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Why Hiring Your Kids Is a Great Idea for You and for Them
 
May 17, 2018
 
 
The end of the school year is coming to a close. What plans do you have for your kids this summer? We have an idea for you. Your kids may not like it, but you will!
 
This summer, consider hiring your kids to help you with your business. Under the new tax reform laws, starting in 2018, the single taxpayer standard deduction increased from $6,350 to $12,000. This means you can pay your kids up to $12,000 and they will pay no federal or state income taxes.
 
This is what we call an income-shifting strategy, where you shift your income from your higher tax bracket to your kids' 0-percent tax bracket. That is tax efficiency, which leaves more money for your family and less for the government.
 
You might ask yourself, "What can my kids do for my business?" In the past, kids often did office cleaning and filing. But nowadays, your tech and social media-savvy kid can do so much more for you. This is great because you can pay them at much higher rate. They can help with social media, marketing, your server, and other technologies. This frees up your time up so you can focus on revenue-generating tasks.
 
3 Things to Consider before Hiring Your Kids
 
If you do consider hiring your kid, here are a few things to be aware of.
 
1. You must pay your kids a W-2 wage. Under the IRS’s family attribution rules, your kids are your employees. You cannot deem them to be independent contractors.
 
2. Your kids’ wages must be reasonable. “Reasonable” is what you would pay someone else to perform the same functions.
 
3. Document the hours your kids work and the duties they perform. Hiring your kids is a great tax strategy, and the IRS knows this. The IRS wants to make sure your kid’s employment is legitimate and that you pay your kids a reasonable wage.
 
Tax Savings and College Savings
 
Let's take this discussion to another level and outline a great college savings plan. Hiring your kid shifts money from your high-income tax bracket to their 0-percent bracket. Your kid can use their wages to fund a Roth IRA. Your kid can put $5,500 into a Roth IRA each year (assuming their wages are $5,500 or more). It gives you these advantages:
 
First, the money grows tax-free and is not subject to the kiddie tax. The kiddie tax is when your kids—dependents under age 24—have unearned income (interest, dividends, capital gains). If they have enough unearned income, the kids will pay tax at your highest tax rate. We certainly don't want that to happen!
 
Second, the amount in your kid’s Roth IRA doesn't count as an asset when you apply for financial aid. It's considered a retirement asset. Therefore, it doesn't count against you as you fill out your FAFSA form. This is a significant advantage over a traditional savings plan, brokerage account, or using a 529 college savings plan.
 
Third, Roth IRA contributions can be withdrawn and used for higher education costs. Remember, you or your kids do not get a deduction when you contribute to a Roth IRA. But under the distribution rules, taxpayers are allowed to withdraw their Roth IRA contributions FIRST, which are tax-free. This is a great plan for higher-income people who most likely won't qualify for any financial aid.
So, hiring your kids can be a great way to save on taxes now and fund your kid’s higher education. Take their wages, put them into a Roth IRA, let that money grow tax-free, withdraw the money later on for higher education expenses.
 
One more recommendation if you have kids age 21 or older. If your older kids are in their final years of college and are continuing their education to earn higher degree, consider having your company hire those kids and setting up a tax-free educational assistance program. It’s another way for you to save money and help your kids fund their education. 
 
Want to take advantage of these tax strategies? Contact Kaiser Tax today for expert help setting up a strategy that works for your kids and your business.

 

Double Protection for Your Business

March 19, 2018

You've worked hard to build up your business. You’ve poured your blood, sweat, tears into it. It's taken years, but you've finally got it to a point where it's highly profitable. and you should be very proud of yourself. And nothing will ever happen to you that will take you away from your business, right? Everybody thinks that way. But statistically, one in four people will become disabled during their working years. You need to protect yourself from this potential disaster.

That’s why we should talk about protecting your most valuable business asset: your future earning potential. Many small business owners have all their eggs in one basket. This can lead to potential catastrophic economic chain of events. What would happen to your business if you were out of the office for 6-9 months? How would that affect your individual household? How would you survive?

Part One of Our Two-Prong Strategy: Disability Insurance

Kaiser Tax has a two-prong strategy for small business owners to help protect what they've worked so hard to build up. Let's start on the personal side - disability insurance. Disability insurance is something every small business owner needs. It's designed to replace your after-tax income—typically 60 percent of your gross monthly income.

