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BGMF CPAs

Choosing the Right Retirement Plan to Maximize Benefits…

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With the various restrictions and limitations on retirement plan contributions and benefits, small business owners and professionals may wonder whether it is possible to fund adequate retirement benefits for themselves using a tax-qualified plan. In many cases, it is — if the most appropriate plan design is chosen.

Why So Many Restrictions?

Many of the restrictions and limitations added to the federal tax code in the pension area have been aimed at making plans nondiscriminatory — i.e., making sure that the plan does not discriminate in favor of a firm’s highly paid employees. In some cases, the perhaps unintended effect of the restrictions has been to dampen enthusiasm for retirement plans because business owners question whether the benefits they will receive justify the expense of maintaining a plan.

What plans should a business owner who is concerned about funding his or her own retirement consider? Several possibilities are discussed below.

Age-Based Profit Sharing Plan

One type of plan that may be appropriate for many small business owners and professionals is the age-based profit sharing plan. The plan combines the traditional benefits of a profit sharing plan with the ability to allocate employer contributions to participant accounts using factors that consider both compensation and age. In contrast, traditional profit sharing plans allocate contributions based only on compensation, with each participant receiving a flat percentage of pay.

If employee demographics favor the age-based approach, more of the annual profit sharing plan contribution is shifted to the accounts of the older owner(s) and key employees participating in the plan. In some instances, the total plan contribution can be lowered while allocations to the owner and the key employees remain at the same levels — or even increase.

Target Benefit Plan

This type of plan is a cross between a defined benefit pension plan and a money purchase plan. It uses actuarial assumptions — including assumptions about remaining years to retirement — in determining the amount to be contributed for each participant. As with an age-based plan, no more than $66,000 a year (in 2023) can be added to each employee’s account, regardless of compensation or age. However, the plan is not as flexible as an age-based plan in that an annual employer contribution is generally required.

Defined Benefit Pension Plan

If the per-employee cap on additions to a plan account is a source of concern, a traditional defined benefit pension plan can often provide more lucrative benefits. With this type of plan, the closer a participant is to retirement age and the larger the promised retirement benefit, the higher the plan contribution, all else being equal.

Other Considerations?

Before deciding to implement any of these plans, the effect of the tax law’s top-heavy rules should be analyzed. These rules generally are triggered when key employees hold more than 60% of the account balances or accrued benefits in all plans sponsored by the employer. When a plan is top heavy, every active participant must receive a minimum contribution or benefit (3% of pay for a defined contribution plan).

There are both retirement and tax strategies to maximize contributions for the company’s employees and owners. This can be discussed in planning sessions we hold with clients on a regular basis.

Contact our team today to begin the process of reviewing or adding a retirement plan to your business.

4 Tips on How Small Businesses Can Reduce Taxes

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As a small business owner, tax liability is the money you owe the government when your business generates income. With changing laws and gray areas regarding deductions, exemptions, and credits, it’s no wonder small business owners rank taxes at the top of the list of the most stress-inducing aspect of business ownership. To reduce that stress, taxes shouldn’t be something to focus on only at year’s end. Use these tips on reducing your business tax year-round and see your taxes and stress level decrease…

1. Business structure

Your company’s business structure is how it is organized – it answers questions like who is in charge, how are profits distributed, and who is responsible for business debt. The most common business structures are:

  • Sole proprietorships have one owner who takes all profits as personal income. The owner is personally liable for any business debts.
  • Partnerships are structured like sole proprietorships but can have an unlimited number of owners.
  • C corporations have unlimited shareholders who each own part of the company. Profits are distributed as dividends between them. Owners are not personally liable for business debts.
  • S corporations are structured like C corporations, but the number of shareholders is capped at 100.

In addition to affecting how a business operates, business structure impacts how much a company pays in taxes. The U.S. tax code is complex and includes four main tax categories:

  • Income tax – paid on profits
  • Employment tax – employee Social Security and Medicare contributions
  • Self-employment tax – Social Security and Medicare contributions for self-employed individuals
  • Excise tax – special taxes for specific goods and services like tobacco, alcohol, etc.

