How to Know If Your Business Should Have an S-Corp Strategy

FROM http://www.foxnews.com/

When it comes to tax strategies for entrepreneurs, I am convinced that the S-Corporation (S-Corp) is one of the most powerful long-term strategies to build upon. The tax benefits, audit protection and foundation for other tax deductions are absolutely amazing in an S-Corp. Frankly, it’s because the S-Corp is so financially efficient for the small-business owner.

So for those of you that are already S-Corps, this is the time of year to dial in your salary level. See my Payroll Matrix and suggestions on how to peg the perfect salary amount for your situation below.

For those who haven’t quite caught the vision or potential of the S-Corp, let me make a few important points and explain some of the benefits you are missing out on.

S-Corps: The Reason Why

The problem we’re trying to solve is that if you sell products or services, receive a commission, flip properties or receive 1099s and generally create ordinary income with a business, you will pay self-employment tax of 15.3 percent on all your net income if you are a sole proprietorship, whether you have an LLC or not.

The S-Corp allows you to minimize this dreaded self-employment tax. When using an S-Corp, your share of the company’s net income will not be subject to self-employment (SE) tax. (SE tax is a combination of Social Security and Medicare taxes also referred to as FICA.)

In 2016, the tax is 15.3 percent on the first $118,500 of net income (this amount is adjusted for inflation annually), then 2.9 percent on everything above that. Moreover, at $200,000 single and $250,000 married filing jointly (adjusted gross income or AGI), the Affordable Care Act (ACA) kicks it up another 1.9 percent.

However, the S-Corp allows owners to take reasonable payroll wages through a W-2 that escapes the SE and ACA taxes on the net. See the Payroll Matrix below.

Retroactive Election

Most small-business owners and even some tax preparers don’t realize that you can make a retroactive election to be an S-Corp for 2016 if you already have been operating as an LLC all year long. Your CPA can help you with the procedure and make reference to the proper revenue procedures to include with your Form 2553. Many believe there is a hard and fast 75-day rule at the beginning of the year to make this election for all of 2016. This is certainly not the case. Talk to your CPA to follow the correct procedure to get a retroactive election accepted.

Year-end tip: Make a retroactive election for your LLC to have an S-Corp for all of 2016, and get your payroll allocation completed before year-end.

Choosing the Proper Payroll Level

In regards to payroll and net income planning, we consistently encourage our clients to allocate at least one-third of their net income to “wage earnings,” and the remaining amount can flow out as “net income” not subject to SE tax. However, please know this is a starting point and every taxpayer is different. It’s important to maintain this procedure through proper payroll planning.

Here is a diagram that can be a useful visual guide in determining the proper salary level in your S-Corp from year to year. You’ll see that I begin the diagram at $40,000 of net income and a 50 percent payroll allocation at that level. As such, when taking the operational costs of maintaining an S-Corp into account, it typically doesn’t make sense to utilize the S-Corp unless you’re making a net income of at least $30,000.

S-Corp Tax Abuse

The problem with this strategy is that some small-business owners abuse it by taking too little or no payroll, thus ruining it for the rest of us. Congress occasionally takes up this issue and debates the strategy because of this abuse.

Many believe that legislation limiting this strategy would be terrible for business and the economy, and as such, the Senate typically will shoot down bills that would hurt the S-Corp. In fact, there are several major advocacy groups lobbying behind the scenes helping keep the S-Corp alive and well, such as the American Institute of CPAs, the Chamber of Commerce and the National Association of Realtors. The S-Corp FICA/SE tax strategy has been around for years, and it will continue to be for many years to come.

Bottom line, the S-Corp strategy works when it is used properly and is not abused. If you are making more than $30,000 (net) in your business, could use the asset protection and you are ready to build corporate credit or better legitimize your business, an S-Corp could be a perfect fit for you! If your CPA is discouraging this strategy or claiming that your payroll needs to be so high that the savings won’t be worth it, the problem isn’t the strategy; the problem is your CPA’s definition of what is too high.

If you have a profitable business as a sole proprietor, you should be considering the S-Corp and getting a second opinion if the numbers fly in the face of the advice you’re receiving. You are the captain of your ship. Take control of your business and your tax return.

India Busts IRS Scammers

Police in India have raided nine call centers in Mumbai and arrested 70 people who were calling phone numbers in the United States pretending to be Internal Revenue Service demanding payment for taxes.

A police official said that another 630 people were also under investigation in the scam after Wednesday's raid.

