Losses can be hard to take, so if you think your S-corporation will show a loss for 2016, now’s the time to plan to make sure you’ll get the full tax benefit.
The problem. The amount of the business loss you can deduct on your individual income tax return is limited to your basis in your S-corporation stock and certain corporate debt. This is true even if the loss reported to you on Schedule K-1 is greater than your basis.
Here’s how basis works. Typically, stock basis in an S-corporation begins with the capital contribution you make to get the company started. Note that when you receive stock as a gift, an inheritance, or in place of compensation, your initial basis is calculated differently.
At the end of each taxable year, your stock basis is adjusted to reflect your business’s operating results. Taxable income increases your basis, while losses reduce it. Basis is also increased by capital you put into your company and reduced by amounts you withdraw, such as distributions.
After your stock basis reaches zero, you may be able to deduct additional losses, up to the extent of your debt basis. That’s the basis you have in loans you make to your company. However, once your stock and debt basis are both reduced to zero, losses incurred are suspended, which means you get no current tax benefit. You can generally take suspended losses in future years, when you again have basis.
The solution. You can increase your basis – and your ability to take losses – by adding capital or making loans to your business.
Please call to discuss how basis affects your individual income tax return. We can guide you through the rules.
As you likely already know, on December 1 a rule was set to go into effect that would double the maximum salary from $23,660 to $47,500 that a person could make and be eligible for overtime pay. However, on November 22, U.S. District Judge Amos Mazzant in Texas granted a nationwide injunction against the ruling, in essence agreeing with the U.S. Chamber of Commerce and 21 states that wanted it halted. This is a developing story and we are sure there will be additional news on this front soon, but we wanted to make sure you were aware of it. To read more see these articles from Reuters and NBC.
Disasters, natural or otherwise, could ultimately lead to your company’s demise. Fortunately, advance planning can keep you on track to survive and thrive no matter what the future may hold. Here are seven scenarios to be prepared for.
A natural disaster. To paraphrase the old saying, you can talk about the weather, but there’s not much you can do about it – except have a plan in place in the event a natural disaster damages your business premises. Two tips: Maintain adequate insurance and store valuable business data at a secure off- site location.
A key employee quits. Cross-training can help you avoid business interruptions if a key employee leaves unexpectedly. You might also want to consider asking key employees to sign a reasonable non-compete agreement to protect confidential information. Typically, these agreements prohibit an employee from working for a competitor for a certain period.
An employee embezzles company funds. To safeguard your business assets, divide responsibilities so one person doesn’t have complete control over the books. Set up a system of checks and balances. But no matter how many internal controls you have in place, make sure to monitor cashflow and expenditures yourself on a regular basis.
Your biggest customer leaves. To keep your business from going under if you suddenly lose a major source of revenue, update your marketing plan, stay in touch with former customers, establish an emergency budget, and diversify your revenue stream.
You become disabled. “Key-person” disability insurance can provide funding to keep your business afloat if serious illness or accident strike the business owner. The policy may also cover employees who are vital to operations.
Your company or partnership splits up. Draft a buy-sell agreement to ensure a smooth transition due to the sale of a business interest, including a forced sale on the death of one of your shareholders or partners. The agreement can establish the terms of a buy-out and set a value for the respective business interests.
Your computer system crashes. Extra hardware, such as tablets or laptops, regular off-site backups, and cloud storage for important documents can avoid a crisis when your computer fails.
Once you reach age 70½, the IRS imposes required minimum distribution (RMD) rules that say you have to withdraw at least a minimum amount from your retirement plans each year or face stiff tax penalties. Since the withdrawals are considered ordinary income, planning in advance can help you prepare for the impact on your federal income tax return. Here are two suggestions to help you avoid surprises and avoid unnecessary costs.
Make a list of your accounts.The rules require an RMD calculation for each plan. With traditional IRAs, including SEP and SIMPLE plans, you can take the total distribution from one or more accounts, in any amount you choose. You can also take more than the minimum. However, withdrawals from different types of retirement plans can’t be combined to meet the minimum distribution threshold. Say for instance, you have one 401(k) and one IRA. You have to figure the RMD for each and take separate distributions. Failing to take distributions from each type of plan, or taking less than is required, could result in a penalty of 50% of the shortfall.
Pay attention to the date distributions must begin.The general rule says you must withdraw your RMD by December 31, starting in the year you turn 70½. The rules provide one exception: You have the option of postponing your first withdrawal until April 1 of the following year. This can be important if your RMD will increase taxable income enough to put you in a higher tax bracket. For example, if you plan to retire on your 70th birthday, which falls in the first half of the year, and you get a substantial retirement bonus. Postponing the first withdrawal until January of the next year can help you avoid a large increase in your income during the year you turn 70.
