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Environmental Tax Breaks You Should Know…

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As more individuals and businesses embrace eco-friendly practices, governments worldwide are offering tax incentives to reward environmentally conscious decisions. Whether you’re a homeowner installing solar panels or a business transitioning to electric vehicles, there are numerous environmental tax breaks available. However, navigating the tax forms associated with these incentives can be daunting. This guide will help you understand the key forms, tax credits, and deductions that can lead to substantial savings for your green initiatives.

1. Understanding Environmental Tax Breaks

Environmental tax breaks are financial incentives offered by federal, state, or local governments to encourage environmentally friendly behaviors. These may include:

  • Installing renewable energy sources like solar, wind, or geothermal systems.
  • Purchasing electric or hybrid vehicles.
  • Implementing energy-efficient upgrades in homes or businesses.

These tax breaks often come in two forms: tax credits and tax deductions. Tax credits reduce the amount of taxes owed, dollar for dollar, while tax deductions lower your taxable income.

Federal vs. State Incentives

Before diving into the specific tax forms, it’s crucial to distinguish between federal and state environmental incentives. The federal government offers nationwide credits, such as the Federal Solar Tax Credit, but many states and municipalities also have their own incentives. Make sure to explore both levels of potential savings.

2. Key Tax Forms for Individuals

Form 5695: Residential Energy Credits

If you’ve made energy-efficient improvements to your home, such as installing solar panels, wind turbines, or geothermal heat pumps, you’ll likely need IRS Form 5695. This form allows you to claim credits for renewable energy installations under the Residential Energy Efficient Property Credit.

What to Include:

  • Cost of equipment and installation.
  • Details of the improvements made (solar, wind, geothermal).
  • Any state or local rebates received, as these must be deducted from the amount you’re claiming.

Form 8911: Alternative Fuel Vehicle Refueling Property Credit

If you’ve installed an electric vehicle (EV) charging station at your home, you may qualify for the Alternative Fuel Vehicle Refueling Property Credit. IRS Form 8911 helps you claim up to 30% of the cost of your charging station.

What to Include:

  • The total cost of purchasing and installing the charging station.
  • Specifics on the location and use (residential or commercial).

Schedule A (Form 1040): Itemized Deductions

If you’ve made energy-efficient improvements that qualify for a state tax deduction (such as insulation, energy-efficient windows, or heating systems), you’ll need to itemize your deductions using Schedule A.

What to Include:

  • Proof of the cost of materials and installation.
  • State-specific guidelines for energy efficiency improvements.

3. Key Tax Forms for Businesses

Form 3468: Investment Credit

Businesses that install renewable energy systems, like solar or wind power, can use Form 3468 to claim the energy investment tax credit (ITC). This form covers both large-scale renewable energy projects and smaller commercial installations.

What to Include:

  • Details of the project and system type (solar, wind, etc.).
  • Total project costs, including installation.
  • Documentation of any state or local incentives received.

Form 8834: Qualified Plug-In Electric and Electric Vehicle Credit

For businesses that purchase electric or plug-in hybrid vehicles, Form 8834 allows you to claim credits for the purchase of environmentally friendly vehicles. This credit applies to certain qualified plug-in electric drive motor vehicles.

What to Include:

  • Purchase price of each qualified vehicle.
  • Vehicle identification numbers (VINs) of the vehicles being claimed.
  • Manufacturer certification that the vehicle qualifies for the credit.

4. State-Specific Forms

In addition to federal tax breaks, many states offer their own environmental tax credits and deductions. Some states have forms specifically designed to capture the details of local incentives. For example:

  • California Form 3800: Used to claim the New Solar Homes Partnership (NSHP) credit.
  • New York Form IT-255: Used for claiming solar energy system equipment credits.

What to Include:

  • Make sure to review your state’s department of taxation or energy office websites for specific forms and eligibility.
  • Include receipts, certifications, and details of local rebates.

5. Tips for Filing Environmental Tax Credits

Filing for environmental tax breaks can be a complex process, but these tips can simplify your experience:

  • Consult a Tax Professional: Navigating federal and state credits can be tricky, especially for businesses. A tax professional can help ensure you don’t miss any deductions or credits.
  • Keep All Receipts and Documentation: For any home or business energy project, you’ll need proof of the cost of equipment and installation. Keep these records for several years in case of an audit.
  • Be Aware of Changes: Tax credits and incentives can change from year to year as new environmental policies are introduced. Always check the most up-to-date information when filing.

Environmental tax breaks are a great way to reduce the financial burden of going green, but it’s essential to understand the associated tax forms to maximize your savings. Whether you’re a homeowner investing in renewable energy or a business adopting sustainable practices, this guide offers the foundational knowledge you need to navigate the paperwork. Consult with tax professionals and explore both federal and state incentives to fully benefit from available environmental tax credits.

Tax Planning 2023 Tips

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Tax planning for the year 2023 is essential to minimize your tax liability and make the most of available tax benefits. Here are some general tax planning strategies to consider, though it’s important to consult with a tax professional for advice tailored to your specific situation:

1. Maximize Retirement Contributions:
– Contribute the maximum allowed to your retirement accounts, such as 401(k), 403(b), or IRA. These contributions are often tax-deductible and can reduce your taxable income.

2. Take Advantage of Tax-Efficient Investments:
– Invest in tax-efficient assets like index funds, ETFs, and tax-efficient mutual funds to minimize capital gains tax.

3. Consider Tax-Loss Harvesting:
– Review your investment portfolio for opportunities to sell underperforming assets and offset gains with losses to reduce your tax liability.

4. Utilize Tax Credits:
– Be aware of available tax credits, such as the Earned Income Tax Credit, Child Tax Credit, and education-related credits, to lower your overall tax bill.

5. Charitable Contributions:
– Make tax-deductible charitable donations to qualified organizations. Keep records of your contributions for tax purposes.

6. Plan for Education Expenses:
– Utilize tax-advantaged accounts like 529 plans to save for education expenses, and take advantage of education tax credits if applicable.

7. Capital Gains and Dividend Income:
– Be mindful of the tax rates for capital gains and dividend income and plan your investments accordingly.

8. Consider a Roth Conversion:
– Evaluate whether it makes sense to convert traditional retirement accounts to Roth IRAs, which may provide tax-free withdrawals in retirement.

9. Health Savings Accounts (HSAs):
– Maximize contributions to HSAs if you have a high-deductible health plan. Contributions are tax-deductible, and withdrawals for qualified medical expenses are tax-free.

10. Estate Planning:
– If you have a large estate, consult an estate planner to minimize estate taxes and ensure a smooth transfer of assets to your heirs.

11. Business Tax Planning:
– If you own a business, explore tax strategies like the Qualified Business Income Deduction (Section 199A) and consider entity selection to optimize your tax position.

12. Keep Records:
– Maintain accurate records of income, expenses, and all financial transactions to support your tax return and potential deductions.

13. Review Withholding and Estimated Taxes:
– Ensure that your withholding and estimated tax payments align with your expected tax liability to avoid underpayment penalties.

14. Stay Informed:
– Keep up-to-date with changes in tax laws, which may occur annually. Tax planning should adapt to new regulations and opportunities.

15. Consult a Tax Professional:
– Consider seeking advice from a tax professional, such as a CPA or tax advisor, to create a personalized tax plan tailored to your financial situation.

Remember that tax planning should be a year-round effort, not just something to think about at the end of the year. By being proactive and staying informed about tax laws, you can potentially save money and reduce your tax burden.

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.