“They would give an American name and a batch number and tell the [US] citizen that they owed the authorities $4,000, $5,000 or $10,000,” Paramvir Singh, police commissioner in the Mumbai suburb of Thane, India, told The Guardian. “They were instructed to stay on the phone and told that their homes would be raided by police within 30 minutes if they hung up. They made threats, they said: ‘You have to pay, otherwise you will lose your job, your money, your house.’”

Eight Ways Children Lower your Taxes

1. Got kids? They may have an impact on your tax situation. If you have children, here are eight tax credits and deductions that can help lower your tax burden.
2. Dependents: In most cases, a child can be claimed as a dependent in the year they were born. Be sure to let the office know if your family size has increased this year. You may be able to claim the child as a dependent this year.
3. Child Tax Credit: You may be able to take this credit on your tax return for each of your children under age 17. If you do not benefit from the full amount of the Child Tax Credit, you may be eligible for the Additional Child Tax Credit. The Additional Child Tax Credit is a refundable credit and may give you a refund even if you do not owe any tax.
4. Child and Dependent Care Credit: You may be able to claim this credit if you pay someone to care for your child under age 13 while you work or look for work. Be sure to keep track of your child care expenses so we can claim this credit accurately.
5. Earned Income Tax Credit: The EITC is a benefit for certain people who work and have earned income from wages, self-employment, or farming. EITC reduces the amount of tax you owe and may also give you a refund.
6. Adoption Credit: You may be able to take a tax credit for qualifying expenses paid to adopt a child.
7. Coverdell Education Savings Account: This savings account is used to pay qualified expenses at an eligible educational institution. Contributions are not deductible; however, qualified distributions generally are tax-free.
8. Higher Education Credits: Education tax credits can help offset the costs of education. The American Opportunity and the Lifetime Learning Credit are education credits that reduce your federal income tax dollar for dollar, unlike a deduction, which reduces your taxable income.
9. Student Loan Interest: You may be able to deduct interest you pay on a qualified student loan. The deduction is claimed as an adjustment to income, so you do not need to itemize your deductions.

As you can see, having children can make a big impact on your tax profile. Make sure that you're getting the appropriate credits and deductions by speaking to a tax professional today.

5 Federal Income Tax Rules to Live By

FROM FOOL.COM

Let's face it, most Americans absolutely dread Tax Day, and it's not hard to understand why. According to a Pew Research poll conducted last year, 72% of Americans surveyed felt bothered either "a lot" or "some" by the complexity of the U.S. tax code.

What was at one time a 1.4 million-word tax code in 1955 has ballooned into more than 10 million words, complete with 2.4 million words of federal internal revenue code and nearly 7.7 million words of federal tax regulations as of today. The Tax Foundation observed that this has worked out to be the addition of 144,500 words to the U.S. tax code every year since 1955.

Yet following some very simple federal income tax rules could make your life a lot easier come tax time. Here are five federal income tax rules you should live by.


1. Never do your taxes by hand
One of the smartest moves you can make is to put the pencil down and instead prepare your taxes using tax software or a tax preparation service/accountant. Tax preparation software takes a lot of the guessing out of preparing your taxes, and it handles the grunt work of adding and subtracting that could lead to a critical error on your taxes. Another ancillary benefit is that e-filed tax returns done via tax software are legible, which may not always be the case for tax returns mailed in and prepared by hand.

According to the Internal Revenue Service, the error rate for e-filed tax returns was just 0.5% in 2013. Comparatively, 21% of paper returns were found to have an error. This 41-fold increase in error rates just isn't worth the risk. Thankfully, 91% of the total returns filed by taxpayers in 2015 were e-filed, but this still leaves somewhere in the neighborhood of 13 million tax filers who could be playing with fire.



2. Aim for $0
It's no secret that Americans are generally poor savers. Based on July 2016 data from the St. Louis Federal Reserve, the personal household savings rate stood at 5.7%, half of what it was 50 years ago, and well below the personal savings rate of households in most developed countries. This is why approximately 80% of tax filers are often thrilled to receive a refund from the IRS in any given year.

However, getting a refund from the IRS isn't necessarily great news. Taking into account that some consumers have poor saving habits, and a tax refund is a method of forced savings for these Americans, allowing the federal government to hang onto your cash for months, or for longer than a year in some instances, without paying you a cent in interest, isn't a smart move. If you had properly adjusted your federal tax withholding during the year, your paychecks could have been bigger, allowing you to invest for your future, or pay down debt, which can grow with interest over time.

Conversely, owing a lot at the end of the year (usually in excess of $1,000) could net you an underpayment penalty from the IRS. Your goal every year should be to adjust your W-4 federal tax withholding to get as close to $0 owed/refunded as possible.



