Welcome to our blog. Please check out some of our latest posts:
- Fresh Look at Reasonable Compensation for S-Corp Shareholders
- The Sales Tax Shoe Has Finally Dropped: States to Require Remote Sellers to Collect Sales Tax
- Why Hiring Your Kids Is a Great Idea for You and for Them
- Double Protection for Your Business
- Playing Your 2018 Tax Trump Card
- Worker Classification Can Be Very Costly
- The S-Corp Shareholder Health Insurance Conundrum
- Halftime Adjustments Help You Win the Tax Game
- To Fend Off Uncle Sam, Pay Yourself First
- Health Reimbursement Arrangements (HRA) Make a Comeback-Savior for Small Businesses
- Can Rental Income Be Tax-Free?
- Business Entities & Owners - Are You Taking Advantage of the Home Office?
As an S-Corp shareholder, how do you know if you’re taking the most advantageous wage? Let’s take a closer look at reasonable compensation and how to settle on a wage that will save you money come tax time.
First, let’s lay down the ground rules. If you own 2 percent or more of a corporation and are active in that corporation (meaning that you're working for that corporation and not just an investor), you are an employee. And as an employee, you—the shareholder—must be paid a reasonable wage for services you perform. This wage needs to be reasonable under the facts and circumstances of your employment.
Why is this important? There's a strategy to be used for S-Corp shareholders. "Reasonable compensation" is not a defined point; it's a range. You want to be on the low end of that range for two reasons. Both have to do with taxes.
S-Corp Reasonable Compensation and Social Security and Medicare Tax
Wages are subject to Social Security and Medicare tax withholding. Your employer must match your Social Security and Medicare contribution. When you're an employee shareholder, you pay 7.65 percent Social Security and Medicare tax, and your corporation matches that amount.
So, the real Social Security and Medicare tax burden is 15.3 percent. Simple math says the lower the wage, the less tax you'll pay as an employee and your corporation as an employer. Thus, taking a lower reasonable wage will result in payroll tax savings.
S-Corp Reasonable Compensation and Income Taxes
President Trump signed the Tax Cut and Jobs Act into law late last year. In that tax bill was a special deduction called the Section 199a deduction. It has a great benefit for pass-through business entities, which is what an S-Corp is. The new Section 199a deduction gives S-Corp shareholders a deduction on their individual return up to 20 percent of the pass-through profits.
For example, if an S-Corp shareholder receives a K-1 form saying they must report $100,000 of S-Corp profits on their individual return, under Section 199a, that shareholder may only pay tax on $80,000 (after the 20 percent deduction). There are rules that apply to Section 199a, but for now, we'll keep it simple. Simple math says the lower your wage, the higher you’re S-Corp profits and that means a bigger Section 199a deduction and the end results is Income tax savings.
The bottom line is this: If you take a reasonable wage that's on the lower end of the scale, you're saving on Social Security and Medicare taxes and paying less income tax due to Section 199a.
What Is Reasonable Compensation for an S-Corp Shareholder?
This brings us to the question: What is reasonable? What you consider reasonable may not be the same as what the IRS considers reasonable. Kaiser Tax looked at recent court cases regarding reasonable compensation audits and found that the IRS's numbers are based on statistical surveys of different industries, employers, labor, and government entities. The IRS uses these numbers to come up with what they think is a reasonable salary for somebody in every occupation.
Determining your reasonable wage is a matter of doing your research and finding reliable stats for your situation. From those statistics, you can make downward adjustments. For example, federal employees are historically paid low wages because they gain an incredible amount of benefits: pension, health insurance, etc. Because of these benefits, the government can pay employees less money.
You can use a similar strategy by having your S-Corporation pay for your health insurance premiums and make large contributions to your retirement plan. So, when we say reasonable wage, what we're really looking at is reasonable compensation.
When to Pay a Reasonable Wage to an S-Corp Shareholder
A question we get frequently is what if a company is showing a small profit or even a loss—does it still need to pay a reasonable wage to the employee shareholder? The answer is simply, no, you don't have to pay a reasonable wage when a company is at a break-even, making a small profit, or showing a loss.
However, if you're not taking salary, you should not be taking distributions or making any loan payments back to yourself. The IRS wants to see wages being paid before optional distributions or loan payments.
Exceptions to the S-Corp Reasonable Wage Rule
With every rule, there are exceptions. Reasonable compensation with S-Corp shareholders is just another example. Typically, you want to take a lower reasonable wage to save on Social Security and Medicare taxes and Income taxes with the new Section 199a deduction. However, there are two clear reasons someone may want to deviate from this strategy.