You pay these premiums personally and there's no tax deduction, but that's okay. While there’s no tax deduction for the premium you pay, the benefits you collect if you become disabled are non-taxable. This way, the policy is working the way it should. The benefits will not be taxable and will replace your after-tax income. 

For example, let's say your gross monthly income is $10,000 and your disability benefit is $6,000. If you become disabled, you're going to need that $6,000 to pay your bills. You don't want that $6,000 to be taxable because it would mean you’d only have $4,000 to pay your bills; you won't be able to survive.

It’s true that personal disability insurance is expensive. Insurance companies may be on the hook for benefits payments over many years. For example, if you become disabled at age 38 and cannot return to work, the insurance company would pay a benefit from your current age to age 65. The insurance company has quite a lot of exposure, and the premium you pay will be reflective of that exposure. 

One thing to consider is whether your business can have a group disability insurance policy. Typically, group disability is much more affordable. Going this route, you still want to pay for your disability policy post-tax so the benefit is tax-free. The company could pay some or all of the premium, providing a tax-free benefit to employees. However, if a company pays all or a portion of the premium, then all or a portion of the benefits, if ever collected, would be taxable. So, there's a trade-off there. 

Part Two of Our Two-Prong Strategy: Business Overhead Insurance

But what about your business? What would happen if you were out for that 6-9 months? Can your business survive without you? If it can’t, what happens to your household income?

Part two of our two-prong approach is for business owners to purchase business overhead insurance. Think of it as disability insurance for your business. The business is the owner of the policy, and it pays for the policy. And here's the really good news: it's affordable and tax-deductible as an ordinary and necessary business expense.

So how does this policy work? If you become disabled, the insurance company will pay for the operating expenses of your business, such as rent, phone, utilities, payroll for your employees, and other costs. But it won't cover your salary or any salary of any of your family members. That's why you need your personal disability policy.

Savvy business owners would also be wise to have business overhead insurance on key income-producing employees, such as a top sales person, top attorney, or high-income producing chiropractor or dentist. Any employee who's critical to your business's success would be a candidate for you to purchase business overhead insurance for. If they become disabled, it won’t cripple your business. 

It's very important for you to protect your most important asset: your future earning potential. This is critical for small business owners in particular. You need the two-prong attack: a disability policy to protect your personal household income and business overhead expense insurance to protect the business.

Full discloser, Kaiser Tax in not an insurance agency and does not sell or receive any remuneration from insurance products.  It is simply our goal to give small business owners the best practical advice. To learn more about our two-prong approach, contact Kaiser Tax today.

 

 

Playing Your 2018 Tax Trump Card

February 2, 2018

Love him or hate him, President Trump just delivered one of the largest tax cuts in American history. The last major overhaul of the tax code was in 1986, so tax reform was way overdue. The first thing you need to know is that the changes will be effective for 2018. The tax bill will not affect your 2017 tax returns. Let's take a look to see if you were dealt a winning hand with the reforms, or at least dealt some good cards.

Good Card: Changes to 2018 Tax Rates and Claiming Dependents

One of the good cards all taxpayers received is a reduction in tax rates. There are still seven brackets, but they're lower and longer. For example, in 2017, if a married couple hits their top federal tax bracket (39.6 percent) at $470,000, that same couple in 2018 will hit their top bracket of 37 percent at $600,000. With this card, everybody gets a lower tax rate. That's a good card to have.

You also have a winning card if you claim dependents. The child tax credit has increased from $1,000 to $2,000 per child under age 17. While this is great news for parents, it gets even better. This credit used to phase out at $110,000 for married couples, but under the new code, the phase-out occurs at $400,000. With this card, many more taxpayers will be able to claim this valuable credit. 
There's also a new $500 credit for taxpayers claiming dependents ages 17 and older. This will help taxpayers who claim college-aged kids or claim their parents as dependents.

Good Card: 2018 Tax Changes for Small Businesses.

Small business owners got dealt a great hand in this tax bill. Flow-through or pass-through businesses such as S corporations, partnerships, and sole proprietors may qualify for special tax deductions. That deduction is 20 percent of their company's net profit. This is huge!
Let's say you're an S corp shareholder and you get a pass-through profit of $100,000. In 2018, you may only pay taxes on $80,000 instead of $100,000. This deduction does have some phase-out rules. For joint filers, phase-out starts at $315,000. It's completely eliminated at $415,000. 
If you're an owner of a C corporation, you were also dealt some good cards. C corps will pay a new federal flat tax of 21 percent. Previously, the federal corporate tax rate started at 15 percent and quickly went as high as 39 percent. This could result in some nice tax savings!