3. Keep good records
Third, you'll want to keep good records of potential deductions. Some consumers believe good tax records are only useful if you're being audited, but this just isn't the case. Yes, having good records is a must if you're facing a correspondence audit since an inability to provide the corresponding paperwork to back up your deductions could result in the loss of those deductions in their entirety. But good record keeping could also provide bigger discounts that you may not be aware of.

For example, you're required to report gambling winnings to the federal government as income. However, I'd be willing to bet that most consumers don't keep a detailed record of their losses at the casino, because who wants to dwell on that, right? Yet, those losses can be used to offset some, or all, of your gambling winnings, ultimately reducing your tax liability.

Good record keeping is especially important if you're self-employed. IRS data from 2010 showed that self-employed persons with $100,000 or more in gross receipts faced an audit rate of 4%, which is about four times higher than the average taxpayer at the time.



4. Invest for the long term
Tax filers seemingly have one mission once they begin preparing their taxes: find any (legal) means possible to lower their effective tax rates. The good news is that there's no shortage of deductions and credits available to the average taxpayer, including standard deductions, mortgage interest, and perhaps even child-based tax credits. But one of the easiest ways to lower your tax liability is to simply do nothing at all with your existing investments.

For the purposes of federal taxation, the IRS differentiates short-term investment holdings as an asset held for 365 days or less, and long-term investments as being held for 366 or more days. The difference in taxation between the two is significant. Short-term capital gains are taxed at the ordinary income tax rate, whereas long-term capital gains are taxed in three progressive brackets that feature a lower tax rate.

For example, assuming your short-term capital gains pushed your income over $37,650 for 2016; those gains would be taxed at 25%. Short-term capital gains could face taxation of up to 39.6%, not including the net investment income tax, which could tack on another 3.8% for individuals and couples earning more than $200,000 and $250,000, respectively.

Long-term capital gains are taxed at 0% if you fall into the 10% or 15% ordinary income brackets, 15% if you're in the 25%, 28%, 33%, or 35% ordinary income tax brackets, or 20% if you're in the highest ordinary income tax bracket. Hanging onto your investments over the long term is a smart tax-saving move.



5. File on time
This should probably go without saying, but the last federal income tax rule to live by is to file your tax return on time each and every year. If you fail to file a tax return and you owe the government money, you'll typically incur a penalty of 5% per month, with the penalty not to exceed 25% of your unpaid taxes. Also, if you fail to file for more than 60 days after Tax Day or your extension deadline, the IRS will hit you with a penalty of $135 or 100% of your unpaid taxes, whichever is smaller.

If you're self-employed, the penalties can be painful, even if you're owed money. If you fail to file a tax return as a self-employed person for a period of three years, you'll stop receiving Social Security credits toward your retirement, which could adversely impact your Social Security benefit once you retire.

Even if you owe money but don't have enough money to cover your tax liability, you should still file on time and work out a plan with the IRS. Doing so could come with monthly fees or penalties, but they'll be up to 10 times smaller than the penalty you'd face by failing to file in the first place.

Following these simply federal income tax rules will likely make Tax Day that much easier every year.

Solo 401(k) Plans explained

These days, many folks are self-employed. Many stayed on with their employers after retirement as consultants. Many others work full time and have a business on the side. With income coming in from employment, pensions, and Social Security, these self-employed persons may not need the extra cash for living expenses and are scrambling for ways to keep income taxes down. For them, the answer may be the Single-Person (or Solo) 401K Plan which came into being in 2001 with the Economic Growth and Tax Relief Reconciliation Act (EGTRRA).

It is easy to qualify for opening a Solo 401K and easy to manage one. For starters, the self-employed persons must have no full-time workers other than their spouse. Their self-employed income can come from any form of business, such as sole proprietorship (schedule C), limited liability company, partnership, or C/S – Corporation.

Why should you even consider opening a Solo 401K Plan? To save significantly more on current income taxes and to sock away money for the future. Even those over 70 ½ who are self-employed but are taking annual required minimum distributions (RMD's) from their other retirement accounts can sock away money into Solo 401K Plans at the same time.

A Solo 401K plan can be easily established through a bank, broker, or other financial institution. There are two basic types of Solo 401k's: Self-Directed and Brokerage Plans. The Self-Directed is a bit more flexible, with features such as checking, loans, and Roth sub accounts.

Solo 401K plans work just like the big company ones, only simpler and with almost no red tape. To grasp the concept for a single person, it is good to think of yourself as serving in two different roles simultaneously: that of employer and that of employee. The Solo 401K combines the contributions of these two components into one because; in fact, that is what the self-employed person really embodies. The IRS refers to the employer portion of contributions as "profit-sharing" and the employee contribution as "salary deferred".