A sole proprietorship or partnership is a good idea for businesses wanting tax simplicity (legal protection discussions are important here as well). For those with less than 100 owners, an S corporation might be the right fit and best tax option. Again, business structure and tax laws are complex and are best determined by a qualified, experienced accountant.

2. Net Earnings

Net earnings (i.e., net income or profit) is the gross business income minus business expenses. Regardless of the business, it begins with gross income (the income received directly by an individual, before any withholding, deductions, or taxes), and allowable expenses are deducted to arrive at net income. How this figure is calculated is dependent upon business structure.

Net earnings are used to calculate business income taxes. Again, the calculation process differs slightly for different business structures. It is best to seek a professional to help with net earnings calculations for the proper calculation and maximum legal deductions.

3. Employ a Family Member

One of the best ways for small business owners to reduce taxes is hiring a family member. The (IRS allows a variety of options for tax sheltering. For example, suppose you hire your child, as a small business owner. In that case, you will pay a lower marginal rate or eliminate the tax on the income paid to your child. Sole proprietorships are not required to pay Social Security and Medicare taxes on a child’s wages. They can also avoid Federal Unemployment Tax Act (FUTA) tax. Consult a trusted accounting professional for details about the benefits of hiring your children or even your spouse.

4. Retirement contributions

Employee retirement plans benefit employees, but they can also be good for your small business. Employer contributions to an employee retirement plan are tax-deductible. They can also carry an employer tax credit for setting up an employee retirement plan. Again, this is a task an accountant can handle for you. They can guide you on retirement plan choices based on your business’s situation, employees, and other factors.

As a small business owner, you can deduct contributions to a tax-qualified retirement account from your income taxes (except for Roth IRAs and Roth 401(k)s). Sole proprietors, members of a partnership, or LLC members can deduct from their personal income contributions to their retirement account.

As with any tax situation, consulting your trusted accounting professional is always best. They are up to date on the latest tax laws, information, and allowable deductions. By being aware of ways your small business can reduce taxes, you can bring these topics up with your accountant, discuss the best options for you, and be prepared long before tax time rolls around.

This only scratches the surface when it comes to tax planning and minimizing taxes while building your wealth. Our team will cater to your goals with a full discussion and tax planning session.

Contact our tax professionals to learn more about how you can control tax exposure for your small business.

Top 3 Reasons to Outsource Your Accounting

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While you may think it’s better to take care of your small business accounting tasks in-house, you may be surprised to know that your business can benefit from having a professional accountant or CPA handle the job for you. Here are the top three reasons to outsource your accounting.  In the long run, it will cost you more by trying to do everything yourself.  Our most successful clients utilize and leverage their teams as much as possible.

1. Peace of Mind

The number one reason for outsourcing your accounting is the peace of mind you will get regarding managing your accounting records. A qualified accountant or CPA on your team allows you to gain access to their professional knowledge and experience. Further, you can even choose an accountant that specializes in your unique business needs. A professional can help you keep your business records accurate and up-to-date. For example, payroll and tax documents will be maintained appropriately and submitted promptly. Timely and accurate accounting reduces your risk of penalties resulting from inaccurate record-keeping or lack of knowledge regarding aspects of accounting like tax laws and deadlines.

2. Focus on Business Development

When you enlist the services of a qualified accountant or CPA to manage your small business accounting needs, you minimize the time that you or your senior staff must spend performing or micromanaging those tasks. Freeing up your time in those areas enhances your ability to maintain a keen focus on the day-to-day tasks your business faces and any additional business needs that arise. Being able to focus your time on managing and growing your business, you improve operational efficiency. As you develop strategic goals, you can convey those to your outsourced accountant to garner their professional guidance and support when executing and realizing those goals.

3. Save Money

Many small business owners feel that handling accounting tasks in-house is more cost-effective because they can utilize existing staff. However, consider the total cost involved in hiring or training a staff member to manage your business’s accounting needs. There is also the associated time expenditure related to supervising an employee who manages the accounting. For a dedicated in-house staff member to handle the task, you must consider the additional costs of payroll, payroll taxes, and employee benefits. There is also employee turnover to consider, which, if high, could lead to additional training and expenses. By not electing to have a full-time dedicated employee handle accounting in-house, you also save on space and technology required to accommodate that individual.

