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Archives for April 2024

Alternative Tax Strategies: When Businesses Should Consider Opposite Approaches to Income and Deductions

Ken Botwinick, CPA | 04/24/2024

Businesses typically seek to delay recognizing taxable income into future years and accelerate deductions into the current year to minimize their current tax liabilities. However, there are instances where the opposite strategy may be advisable, particularly in anticipation of tax law changes that could increase tax rates.

One such scenario is the proposed increase in corporate federal income tax rates by the Biden administration, potentially raising the flat rate from 21% to 28%. Similarly, discussions about raising individual federal income tax rates could affect noncorporate pass-through entities, where income is taxed on personal returns.

If there’s a belief that income could be subject to higher tax rates in the future, accelerating income recognition into the current tax year can capitalize on the current lower rates. Conversely, postponing deductions to a later tax year, when rates are expected to be higher, can maximize their tax-saving impact.

To accelerate income recognition:

  • Consider selling appreciated assets with capital gains in the current year instead of waiting.
  • Review depreciable assets and sell fully depreciated ones to trigger taxable gains now.
  • Elect out of installment sale treatment for gains to be recognized in the year of sale.
  • Opt for taxable transactions instead of tax-deferred exchanges like Section 1031 for real property.

To postpone deductions:

  • Delay purchasing capital equipment and fixed assets that would lead to depreciation deductions.
  • Avoid claiming large first-year Section 179 or bonus depreciation deductions and spread out asset depreciation over time.
  • Capitalize professional fees and salaries associated with long-term projects to spread out costs.
  • Purchase bonds at a discount to increase interest income in future years.
  • Delay inventory shrinkage write-downs and other deductions to years with higher tax rates.

These strategies can be complex and tailored to your specific business circumstances. It’s recommended to consult with a tax advisor to determine the best approach for optimizing your tax planning amidst potential tax rate changes.

© 2024

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Establish a Tax-Advantaged Retirement Plan for Your Business Today

Ken Botwinick, CPA | 04/18/2024

Considering a Retirement Plan for Your Business: Tax Advantages and Planning Strategies

If your business has yet to establish a retirement plan, now presents a prime opportunity to do so. Current retirement plan regulations offer substantial benefits through tax-deductible contributions.

For instance, if you’re self-employed, setting up a SEP-IRA allows you to contribute up to 20% of your self-employment earnings, with a cap of $69,000 for 2024 (increased from $66,000 in 2023). For those employed by a corporation they own, contributions of up to 25% of their salary are permissible, also up to $69,000. In a 32% federal income tax bracket, maximizing these contributions could potentially reduce your 2024 tax liability by as much as $22,080 (32% × $69,000).

Exploring Your Options

Various retirement plan options are available for small businesses, including:

  • 401(k) plans, which can be tailored for sole proprietors (often referred to as solo 401(k)s),
  • Defined benefit pension plans, and
  • SIMPLE-IRAs.

The deductible contributions permitted by these plans can vary, depending on your specific circumstances. For instance, in 2024, participants in a 401(k) plan can contribute $23,000, with an additional $7,500 allowed as a catch-up contribution for those aged 50 or older.

Consider Timelines

Thanks to a provision introduced by the 2019 SECURE Act, qualified employee retirement plans (excluding SIMPLE-IRAs) can now be adopted by the due date (including extensions) of the employer’s federal income tax return for the year of adoption. This change allows deductible employer contributions to be made by this same deadline, with deductions claimed on the return for the adoption year.

Key Details

It’s important to note that this provision does not affect the October 1 deadline for establishing a SIMPLE-IRA plan, nor does it override requirements mandating certain plan provisions be active during the plan year, such as those governing employee elective deferral contributions in a 401(k) plan.

For example, for a sole proprietorship operating on a calendar tax year, the deadline to establish a SEP-IRA for the 2023 tax year, with extensions, is October 15, 2024. Similarly, contributions for the 2023 tax year must be made by this date. Looking ahead to the 2024 tax year, the deadline for both establishing a SEP and making contributions is October 15, 2025, with extensions.

While it’s permissible to delay setting up a retirement plan until next year (excluding SIMPLE-IRAs), taking action now as part of your tax strategy can prove advantageous. We can provide further insights into small business retirement plan options tailored to your needs, ensuring compliance with any applicable contribution requirements for your employees.

© 2024

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Effective Recordkeeping and Valid Business Expenses: Mitigating Challenges in IRS Audits

Ken Botwinick, CPA | 04/17/2024

Operating a business, whether established or newly launched, necessitates diligent record-keeping of income and expenses. It is crucial to accurately record expenses to maximize eligible tax deductions and to effectively substantiate reported amounts in the event of an IRS audit.