Good Card: 2018 Tax Changes for Business Expenses

Another good card for business owners is an improvement in the ability to expense equipment. The Section 179 limit on expensing fixed assets increased to $1 million. The limit had been at $500,000 for the last several years. Next year will be a great year to buy new equipment, furniture, fixtures, etc.
Bonus depreciation has also been increased. In the past, you were only able to use bonus depreciation on brand new equipment. Now, you can claim bonus depreciation on new and used equipment you purchase.

One bad card manufacturers received is the loss of the domestic production activities deduction. This has been a special tax break for manufacturing companies that has been in the code for a good number of years. It's been eliminated for 2018. 

Good Card: New and Improved Alternative Minimum Tax (AMT)

Taxpayers who've been subject to the alternative minimum tax (AMT) also received some winning cards. Although the AMT was not eliminated, it was reformed. First, the amount exempted from the AMT has increased. And, the phase-out of the exemption amount drastically increased from $495,000 to $1 million. The bottom line: much fewer taxpayers will pay the AMT.

Good Card & Bad Card: 2018 Tax Changes to Standard and Itemized Deductions

Now let's look at some areas where some taxpayers have a winning hand while others have a losing hand: taxpayers using the standard deduction versus itemized deductions.
The standard deduction doubled. That's a wonderful thing for taxpayers who use it. For a younger family that doesn't own a house, the new standard deduction is great news for them.
However, if you're a taxpayer who's been itemizing your deductions, you got dealt some bad cards. One of the worst is the change to state and property tax deductions. It's now limited to $10,000. This could potentially hurt higher-income taxpayers or taxpayers who have several properties, such as a home and a cabin or vacation property, where they’re deducting taxes from multiple properties.
Another group that got hit hard with the tax reform act was people who claim employee business expenses, such as mechanics who deduct the tools they purchase or airline employees who deduct per diems for out-of-town meals. They'll get hit very hard, as those deductions have been eliminated.
One itemized deduction that got better is the deduction for out-of-pocket medical expenses. The threshold for deducting out-of-pocket medical and dental-related expenses went down, which is a really good thing, particularly for elderly taxpayers.

There's a lot to like about this new tax reform bill. Many taxpayers will have winning hands while some won't. But overall, we see a lot of good in this. Always feel free to reach out to Kaiser Tax with any questions you have about how this may affect you individually.

 

Worker Classification Can Be Very Costly

January 2, 2018

 

The number of independent contractors working in the United States has risen steadily over the last two decades. But did you know you can’t simply label a worker as an independent contractor? The facts and circumstances of the relationship determine if the worker is an employee or an independent contractor.

By hiring independent contractors, companies save time and money on payroll processing, avoid paying payroll taxes like FICA and unemployment taxes, and don’t need to purchase worker's compensation insurance or provide retirement and other benefits. 

But misclassifying an employee as an independent contractor can be very costly for a business. The company will owe back payroll taxes. Payroll taxes are a top priority for the tax agencies, and the fines and penalties are horrendous!

When do these issues come up? 

Typically, everything goes great until you stop paying the worker in question. The classic example is a company stops paying a worker, who goes down to their local unemployment office and files for benefits. There, they find out they're not eligible for benefits because they were self-employed. At that point, the worker will say that they were misclassified or treated incorrectly. This starts a series of problems for you as an employer.

How do I know if I’ve misclassified a worker?

Ultimately, a worker is an employee if he or she is subject to the will and control of the employer. It's not necessary for the employer to control or direct the work that's performed. It is sufficient if the employer has the right to do so.

The IRS, the state department of revenue, and the unemployment department all like W-2 employees. They can and will take issue with your worker classification. In revenue ruling 87-41, the IRS developed a 20-factor test to determine if an employee has been misclassified as an independent contractor. Kaiser Tax has represented many companies in worker classification audits.

Here are a few of the 20 factors that get businesses into trouble fast.

