDs after you reach age 72. But if you convert to a Roth, you’ll owe income tax on the converted amount. If your traditional IRA has lost value due to a market downturn, converting to a Roth now will minimize the tax, and you’ll avoid tax on future appreciation. Interested? Contact us to see whether a conversion is right for you.
Calculating corporate estimated tax
The next quarterly estimated tax payment deadline is June 15 for individuals and businesses so it’s a good time to review the rules for computing corporate federal estimated payments. You want your business to pay the minimum amount of estimated taxes without triggering the penalty for underpayment of estimated tax. The required installment of estimated tax that a corporation must pay to avoid a penalty is the lowest amount determined under each of these four methods: The current year method, the preceding year method, the annualized income method or the seasonal income method. Contact us to determine which method is best for your corporation.
Dodge the tumult with a buy-sell agreement
A business with multiple owners can be thrown into tumult if one of the owners decides to leave, gets divorced, becomes disabled or dies. For this reason, such companies should strongly consider implementing a buy-sell agreement. This is a legal document that spells out how an owner’s share will be valued and transferred following a “triggering event.” Generally, buy-sell agreements are structured as either: 1) cross-purchase, under which the remaining owners buy the departing owner’s shares, or 2) redemption, under which the business entity itself buys the shares. It’s important to understand the tax impact of both options. Contact us for help creating or reviewing a buy-sell agreement.
3 summertime marketing ideas for 2022
Summer is on the way and, with it, a variety of seasonal marketing opportunities for small to midsize companies. Here are three ideas to consider: 1) support summer camps and local sports by arranging a sponsorship that gets your name and logo on t-shirts and other items, 2) attend outdoor festivals or other public events where you can set up a booth and hand out samples, brochures and branded souvenirs, and 3) heat up your social media strategy with summer-themed fun, such as a vacation photo contest or posts showing your team doing outdoor charity work. We can help you assess the costs of potential marketing strategies and measure the return on investment of any you pursue.
The ins and outs of Series EE savings bond taxation
Do you have Series EE savings bonds purchased years ago? You may wonder how the interest is taxed. EE bonds don’t pay interest currently. Instead, accrued interest is reflected in their redemption value. (Owners can elect to have interest taxed annually.) EE bond interest isn’t subject to state income tax. And using the money for higher education may keep you from paying federal tax on it. Unfortunately, the law doesn’t allow for the tax-free buildup of interest to continue forever. When the bonds reach final maturity, they stop earning interest. If you own bonds reaching final maturity this year, action is needed to assure that there’s no loss of interest or unexpected tax consequences.
Partners may have to report more income on tax returns than they receive in cash
If you’re a partner in a business, you may have come across a situation that’s puzzling. In a given year, you may be taxed on more partnership income than was distributed to you from the partnership in which you’re a partner. Why? It’s due to the way partnerships and partners are taxed. Unlike C corporations, partnerships aren’t subject to income tax. Instead, each partner is taxed on partnership earnings whether or not they’re distributed. And if a partnership has a loss, it’s passed through to partners. (However, various rules may prevent partners from currently using their share of a partnership’s loss to offset other income.) Contact us if you’d like to discuss how a partner is taxed.