Archives for August 2025

Divorce and Business Ownership: How Smart Tax Planning Can Protect Your Settlement

Ken Botwinick, CPA | 08/26/2025

Divorce is never easy, but for business owners, the financial stakes are even higher. Your business often represents one of your most valuable assets, and how it is divided can have long-lasting tax and financial consequences. Without proper planning, taxes can quickly erode the value of your settlement.

At Botwinick, we help business owners navigate the complex intersection of divorce, business valuation, and tax rules to ensure the settlement you walk away with is fair — and tax-efficient.

Tax-Free Transfers: What You Need to Know

Under IRS rules, most assets — including business ownership interests — can be transferred between spouses during divorce without triggering federal income or gift taxes.

The receiving spouse assumes the original tax basis and holding period of the asset.
Tax-free treatment applies to transfers made before, during, or shortly after divorce if outlined in the divorce agreement.

Example: If you keep your company stock in exchange for transferring your spouse the marital home, both the home and the stock retain their original tax basis and holding period. No taxes are due at the time of transfer.

Future Tax Consequences Still Apply

Even though transfers are tax-free initially, the receiving spouse will be responsible for any taxes when the asset is eventually sold.

Appreciated Assets: If your ex-spouse later sells shares of your business that have significantly increased in value, they will owe capital gains tax based on your original basis.
Ordinary-Income Assets: Items such as business receivables, inventory, or nonqualified stock options may also transfer tax-free, but income will be taxed once the asset is collected or exercised.

👉 Takeaway: Appreciated or income-producing assets often carry hidden tax liabilities. This makes them less valuable than cash or non-appreciated property and should be factored into settlement negotiations.

Business Valuation in Divorce Settlements

Determining the fair value of a business is one of the most contentious parts of divorce for business owners.

A thorough valuation should account for:

Tangible assets such as equipment, property, and inventory
Intangible assets like brand reputation, patents, and client relationships
Potential tax liabilities including deferred taxes, goodwill considerations, and liabilities from unreported income

Because state laws vary and valuations are often scrutinized in court, working with experienced financial experts is critical. Botwinick’s advisors provide in-depth business valuations that consider both tax and legal implications, ensuring fairness in your divorce settlement.

Beyond Taxes: Other Issues Business Owners Face in Divorce

While taxes are central, there are several other financial and operational challenges to anticipate:

Cash Flow & Liquidity: Divorce settlements may require significant payouts, which could impact your ability to operate your business. Strategic planning — such as restructuring debt or budgeting differently — can help maintain financial stability.
Privacy & Confidentiality: Divorce proceedings may expose sensitive business information, including client lists and financial records. Protective legal measures can help safeguard confidentiality.

Plan Ahead to Protect Your Financial Future

For business owners, divorce is more than just dividing assets — it’s about protecting your livelihood. Early planning and proactive tax strategies can make the difference between a fair settlement and a financially draining outcome.

At Botwinick, we guide business owners through divorce settlements with a focus on minimizing tax exposure, preserving business value, and protecting your financial future.

📞 Contact Botwinick today to schedule a confidential consultation and learn how we can help you navigate the financial complexities of divorce as a business owner.

How Switching to an S Corporation Can Lower Your Self-Employment Tax Bill

Ken Botwinick, CPA | 08/19/2025

If you’re a small business owner, you may be surprised by how quickly self-employment (SE) taxes add up. Whether you operate as a sole proprietor, a partnership, or an LLC taxed as one of those entities, you could be paying thousands more in federal employment taxes than necessary. One proven strategy to potentially cut those taxes is by electing S corporation (S corp) status to take advantage of S corporation tax savings.

Understanding Self-Employment Taxes

Business income earned through sole proprietorships, general partnerships, and most LLCs is subject to SE tax. For 2025, the self-employment tax rate of 15.3% applies to the first $176,100 of net SE income:

12.4% for Social Security
2.9% for Medicare

Once your income exceeds the Social Security wage base of $176,100, the Social Security portion stops. However, the Medicare tax continues at 2.9%—and increases to 3.8% once you cross certain thresholds ($200,000 for singles, $250,000 for married couples filing jointly, and $125,000 for married filing separately).

For many small business owners, these taxes can take a significant bite out of profits. This is why exploring strategies for self-employment tax reduction can be so valuable.

How an S Corporation Reduces Taxes

Converting your unincorporated business to an S corp creates a unique opportunity:

You pay yourself a reasonable salary, which is subject to federal employment taxes.
Remaining profits can be taken as distributions, which are not subject to SE tax.

This tax treatment allows business owners to reduce employment taxes while still enjoying the pass-through benefits of an S corp. Compared to sole proprietorships, partnerships, or LLCs, S corporations often deliver meaningful S corporation tax savings.