Here's how much income a self-employed person (Sole Proprietor or Single-Member LLC) can stash away into a Solo 401K:

1. Profit Sharing:
• Up to 20% of earned income (maximum of $53,000) $33,000
(technically 25%, but netting to 20%)
• Catch up for those over 50 6,000
2. Salary Deferral Maximum: 18,000
Total possible contribution $67,000

For some, this reduction in taxable income can affect other eligibility aspects as well, such as Medicare. And there is no requirement to make these 401K contributions every year. Once your Solo 401(K) account is opened, you can wait until filing your tax return next year to see what your tax picture looks like and, also, how much cash is available at that time to make your contribution for the prior year.

Let's say you are 70 and earn $50,000 from self-employment as a consultant (sole proprietor). You could potentially contribute the following to your Solo 401K:

Profit Sharing: 20% x $50,000 $10,000
Catch up 6,000
Salary Deferred: Maximum 18,000
Total Maximum Contribution $34,000

This would mean that your self-employed income on your tax return would only be $16,000 ($50,000-$34,000 401K contributions).

Those who are still employed and are still eligible to contribute to the company 401K plan must take care not to exceed the maximum. Those maximum amounts apply to all 401K Plans for which the individual is eligible to contribute.

If your Solo 401(K) account is opened with a discount broker, investing the cash in that account is easy. Just liked your IRA's or other investment accounts, you can select from the universe of high-quality mutual funds in that one account.

If you are considering a SEP-IRA or a Solo 401K, here are some features of a 401K that are not allowed with a SEP-IRA:

• Employee salary contributions of $18,000 plus catch-up of $6,000.
• Roth contributions regardless of income levels.
• You can borrow up to $50,000.

If you have self-employed income and are looking for more tax shelter, it would be well to open a Solo 401(K) prior to December 31. There is not a lot of paperwork required to open the account nor in the reporting. Probably the best place to choose is a discount broker, like TD Ameritrade or Vanguard. Once the account is opened (with zero balance), you have until April 15, 2017 (or October 15, with an extension) to figure out the tax effects of different contribution amounts and, also, how much cash you'd have available to sock away into your Solo 401(K) for tax year 2016. These accounts are great tax planning opportunities for those who seek tax shelter.

Why You Should Start Thinking About Your Taxes Now

FROM http://finance.yahoo.com/

It may seem like the wrong time of year to be thinking about taxes. Fall has only just begun, and it will be months before the IRS begins accepting 2016 income tax returns. Yet, now may be the best time to begin a review of income and expenses. With the holidays fast approaching, waiting could mean running out of both time and money to take advantage of tax-minimizing strategies.

"If you're a W-2 earner, then there is probably not a need to look at it now," says Charlie Harriman, a financial planner with Cloud Investments in Huntsville, Alabama. However, those with high incomes or itemized deductions, and the self-employed, may find it's in their best interest to start working on their personal taxes sooner rather than later.

Plan now to avoid surprises next spring. Joe O'Boyle, a certified financial planner with Voya Financial Advisors, says he tells his clients now is the time to start their tax review. "We recommend they take a proactive approach to their tax planning and meet with a CPA in the fourth quarter," he says. After that meeting, taxpayers should have a better idea of how they will end the year financially, something that can help them avoid any unpleasant surprises.

For example, there is an income cap on who can contribute to a traditional IRA. "What we can do is jerk that money out of there," says Scott Goble, a certified public accountant and founder of Sound Accounting in Chickamauga, Georgia. Otherwise, if the problem is overlooked before the end of the year, people could get hit with not only taxes on the contributions but penalties as well.

"All [high] wage-earners have a year in which taxes take them completely by surprise," Harriman says. That could be because of unexpected penalties or simply because their income pushes them into a higher tax bracket. The additional taxes may be no small amount either. "My client this past year owed $25,000 in additional income taxes," Harriman says as an example.

Early planning means time to make changes. Beginning a tax review now means there is plenty of time for a tax professional to step in and recommend changes. "That's the bigger problem," Craig Wear, founder of My 401K Investing, says about waiting. "They've put [their CPA] in a position where there is no time to plan."

However, knowing in October that changes need to be made gives ample opportunity to maximize deductions. Depending on income and other factors, taxpayers may be able to contribute more to a 401(k) plan, fully fund a health savings account, sell stocks at a loss or make additional charitable donations, all of which must be done before Dec. 31 to be included on a person's 2016 tax return. "After the first of the year, the number of options drop to very, very few," Goble says.