Delaying income can be a sound tax move. But because you’ll still have to take your second distribution by December 31, you’ll receive two distributions in the same year, which can increase your taxes. It’s important to plan carefully and know what to expect so that you won’t be hit with a higher tax bill than you may be prepared for, whenever you decide to take your first RMD.
Contact us before year-end to discuss your retirement plan distributions. We can help you create a sound plan that keeps you in control of your tax situation.
An important part of our service to you is helping you identify actions you can take before year-end to minimize your personal 2016 federal income tax bill. Accelerating or delaying income and deductions, contributing to retirement plans, and taking investment losses are just a few of the strategies you might want to consider. Here’s a checklist to help you get started.
Max out your 401(k) before year-end. For 2016, you can set aside $18,000 if you’re under age 50. If you’re 50 or older, you can contribute $24,000.
Get your investment planning in order. Year-end sell decisions, either to rebalance your portfolio at the lowest tax cost or to offset gains and losses, are only one aspect of investment planning. Another is keeping good records for the reinvested dividends of stocks you sell in 2016. Reinvested dividends add to your cost basis and reduce taxable gain or increase the deductible loss on the sale. Finally, consider the wash sale rule. This rule disallows a current-year loss when you purchase substantially identical securities within a 61-day period. If you plan to sell stocks to secure a loss, and intend to buy the stock back, don’t wait until the last moment.
Make gifts before year-end. The use-it-or-lose-it tax-free gifting allowance is $14,000 per donee for 2016. Remember, gifts to individuals are not tax-deductible.
Contribute to your Health Savings Account. Within limits, contributions are tax-deductible and can be used tax-free to pay unreimbursed medical expenses.
Keep an eye on the “kiddie tax.” This tax on your dependent child’s unearned income in excess of certain limits applies when your child is under age 19 (under age 24 if a full-time student).
We have more planning strategies that can save you tax dollars, depending on your individual situation. Contact us for a year-end review to make sure you’re taking advantage of all the ways you can to reduce your 2016 tax liability.
As the end of the year approaches, turn your attention to ways you can reduce your 2016 tax liability. Here are some suggestions that can add up to a lower tax burden next April:
Business equipment.Take advantage of end-of-year sales on business equipment. For 2016, a maximum Section 179 deduction of $500,000 and 50% bonus depreciation are generally available for qualified property placed in service anytime during the year. Be aware that special limits apply to vehicles.
Business trips.When you travel to wrap up year-end business deals, you can write off your expenses – including airfare, lodging and 50% of the cost of meals – if the primary motive of the trip is business-related. Costs attributable to personal side trips are nondeductible. If you travel by car, deduct actual business-related auto costs or a flat rate of 54 cents per mile (plus tolls and parking fees).
Entertainment and meals.Generally, you can deduct 50% of the cost of entertainment and meals that precede or follow a “substantial business discussion.” For example, you might treat a client to dinner and drinks after completing a contract earlier in the day. In this case, you can include 50% of the expenses for the client and yourself, as well as for spouses and significant others.
Company outings.Generally, deductions for business entertainment and meals are limited to 50% of the cost. However, if you throw a company-wide holiday party before year-end, you might be able to deduct 100% of the cost when you meet certain requirements, such as inviting your entire staff.
Hire your child.Does your teenaged child want a job to help pay for holiday gifts? If you hire your child, reasonable wages paid for actual services rendered are deductible, the same as wages of other employees. The wages will be taxable to your child at your child’s tax rate, which may be lower than your rate or that of your business.
Job credits.When your business hires workers from certain “targeted groups,” such as veterans and food stamp recipients, you may be able to claim the Work Opportunity Tax Credit. The maximum credit is generally $2,400 per qualified worker.
Depending on your situation, there may be other steps you can take now to reduce the taxes you’ll pay for 2016. Please call our office to schedule a year-end tax planning consultation.
Did you inadvertently miss the 60-day time limit for making an IRA or retirement plan rollover? You may be able to avoid taxes and possible penalties by notifying your account trustee with a “self-certification.”
When you take a distribution from your IRA or qualified plan with the intention of depositing it, or “rolling it over,” into another IRA or qualified plan, the 60-day rule says you’re required to complete the rollover within 60 days of receiving the distribution. In the past, when you missed the deadline, you generally had to request relief from the IRS. That meant paying a fee and going through a process to obtain a written statement waiving the rule.
Now, the IRS says that in some cases you can “self-certify” by submitting a written letter to your financial institution or trustee explaining why you missed the 60-day deadline. Your error must be one of eleven allowable reasons, such as death or serious illness in your family, severe damage to your principal residence, or misplacing and never cashing the distribution check.
