With the end of 2016 right around the corner, many business owners are looking at ways to adjust their spending habits in order to meet cash flow demands. In this blog, we share four common expenses that are usually cut early. Unfortunately, cutting costs in these areas can have a negative effect on growth and strategies heading in to the new year.
On Friday, May 6, 2016, Rives & Associates LLP Partner, J. A. (Jay) Lesemann, Jr. CPA CGMA and the 2017 Chair-Elect of the Lake Norman Chamber of Commerce, will help bring the 2016 Small Business Week to a close by announcing the Lake Norman Chamber of Commerce Small Business of the Year. The event will be held at the Lake Norman Chamber of Commerce located at 19900 West Catawba Avenue, Cornelius, NC 28031. The public is invited.
Additionally and in conjunction with the National Small Business Week (May 1st – May 7th), the Partners and Staff of Rives & Associates, LLP wants to personally thank each and every small business across America. Entrepreneurs started this nation and we celebrate this important week along side you. National Small Business Week has been recognized every year starting with 1963. The proclamation issued by the President of the Untied States recognizes the contributions that are made by all of America’s entrepreneurs and small business owners.
About Rives & Associates:
Rives & Associates, LLP with offices in Charlotte, Huntersville, Lexington and Raleigh is focused on the delivery of consulting, tax, and attest services to small and middle market companies, governmental entities, and non-profit organizations. Rives & Associates, LLP was named the 2014 US Captive Insurance Company CPA Firm of the Year, recognized as the fastest growing CPA ever by Triad Business Journal, among other honors. For more information, visit us at www.RivesCPA.com.
At Rives, we are different – and we like it like that!
Congress’s decision not to include a proposed minimum term for grantor retained annuity trusts (GRATs) in the tax legislation passed back in January — combined with low interest rates — may make it an ideal time to add short-term GRATs to your estate planning arsenal.
A GRAT consists of an annuity interest, retained by you, and a remainder interest that passes to your beneficiaries at the end of the trust term. The remainder interest’s value for gift tax purposes is calculated using an IRS-prescribed growth rate. If the GRAT outperforms that rate — which is easier to do in a low-interest-rate environment — the GRAT can transfer substantial wealth gift-tax-free.
If you die during the trust term, however, the assets will be included in your taxable estate. By using a series of short-term GRATs (two years, for example), you can capture the upside of market volatility but minimize mortality risk.
If short-term GRATs might be right for you (consult us for more information), consider deploying them soon in case lawmakers revive proposals that would reduce or eliminate their benefits.
S corporation owners often take modest salaries as a tax-saving strategy. By distributing most of the corporation’s profits in the form of dividends rather than wages, the company and its owners can avoid payroll taxes on these amounts. The tax savings may be even greater now that the additional 0.9% Medicare tax on wages in excess of $200,000 ($250,000 for joint filers and $125,000 for married filing separately) has gone into effect. (S corporation dividends paid to shareholder-employees generally won’t be subject to the new 3.8% Medicare tax on net investment income.)
Although S corporations may be tempted to pay little or no salary to their shareholder-employees, this is a dangerous tactic. The IRS has targeted S corporations, assessing unpaid payroll taxes, penalties and interest against companies whose owners’ salaries are unreasonably low.
To avoid an unexpected tax bill, S corporations should conduct an analysis — using compensation surveys, company financial data and other evidence — to establish and document reasonable salaries for each position. Please contact us if you have questions about the right mix of salary vs. distributions for your S corporation’s shareholder-employees.
If you rent out your vacation home for 15 days or more, you must report the income. But exactly what expenses you can deduct depends on whether the home is classified as a rental property for tax purposes, based on the amount of personal vs. rental use. Adjusting your personal use — or the number of days you rent it out — might allow the home to be classified in a more beneficial way.
With a rental property, you can deduct rental expenses, including losses, subject to the real estate activity rules. You can’t deduct any interest that’s attributable to your personal use of the home, but you can take the personal portion of property tax as an itemized deduction.
With a nonrental property, you can deduct rental expenses only to the extent of your rental income. Any excess can be carried forward to offset rental income in future years. You also can take an itemized deduction for the personal portion of both mortgage interest and property taxes.
We can help you determine how your vacation home rental will affect your tax bill — and whether there are steps you can take to reduce the impact.
If you’re in need of cash, early retirement plan withdrawals generally should be a last resort. With a few exceptions, distributions before age 59½ are subject to a 10% penalty on top of any income tax that ordinarily would be due on a withdrawal. Additionally, you’ll lose the potential tax-deferred future growth on the withdrawn amount.
If you have a Roth account, you can withdraw up to your contribution amount free of tax and penalty. But you’ll lose out on potential tax-free growth.
Alternatively, if your employer-sponsored plan, such as a 401(k), allows it, you can take a plan loan. You’ll have to pay it back with interest and make regular principal payments, but you won’t be subject to current taxes or penalties.
Please contact us if you have questions about potential taxes and penalties on early retirement plan withdrawals. We also can help you determine if there are better options available for meeting your cash needs.
On June 26, the U.S. Supreme Court struck down Section 3 of the 1996 Defense of Marriage Act (DOMA) as a violation of the U.S. Constitution’s guarantee of equal protection under the law. Sec. 3 defined marriage for federal benefits purposes as being between a man and a woman, thus denying federal benefits — including many tax benefits — to same-sex married couples.
The ruling means that, in states where same-sex marriage is recognized, same-sex married couples will be able to claim numerous federal tax benefits related to being married. But in some cases, these couples will also be subject to some tax burdens, such as the “marriage penalty.”
Same-sex married couples in states where their marriages are recognized should consult their tax planning advisors to determine what new opportunities may be available to them and whether there are any new burdens they should plan for. Please contact us if you have questions.
If you allow employees to telecommute, be sure to consider the potential tax implications. Hiring someone in another state, for example, might create sufficient nexus to expose your company to that state’s income, sales and use, franchise, withholding, or unemployment taxes. And the employee might be subject to double taxation if both states attempt to tax his or her income.
The rules vary by state and also by type of tax — and become even more complicated for international telecommuters. So it’s a good idea to review the rules before you approve a cross-border telecommuting arrangement.
Day camp is a qualified expense under the child or dependent care credit, which is worth 20% of qualifying expenses (more if your adjusted gross income is less than $43,000), subject to a cap. For 2013, the maximum expenses allowed for the credit are $3,000 for one qualifying child and $6,000 for two or more. The credit’s value had been scheduled to drop in 2013, but the American Taxpayer Relief Act of 2012 made higher limits permanent.
Be aware, however, that overnight camp costs don’t qualify for the credit.
A wide variety of tax breaks are available to parents. If you’d like to learn more, please contact us.
Under the health care act, starting in 2013, taxpayers with earned income over $200,000 per year ($250,000 for joint filers and $125,000 for married filing separately) must pay an additional 0.9% Medicare tax on the excess earnings. Employers are required to withhold the tax beginning in the pay period in which wages exceed $200,000 for the calendar year — without regard to the employee’s filing status or income from other sources. So, it’s possible your employer:
Will withhold the tax even though you aren’t liable for it. You can’t ask your employer to stop withholding the tax, but you can claim a credit on your income tax return.
Won’t withheld the tax even though you are liable for it. You may use Form W-4 to request additional income tax withholding to cover your liability and avoid interest and penalties.
If you have questions about how withholding issues related to the new 0.9% Medicare tax might affect you, please contact us.