In the event someone's income is lower than expected, other tax strategies may come into play. Converting a traditional IRA to a Roth IRA may mean significant tax savings in retirement but requires a person to pay income tax on the converted amount. As a result, conversions are typically best done in a year in which a person is in a lower tax bracket. "If someone wants to convert, that has to happen before December 31," O'Boyle says.

The self-employed may have other options. Early tax preparation may be most important for those who are self-employed. "It's very important before the end of the year to see if the estimated tax payments they've made through the year are sufficient," Goble says. Self-employed individuals can also decide whether to delay some invoices to January or incur expenses prior to the end of the year if they want to reduce their taxable income for 2016.

"Most people put it on autopilot and assume [their taxes] will be the same this year as they were last year," Wear says. However, the tax code changes regularly, which means taxpayers should take time now to review their income and expenses before they miss savings opportunities later in the midst of the holiday rush.

Retirement Planning in the 21st Century

As recently as a generation ago, planning for retirement was a very different exercise than it is today for millions of Americans. From factory workers to executives to skilled tradesmen, the bulk of retirement income centered around a company or union-supplied defined benefit pension plan, or a money purchase pension plan – paid to an individual either as a lump sum or monthly benefit – from the time he or she retired until their death. Unfortunately, the majority of these pension programs have become a thing of the past. While most companies do offer their employees some type of retirement savings program, planning today largely falls on the individual to make sure they have saved enough to be comfortable when their career ends.

The good news is, there are a variety of retirement planning options in the marketplace to meet your needs. Today, we’ll discuss a few of those options in-depth.

401(k) Plans: These plans are established by employers as a benefit to help individuals save for future retirement benefits. Under 401(k) plans, employees allocate a percentage of their salaries each pay period to the plan, with employers matching a certain percentage of those employee contributions. In 2016, the maximum annual contribution is $18,000 if you are under 50, or $24,000 if you are over. Under most 401 (k) plans, employee contributions are made on a pre-tax basis, and employer contributions are often tax-deductible. Individuals can begin withdrawing without incurring a 10 percent penalty at age 59 ½ from these plans.

Profit Sharing Plans: Many employers now offer their employees Profit Sharing Plans as a retirement benefit. Profit-sharing plans give employees a share in the profits of a company each year. All the money contributed to a profit-sharing plan accumulates tax-deferred, but employer contributions are tax deductible only if the plan is defined as an elective deferral plan, which means that instead of accepting their profit shares as cash, employees defer the assets into retirement funds.
Profit sharing is attractive to business owners because of its flexibility. Employers can choose how much to allot to employees each year based on the amount of revenue taken in, and are allowed to contribute up to 25 percent of an employee’s salary or $53,000 (whichever is less) in 2016. Employees can begin withdrawing without penalty at age 59 ½.

Traditional Individual Retirement Accounts (IRA): If you do not participate in a company-sponsored retirement plan, a Traditional IRA is a good way to save your retirement income. A traditional IRA is a tax-deferred savings account that has a number of investing options and is typically set up through a financial institution. A Traditional IRA can include stocks, bonds, mutual funds, cash equivalents, real estate and other investment vehicles. However, you must begin taking annual minimum distributions at age 70 ½, or be subject to a 50 percent income tax penalty on the minimum amount you should have withdrawn. Traditional IRA contribution limits are $5,500 for 2016.

Roth Individual Retirement Account (Roth IRA): Roth IRAs differ from Traditional IRAs in that contributions to Roth IRAs are not tax-deductible. Contribution limits are the same as Traditional IRAs in 2016 ($5,500). However, one potential advantage to a Roth IRA is that retirement distributions are not subject to federal income tax, although they may be subject to state and/or local income tax. Additionally, Roth IRAs withdrawal of contributions (not earnings) can be done at any time and for any reason.

403 (b) Plans: A 403 (b) retirement plan is similar to a 401(k) plan and is often referred to as a tax-sheltered annuity or a tax-deferred annuity. However, only employees of public school systems and 501(c)3 organizations can participate. Employees are allowed to contribute to their account with pre-tax contributions. Employers can also make contributions to employee accounts, with both fixed or discretionary options available. Eligible employees may elect to defer up to 100 percent of their salaries, as long as the amount does not exceed $18,000. Additionally, a special “catch-up” contribution provision enables those who are 50 and older to save an additional $6,000. Total combined employer and employee contributions cannot exceed $53,000 in 2016.

As you can see, there are a number of options available to help plan for retirement: your employer funds some; you fund some. A few things to note: bear in mind that, in most cases, early withdrawals before age 59½ may be subject to a 10% federal income tax penalty. Additionally, the latest date to begin required minimum distributions is usually April 1 of the year after you turn age 70½. In most cases, withdrawals are taxed as ordinary income.