The IRS offers flexibility in choosing a recordkeeping system that best suits your business needs, emphasizing clarity in documenting income and expenses. However, strict guidelines govern the deduction of legitimate expenses for tax purposes. Certain expenses, such as those related to automobiles, travel, meals, and home offices, require meticulous recordkeeping due to specific requirements or limitations on deductibility.

Key to deductibility is establishing that a business expense is both “ordinary and necessary” for profit generation. A recent case serves as a poignant example where a married couple faced disallowed deductions primarily due to expenses being deemed personal and lacking sufficient documentation.

In this instance, the husband, a salaried executive, and his wife established separate businesses as S and C corporations, respectively. While conducting business meetings at properties they owned, the couple charged rent to their businesses. However, during an IRS audit, deductions for travel expenses were disallowed due to reconstructed rather than contemporaneous travel logs. Similarly, payments from the S corporation to the C corporation were disallowed as they were used for personal family expenses rather than marketing purposes. The rent payments for business use of their homes were also deemed excessive and not reflective of fair market rates.

Despite these challenges, the couple successfully defended deductions for contributions to their sons’ 401(k) accounts. Documentation proving the sons’ involvement in business operations played a crucial role in upholding these deductions.

Lessons drawn from this case emphasize the importance of segregating personal and business expenses and maintaining meticulous records. It is advisable to conduct all business transactions through dedicated business accounts and to retain comprehensive documentation to support tax returns and substantiate deductible business expenses during potential IRS audits.

For further guidance on effective business recordkeeping practices or inquiries regarding tax compliance, please feel free to contact us.

© 2024

Q&A

What defines an “ordinary and necessary” business expense?

An expense is deemed “ordinary and necessary” if it is customary in your industry and essential for your business operations. It should be reasonable in amount and directly contribute to generating income or facilitating business operations. Essentially, such expenses are typical within your trade and vital for your business’s effective functioning.

Why is maintaining good records of business expenses important?

Maintaining accurate records of business expenses is crucial, particularly during IRS audits. Comprehensive documentation substantiates claimed deductions, validating the legitimacy of business expenses. This practice significantly reduces the risk of penalties or fines due to inaccuracies or non-compliance. Furthermore, well-kept records streamline the audit process, enabling prompt and effective responses to IRS inquiries.

What are the implications if the IRS disallows business expenses during an audit?

When the IRS disallows business expenses during an audit, it signifies that certain expenses claimed on your tax return are not recognized as deductible. Consequently, you may face additional taxes, penalties, and interest related to the disallowed expenses. It is essential to carefully review the audit findings, consider appealing the decision, or furnish supplementary documentation to support your claimed expenses. In some instances, consulting with a tax professional may be necessary to navigate discussions and negotiations with the IRS.

These measures aim to resolve discrepancies and ensure compliance with tax regulations, safeguarding your business against potential financial repercussions.

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2024 Second Quarter Tax Calendar: Important Deadlines for Businesses and Employers

Ken Botwinick, CPA | 04/02/2024

Below are some of the key tax-related deadlines applicable to businesses and employers in the second quarter of 2024. Please note that this list is not exhaustive, so there may be additional deadlines specific to your situation. We recommend contacting us to ensure compliance with all relevant deadlines and to understand specific filing requirements.

April 15

  • Calendar-year corporations must either file their 2023 income tax return (Form 1120) or request an automatic six-month extension (Form 7004) and make any tax payments due.
  • Corporations should also pay the first installment of their estimated 2024 income taxes and retain Form 1120-W for record-keeping purposes.
  • Individuals should file their 2023 income tax return (Form 1040 or Form 1040-SR) or request an automatic six-month extension (Form 4868) and pay any taxes owed.
  • Individuals making estimated tax payments for 2024 (Form 1040-ES) should also pay their first installment if they do not pay income tax through withholding.

April 30

  • Employers must report income tax withholding and FICA taxes for the first quarter of 2024 using Form 941 and pay any taxes owed.

May 10

  • Employers should report income tax withholding and FICA taxes for the first quarter of 2024 using Form 941, provided they deposited all associated taxes due on time and in full.

May 15

  • Employers subject to the monthly deposit rule must deposit Social Security, Medicare, and withheld income taxes for April.

June 17

  • Corporations are required to make their second installment payment of estimated 2024 income taxes.

For comprehensive guidance tailored to your specific tax obligations and to ensure timely compliance, please do not hesitate to contact us.

© 2024

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