February 11, 2020
Do You Want to Go Into Business for Yourself?
Many people who launch small businesses start out as sole proprietors. There are many tax rules and considerations involved in operating that way. For example, you may qualify for the pass-through deduction on qualified business income. You must pay self-employment taxes and make estimated tax payments on income earned. If you hire employees, you need a taxpayer ID number and must withhold and pay employment taxes. Keep complete records of income and expenses. Also, consider setting up a qualified retirement plan.Contact us if you want more information about the tax aspects of your business, or if you have questions about reporting or recordkeeping requirements.
February 11, 2020
February 11, 2020
Determining Whether you Need to File a Gift Tax Return can be Tricky
For 2020, the lifetime gift and estate tax exemption is $11.58 million. As a result, few people will be subject to federal gift taxes. If your wealth is well within the exemption amount, does that mean there’s no need to file gift tax returns? Not necessarily. If you make gifts during the year, consider whether you’re required to file Form 709, and be aware of common traps such as making gifts of future interests. (Gifts of present interests are within the annual $15,000 exclusion amount.) Gifts of future interests, such as transfers to a trust for a donee’s benefit, aren’t covered, so you’re required to report them on Form 709 even if they’re less than $15,000. Contact us for more details.
February 11, 2020
February 11, 2020
Numerous Tax Limits Affecting Businesses Have Increased for 2020
An array of tax-related limits that affect businesses are annually indexed for inflation, and many have increased for 2020. Here are some that may be important to you and your business.
Social Security tax
The amount of employees’ earnings that are subject to Social Security tax is capped for 2020 at $137,700 (up from $132,900 for 2019).
Deductions
- Section 179 expensing:
- Limit: $1.04 million (up from $1.02 million for 2019)
- Phaseout: $2.59 million (up from $2.55 million)
- Income-based phase-out for certain limits on the Sec. 199A qualified business income deduction begins at:
- Married filing jointly: $326,600 (up from $321,400)
- Married filing separately: $163,300 (up from $160,725)
- Other filers: $163,300 (up from $160,700)
Retirement plans
- Employee contributions to 401(k) plans: $19,500 (up from $19,000)
- Catch-up contributions to 401(k) plans: $6,500 (up from $6,000)
- Employee contributions to SIMPLEs: $13,500 (up from $13,000)
- Catch-up contributions to SIMPLEs: $3,000 (no change)
- Combined employer/employee contributions to defined contribution plans (not including catch-ups): $57,000 (up from $56,000)
- Maximum compensation used to determine contributions: $285,000 (up from $280,000)
- Annual benefit for defined benefit plans: $230,000 (up from $225,000)
- Compensation defining a highly compensated employee: $130,000 (up from $125,000)
- Compensation defining a “key” employee: $185,000 (up from $180,000)
Other employee benefits
- Qualified transportation fringe-benefits employee income exclusion: $270 per month (up from $265)
- Health Savings Account contributions:
- Individual coverage: $3,550 (up from $3,500)
- Family coverage: $7,100 (up from $7,000)
- Catch-up contribution: $1,000 (no change)
- Flexible Spending Account contributions:
- Health care: $2,750 (up from $2,700)
- Dependent care: $5,000 (no change)
These are only some of the tax limits that may affect your business and additional rules may apply. If you have questions, please contact us.
© 2020
February 11, 2020
Use Nongrantor Trusts to Bypass the SALT Deduction Limit
Nongrantor trusts may ease the tax bite of the $10,000 federal limit on state and local (SALT) deductions. A nongrantor trust is a discrete legal entity that files its own tax returns and claims its own deductions. The idea behind the strategy is to divide real estate that’s subject to more than $10,000 in property taxes among several trusts, each of which enjoys its own SALT deduction up to $10,000. Each trust must generate sufficient income against which to offset the deduction. Be aware that multiple trusts may be treated as a single trust if they have “substantially the same grantor or grantors and substantially the same primary beneficiary or beneficiaries.” Contact us to learn more.