  1. The company pays or reimburses the independent contractor for expenses. You should never pay for an independent contractor’s expenses--NONE WHATSOEVER. To be truly an independent contractor, the worker must have the ability to lose money. If the worker doesn't have business expenses, they can't lose money, and therefore they are clearly your employee. Instead, simply pay the independent contractor more money and have them pay for their own expenses.
  2. The worker is paid hourly and on a regular schedule such as weekly, biweekly, or monthly. It is much better to pay independent contractors on a project basis. The independent contractor can submit a progressive billing based on completion of the project so they don't have to wait for the project to be complete to be paid. They could take payments after a project is 20%, 40% or 50% completed and take progressive payment. Or, you could pay a commission or flat fee. 
  3. Workers perform services mostly on your premises. Government agencies assume if the worker is performing services at your location and with your equipment, they are employees. Have the worker perform services outside your premises at least some of the time. 
  4. You have a long-term, continuous relationship with the worker. Consider putting together a series of contracts that each last 6 to 12 months. The period is short and you can always have another contract once the current one expires. This avoids the continuous relationship problem.
  5. You don’t allow workers to work outside your company. You don't want independent contractors working exclusively for your business. That points to an employee/employer relationship

How can I avoid misclassifying a worker?

Kaiser Tax recommends you work with a professional to design an independent contractor agreement. Always have the independent contractor agreement signed by both parties and follow the agreement. The independent contractor must complete a W-9 form. We suggest not paying a contractor until you have received a completed W-9 from them. Use getting paid as leverage to getting that form completed. 

Lastly, treat all similar workers in the same manner. They're all either employees or independent contractors. Do not have some of each. Issue independent contractors 1099s each year by January 31. It's always better to pay a business entity versus an individual. Consider having your independent contractors form an LLC and have a contract between your company and their LLC. 

A note for corporations

By federal statute, any person who owns 2% or more of a corporation is an employee. You cannot be an independent contractor for a company in which you have an ownership interest. This also applies to your spouse, kids, and parents. In other words, all family members are employees of a corporation you have an ownership interest in.

Many companies pay independent contractors to avoid paying benefits and payroll taxes. If your company does this, you must be very careful to design and follow an independent contractor agreement that can hold up under audit. The consequences of misclassifying a worker are huge. Remember an ounce of prevention is worth a pound of cure. For help with a worker misclassification audit or tips for hiring an independent contractor the right way, contact Kaiser Tax today. 

 

 

The S-Corp Shareholder Health Insurance Conundrum

November 7, 2017

 

If you’re are a S corporation shareholder and your corporation pays for your health insurance, it’s time for you to listen up. While the rules on reporting health insurance have not changed, small business owners often misunderstand them. Kaiser Tax is here to help you make sense of the health insurance reporting rules so Uncle Sam doesn’t’ come calling.

How do health insurance benefits work for S-corp shareholders?
S corporations often offer a range of health insurance benefits, including medical, dental, and long-term care insurance. The corporation usually pays for the insurance premiums for the shareholders’ benefit. The corporation can deduct what it pays in premium as an ordinary business expense. That’s the good news.

The bad news is that the premium the corporation pays for is a taxable fringe benefit for the shareholder and family members. It is added to their wages on form W-2. To be clear, this only includes the company-paid portion of premiums paid for the shareholder, spouse, and dependents. These additional wages are not subject to FICA or unemployment taxes, but should be included in box 1 of shareholders’ W-2s.  

Does that mean S corporation shareholders do not get a deduction for health insurance?
Do not panic, you’re actually still eligible for an above-the-line, self-employed health insurance deduction on your individual tax return. You need to follow the three steps to ultimately get a deduction for health insurance premiums.  

Step 1: The corporation takes a deduction for the premiums as an ordinary business expense, which lowers your corporate profits.  

Step 2: The corporation adds the premium amount to the shareholder’s wages, which increases their W-2 amount.

Step 3: The shareholder takes the Self Employed Health Insurance deduction on their individual returns.

This is the only way an S corporation shareholder can deduction health insurance premiums. The IRS has made it very clear: Follow the three-step process or lose the deduction.  

So, what employees does all this apply to?  
Employees who own more than 2 percent of corporate stock are subject to these rules. A common pothole for a company is when to apply the family attribution rules. Family attribution rules consider an individual the owner of the stock of their spouse, children, grandchildren, and parents. So if Dad owns 100 percent of an S corporation and Junior is simply an employee, the health insurance premiums paid on Junior’s behalf should still be included in Junior’s wages reported on his W-2 through the family attribution rules.

