#businessownertaxes

By:  Michael Allbee, CFP®, Senior Portfolio Manager

There are many tax strategies available for business owners, but it requires proper planning throughout the year. Here are some things to consider as we approach the year-end to minimize your tax liability.

Take advantage of the expiring “Tax Cuts and Jobs Act” (TCJA) bonus depreciation

In 2017, the TCJA made it so business owners could deduct 100% of qualifying business property (i.e., new equipment, auto above 6,000 lbs., etc.) in the first year it was put to use. However, this regulation is expiring in 2022, and by 2023, owners will only be able to deduct 80% of qualifying properties within the first year of investment. Then, the percentage drops by 20% each following year. If you need to purchase business-related property, now is the time to do it.

Defer revenue and accelerate expenses (or vice versa)

Many small businesses use the cash method of accounting on their books and tax returns. Under the cash method, a company recognizes income when it’s received and expenses when paid — in other words, when cash actually changes hands. That creates some interesting tax planning strategies.

If you expect to be in a lower tax bracket next year, you might want to defer income to next year, when you’ll pay taxes at a lower rate. The same concept works with expenses. If you’re in a high tax bracket this year, you might want to accelerate expenses in 2022 to reduce your taxable income.

On the other hand, it might make more sense to accelerate income into this year — especially if you think tax rates will increase in the near future. In that case, you might want to send your invoice and try to collect payment from your client in 2022, so more income will be taxed at your current tax rate.

Here’s a handy guide for when to accelerate or defer income and expenses.

Consider the following strategies for executive compensation such as stock options

• Consider the timing of non-qualified stock option (NSO) exercises to fill lower marginal tax brackets.

• Consider qualifying disposition of incentive stock options (ISOs) for potential long-term capital gains treatment.

• Consider disqualifying disposition or tandem exercise of ISOs to avoid the alternative minimum tax (AMT).

Take advantage of the home office deduction (if you qualify)

If you have a home office, you may be eligible to deduct direct and indirect expenses for your home office. What can you deduct if you qualify? Read further here.

Use required minimum distributions (RMDs) to pay estimated taxes

Business owners typically pay quarterly taxes. For those that want to pay as late as possible, instead of quarterly taxes, you can have money withheld from IRA distributions to pay for taxes.

Take full advantage of tax-advantaged retirement accounts

Set-up or contribute to a retirement account. Deductible contributions to a retirement account such as an individual 401(k), SEP-IRA, or SIMPLE IRA can reduce your 2022 taxable income. Contributing to your retirement accounts may help you build retirement savings over time – without impacting your take-home pay as much as you may think.

Make charitable contributions

If you are charitably inclined, you should plan your donations in advance to ensure you maximize the tax benefits. The most common way to make a charitable gift is with cash. This works fine for smaller gifts (think one-time small charitable donations) but for larger charitable gifts there might be better alternatives to consider. Consider gifting appreciated assets or gifting from your IRA (Qualified Charitable Distributions).

If you’d like to learn more about tax planning strategies unique to your business, feel free to Talk With Us!

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

When selling your interest in a business, you must consider several factors. One very important factor is taxation. Typically, you will transfer your interest in the business to others or to your corporation in return for cash or property. This will generally result in capital gain (or in some cases, dividends) or ordinary gains.

The tax consequences to you of selling your interest in a business depend on the type of business entity. The sale of corporate stock is usually taxed as capital gain or loss, although certain redemptions of your stock could result in dividend treatment. The sale of your interest in a partnership is also usually taxed as capital gain or loss, but certain payments for unrealized receivables and inventory items are taxed as ordinary income or loss. The sale of your interest in a sole proprietorship is treated as a sale of the assets of the sole proprietorship.

Note: Long-term capital gains and qualified dividends are generally taxed at 0%, 15%, or 20%, depending on the amount of the taxpayer’s taxable income. An additional 3.8% Medicare tax applies to some or all of the investment income for married filers whose modified adjusted gross income exceeds $250,000 and single filers whose modified adjusted gross income is above $200,000.