February 11, 2020
New Law Helps Businesses Make Their Employees’ Retirement Secure
A significant law was recently passed that adds tax breaks and makes changes to employer-provided retirement plans. If your small business has a current plan for employees or if you’re thinking about adding one, you should familiarize yourself with the new rules.
The Setting Every Community Up for Retirement Enhancement Act (SECURE Act) was signed into law on December 20, 2019 as part of a larger spending bill. Here are three provisions of interest to small businesses.
- Employers that are unrelated will be able to join together to create one retirement plan. Beginning in 2021, new rules will make it easier to create and maintain a multiple employer plan (MEP). A MEP is a single plan operated by two or more unrelated employers. But there were barriers that made it difficult to setting up and running these plans. Soon, there will be increased opportunities for small employers to join together to receive better investment results, while allowing for less expensive and more efficient management services.
- There’s an increased tax credit for small employer retirement plan startup costs. If you want to set up a retirement plan, but haven’t gotten around to it yet, new rules increase the tax credit for retirement plan start-up costs to make it more affordable for small businesses to set them up. Starting in 2020, the credit is increased by changing the calculation of the flat dollar amount limit to: The greater of $500, or the lesser of: a) $250 multiplied by the number of non-highly compensated employees of the eligible employer who are eligible to participate in the plan, or b) $5,000.
- There’s a new small employer automatic plan enrollment tax credit. Not surprisingly, when employers automatically enroll employees in retirement plans, there is more participation and higher retirement savings. Beginning in 2020, there’s a new tax credit of up to $500 per year to employers to defray start-up costs for new 401(k) plans and SIMPLE IRA plans that include automatic enrollment. This credit is on top of an existing plan start-up credit described above and is available for three years. It is also available to employers who convert an existing plan to a plan with automatic enrollment.
These are only some of the retirement plan provisions in the SECURE Act. There have also been changes to the auto enrollment safe harbor cap, nondiscrimination rules, new rules that allow certain part-timers to participate in 401(k) plans, increased penalties for failing to file retirement plan returns and more. Contact us to learn more about your situation.
© 2019
February 11, 2020
February 11, 2020
Nondeductible IRA Contributions Require Careful Tracking
If, like many people, your traditional IRA holds a mixture of deductible (after-tax) and nondeductible (pretax) contributions, it’s important to track your contributions carefully to avoid double taxation of distributions. Why? Because the IRS treats distributions as a blend of pretax and after-tax dollars. If you treat distributions as fully taxable, you’ll end up overpaying.
An example
Dan, age 62, withdraws $40,000 from his traditional IRA on August 1, 2019. At the time, his IRA balance is $200,000, consisting of $50,000 in deductible contributions, $80,000 in nondeductible contributions and $70,000 in investment earnings. On December 31, 2019, the IRA’s balance is $170,000 — $200,000 minus the $40,000 distribution plus additional contributions and earnings after August 1.
To ensure that his distribution is taxed correctly, Dan must calculate the portion attributable to nondeductible contributions. These are the contributions that were made with after-tax dollars and, therefore, aren’t taxable again. First, he takes the IRA’s year-end balance, $170,000, and adds back the $40,000 distribution, to arrive at $210,000. Next, he divides his nondeductible contributions ($80,000) by $210,000 and multiplies the resulting percentage (38%) by the amount of the distribution. The result — $15,200 — is the nondeductible portion of his distribution, which is tax-free. For purposes of future distributions, Dan’s nondeductible contributions are reduced by $15,200 to $64,800.
Multiple IRAs
Be aware that, if you have several IRAs, including one or more that are funded exclusively with nondeductible contributions, you can’t avoid tax by taking distributions from those accounts. All your traditional IRAs are treated as a single IRA for tax purposes, so your distributions are deemed to be a combination of taxable and nontaxable funds, regardless of the account they’re withdrawn from.
The easiest way to track and report your deductible and nondeductible IRA contributions is to complete and file Form 8606, “Nondeductible IRAs,” with your federal income tax return each year.
Contact us with any questions you many have regarding your IRAs.
© 2019