What do you need to do?
If you’re working with a payroll processing company, it’s important that you let them know the amount of the company-paid health insurance for the shareholder(s) before year-end. They don’t know what they don’t know.  We have seen this missed dozens of times, and your payroll processing company will charge a big fee to fix this mistake if you failed to share your company-paid premium with them. Even worse, if not done properly, you will lose a large deduction, which hurts even more. With the cost of health insurance these days, you do not want to miss out on this deduction.  

Let’s walk through an example. Let’s say Bob Lee owns 100 percent of Lee Consulting Inc., a S corporation. During 2017, Lee Consulting Inc. paid $5,000 in health insurance premiums to cover Bob’s health insurance.  Bob’s $70,000 salary is included in boxes 1, 3, and 5 on his W-2, per usual. Since Bob Lee owns more than 2 percent of the S corporation as a shareholder, his $5,000 in health insurance premiums should also be included in box 1 of his W-2. This would bring the total in box 1 to $75,000. Bob Lee will then take the Self Employed Health Insurance deduction on his individual tax returns in the amount of $5,000.00. See below for a snapshot of Bob Lee’s W-2.

 

 

Health insurance rules for S corporations is complex, which is why it’s always a good idea to ask a CPA for expert advice. If you have questions about the health insurance deduction you may be entitled to, contact Kaiser Tax today.

 

 

Halftime Adjustments Help You Win the Tax Game

October 24, 2017

 

One thing I really like about the fall is watching pro football. It makes Sundays very exciting, and what a fun game it is. Football a great spectator sport.

Have you ever noticed that a team that performs poorly during the first half of the game often comes out after halftime and makes the necessary adjustments to ultimately win the game? What do they talk about during halftime to make it seem like you’re watching a totally different team?

In the tax world, we’re at about halfway point. We're less than six months away from your next tax deadline. Now's the time to huddle up with your team, review your tax plan, and make any necessary adjustments to help you win the tax game.

Leave Tax Preparers on the Bench

Everyone wants to win the tax game. Nobody likes paying more than their fair share to Uncle Sam. Most people work with tax preparers. Tax preparers are reactive professionals. They come in after the year has closed and do their best with the information you have provided to them. They try to make the best results they can.

Think of a tax preparer as your two-minute drill. The tax preparer has a limited playbook, is often rushed, and simply hopes the clock doesn't run out or that you turn over the ball.

A Tax Strategist Can Be Your Tax MVP ers.

Everybody wants to win and wants their team to win. Good teams have a game plan. The game plan is discussed and communicated to all the players. It's important everybody is on the same page.

Do you think your football team would win if they did not study film, practice, and game plan for their next opposite? Probably not.

The same thing happens with your taxes. The best chance for you to win the tax game is between now and the end of the year. It's time for you to huddle up with your tax professional, review your plan, and make the necessary adjustments so you can be a winner.

No one likes surprises or to discover opportunities that were once there are no longer there because time’s run out. Now is the time for you to make those adjustments, become a winner, and beat Uncle Sam at his own game. Contact Kaiser Tax today to draft a tax strategist to your team.

 

To Fend Off Uncle Sam, Pay Yourself First

September 21, 2017

 

 

Your Uncle Sam is a greedy old man. He's always taking money from you and is never satisfied with your contribution to the cause. What can you do to get even? Stop paying Uncle Sam and pay yourself instead! 

Pay Yourself First with Retirement Plan Contributions
Stop giving Uncle Sam more than you need to by paying into your retirement plan. Lots of taxpayers use IRAs, which are nice retirement plan products, but the contribution limits are low at $5,500 for people under age 50 and $6,500 for people 50 years old and older.

The real opportunity is for business owners, who have a variety of retirement plans options to choose from. Many retirement plans allow for up to $54,000 of contributions, which is a lot more than you can contribute to an IRA.  What you want to do is set up a retirement plan, harvest some of your profits, and keep them out of the reach of old Uncle Sam. You’re simply moving money from one hand (your business checking account) to your other hand (your retirement accounts). It's still your money, but you're getting a large tax deduction for doing so.