Key Considerations Before Switching

While the S corp structure offers attractive benefits, it also comes with important caveats:

Reasonable Salary Requirement
The IRS requires shareholder-employees to receive a “reasonable” wage for their services. Paying yourself too little could trigger an audit, penalties, and back taxes. Benchmarking salaries against market data can help justify your compensation.
Impact on Retirement Contributions
If your S corp uses a SEP or profit-sharing plan, contributions are capped at 25% of wages. A modest salary may reduce your retirement savings potential. However, a 401(k) plan can help offset this limitation.
Additional Compliance and Administration
Operating as an S corp means more paperwork—such as filing a separate corporate tax return and following state corporate formalities (like maintaining board minutes). You’ll also need to carefully manage transactions between the business and shareholders to avoid unintended tax consequences.

Steps to Convert to an S Corporation

Transitioning your business to an S corp depends on your current structure:

Sole proprietors and partnerships must incorporate under state law and transfer business assets to the new corporation. Then, file an S election (Form 2553) with the IRS—generally by March 15 to apply for that tax year.
LLCs can usually elect S corp status directly with the IRS without formally incorporating, provided they meet qualification rules. The same March 15 deadline applies.

Careful planning is essential to ensure a smooth transition and avoid missteps.

Is an S Corporation Right for You?

Choosing an S corporation can be a powerful way to lower your self-employment tax burden, but it isn’t a one-size-fits-all solution. Factors such as income level, retirement goals, and administrative tolerance all play a role.

At Botwinick & Company, we help business owners evaluate whether S corporation status is the right move and guide them through the conversion process. Before making the switch, consult with our team to understand the full tax, financial, and compliance implications—including opportunities for self-employment tax reduction.

Choosing the Right Business Entity: Tax Implications and Key Considerations

Ken Botwinick, CPA | 08/12/2025

Starting a new business or restructuring an existing one involves numerous decisions, but one of the most critical is selecting the right business entity. This choice not only determines how your business is taxed but also influences your administrative responsibilities and regulatory compliance. While liability considerations are crucial, this article focuses on the tax implications of various entity types. For liability concerns, it’s always wise to consult with a legal expert.

Whether you’re launching a new venture or reevaluating your current setup, understanding how each business entity is taxed can help you make more informed decisions that align with your financial goals. Below is an overview of the most common business structures and how they impact your taxes.

1. Sole Proprietorship: The Simplest Structure with Full Personal Responsibility

A sole proprietorship is the easiest and least expensive business structure to establish. It is owned and operated by one individual, with minimal administrative overhead. Here are the key points to consider:

Taxation: The income generated by the business is reported on the owner’s personal tax return via Schedule C (Form 1040). The owner will pay self-employment tax (15.3%) on the income, as the business itself isn’t taxed separately. Additionally, the owner may qualify for a Qualified Business Income (QBI) deduction, potentially reducing the effective tax rate.

Compliance: There is minimal paperwork required aside from securing necessary licenses or business name registration. However, the owner is personally liable for any debts or legal issues arising from the business.

2. S Corporation: A Pass-Through Entity with Payroll Considerations

An S Corporation (S corp) is a tax classification that allows for pass-through taxation, meaning the corporation itself doesn’t pay taxes on profits. Instead, profits or losses are passed through to shareholders. This option offers both benefits and specific requirements:

Taxation: Profits from an S corp are passed to shareholders and reported on their individual returns via Schedule K-1. Shareholders who are also employees must be paid a reasonable salary, which is subject to payroll tax. However, additional profit distributions are not subject to self-employment tax. S corps are also eligible for the QBI deduction.

Compliance: To qualify as an S corp, you must meet several requirements, including having no more than 100 shareholders, all of whom must be U.S. residents. The entity must file Form 2553 to elect S corp status and must comply with corporate formalities like annual meetings and recordkeeping. Form 1120-S must also be filed.

3. Partnership: Shared Ownership with Pass-Through Taxation

A partnership involves two or more people who jointly own and operate a business. It can take several forms, including general partnerships, limited partnerships, and limited liability partnerships (LLPs).

Taxation: Like S corps, partnerships are pass-through entities. The business files an informational return (Form 1065) and income or losses are distributed to partners via Schedule K-1, which they report on their personal returns. General partners must pay self-employment taxes, while limited partners generally do not. Partnerships are eligible for the QBI deduction.

Compliance: Partnerships require a detailed partnership agreement, clear profit-sharing arrangements, and coordinated recordkeeping. While more complex than a sole proprietorship, partnerships offer flexibility in ownership and distribution.

4. Limited Liability Company (LLC): Flexibility with Liability Protection

An LLC combines elements of both corporations and partnerships, offering flexibility in management and liability protection for its owners, called members.

Taxation: By default, an LLC is taxed like a sole proprietorship if it has one member or as a partnership if it has multiple members. However, LLCs can choose to be taxed as an S corp or C corp by filing Form 8832 or Form 2553, giving owners control over their tax strategy. LLCs are also eligible for the QBI deduction if not taxed as a C corp.

Compliance: LLCs are less complicated than corporations but still require the filing of articles of organization and, in many cases, an operating agreement. They also have state-specific filing requirements and must meet annual reporting obligations.