Do you regularly monitor your company’s cash accounts? Being aware of where your cash is going can help prevent theft or improper expenditures, which are among the chief sources of loss for small companies.
What can you do to reduce the risk of losses? The textbook answer is to implement “internal controls.” Internal controls are standard procedures for assuring the integrity of your financial processes. For example, segregation of duties, such as having more than one person involved in preparing, signing, and reconciling checks, is an internal control
Utilizing internal controls and other cash monitoring strategies can minimize the chances of your business losing money unnecessarily. Here are a few suggestions for safeguarding your company’s cash:
Make sure all invoices have an approval signature before being paid.
Personally verify that new vendors exist.
Require sign-off of employee expense reports by a higher-level employee.
Don’t permit the person who prepares a company check to sign that check.
Consider requiring two signatures on checks.
Maintain a list of void checks and compare them to your bank statement.
Use a bank stamp to endorse checks immediately upon receipt.
Personally open bank statements and other mailings from the bank.
Review and reconcile your bank statement regularly.
Are you confused about your choices for paying medical expenses under your employer’s benefit plan? Many people struggle to determine which of their options will provide the best fit, in part because the plans are similar in some ways – but not all. If you’re offered a choice, it will probably include two of the most common types: a health savings account (HSA) and a health care flexible spending account (FSA).
Overview. With an FSA, which is generally established under an employer’s benefit plan, you can set aside a portion of your salary on a pretax basis to pay out-of-pocket medical expenses. An HSA is a combination of a high-deductible health plan and a savings account specifically designated to pay medical expenses not covered by the insurance.
Contributions. The maximum contribution to an FSA is $2,550 in 2016. Typically, you have to use the funds by the end of the year or forfeit that money under what’s commonly called the “use it or lose it” rule. However, your employer can adopt one of two exceptions to the rule.
The 2016 HSA contribution limit is $3,350 if you are single, $6,750 for a family. You can add a catch-up contribution of $1,000 if you are over age 55. You do not have to spend all the money you contribute to your HSA each year. These funds can remain in the account and grow until you need to use them.
Earnings. FSAs do not earn interest. Your employer holds your money until you request reimbursement for qualified expenses. HSAs, on the other hand, are savings accounts, and the money in the account can be invested. Earnings held in the account are not included in your income.
Withdrawals. Distributions from both accounts are tax- and penalty-free as long as you use the funds for qualified medical expenses.
Portability. If you change jobs, your FSA normally stays with your employer. Your HSA belongs to you; the account and the funds in it stay with you no matter where you may work. That’s true even if your employer makes contributions to your HSA for you.
It’s important to understand the differences between these kinds of accounts. In most cases you may not contribute to both accounts in the same year, so you’ll want to examine their respective advantages and choose the one that best fits your circumstances.
After your death your retirement accounts, life insurance policies, annuities and accounts at financial institutions will be governed by beneficiary designations already in place. If those designations are outdated, unspecific or wrong, your assets may not be distributed the way you would like.
All the funds from your retirement accounts, life insurance policies, annuities and accounts at financial institutions are governed by the beneficiary designations in place at the time of your death. If those designations are outdated, unspecific or wrong, your assets may not be distributed the way you would like. Make sure these assets reach the individuals and organizations you choose by following these guidelines for assigning beneficiaries:
Be specific and stay current. If you name a beneficiary, your assets can pass directly to that person or entity without going through a legal process called probate. Remember to update these designations, if necessary, following life events such as divorce, remarriage, births, deaths, job changes and retirement account conversions.
Think about unexpected outcomes. Be alert to the effect of taxes and try to avoid unintended consequences. For example, if the money in your accounts is distributed directly to your heirs, they may be stuck with a large unexpected tax bill. For wealthier heirs, estate tax may also play a role. In 2016, the estate tax exclusion is $5.45 million and the top estate tax rate is 40%. Another concern: If one of your designated beneficiaries is disabled, his or her government benefits may be reduced or eliminated by the transfer of assets. You may want to consult an attorney to establish a special needs trust to ensure your loved one is not adversely affected by your generosity.
Name contingent beneficiaries. If your primary beneficiary dies or is incapacitated, having a backup (contingent) selection named will ensure that your assets are properly distributed. In some cases, a primary beneficiary may choose to disclaim, or waive, the right to the assets. In that case, contingent beneficiaries can step up to primary position.
Practice good record keeping. Keep your beneficiary designation forms in a safe location, and maintain current copies with your financial institution, attorney, or advisor.
Beneficiary designations are an important part of estate planning. If you keep them up to date, well planned and carefully organized, you can be confident that your assets will reach your intended beneficiaries and be a valuable legacy for your loved ones.
