Rake in The Rewards With a Little Tax Planning 🍂

September 2024

Feature Articles

• Are You Aware of the Business Credits and Other Tax Benefits Available?
• Business Succession and Estate Planning Should Be Inseparable
• Home Sale: Failure to Plan may Raise Your Tax Bill

Tax Tips

• Medicare Premiums may Lead to Tax Savings
• Don't Wait Until the Last Minute to File Your Extended Return!
• An Employee Benefit with Possible Magnetic Power

Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. If desired, we would be pleased to perform the requisite research and provide you with a detailed written analysis. Such an engagement may be the subject of a separate engagement letter that would define the scope and limits of the desired consultation services.

Are You Aware of the Business Credits and Other Tax Benefits Available?

It’s a challenging time for many businesses. Therefore, any help you can get, such as tax incentives and sales tax exemptions, can make a big difference. Unfortunately, these benefits often go unclaimed because businesses don’t know about them or erroneously think they’re ineligible.

1. Statutory Incentives

Some credits are available “as of right.” That is, if your business meets the specified requirements, you just need to claim the benefit on a timely filed tax return to receive it.

State and federal tax credits and exemptions are designed as incentives for businesses to engage in certain activities or invest in specific economically distressed areas. Here are a few:

Work Opportunity Tax Credit (WOTC). The WOTC is a federal credit ranging from $2,400 to $9,600 per eligible new hire from certain disadvantaged groups. Examples include convicted felons, welfare recipients, veterans and workers with disabilities. Other steps must also be taken, such as completing paperwork.

State and federal research and development tax credits. These credits may be available to an eligible business that invests in developing new products or techniques, improving processes, or developing software for internal use, regardless of size. The federal “increasing research activities” credit is generally equal to 20% of the amount by which the business increases qualified research expenditures, compared to a base amount.

The credit is available even to businesses with no income tax liability and may be carried forward to offset taxable income in future years. If eligible, a start-up company can claim the federal research credit against up to $500,000 in employer-paid payroll taxes.

Empowerment zone incentives. Certain tax breaks are available to companies that operate in federally designated, economically distressed “empowerment zones.” Tax credits may be worth up to $3,000 for each eligible employee.

Industry-based and investment credits. Many states and other jurisdictions offer tax credits and other incentives to attract certain types of businesses, such as manufacturing or film and television production. Jurisdictions may also offer investment tax credits for capital investments within their borders.

2. Discretionary Incentives

Discretionary tax breaks must be negotiated with government representatives. Typically, these incentives are intended to persuade a business to stay in or relocate to a certain state or locality.

To secure these incentives, a business must show it’ll bring benefits to the jurisdiction, such as job creation and revenue generation. Discretionary incentives may include income and payroll tax credits, property tax abatements and utility rate reductions.

3. Sales Tax Exemptions

States with sales taxes provide exemptions for some business purchases. Common exemptions include purchases by:

• Retailers for the purpose of resale,
• Manufacturers of equipment, raw materials or components used in the manufacturing process,
• Specific tax-exempt entities, and
• Agricultural businesses that buy such items as farming equipment and fuel, feed, seeds, fertilizer, and chemical sprays.

Businesses should familiarize themselves with the exemptions available where they do business and what it takes to qualify. For example, they may need to prove to the sellers that they have a resale or exemption certificate.

Don't Miss These Opportunities

Every year, a vast amount of tax credits and incentives aren’t claimed because businesses are unaware of them or erroneously believe they’re ineligible. Many more examples exist. Contact the office for help ensuring that your business receives all the tax breaks it deserves.

Business Succession and Estate Planning Should Be Inseparable

If you’re a business owner, your company is likely your most valuable asset. To ensure it survives after you’re gone, you first need a succession plan that will provide a smooth transition of the business to one or more of your children (assuming you want to keep it in the family). In addition, you need an estate plan that effectively addresses the tax impact of transferring your ownership interests to the next generation.