For these reasons – and more such as getting timely financial advice, understanding cash flow, and maximizing your tax savings opportunities – it’s time to outsource your business’s accounting needs. What you gain far outweighs the cost.

Contact our firm to find out how we can create a package of accounting services for your small business.

Pandemic Is a Wake-Up Call for Underinsured Small Businesses

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business insuranceMany small businesses have been devastated by the coronavirus pandemic. Unlike their larger brethren, small companies typically lack the cash cushion or access to funds that bigger businesses enjoy. Even with new programs to help small businesses out, such as the Paycheck Protection Program, many are seeing their resources run dry. A large number of them will not survive.

Those that do make it may want to look into their insurance coverage. Business insurance can cover a wide variety of issues, including property damage, liability, lawsuits, loss of key employees – and especially important today – loss of business income.

If it has been some time since you last reviewed your business’s insurance coverage, now may be a good time to conduct an in-depth review of your policies. A review can help detect shortcomings in coverage and help you protect your livelihood from financial harm.

What’s the “Right” Amount of Coverage?

It’s likely that you have commercial property and general liability coverage as well as additional policies. However, it may be that things have changed in your business since you last reviewed your policies — new locations, updated equipment, or other changes. The right amount of coverage should reflect the current status of your business. You may also consider reviewing your deductibles. Raising deductible amounts to reduce policy premiums is considered a fiscally sound strategy — but only up to a point. The bottom line is that if you cannot afford to pay the deductible, it is too high.

Look for Gaps in Your Coverage

Review your policies thoroughly before you renew them. In particular, look for new exclusions, since these can potentially expose your business to risks you assumed were covered. The review period is also a good time to dig deep into the financial soundness of your insurance carriers. Various insurance ratings agencies, such as A.M. Best, Moody’s Investors Service, Standard and Poor’s, and Fitch Ratings, measure the financial health of insurance companies and their ability to pay policy holders’ claims. Each ratings agency employs its own ratings system, though these are generally similar to letter grades used in education.

Take the time to investigate new areas of potential vulnerability that could harm your business. For example, what if there are repeated waves of coronavirus infections, resulting in more lockdowns and closures? Or what if another pandemic hits? Business income insurance may help cover your costs until your business is up and running again, helping you to continue to pay expenses, such as payroll and monthly bills, until the crisis has passed. But you’ll want to make sure crises such as a pandemic are covered, and the specific terms of coverage.

Insure Your Most Valuable Resources

Who is essential to your business’s success? Most likely, it’s you, your partner, or your most productive salesperson. Think what might happen if you or that person were to die unexpectedly. Your revenues could fall, your operations could be disrupted, and the future of your company could be placed in danger. A key person life insurance policy can provide the funds to carry on with operations as usual.

With a key person life insurance policy, the business buys the policy, pays the premiums, and is the beneficiary. If you or the other insured person were to die, the proceeds from the policy would be available to help your business make up for lost sales and interrupted cash flow. The proceeds also could help hire and train a replacement or permit the business to move on with any business or expansion plans. This calculator can give you an idea of the factors that determine how much personal life insurance coverage is typically called for.

Find Help

It can be time consuming and somewhat difficult to conduct a thorough insurance review. But as recent history shows, bad things can come out of nowhere and devastate your business. That’s why it may make sense for you to work closely with your financial professional to see if your business’s insurance coverage continues to meet your needs.

BGMF CPAs is not an insurance provider, but we do work with directly with them and our clients to obtain proper insurance. Contact us to discuss this complex subject further along with other strategies to protect your business and wealth.

Employee Retention Tax Credit

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Eligible employers are entitled to an Employee Retention Tax Credit (ERTC) of up to 70 percent of the first $10,000 in wages and certain health care plan expenses paid per employee for each of the first two quarters of 2021 according to the New Stimulus Act.

What is the Employee Retention Tax Credit (ERTC)?