Shareholders who are getting close to retirement age may want to rethink this strategy. One of the drawbacks of the plan above is that it could affect your Social Security benefits once you retire. Often, as shareholders get closer to retirement, they'll increase their salaries and pay more in Social Security taxes, so they can reap a greater Social Security benefit. Your Social Security benefit is based on your 35 highest-paid working years. What some S-Corp shareholders will do later in their working life is increase one or more of those 35 years by paying more salary.
You'll also see corporations add spouses to the payroll. When you add a spouse to the payroll, you're adding additional Social Security and Medicare taxes, so why would you do that? One of the reasons is so that spouse can collect Social Security benefits later in life. An individual must have 40 working quarters (equivalent to 10 years) to be eligible to receive Social Security benefits. Many times, one spouse will be the primary income producer for the household, and another spouse is the stay-at-home provider. However, we typically find the stay-at-home spouse is almost always involved in the company. That spouse could be paid a wage. By doing so, you're adding to their number of quarters worked and this will help the spouse qualify for their Social Security benefits.
The second reason why you may want to take a higher salary is for retirement planning purposes. Some taxpayers are simply not going to qualify for a Section 199a deduction. Like any other tax rule, it's complicated. While many S-Corp shareholders will enjoy the deduction, not everyone is going to. These individuals may be better off taking a higher W-2 wage to allow for a greater retirement contribution by the company.
For example, if you're using a SEP, 401(k), or profit-sharing plan at your company, the amount an employer (your corporation) can contribute to a retirement plan is a function of your W-2 wages. The higher the W-2 wage, the higher the retirement contribution.
The Bottom Line on S-Corp Reasonable Compensation
Under the Section 199a deduction, the lower your wages, the higher your profits, the greater your Section 199a deduction. An S-Corp shareholder gets that special Section 199a deduction on the company profits, but not on the wages. That’s why we want to keep the wages on the low side—to maximize the Section 199a deduction.
The IRS does audit corporations for reasonable compensation to their S-Corp shareholders. We've learned over the years that the IRS goes after the blatant abusers—people who are taking $100,000 out of their company and paying themselves $5,000 in wages and $95,000 in profit distributions. If you make efforts to be in the reasonable range, the IRS simply does not have the resources to go after you.
In summary, most S-Corp shareholders will use the strategy of using lower reasonable compensation to save on employment taxes and now income taxes through Section 199a deduction. That shareholder needs to be careful to not be too low or risk an IRS audit. We suggest you look at the same statistics the IRS would use to determine what is reasonable for your situation. Then, determine how you can take that number down by other factors (ex: non-taxable benefits). For help determining your reasonable compensation, contact Kaiser Tax today.
It finally happened. On June 21, 2018, the US Supreme Court ruled that online sellers who aren’t based in Minnesota, but who sell goods in Minnesota, must collect sales tax. This US Supreme Court ruling is not for just for Minnesota, but applies to all states. Before June, mail-order, online, and other remote sellers were required to collect sales tax in the states where they had a physical presence (like an office building or warehouse) but not other states where they sold their goods. Let’s take a look at the ruling and the effect it may have on your business.
South Dakota v. Wayfair
In South Dakota v. Wayfair, the Supreme Court ruled that states could require remote sellers to collect sales tax. Remote sellers, for example, are businesses that do not have a physical presence in Minnesota but sell goods and services in Minnesota.
This will become the biggest, and most expensive, administrative burden for many small businesses. For example, a small home-based business that sells products from their website and ships them to customers in 30 states may now need to collect, track, and remit sales tax to 30 different states!! This burden gets worse for the following reasons:
- The sales tax rules will be different in each state. For example, the way clothing is exempt from sales tax in Minnesota, but not all states.
- Each state will have its own tax ID number and login credentials.
- The sales tax reporting and payments will be handled differently by each state. Some states will require annual reports, while others will be quarterly or possibly even monthly.
- There could also be county, city, or local sales tax to collect and remit.
This ruling will require businesses that sell across state lines to research the sales tax implications for each state.
There is Some Good News
Like most states, Minnesota Revenue recently announced some exceptions for small sellers. A remote seller may be exempt from Minnesota sales tax law if they ship fewer than 100 sales to Minnesota over a 12-month period or fewer than 10 sales of more than $100,000 over a 12-month period. Each state will announce their own the small sellers exceptions. Hopefully, these small seller exceptions will help reduce your sales tax burden.
