Self-Employed? Five Easy Ways to Lower your Tax BillPosted on May 19th, 2018
Marianne Kern, CPA
Kern & Associates CPA, P.A.
If you’re like most small business owners, you’re always looking for ways to lower your taxable income. Here are five ways to do just that.
- Deducting the Cost of a Home Computer
If you purchased a computer and use it for work-related purposes, you can take advantage of the Section 179 expense election, which allows you to write off new equipment in the year it was purchased if it is used for business more than 50 percent of the time (subject to certain rules).
- Meal Expenses for Company Picnics and Holiday Parties
If you host a company picnic or holiday party–even if it is at your home–100 percent of your meal expenses are deductible. Prior to tax reform legislation passed in late 2017, 50 percent of your business-related entertainment expenses (with some exceptions) were generally deductible. Starting in 2018, however, entertainment-related expenses are no longer deductible. If you have any questions, please don’t hesitate to call.
- Deduct $25 for Business Gifts to Associates
Don’t overlook the deductible benefit of business gifts during the holidays or at any other time of the year. As a self-employed individual, you can deduct the cost of gifts made to clients and other business associates as a business expense. The law limits your maximum deduction to $25 in value for each recipient for which the gift was purchased with cash.
- Food Offered to the Public at a Trade Show
If you are a frequent trade show exhibitor (or you are in the business of “food”), you know that offering free food is a sure way to get people to visit your booth. Did you know it’s also a tax write off? Typically associated with a promotional campaign, food offered to the public free of charge is 100 percent deductible.
- Minimize your Tax Bill by Funding a Retirement Plan
As a self-employed small business owner, there are several retirement plan options available to you, but understanding which option is most advantageous to you can be confusing. The “best” option for you may depend on whether you have employees and how much you want to save each year.
There are four basic types of plans:
- Traditional and Roth IRAS
- Simplified Employee Pension (SEP) Plan and Savings Incentive Match Plan for Employees (SIMPLE)
- Self-employed 401(k)
- Qualified and Defined Benefit Plans
To make sure you are getting the most out of your financial future, contact your accountant to determine your eligibility and to figure out which plan is best for your tax situation.
Using a Car for Business: New Rules under TCJAPosted on May 9th, 2018
Marianne Kern, CPA
Kern & Associates CPA, P.A.
Many of the tax provisions under tax reform were favorable to small business owners including those relating to using a car for business. Here’s what you need to know.
- Section 179 Expense Deduction
If you bought a new car in 2018 and use it more 50 percent for business use, you can take advantage of the Section 179 expense deduction when you file your 2018 tax return. Under Section 179 you can immediately deduct (rather than depreciating) the cost of certain property in the year it is placed in service. In 2018, the Section 179 expense deduction increases to a maximum deduction of $1 million of the first $2,500,000 million of qualifying equipment placed in service during the current tax year. It is indexed to inflation for tax years after 2018.
For sport utility vehicles (defined as four-wheeled passenger automobiles between 6,000 and 14,000 pounds), however, the maximum deduction is $25,000 (also indexed for inflation). Certain exceptions may apply, however such as a seating capacity of more than nine persons behind the driver’s seat. Vehicles weighing more than 14,000 pounds are typically considered “work vehicles” and would not be used for personal reasons. As such, there is no expense deduction limit.
- Luxury Auto Depreciation Allowance
For luxury passenger automobiles placed in service after December 31, 2017, the amount of allowable depreciation increases to a maximum of $10,000. The deduction increases to $16,000 for the second year, then decreases to $9,600 for the third year and $5,760 for the fourth year and for years beyond. These dollar amounts are indexed for inflation. Deductions are based on a percentage of business use; i.e., a business owner whose business use of the vehicle is 100 percent can take a larger deduction than one whose business use of a car is only 50 percent.
- Additional First-Year Bonus Depreciation for Passenger Vehicles
For passenger autos eligible for the additional bonus first-year depreciation, the maximum first-year depreciation allowance remains at $8,000. It applies to new and used (“new to you”) vehicles acquired and placed in service after September 27, 2017, and remains in effect for tax years through December 31, 2022. When combined with the increased depreciation allowance above, the deduction amounts to as much as $18,000.