5. C Corporation: Double Taxation with Growth Potential

A C Corporation (C corp) is a separate legal entity that provides the highest level of liability protection and scalability, making it ideal for businesses aiming for significant growth or seeking investors.

Taxation: C corps are subject to double taxation: the business pays corporate income tax on its earnings (currently at a 21% federal rate), and shareholders are taxed again on any dividends received. However, C corps can offer tax-deductible benefits like health insurance and retirement plans. Unlike other entities, C corps are not eligible for the QBI deduction.

Compliance: C corps have extensive administrative requirements, including the need for bylaws, shareholder meetings, and annual reports. They also face more stringent state and federal compliance obligations. However, C corps are well-suited for businesses seeking venture capital or planning for an IPO.

Adding Employees: Increased Compliance and Responsibilities

Regardless of your business structure, hiring employees increases your compliance obligations. You must obtain an Employer Identification Number (EIN) and withhold payroll taxes at the federal and state levels. Additionally, employers must manage employee benefits, tax deposits, and compliance with employment laws.

Choosing the Right Entity for Your Business

There is no one-size-fits-all answer when it comes to choosing the right business entity. The best choice depends on your specific goals, the complexity of your business, and how you want to be taxed. For instance, an LLC that elects S corp status can minimize self-employment taxes while offering operational flexibility.

For personalized guidance, consider working with both your tax advisor and attorney to ensure that your business structure aligns with your financial objectives and legal requirements. Contact us today to discuss how we can help you choose the best entity for your business and optimize your tax strategy.

Big Changes to 1099 Reporting: What Businesses Need to Know About the New $2,000 Threshold

Ken Botwinick, CPA | 08/06/2025

A major shift is coming to business payment reporting requirements—and it’s good news for small business owners and contractors. Thanks to the One Big Beautiful Bill Act (OBBBA), the long-standing $600 threshold for issuing certain IRS forms will soon rise to $2,000.

At Botwinick & Co., we’re committed to helping businesses stay ahead of IRS reporting requirements. Below, we’ll break down what’s changing, when it takes effect, and how it will impact your 1099 filing obligations.

What’s Changing in 2026?

Beginning with payments made in 2026, the threshold for issuing Form 1099-NEC and Form 1099-MISC will increase from $600 to $2,000. Starting in 2027, that threshold will be adjusted for inflation.

Current Requirements (Through 2025)

Form 1099-NEC

File for non-employee compensation over $600
IRS & recipient deadline: January 31

Form 1099-MISC

Used for rents, legal fees, prizes, etc. over $600
Recipient deadline: January 31
IRS deadline: February 28 (paper) or March 31 (electronic)

What the New $2,000 Threshold Means

Less paperwork – Fewer 1099s need to be filed
Lower risk of penalties for missed filings
Better alignment with modern business economics

Example

If you pay a contractor $700 in 2025, you must issue a 1099-NEC in 2026. But if you pay the same contractor $1,800 in 2026, no 1099 is required in 2027.

Remember: Income is Still Taxable

Even if a 1099 isn’t issued, the contractor must report the income. Businesses should still maintain accurate records of all payments.

Changes to Form 1099-K

The OBBBA also increases the 1099-K threshold to $20,000 and 200 transactions, reversing the prior move to a $600 threshold under the American Rescue Plan Act.

Summary of New Reporting Thresholds

Form	Old Threshold	New Threshold (2026)	Used For
1099-NEC	$600	$2,000	Contractors & freelancers
1099-MISC	$600	$2,000	Rents, legal fees, prizes
1099-K	$600 (phased-in)	$20,000 + 200 transactions	Payment platforms

How Botwinick & Co. Can Help

We offer:

1099 preparation and e-filing
Year-round tax planning
IRS audit assistance
Bookkeeping and compliance support

Frequently Asked Questions

Question: When does the $2,000 threshold take effect?

Answer: For payments made in 2026 and reported in 2027.

Question: Will the $2,000 amount change in future years?

Answer: Yes, it will be adjusted annually for inflation starting in 2027.

Question: Do I still need to track all payments?

Answer: Yes. Accurate records are critical for all payments, even under $2,000.

Question: What about 1099-K changes?

Answer: The 1099-K threshold has been reset to $20,000 and 200 transactions.

Question: Will fewer 1099s reduce audit risk?

Answer: Possibly, but only if your reporting and records remain compliant.

Question: What happens if I forget to file a 1099?

Answer: You could face IRS penalties. Timely filing is essential.

Question: Can Botwinick help with 1099s?

Answer: Yes! We offer expert 1099 prep, e-filing, and compliance consulting.

Question: What’s the difference between 1099-NEC and 1099-MISC?

Answer: 1099-NEC is for contractors. 1099-MISC is for other types of payments like rent or prizes.

Need Expert Help with Reporting Rules?

Let our experienced tax professionals simplify your year-end filing and help you navigate changing IRS laws with confidence.

Contact Botwinick & Co. today:

📞 212-571-1212
🌐 https://botwinick.com
📍 Serving New York, New Jersey, and nationwide

Let’s make tax season stress-free—together.