Retirement Contributions for Business Owners
As a business owner, your retirement plans can evolve and change as your business evolves and changes. Typically, this happens when you add employees. An employer-sponsored plan where the employer makes the bulk of contributions, such as a SEP, a Keogh, or a Profit Sharing plan, are great if you only employ family members.

However, once you start adding non-family member employees, your retirement planning options may need to change. Switching to popular plans like 401(k) and SIMPLE make more sense. In these plans, the employee makes most of the contributions, not you the employer.  

If you’d like to start a 401(k) or SIMPLE retirement plan for 2017, you must do so by October 1 of this year. Don't miss out on this great opportunity to stuff some money aside, shelter it from Uncle Sam, and build your future.

Retirement Contribution Timelines
You have until March 15 of the year after to make employer contributions to retirement plans. If your company files an extension, you have until September 15 to do so.  We often recommend filing a business tax extension to buy more time to make retirement contributions.  Real Estate agents are a classic example of this as they are typically cash poor in the spring but have lots of cash in the summer.  

You can make contributions after the year closes and still take it as a deduction for the previous year. For example, if you wanted to make an employer contribution to a retirement plan for 2017, you can make that contribution after December 31 and it will still be counted as a deduction for 2017.

But There's a Trap
The fact that you can contribute after the close of the year doesn't mean it will always work out for you. You must have the money you plan to contribute in your business account on December 31. If the money isn't there and you plan to use 2018 profits to fund the contribution, you may be caught short. If you're planning to contribute after the close of the year, make sure you have the money in your business account at year end.

Defined Benefit Plans for Successful Companies
Now, some businesses are very fortunate and make their owners a ton of money. A great opportunity for them is to set up a defined benefit plan. Think of it as an old-time pension plan like our parents used to have when they worked for an employer and upon retirement, received a pension that paid out as long as they were alive. 

With a defined benefit plan, the company has an obligation to make payments for your lifetime. An actuary reviews your plan and determines how much money your company needs to fund to be able to meet that future obligation.

Because of the anticipated expenditure, the contributions for a defined benefit plan are HUGE. The limit is $215,000 per year. That's correct—your company could be putting $215,000 annually into a defined benefit plan, sheltering that money from taxation, keeping that money out of Uncle Sam’s hands, and building your future. 

To recap, a great way to protect your money from Uncle Sam is simply put it away for your future. Don't allow the government to continue to take money from you. As you become more successful and your tax bracket increases, the most impactful way to shelter money is to simply put money into retirement plans. Contact Kaiser Tax to learn more about your retirement plan options. 

 

Health Reimbursement Arrangements (HRA) Make a Comeback-Savior for Small Businesses

August 22, 2017

 

Many small business owners have canceled their group health insurance reimbursements because the annual premium increases have priced them right out of the market. Some other small business owners would like to offer health insurance reimbursements, but are simply unable to do so. And there's another group of small business owners who have reimbursed their employees for their own individual health insurance in the past, but can no longer continue to do so under the Affordable Care Act.

All of this means that tax-free health insurance benefits have become a real problem for small employers. It's hard to compete against large companies if you do not offer a competitive health insurance package, but Kaiser Tax has great news! Health reimbursements, known as HRAs, are making a comeback. That's great news for small business owners in Minnesota.

How does a health reimbursement arrangement (HRA) work?
Effective January 1, 2017, a small employer can adopt a qualified small employer health reimbursement arrangement. A small employer is a company with fewer than 50 full-time employees during the previous year that does not offer group health insurance. That’s a fairly broad definition. 

In a health reimbursement arrangement, a small employer can reimburse their employees for individual health insurance and out-of-pocket medical costs. The annual reimbursement maximums are $4,950 for individuals and $10,000 for families.

Health reimbursement arrangement (HRA) benefits for employers
Health reimbursements allow small employers to control costs through the maximum reimbursement amount. Employers can set up the reimbursement to have lower reimbursement amounts if they choose to. 

For example, perhaps an employer sets up their reimbursement to have a maximum of $3,000 for an individual and $7,000 for a family. The employer can control the reimbursement amount they pay employees without worrying about annual premium increases as they would with a group health reimbursement.

Another benefit is that employers do not need to pick an insurance company or group reimbursement. No matter the reimbursement, somebody's going to be unhappy. A health reimbursement eliminates that factor. Plus, the health reimbursement is a tax-deductible expense to the business. 