Designed to incentivize businesses to keep employees on the payroll during the pandemic, the ERTC is a fully-refundable tax credit that is part of the federal government’s COVID-19 relief plan. As part of this plan, the New Stimulus Act includes the Taxpayer Certainty and Disaster Tax Relief Act of 2020, which became effective January 1, 2021. This Act amends and extends the former ERTC and the availability of advance payments of the tax credits under the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

Is My Company Eligible for the ERTC?

Previously, employers could only take advantage of the Paycheck Protection Program (PPP) OR the ERTC, so the ERTC was not widely used. However, Congress revised this provision to make both plans available to qualifying businesses.

As of December 2020, small businesses (with 500 or fewer employees) that suffered a revenue reduction in 2020 can claim the ERTC. A revenue reduction specifically means a business experienced a decline in gross receipts by more than 20 percent in any quarter of 2020 compared to the same quarter in 2019. (Note this is a change from the previous ERTC rule that required a gross receipts decline of at least 50 percent.)

Further, the tax credit applies to employers, including tax-exempt organizations, that conducted business during 2020 and were forced to fully or partially suspend operation during any quarter due to government orders related to COVID-19, according to the Internal Revenue Service (IRS).

How is the Maximum Amount of ERTC Determined?

As mentioned, under the New Stimulus Act, eligible employers are entitled to a tax credit equal to 70 percent of the first $10,000 in wages and qualifying health plan expenses paid per employee for each of the first two quarters of 2021 (up to $14,000).

Note that the combined maximum $14,000 credit for the first two quarters of 2021 is available even if the employer previously received the $5,000 maximum credit for wages paid in 2020.

In addition to the aforementioned changes to the ERTC, the wage period has been extended. Under the New Stimulus Act, qualified wages are those paid after March 12, 2020 up until July 1, 2021. The previous cutoff date was January 1, 2021.

What are Qualified Wages?

Qualified wages are wages, compensation, and qualified health plan expenses paid by an eligible employer after March 12, 2020 and before July 1, 2021 for time that the employee did not provide services due to a full or partial COVID-19-related government suspension of operations OR a 20 percent or greater decline in gross receipts.

For specific determinants, see sections 3121(a) and 3231(e) of the Internal Revenue Code.

The determination of qualified health plan expenses is the same as qualified health plan expenses for the Family and Medical Leave Tax Credit under the Families First Coronavirus Response Act.

Number of Employees Matters

Under the CARES Act, companies with 100 or fewer employees were eligible for the ERTC; however, under the New Stimulus Act, the threshold increased to 500 employees. In other words, for the first two quarters of 2021, a company with 500 or fewer employees is eligible for the ERTC. This is true whether those employees are working or not.

Other Notable Changes to the ERTC

  • Previously, governmental entities were not eligible for the ERTC under the CARES Act; however, under the New Stimulus Act this tax credit is available to state or local run colleges, universities, and organizations providing medical or hospital care.
  • While the New Stimulus Act allows businesses with a PPP loan to qualify for the ERTC, the tax credit may not be claimed on wages paid with the PPP loan that has been or will be forgiven.

Please reach out to us to discuss the qualifications of the ERTC for your business!

Filed Under: Tax

2020 Year-End Tax-Planning Moves for Businesses & Business Owners

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2020 year end is now!  There is still time to consider final moves for tax planning purposes that you as a business owner may want to take.  Below is a summary of strategies that are recommended. If you want to consider these or look at more advanced tax strategies, be sure to contact us today!

Taxpayers other than corporations may be entitled to a deduction of up to 20% of their qualified business income. For 2020, if taxable income exceeds $326,600 for a married couple filing jointly, $163,300 for singles, marrieds filing separately, and heads of household, the deduction may be limited based on whether the taxpayer is engaged in a service-type trade or business (such as law, accounting, health, or consulting), the amount of W-2 wages paid by the trade or business, and/or the unadjusted basis of qualified property (such as machinery and equipment) held by the trade or business. The limitations are phased in; for example, the phase-in applies to joint filers with taxable income between $326,600 and $426,600, and to all other filers with taxable income between $163,300 and $213,300.

