Business Tax

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…

You May Want to Separate Real Estate Assets from Your Business

Many companies choose not to combine real estate and other assets into a single entity. Perhaps the business fears liability for injuries suffered on the property. Or legal liabilities encountered by the company could affect property ownership. But there are valid and potentially beneficial tax reasons for holding real estate in a separate entity as well. Avoiding Costly Mistakes Many businesses operate as C corporations so they can buy and hold real estate just as they do equipment, inventory and other assets. The expenses of owning the property are treated as ordinary expenses on the company’s income statement. However, when…

Deducting Pass-Through Business Losses

Many business ventures generate tax losses, especially in the first few years of operation or under adverse conditions. When can losses be deducted — and how much can you deduct in any given year? This article explains new limitations on the ability of individual taxpayers to deduct losses from pass-through business entities, including sole proprietorships, limited liability companies (LLCs) treated as sole proprietorships for tax purposes, partnerships, LLCs treated as partnerships for tax purposes and S corporations. Old Rules Before the Tax Cuts and Jobs Act (TCJA), an individual taxpayer’s business losses could usually be fully deducted in the tax…

Protect Your Company Retirement Plan from an IRS Attack

When your company sponsors a qualified retirement plan, you must comply with complex rules established by the IRS and the Department of Labor. Ignore the rules and your firm could face costly penalties from federal regulators — and plan participants might sue you for mishandling trust assets. In the worst-case scenario, the IRS could disqualify your company’s plan if you engage in prohibited transactions.   This is no time to be a do-it-yourselfer. You need the help of a skilled professional who knows the requirements and can help you stay in compliance. Here’s why. Under the so-called “prudent investor” guidelines,…