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Archives for November 2018

How to Choose the Right Business Entity

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business structureCritical Choices: How the Business Entity You Select Impacts Your Taxes and Business Decisions

Entrepreneurs have a long list of special opportunities to save on taxes. However, your eligibility for some tax breaks depends on the decisions you make as you are planning and launching your business. One of the most critical choices is which business entity you will operate under.

The Amazon Best Selling book, The Great Tax Escape, walks you through each of your options, spelling out the benefits and drawbacks of the most common business structures. Although you can determine this on your own, you may want to consult an advisor to discuss the pros and cons of each type of entity.

Business Entity Basics

It’s no surprise that you must pay taxes on any income your business generates, but you might not realize that the same income can be taxed differently depending on how your business is organized. While some types of businesses are considered separate taxpayers from their owners, others require that you include your business income on your personal tax returns.

Your tax rates aren’t the only thing impacted by your choice of business entity. The structure you select affects whether you are personally responsible for business debts and whether you can be held personally liable if the business is sued.

When your business exists as a separate entity, the business itself can apply for credit, and these types businesses can continue to operate when you decide to move on or retire.  During this process there is more to consider than just taxes so you don’t want to take this lightly.

These are a few of the most common options:

Sole Proprietorships and Partnerships

When you are starting out and working alone, it is easy to operate as a sole proprietorship. Essentially, you and your business are one and the same for tax and legal purposes. Simply register your business name with the state, and you are ready to launch. You can still have employees as a sole proprietor, but you own the entire company.

The simplicity of this structure makes it quite popular, but it isn’t always the best choice for entrepreneurs. Business income is treated the same way as other personal income for tax purposes, and you assume full liability for all business debts and legal issues. That puts your personal assets at risk.

Though there is slightly more paperwork involved, a partnership is quite similar to a sole proprietorship. Taxes and legal liability are the responsibility of all partners, and partners can be sued individually or collectively for the actions of one business owner.

Operating out of these types of structures could cost you thousands in unwanted taxes each year. This is why we recommend doing your research so you aren’t giving your hard-earned money away.

Limited Liability Companies (LLC)

It is common to see the initials LLC after many small and medium-sized business names, and there is a good reason for that. LLCs offer business owners many of the protections that larger corporations enjoy, without the complexity and cost associated with incorporation.

With LLCs, business owners are considered separate from the business itself for the purpose of taxation and legal liability. This can lead to significant tax savings, and it protects personal assets from business-related debts and lawsuits.

Of course, setting up an LLC is more complicated than operating as a sole proprietor, so some entrepreneurs choose to hold off on this step until the business begins to be profitable. Your choice of business entity can dramatically impact your bottom line tax bill, and it will affect your long-term level of risk as the organization grows.

Depending on your situation there are more decisions when operating as an LLC that can be considered to save in taxes. This is something our firm analyzes for each company.

In Summary

This is a very high level overview of how to choose an entity. We haven’t even covered incorporating or electing to be an S Corporation. With the new tax laws in place the review of entity selection has been an important part of discussions and planning.

Whether you own a start-up or a company that has been around, this topic has become critical to review and analyze.

If you are starting a company, want to consider the differences in each type of entity as it relates to your business or analyze your current company to determine if you need to consider a switch to a different entity, please contact us today!

2018 Tax Changes: FAQ’s

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2018 tax changesThe Tax Cuts and Jobs Act (TCJA) raises many questions for taxpayers looking to plan for the coming year.

Below are answers to some of them to consider as we close out 2018.

Do I need to adjust my withholding allowances, given that tax brackets have changed?

You may notice a change in your net paycheck as a result of the tax law, which alters tax rates, brackets, and other items that affect how much tax is withheld from your pay. The IRS has already issued new withholding tables, and your employer should adjust its withholding without requiring any action on your part. But you may want to take the opportunity to make sure you are claiming the appropriate number of withholding allowances by filling out IRS Form W-4. This form is used to determine your withholding based on your filing status and other information. The IRS suggests that you consider completing a new Form W-4 each year and when your personal or financial situation changes.

Can I take advantage of the new deduction for pass-through business income?

The new rules for owners of pass-through entities — partnerships, limited liability companies, S corporations, and sole proprietorships — allow them to deduct 20% of their business pass-through income. The 20% deduction is available to owners of almost any type of trade or business whose taxable income does not exceed $315,000 (joint return) or $157,500 (other returns). Above those amounts, the deduction is subject to certain limitations based on business assets and wages. Different deduction restrictions apply to individuals in specified service businesses (e.g., law, medicine, and accounting).

Can I still deduct mortgage interest and real estate taxes paid on a second home?

Yes, but the new rules limit these deductions. The deduction for total mortgage interest is limited to the amount paid on underlying debt of up to $750,000 ($375,000 for married individuals filing separately). Previously, the limit was $1 million. Note that the new restriction will not apply to taxpayers with home acquisition debt incurred on or before December 15, 2017. Additionally, the deduction for interest on home equity loans (new and existing) is suspended and will not be available for tax years 2018-2025.

Note that the law also establishes a $10,000 limit on the combined total deduction for state and local income (or sales) taxes, real estate taxes, and personal property taxes. As a result, your ability to deduct real estate taxes may be limited.

Are there any changes to capital gains rates and rules that I should know about?

The rules concerning how capital gains are determined and taxed remain essentially unchanged. But since short-term gains (for assets held one year or less) are taxed as ordinary income, they will be taxed at the new ordinary income rates and brackets. Net long-term gains will still be taxed at rates of 0%, 15%, or 20%, depending on your taxable income. And the 3.8% net investment income tax that applies to certain high earners will still apply for both types of capital gains.