Why the New Sales Tax Rule Matters
Minnesota, like all other states, stands to generate millions more in sales tax revenue from the Supreme Court ruling. It requires businesses across the country and around the world to charge sales tax. But if you’re a Minnesota-based business selling in Minnesota, you’re already collecting sales tax. So why care about the rule change?
First, it evens the playing field for you and your remote seller competitors. Consumers can no longer avoid paying sales tax by buying from an online retailer rather than you.
Sound intimidating? It is, which is why it pays to have a great CPA such as Kaiser Tax in your corner. We stay on top of changes to state and federal tax laws so you don’t have to. To learn more about what the new sales tax law means for you and your business, contact Kaiser Tax today.
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.
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.
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.
- 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.
- 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.
- 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.
- 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.
- 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.
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.
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.
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.
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.
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.
We are often asked if a company can take a home office deduction and the correct answer is “only if you’re a sole proprietor.” If you are the owner of an S corporation or a C corporation, you are not entitled to a home office deduction. The reason for this is that the business entity itself is not legally obligated for the expenses of your household. But there is good news. Business entities can reimburse their owners for their home office. The keyword here is reimburse. And you like the word reimburse because reimbursements are deductible by your company but non-taxable to you as the owner. This is much better than having your business entity pay rent to you for your home office for two reasons: First, the rent paid by the company to the owner is taxable. This is rental income and will need to be reported on the owner’s individual tax return. Second, under Internal Revenue Code Section 280, the business owner isn’t allowed to take any deductions against the rental income so what you have here is a situation where your company profits go down by the rent expense but your personal income goes up by the same amount and you don’t get anywhere. So what you really want is the home office reimbursement. That is because the company can deduct the home office reimbursement and that reimbursement is non-taxable to the business owner. Again, rent paid for your home office is deductible to the company but taxable to the owner. So clearly the home office reimbursement is the way to go.
Another thing we like about the home office reimbursement is you’re getting a deduction for items you already pay. This is done by deducting a portion of your household expenses. There are some rules you need to be aware of with this, however. Specifically, let’s look at a common situation where the business has a location to meet or service clients. In this scenario, the business owner will want to maintain an administrative office in their home. To qualify for the home office reimbursement, business owners must complete at least 50 percent of their administrative time at their home office. It does not matter what the other employees do or what their administrative functions are. Focus on the business owner. What administrative tasks or duties do they have and where/how are they performed? Again, you need to have 50 percent of the business owner’s administrative functions performed at their home office. Common duties you can do at your home office include billing, banking, invoicing, bookkeeping, ordering supplies, scheduling, emailing clients or prospects, education, research, reading journals or publications just to name a few. The important point is that the business owner needs to complete at least 50 percent of their administrative time from the home office.
So how do you determine the reimbursement amount? First, you need to determine the usable square footage of your home and the usable square footage of your home office. This will determine the home office percentage. Then you multiply the home office percentage by the monthly expenses of your home. This includes mortgage interest, property taxes, homeowners insurance, utilities, association dues, security monitoring, repairs and maintenance. The business needs to reimburse the business owner every month. This expense should be recorded in the company’s accounting system as an office expense. Remember, this is not rent and should not be recorded as rent.
What other items can you deduct? Your business can pay for and deduct 100 percent of the items you put into your home office like furniture such as desks, chairs, file cabinets, lighting, artwork etc. and also for your computer and software needs such as printers, scanners, monitors...the whole works. You can also deduct a reasonable part of your home’s internet service. All businesses need connectivity and that includes you at your home office. You can estimate your home internet usage and have your business reimburse you for the business portion.
There’s another big reason you want to maintain an administrative office in your home. That reason is business mileage. The IRS is very clear on this issue. If you have a home office, your business mileage starts at your doorstep thus eliminating the commuting rules. Normally, your drive from your home to your work location is non-deductible. By maintaining a home office, you increase your deductible business miles. Oftentimes, this is much more than your actual home office reimbursement. But the point is that you’re gaining deductions at the same time as you’re receiving non-taxable reimbursements.
It is very common for a business owner to maintain a home office. Special rules apply if your business has a separate location to meet or serve clients. To qualify for the home office reimbursement, the business owner must complete at least 50 percent of their administrative time at the home office. By doing so, the business can deduct a portion of the business owner’s household expenses and increase their mileage deductions.