Consider Who’ll Take the Reins

If you’re like many business owners, you may dream of the day you can transfer ownership to your children. A succession plan can provide a smooth transition of power when you retire and be used in the event of unexpected death before retirement.

Typically, a succession plan will outline the structure going forward and prepare for the eventual transfer of ownership interests in the business, whether through selling, gifting or a combination of the two. Make sure the plan is in writing. Identify training opportunities and special compensation arrangements for your successors. Include in the plan financial details reflecting assets, liabilities and current value, and update the plan periodically. Also, coordinate your succession plan with your estate plan.

Ensure Key Estate Planning Documents Are in Place

A comprehensive estate plan should be supported by several key documents, starting with a basic will. A will specifies how your assets will be distributed to designated beneficiaries and meets other objectives. Without a will or having assets otherwise titled, your business and other assets will be distributed under the prevailing state law, regardless of your wishes.

A financial power of attorney (POA) appoints someone to manage your affairs in case you become incapacitated and allows this “attorney-in-fact” to conduct business transactions. (Other important documents include health care powers of attorney and advanced directives.)

Make Use of Tax Breaks

If you own significant business assets, consider taking maximum advantage of currently available federal estate tax breaks. These include the unlimited marital deduction and the federal gift and estate tax exemption, which in 2024 shields up to $13.61 million. Some states also impose their own state estate or inheritance taxes.

You may be able to minimize federal and state taxes by using trusts or setting up a family limited partnership (FLP). With a tax-favored FLP, assets are removed from your taxable estate and limited partner interests can be gifted to loved ones, often at a discounted value.

Bypass Potential Family Conflicts

As you develop your succession and estate plans, you may face family challenges. Unfortunately, elevating one child to run the business and leaving another out, or giving someone a secondary role, may create hard feelings.

One estate planning strategy is to attempt to even things out. For example, let’s say that you own a business valued at $5 million and you have $5 million in other assets. You might give $5 million in business assets to the child who’s taking the helm of your business and give other assets worth $5 million to the child who isn’t active (or is less active) in the business.

Relax and Enjoy a Smooth Transition

There’s no universal plan for family business succession. What’s right depends on your circumstances and goals. Contact the office for help.

Home Sale: Failure to Plan may Raise Your Tax Bill

As the saying goes, there’s nothing certain in life except for death and taxes. But when it comes to selling your home, proactive tax planning can help you reduce your federal income tax bill.

A Costly Mistake to Avoid

Let’s say Tom is a soon-to-be married homeowner who’s looking to sell his principal residence. If certain tests are met, an unmarried individual may be able to exclude up to $250,000 of taxable gain.

Just before the wedding, Tom sells the home he’d purchased 20 years earlier. The home had appreciated by $500,000. He and his future wife, Stacy, plan to move into her much smaller fixer-upper home after the wedding.

As an unmarried taxpayer, Tom can exclude $250,000 of the gain from the sale of his home, leaving a taxable gain of $250,000 ($500,000 minus the $250,000 federal home sale gain exclusion). He owes 15% federal income tax on the gain, plus the 3.8% net investment income tax and state income tax.

Instead, suppose that Tom and Stacy had taken the time to seek tax planning advice. Their tax advisor would have let them know that the home sale gain exclusion for married couples is $500,000 if various tests are met, including that both spouses have resided in the home as their principal residence for at least two years.

Rather than sell Tom’s house before the wedding, they might have kept it and lived in it as a married couple for two years. That would have allowed them to avoid the full $500,000 in taxable gain and the resulting taxes when they later sold it. Even if Stacy had sold her fixer-upper home before the wedding, the gain would likely have been much smaller and may have been fully sheltered with her $250,000 home sale gain exclusion.

Slow Down and Seek Advice

Proactive tax planning is generally worth the effort, especially if you have a lot at stake and/or tax rates increase. Even if you don’t need advice on the subject of home sales, other issues may be much more complicated and a lack of knowledge could lead to costly mistakes. Contact the office to get the best tax planning results for your circumstances.

