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.
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.
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.