Health reimbursement arrangement (HRA) benefits for employees
Now, let's look at it from the employee side. The reimbursement for health insurance and out-of-pocket costs are all tax-free for employees. Everybody loves tax-free benefits. Additionally, they have freedom of choice, as they're not stuck with their employer's reimbursement. The employee picks the health insurance reimbursement that suits them best. It gives great flexibility.

As you might guess, there are some rules, complications, and requirements to this plan. You must have a reimbursement in writing and give employees written notice at least 90 days before the reimbursement starts. Employees must provide proof that they have minimum essential health insurance.

Special considerations for corporations and partnerships
We like health reimbursement arrangements and have used them several different ways with different entities. For sole proprietors, it works well if you have a family member who is a bona-fide employee. Two classic examples are family farms or husband-wife real estate teams.

C-corps also benefit greatly from health reimbursement arrangements. Shareholders can take full advantage of tax-free benefits. But S-corp shareholders and partners in partnerships have special rules that also include their family members. If you're an S-corp shareholder or partner in a partnership, the plan is still pretty good. Ultimately for the shareholder and the partner, you'll get tax-free benefits out of the reimbursement for health insurance. But the reimbursement for out-of-pocket expenses is a taxable fringe benefit for S-corps shareholders, partners and their family members. Compared to group health benefits, health reimbursement is still a pretty good option for these types of businesses.

If you're looking to offer health benefits to your employees, take a look at the health reimbursement arrangements (HRA)and give us a call at 952-646-9282. We can go through the requirements and set you up on the right path.

 

 

Can Rental Income Be Tax-Free?

August 1, 2017

Recently, we got a call from one of our clients who owns a downtown condominium. He wanted to rent his condo during Super Bowl Week and make some easy money. My client hoped to rent his condo for $1,250 per night for a week for a total $8,750 of rental income. 

Of course, our client was wondering about the tax consequences of doing so and if renting his condo was worth the effort after the IRS came calling. I was happy—delighted, actually—to inform my client that this rental income would be tax-free.

Our client was stunned. He asked his question again and wondered if we understood what he was asking. We did, and then went on to explain that under Internal Revenue Code 280(a), a taxpayer can rent out a dwelling for 14 days or fewer every tax year and not report it as income. 

Yes, you read that correctly: under the Internal Revenue Code, if you rent a dwelling unit for 14 days or fewer during a calendar year, that income is completely tax-free. My client was absolutely astounded and delighted to hear that he wouldn’t have to pay tax on his Super Bowl rental income.

Tax-Free Rental Income for corporate shareholder

So, how does a corporate shareholder receive and use code section 280(a) to get tax-free rental income? Here are a few ideas for you.  

Your corporation rents your house for a training, annual picnic, or holiday party and pays you—the homeowner—fair rental value. Consider a company retreat to your cabin up north or your condo in Florida.  You have greater opportunities for tax free rental income if you own more than one residence.  The great news is you can get up to 14 days of tax-free rent per residence. It even gets better as a residence includes some boats, mobile homes and any dwelling unit that has basic living accommodations, which includes a sleeping area, a toilet, and cooking facilities.  

The company itself reports the rent as an ordinary, necessary business expense, which will reduce its corporate profit and save you some taxes. At the same time, you receive the rental income to you personally, and it is tax free. So, you'll be getting the best of both worlds. Your corporation gets a deduction, lowering your corporate profits and saving tax, while at the same time you receive rental income that is non-taxable under code section 280(a).  

A couple of things to keep in mind here. We need to point out that the company use of your residence needs to be for meetings and not entertainment purposes. It's very important that you come up with and document a fair rental value. Make sure you as the homeowner invoice the corporation for the rent. In turn, the corporation should issue you a 1099-MISC for the rental income you receive. You need to handle the 1099-MISC properly on your individual income tax returns to make sure it's tax-free. 

Tax-free rental income under Internal Revenue Code 280(a) is a great reimbursementning opportunity for corporations and their shareholders to get tax-free rental income. To take advantage of this great opportunity, contact Kaiser Tax today.

 

Use Your Business Entity to Create a Tax-Free Educational Assistance Program

July 13, 2017

We all know the cost of higher education is skyrocketing. We want to give you a tax strategy that willwork for your kids who are age 21 and older. They may be entering MBA programs, law school, or medical school. Or, perhaps your child is entering college later in life.