Although myriad business entities exist, the following types will be covered here: C corporations, S corporations, partnerships, sole proprietorships, limited liability companies (LLCs), limited liability partnerships (LLPs), limited partnerships (LPs), and professional corporations (PCs).

Impact on Specific Business Entities

Tax treatment will vary, depending on the type of business entity you select.

C Corporations

Generally, the sale of your stock in a C corporation results in a capital gain or loss. Thus, a sale to another person or an entity other than the corporation typically results in a capital gain or loss. However, a redemption of your stock by the corporation may be treated as a sale or exchange of the stock or as a dividend.

S Corporations

In general, the sale of stock in an S corporation is treated the same as the treatment of the sale of stock in a C corporation. Where the redemption of your stock by an S corporation is treated as a dividend, special rules apply if the S corporation has earnings and profits from before 1983 or from when the S corporation was a C corporation.

Partnerships

Generally, the sale of your interest in a partnership results in a capital gain or loss. However, certain payments for unrealized receivables and inventory items are taxed as ordinary income or loss.

Sole Proprietorships

A sole proprietor and his or her business are indistinguishable for tax purposes. Thus, the sale of a sole proprietorship is treated as a sale of the assets of the sole proprietorship.

Limited liability company (LLC)

Generally, the sale of an interest in an LLC will be determined in accordance with the partnership rules. The tax treatment of the sale of an interest in a one member LLC (if permitted by state law) will generally be determined in accordance with the sole proprietorship rules. The tax treatment of the sale of an LLC taxed as corporation will generally be determined in accordance with the C corporation rules.

Limited liability partnership (LLP)

The tax treatment of the sale of an interest in a LLP will generally be determined in accordance with the partnership rules.

Limited partnerships (LPs)

The tax treatment of the sale of an interest in a LP will be determined in accordance with the partnership rules.

Professional corporations (PCs)

The tax treatment of the sale of stock in a PC is treated the same as the treatment of the sale of stock in a C corporation. Keep in mind that the sale of an interest in a PC can usually only be made to another licensed professional or to the PC itself.

Caution: When considering any sale of an interest in a business, be sure to examine all relevant documents or laws for restrictions or conditions placed on the sale of your interest in the business. These might include the document creating the business, a stock certificate, a buy-sell agreement, a loan agreement, or state or federal laws. Restrictions or conditions might be placed on (1) who you can sell your interest to; (2) whether, when, or under what conditions you can sell your interest; or (3) the price that you can sell your interest for.

Managing a sale of a business to result in the best possible tax scenario can be extremely complicated. Qualified tax and financial professionals can provide valuable insight and guidance.¹

1. Working with a tax or financial professional cannot guarantee financial success. This material has been distributed for general educational/informational purposes only and should not be considered investment advice, tax advice or legal advice, or a recommendation for any particular security, strategy or investment product.

Prepared by Broadridge Advisor Solutions. Edited by BFSG. Copyright 2022.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

By:  Michael Allbee, CFP®, Senior Portfolio Manager

We pointed out last year there was an opportunity for some Californian taxpayers to get relief for the $10,000 state and local tax (SALT) cap through 2021 – 2025. You can do this by paying some of your California taxes through a profitable pass-through business with some limits and nuances. This helps get around the $10k federal cap for state and local taxes.

There is still an opportunity to make the election for your 2021 return and make a payment to CA for 2021 by March 15, 2022, which will give you a higher deduction on your 2022 federal tax return and a credit against your 2021 CA taxes.

As of February 9^th, California Governor Newsom signed a consequential new tax bill into law (SB 113) which expands eligibility for businesses who may benefit from the Pass-Through Entity Tax. Note, you can be a part owner of a business and still qualify.

For business owners of S-Corporation or LLC, you will want to discuss this with us and your tax advisor to make sure that it makes sense. The irrevocable election is made on an annual basis. If your business is a sole proprietor this would be a good time to review and see if it makes sense to convert to an LLC or S-Corporation this year.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.