Taxpayers may be able to achieve significant savings with respect to this deduction, by deferring income or accelerating deductions so as to come under the dollar thresholds (or be subject to a smaller phaseout of the deduction) for 2020. Depending on their business model, taxpayers also may be able increase the new deduction by increasing W-2 wages before year-end. The rules are quite complex, so don’t make a move in this area without consulting your tax adviser.

An analysis of electing S Corporation is something our firm can perform to determine if your Company would fit this model or is better suited in another model or it’s current model.  A variety of considerations go into the analysis in determining if moving to an S Corporation for tax purposes makes sense.

More small businesses are able to use the cash (as opposed to accrual) method of accounting in than were allowed to do so in earlier years. To qualify as a small business a taxpayer must, among other things, satisfy a gross receipts test. For 2020, the gross-receipts test is satisfied if, during a three-year testing period, average annual gross receipts don’t exceed $26 million (the dollar amount was $25 million for 2018, and for earlier years it was $1 million for most businesses). Cash method taxpayers may find it a lot easier to shift income, for example by holding off billings till next year or by accelerating expenses, for example, paying bills early or by making certain prepayments.

Businesses should consider making purchases that qualify for the accelerated depreciation options. For tax years beginning in 2020, the depreciation limit is $1,040,000, and the investment ceiling limit is $2,590,000. The expense is generally available for most capital property and off-the-shelf computer software. It is also available for qualified improvement property (generally, any interior improvement to a building’s interior, but not for enlargement of a building, elevators or escalators, or the internal structural framework), for roofs, and for HVAC, fire protection, alarm, and security systems.

The generous dollar thresholds mean that many small and medium sized businesses that make timely purchases will be able to currently deduct most if not all their outlays for certain vehicles, machinery, and equipment. What’s more, the depreciation deduction is not prorated for the time that the asset is in service during the year. The fact that the deduction may be claimed in full (if you are otherwise eligible to take it) regardless of how long the property is in service during the year can be a potent tool for year-end tax planning. Thus, property acquired and placed in service in the last days of 2020, rather than at the beginning of 2021, can result in a full deduction for 2020.

The consideration is if the deduction is not needed, the asset could either be placed in service in 2021 or the depreciation will be taken over the allowed life of the asset giving you a tax benefit each year for 3, 5, 7 plus years.

Businesses also can claim a 100% bonus first year depreciation deduction for machinery and equipment bought used (with some exceptions) or new if purchased and placed in service this year, and for qualified improvement property, described above as related to the depreciation deduction. The 100% write-off is permitted without any proration based on the length of time that an asset is in service during the tax year. As a result, the 100% bonus first-year write-off is available even if qualifying assets are in service for only a few days in 2020.

Businesses may be able to take advantage of the de minimis safe harbor election (also known as the book-tax conformity election) to expense the costs of lower-cost assets and materials and supplies, assuming the costs don’t have to be capitalized under the Code Sec. 263A uniform capitalization (UNICAP) rules. To qualify for the election, the cost of a unit of property can’t exceed $5,000 if the taxpayer has an applicable financial statement (AFS; e.g., a certified audited financial statement along with an independent CPA’s report). If there’s no AFS, the cost of a unit of property can’t exceed $2,500. Where the UNICAP rules aren’t an issue, consider purchasing such qualifying items before the end of 2020.

A corporation (other than a large corporation) that anticipates a small net operating loss (NOL) for 2020 (and substantial net income in 2021) may find it worthwhile to accelerate just enough of its 2021 income (or to defer just enough of its 2020 deductions) to create a small amount of net income for 2020. This will permit the corporation to base its 2021 estimated tax installments on the relatively small amount of income shown on its 2020 return, rather than having to pay estimated taxes based on 100% of its much larger 2021 taxable income.

To reduce 2020 taxable income, consider disposing of a passive activity in 2020 if doing so will allow you to deduct suspended passive activity losses.  A typical passive activity would be investment real estate or investment in a business that you have no participation.

These are just some of the basic year-end steps that can be taken to save taxes. There are a number of expired tax regulations that have been reconsidered due to COVID-19 that could potentially save you in taxes from prior years.  Again, by contacting us, we can tailor a particular plan that will work best for you and provide a prior year tax review for free!