- 100 Percent First-Year Bonus Depreciation for Heavy Vehicles
For tax purposes, pickup trucks, vans, and SUVs whose gross vehicle weight rating (GVWR) is more than 6,000 pounds are treated as transportation equipment instead of passenger vehicles. Heavy vehicles (new or used) placed into service after September 27, 2017, and before January 1, 2023, qualify for a 100 percent first-year bonus depreciation deduction as well, if business-related use exceeds 50 percent. These deductions are based on percentage of business use and vehicles used less than 50 percent for business are required to depreciate the vehicle cost over a period of six years.
- Deductions Eliminated for Unreimbursed Expenses for Business use of a Car
Under tax reform miscellaneous itemized expenses were repealed. As such starting in 2018, if you are an employee who is required to use your own vehicle for business-related use and are not reimbursed for these expenses by your employer you are no longer able to claim a deduction for unreimbursed expenses for business use of a car on your tax return.
Selling your Small BusinessPosted on May 3rd, 2018
Outsourced Accounting Department, Inc.
Selling a small to medium-sized business is a complex venture, and many business owners are not aware of the tax consequences.
If you’re thinking about selling your business the first step is to consult a competent tax professional. You will need to make sure your financials in order, obtain an accurate business valuation to determine how much your business is worth (and what the listing price might be) and develop a tax planning strategy to minimize capital gains and other taxes to maximize your profits from the sale.
Accurate Financial Statements
The importance of preparing your business financials before listing your business for sale cannot be overstated. Whether you use a business broker or word of mouth, rest assured that potential buyers will scrutinize every aspect of your business. Not being able to quickly produce financial statements, current, and prior years’ balance sheets, profit and loss statements, tax returns, equipment lists, product inventories, and property appraisals and lease agreements may lead to loss of the sale.
Many business owners have no idea what their business is worth; some may underestimate whereas others overestimate–sometimes significantly. Obtaining a third-party business valuation allows business owners to set a price that is realistic for potential buyers while achieving maximum value.
Tax Consequences of Selling
As a business owner you probably think of your business as a single entity sold as a lump sum. The IRS however, views a business as a collection of assets. Profit from the sale of these assets (i.e., your business) may be subject to short and long-term capital gains tax, depreciation recapture of Section 1245 and Section 1250 real property, and federal and state income taxes.
For IRS purposes each asset sold must be classified as capital assets, depreciable property used in the business, real property used in the business, goodwill, or property held for sale to customers, such as inventory or stock in trade. Assets are considered tangible (real estate, machinery, and inventory) or intangible (goodwill or trade name).
The gain (or loss) on each asset sold is figured separately. For instance, the sale of capital assets results in capital gain or loss whereas the sale of inventory results in ordinary income or loss, with each taxed accordingly.
Section 1231 gains and losses are the taxable gains and losses from Section 1231 transactions such as sales or exchanges of real property or depreciable personal property held longer than one year. Their treatment as ordinary or capital depends on whether you have a net gain or a net loss from all your Section 1231 transactions.
When you dispose of depreciable property (Section 1245 property or Section 1250 property) at a gain, you may have to recognize all or part of the gain as ordinary income under the depreciation recapture rules. Any remaining gain is a Section 1231 gain.
Your business structure (i.e., business entity) also affects the way your business is taxed when it is sold. Sole proprietorships, partnerships, and LLCs (Limited Liability Companies) are considered “pass-through” entities and each asset is sold separately. As such there is more flexibility when structuring a sale to benefit both the buyer and seller in terms of tax consequences.
C-corporations and S-corporations have different entity structures, and sale of assets and stock are subject to more complex regulations.
For example, when assets of a C-corporation are sold, the seller is taxed twice. The corporation pays tax on any gains realized when the assets are sold, and shareholders pay capital gains tax when the corporation is dissolved. However, when a C-corporation sells stock the seller only pays capital gains tax on the profit from the sale, which is generally at the long-term capital gains tax rate. S-corporations are taxed similarly to partnerships in that there is no double taxation when assets are sold. Income (or loss) flows through shareholders, who report it on their individual tax returns.
As you can see, selling a business involves complicated federal and state tax rules and regulations. If you’re thinking of selling your business soon, don’t hesitate to call the office and schedule a consultation with a tax and accounting professional.