2018 Long-Term Capital Gains Breakpoints

Rate Single Filers Joint Filers Head of Household Married Filing Separately
0% Below $38,600 Below $77,200 Below $51,700 Below $38,600
15% $38,600-$425,799 $77,200-$478,999 $51,700-$452,399 $38,600-$239,499
20% $425,800 and above $479,000 and above $452,400 and above $239,500 and above

Can I still deduct my student loan interest?

Yes. Although some earlier versions of the tax bill disallowed the deduction, the final law left it intact. That means that student loan borrowers will still be able to deduct up to $2,500 of the interest they paid during the year on a qualified student loan. The deduction is gradually reduced and eventually eliminated when modified adjusted gross income reaches $80,000 for those whose filing status is single or head of household, and over $165,000 for those filing a joint return.

I have a large family and formerly got to take an exemption for each member. Is there anything in the new law that compensates for the loss of these exemptions?

The new law suspends exemptions for you, your spouse, and dependents. In 2017, each full exemption translated into a $4,050 deduction from taxable income which, for large families, added up. Compensating for this loss, the new law almost doubles the standard deduction to $12,000 for single filers and $24,000 for joint filers. Additionally, the child tax credit is doubled to $2,000 per child, and the income levels at which the credit phases out are significantly increased. Depending on your situation, these new provisions could potentially offset the suspension of personal exemptions.

I have been gifting friends and relatives $14,000 per year to reduce my taxable estate. Can I still do this?

Yes, you may still make an annual gift of up to $15,000 in 2018 (increased from $14,000 in 2017) to as many people as you want without triggering gift tax reporting or using any of your federal estate and gift tax exemption. But TCJA also doubles the exemption to an estimated $11.2 million ($22.4 million for married couples) in 2018. So anyone who anticipates having a taxable estate lower than these thresholds may be able to gift above the annual $15,000 per-recipient limit and ultimately not incur any federal estate or gift tax. Note, however, that the higher exemption amount and many of TCJA’s other changes to personal taxes are scheduled to expire after 2025, unless Congress acts to extend them.

There were a lot of changes that will create tax planning opportunities for the current year and future years. If you want to discuss your particular situation in depth to understand how you will be impacted and what you can do to minimize your tax liability, contact us today.

This communication is not intended to be tax advice and should not be treated as such. Each individual’s tax circumstances are different. You should contact your tax professional to discuss your personal situation.

Are Entertainment Deductions History?

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It’s no secret that many a sale has been closed over a three-martini lunch. Client entertainment is a given in most industries and most salespeople carry a company credit card for just such transactions.

It’s also no secret that more than a little commingling goes on between personal entertainment expenditures and those that qualify as business expenditures. That is no longer an issue; at least for now. Here’s why….

Under the new tax reform, the veil separating business expenses and pleasure has come crashing down with the elimination of entertainment deductions.

Not good news for business owners who counted on this deduction to defray tax bills at the end of the year. Even the limited deduction of 50% is no longer valid for dinners or cocktails with prospective clients or service providers and similar entertainment expenses.

What could be worse?

Well, how about this: sales related entertaining such as:

  • Sporting events—nixed,
  • Boating and Golfing—nixed.
  • Theater and other shows, box seats at stadiums—yes, those too.

What Does This Mean for Tax Planners?

Will they still be able to work their magic? Their expertise as tax planners is founded in creative workarounds and alternatives. The old saying, when one door closes, another opens applies in the tax world too.

What are The Options?

Well, there’s always Internal Revenue Code Section 274(e).

Despite reforming entertainment-related expenses, this will allow some expenses to be deducted, albeit under different circumstances.

For instance, if you pay for the use of club seating or a private box at a stadium, using this as compensation for your employees will still allow this expense to be deductible.

You need to meet two criteria to make this shift:

  • Ensure your employees attend these events.
  • Include the value of each event as taxable wages.

The “downside” for your team is additional tax that will be subject to withholding and is included on their form W-2.

The “upside” is it will ensure you can still deduct the expense.

Are Business Meetings Still Covered?

Brace yourself for the GOOD NEWS … YES!

As always, events and entertainment expenses related to business meetings including board of directors and employee meetings continue to be deductible. Deductible expenses continue to include meals and beverages, subject to the 50% limitation, facility rental, décor, supplies, and ancillary costs.

Is There Any Other Way to Deduct Entertainment Expenses?

Again, yes. You can still provide entertainment to the public, your clients, or prospective customers by issuing an information tax statement to the recipient. The most common form to use would be the form 1099-Misc. The recipient will need to include it as income and it will be taxable, but your business will still benefit from the deduction.

Let’s get more creative.

You might consider charging for the event or experience. Sure the income will be taxable, but the cost of the activity will become deductible, transforming your expense from after tax to pre-tax dollars.

The new tax reform brings big changes but your tax planner will still be able to work with you and provide valuable advice. To find out more about how to navigate the tax laws both new and old, be sure to work with someone who is certified in tax planning. We’ll help you find the new ways to open doors to a lower tax bill!

Request a free tax strategy session with one of our CPA’s

Welcome to BGMF CPAs Blog

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Welcome to BGMF CPAs blog.  We will be providing updates surrounding accounting and tax matters on a regular basis that are important for you to know.  Please stay tuned for upcoming articles and posts. If you have questions don’t hesitate to contact us.