Did you know your business could pay up to $5,250 per year for educational assistance? It can, and it's simply wonderful. This education assistance is deductible to your business as a normal and necessary business expense. This means tax savings for you and at the same time, the assistance is a non-taxable fringe benefit to your employees, including your adult children who work for you. An educational assistance program pays for typical things such as tuition, fees, books, and supplies. It does not cover meals, lodging, and transportation. 

Educational Assistance Program Questions 

Kaiser Tax is often asked if educational assistance needs to relate to your business. That’s another wonderful part of this program: No, it does not. Let's say you own a retail store and your daughter is going to medical school. Under a qualified educational assistance program, your company can pay $5,250 per year for her medical schooling. The educational assistance program allows you to pay for classes that have nothing to do with your business.

Kaiser Tax also gets asked how many hours per year does a child need to work in your business to be eligible for this benefit. The good news is the Internal Revenue Code does not require your child to work a certain number of hours before they can become eligible. This means your child can work for you part time and still be eligible for this benefit.  

Educational Assistance Program Requirements

This all might sound too good to be true. You hire your kids, you pay them to work for you, and you get to pay $5,250 tax-free for education. You must think there are some requirements or pitfalls, and you are correct. There are some.

At the company level, educational assistance is a qualified reimbursement. There must be a written reimbursement that spells out the benefit and who is eligible. The benefit must be offered to all “eligible” employees. You must consider the number of employees who might be eligible and what the potential costs may be to offer assistance to all of them. 

If that cost is still favorable, there are several important requirements regarding your kids. Your child must be 21 years or older and a legitimate employee of your business. They cannot be more than a 5 percent owner of your business, and they cannot be your dependent for tax purposes. That's why these programs work best for children who are a little older and on their own.

If you can jump through these hoops, an educational assistance program is a great way to help your kids with higher education costs in the most tax-favored way possible. While this is a great strategy to help with the education costs for your kids, remember that everybody loves tax-free benefits. An educational assistance program is a wonderful recruitment and retention tool for other employees. To get help on your business’s educational assistance program, contact Kaiser Tax today.

 
5 Tax Deductions You’re Probably Missing When You File Your Business Tax Return
May 16, 2017
 
For self-employed individuals, tax time is a complicated time, even when you’re used to wearing all the hats at the office. That’s why we always recommend getting a CPA’s help during tax season and throughout the year. Here are five of the most common deductions we see self-employed professionals miss when they file their own tax returns.
 
1. The Home Office Deduction
Professionals new to working from home are always eager to take the home office deduction.  Good news, if you use at least a portion of your home for administrative purposes, you likely will qualify.
 
If you do qualify for this valuable deduction, you can take it two different ways. The traditional method allows you to deduct a percentage of your actual home expenses, based on square footage. The simplified method is more straightforward: you can deduct $5 per square foot of your home office, up to $1,500.
 
S-corp and C-corp shareholders also have some options to take advantage of home office expenses as well.
 
2. Business Mileage 
If you’re self-employed, each mile you spend on the road for your business earns you a 53.5-cent deduction for 2017. If you track your mileage, this can add up to substantial savings over the course of the year. There are many great apps out there that make this a breeze.
 
3. Accelerated Depreciation and Bonus Depreciation
Accelerated depreciation, aka the Section 179 tax deduction, saves you money on purchases of tangible business property, from software to heavy machinery. If you’ve purchased or financed certain equipment for your business in 2016, ask your tax preparer about the Section 179 deduction. You can claim up to $500,000 in deductions for up to $2 million spent on equipment.
 
4. Health Insurance Premiums
If you pay for your own healthcare as a self-employed professional, partner in a business, or as an owner of an s-corporation, you can deduct the amount you’ve personally paid in health insurance premium. This is one of the most commonly missed deductions.  
 
5. Business Use of Cell Phones and Internet
If you’re self-employed or pay personally for your cell phone and internet, you can likely deduct at least a portion of your bill. Ask your tax preparer if you qualify. 
 
Not sure if you qualify for any of these commonly missed deductions? Kaiser Tax can help you understand all the deductions you’re entitled to. For help on your 2016 tax return, contact us today.
 
 

 

 

 

 

 

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