Medicare Premiums may Lead to Tax Savings

If you pay premiums for Medicare health insurance, you may be able to combine them with other qualifying expenses and claim them as an itemized deduction for medical expenses on your tax return. This includes amounts for “Medigap” insurance and Medicare Advantage plans, which cover some costs that Medicare Parts A and B don’t cover.

Generally, you can deduct medical expenses only if you itemize deductions and only to the extent that total qualifying health care expenses exceeded 7.5% of your adjusted gross income. But, if you’re self-employed people or a shareholder-employees of an S corporation, you can generally claim an above-the-line deduction for your health insurance premiums, including Medicare premiums. That means it’s not necessary for you to itemize deductions to get the tax savings.

Contact the office with questions about claiming medical expense deductions on your personal tax return. Also, be sure to ask for help identifying an optimal overall tax-planning strategy based on your personal circumstances.

Don't Wait Until the Last Minute to File Your Extended Return!

If you requested an extension to file your 2023 tax return, you probably know that the extended deadline is coming up soon, on Oct. 15. If you have the information you need, consider filing now.

There’s no advantage to waiting, and last-minute filing may lead to worry. If you’re concerned about paying any tax owed, the IRS offers short- and long-term payment plans, as well as installment agreements, to taxpayers who qualify. It’s important to act quickly if you owe because any amount that was due April 15 accrues interest until the balance is paid. As soon as possible, gather your 2023 tax year records and contact the office for a tax preparation appointment or to ask questions you may have.

An Employee Benefit with Possible Magnetic Power

Employers seeking to attract new recruits and retain talent should consider offering educational assistance programs to their employees. The plans aren’t new, but they temporarily offer greater flexibility in how they work.

Through Dec. 31, 2025, the funds can be used to help employees pay their federal student loan debts. According to the U.S. Dept. of Education, the average borrower in 2024 has federal student loan debt of $37,850. Student loan payments can be made directly to employees or lenders. These tax-free benefits are limited to $5,250 per employee, per year. Benefits that exceed that amount are taxable as wages.

If your company doesn’t offer an educational assistance program, it might be a good idea to consider establishing one while this additional feature is still in force. In today’s tight labor market, fringe benefits like this one may be a magnet that gives your company an advantage. To learn more about adding this program to your benefit package: https://www.irs.gov/newsroom/employer-offered-educational-assistance-programs-can-help-pay-for-college

Upcoming Tax Due Dates

September 16

Individuals: Pay the third installment of 2024 estimated taxes (Form 1040-ES), if not paying income tax through withholding or not paying sufficient income tax through withholding. Calendar-year corporations: Pay the third installment of 2024 estimated income taxes, completing Form 1120-W for the corporation’s records. Calendar-year S corporations: File a 2023 income tax return (Form 1120-S) and provide each shareholder with a copy of Schedule K-1 (Form 1120S) or a substitute Schedule K-1 if an automatic six-month extension was filed. Pay any tax, interest and penalties due. Calendar-year S corporations: Make contributions for 2023 to certain employer-sponsored retirement plans if an automatic six-month extension was filed. Calendar-year partnerships: File a 2023 income tax return (Form 1065 or Form 1065-B) and provide each partner with a copy of Schedule K1 (Form 1065) or a substitute Schedule K1 if an automatic six-month extension was filed. Employers: Deposit Social Security, Medicare and withheld income taxes for August if the monthly deposit rule applies. Employers: Deposit nonpayroll withheld income tax for August if the monthly deposit rule applies.

September 30

Calendar-year trusts and estates: File a 2023 income tax return (Form 1041) if an automatic five-and-a-half-month extension was filed. Pay any tax, interest and penalties due.

October 10

Individuals: Report September tip income of $20 or more to employers (Form 4070).

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