Business Tax

How to Pay Retiree Health Costs Tax-Free

If you own a small business, you may have set up a defined benefit pension plan for you and your employees that will provide a specific amount of retirement income based on salary history and years of service. For 2020, the maximum annual benefit of a defined pension plan is $230,000 (up from $225,000 in 2019). In future years, it will be subject to cost-of-living adjustments. Main Requirements To qualify for tax-free treatment, a 401(h) plan: Cannot favor officers, shareholders, managers or highly compensated employees in coverage, contributions and benefits. Must specify the medical benefits that will be available and…

Handle Payroll Taxes With Kid Gloves

If you operate a business that collects payroll taxes from employees, here’s a warning: Regardless of what your corporate financial situation is, don’t borrow from the withholding tax fund. If that money isn’t there when it’s due, Uncle Sam will crack down hard. All businesses face downturns when cash flow dries up. It may be tempting to look at payroll tax money as an easy fix to a cash crunch. “I’ll send it in later,” you may think. But when it comes to bad ideas, this is one of the worst. How Hard Will an IRS Crackdown Be? The fine…

Taxation Issues in the Gig Economy

Do you provide car rides through a mobile app, rent out your spare room using an online platform or repair computers for local businesses on demand? If so, you may be considered part of the “gig economy” or the “sharing economy.” Participation in this emerging method of distributing services can be a good way to earn money in your down time, pursue a more flexible lifestyle and provide cash to offset the expenses associated with owning a vehicle or a home. The IRS recently offered some guidance for this rising trend. Here’s a summary of the key points. Employee vs….

Go It Alone with a 401(k) Plan

If your business is essentially a one-person operation, there’s an option to help you save more money for retirement: The Solo 401(k) plan. Ordinarily, traditional defined contribution retirement plans allow annual contributions that are limited to either 25% of salary if you’re employed by your own S or C corporation or 20% Tax Year Under Age 50 Over Age 50 2019 limit on elective deferral contributions $19,000 $25,000 2019 limit on combined elective deferral and employer contributions $56,000 $62,000 of self-employment income if you operate as a sole proprietor or single member LLC. Also, traditional profit sharing plans, Keogh or…

How Tax Reform Affects Divorce Settlements for Small Business Owners

How does the Tax Cuts and Jobs Act (TCJA) affect divorce settlements? Changes in the new law may require divorcing individuals — especially those who own businesses and other investments — to take a different approach to splitting assets and setting maintenance payments than under prior law. To illustrate, consider Pat and Chris, a hypothetical married couple who decided to file for divorce on Valentine’s Day 2019. Here’s an overview of several key issues they face. Business Tax Issues Pat is the family’s sole breadwinner. During her 15-year marriage with Chris, Pat started a successful electrical subcontracting business. It’s a…

Understanding IRS Audit Guidance

IRS examiners usually do their homework before meeting with taxpayers and their professional representatives. This includes reviewing any relevant Audit Techniques Guides (ATGs) that typically focus on a specific industry or audit-prone business transaction. Though designed to help IRS examiners prepare for audits, ATGs are available to the public. So, small business taxpayers can review them, too — and gain valuable insights into issues that might surface during audits. Auditor Specialization In the past, IRS examiners were randomly assigned to audit taxpayers from all walks of life, with no real continuity or common thread. For example, after an examiner audited…

Classification of Workers: Could Section 530 Come to the Rescue?

The IRS and employers often are at loggerheads over the classification of workers as employees or independent contractors. Typically, many employers want to to treat workers as independent contractors, while the IRS often determines that workers are misclassified employees. Sometimes, the issue winds up in the courts. Fortunately, there might be a way for employers to obtain a measure of protection if the IRS challenges the classification of a worker or workers. With “Section 530 relief,” an employer may avoid adverse tax consequences from a misclassification of employment status. However, this special safe-harbor rule is only available if the employer…

Tax Law Changes Affecting Partnerships, LLCs and Their Owners

The Tax Cuts and Jobs Act (TCJA) brought many modifications to the tax laws that affect partnerships, limited liability companies (LLCs), and their owners. Here’s a look at the key changes. Technical Termination Rule Repealed Under prior law, a partnership (or LLC treated as a partnership for tax purposes) was considered to terminate for federal income tax purposes if, within a 12-month period, there was a sale or exchange of 50% or more of the partnership’s (LLC’s) capital and profits interests. This “technical termination rule” was generally unfavorable because: It could require you to file two short-period partnership tax returns…

Beware of Deductions Claimed for Certain Business Expenses

To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your field of business. A necessary expense is one that’s helpful and appropriate for your business. The IRS sometimes challenges deductions claimed for certain types of business expenses. In doing so, an examiner might claim that payments made by a corporation to a shareholder for personal items or that are above or below fair market value constitute “constructive dividends.” Reclassifying business expenses as dividends has adverse tax consequences, as a recent case demonstrates. No Deduction for Dividends…

Squeeze More Out of a Company SEP

If you want a retirement plan for your small company or self-employed business — but you don’t want to be buried in paperwork — consider a simplified employee pension plan or SEP. Among the appealing advantages: SEPs are set up by simply filling out a brief form. Annual reports aren’t required to be filed with the IRS, although you must provide a copy of the SEP form to each covered employee. (Most retirement plans require detailed reports to be filed with the IRS and the Department of Labor.) Contributions can go from zero to the maximum each year, so if…