In this Edition
February 24, 2022
Important Tax Aspects of Operating Your Business as a Sole Proprietor
PODCAST: Credit Reports
Making Withdrawals From Your Closely Held Corporation That Aren't Taxed as Dividends
Businesses Can Still Deduct 100% Of Restaurant Meals
Could You Have to Pay a Parent's Nursing Home Costs?
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Important Tax Aspects of Operating Your Business as a Sole Proprietor |
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If you’re in business for yourself as a sole proprietor, or you’re planning to start a business, you need to know about the tax aspects of your venture. Here are eight important issues to consider:
1. You report income and expenses on Schedule C of Form 1040. The net income is taxable to you regardless of whether you withdraw cash from the business. Your business expenses are deductible against gross income and not as itemized deductions. If you have any losses, they’re generally deductible against your other income, subject to special rules relating to hobby losses, passive activity losses and losses in activities in which you weren’t “at risk.”
2. You may be eligible for the pass-through deduction. To the extent your business generates qualified business income, you’re eligible to take the 20% pass-through deduction, subject to various limitations. The deduction is taken “below the line,” so it reduces taxable income, rather than being taken “above the line” against gross income. You can take the deduction even if you don’t itemize and instead take the standard deduction.
3. You might be able to deduct home office expenses. If you work from home, perform management or administrative tasks from a home office or store product samples or inventory at home, you may be entitled to deduct an allocable portion of certain costs. And if you have a home office, you may be able to deduct expenses of traveling from there to another work location.
4. You must pay self-employment taxes. For 2022, you pay self-employment tax (Social Security and Medicare) at a 15.3% rate on your self-employment net earnings of up to $147,000 and Medicare tax only at a 2.9% rate on the excess. An additional 0.9% Medicare tax is imposed on self-employment income in excess of $250,000 for joint returns, $125,000 for married taxpayers filing separately, and $200,000 in all other cases. Self-employment tax is imposed in addition to income tax, but you can deduct half of your self-employment tax as an adjustment to income.
5. You can deduct 100% of your health insurance costs as a business expense. This means your deduction for medical care insurance won’t be subject to the rule that limits your medical expense deduction to amounts in excess of 7.5% of your adjusted gross income.
6. You must make quarterly estimated tax payments. For 2022, these are due April 18, June 15, September 15 and January 17, 2023.
7. You should keep complete records of your income and expenses. Carefully record expenses in order to claim all of the deductions to which you are entitled. Certain expenses, such as automobile, travel, meals and home office expenses, require special attention because they’re subject to special recordkeeping requirements or limits on deductibility.
8. If you hire employees, you need a taxpayer identification number and you must withhold and pay over employment taxes.
We Can Help
Contact us if you’d like more information or assistance with the tax or recordkeeping aspects of your business.
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Jay Kramer, CPA, MST
D 920.337.4551
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Credit Reports
With so much of our information being online these days, the risk of our identities being stolen is higher than it has ever been. Did you know that you can request a free copy of your credit report annually? This episode explains helpful tips on how to manage your credit score.
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Making Withdrawals From Your Closely Held Corporation That Aren't Taxed as Dividends |
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Do you want to withdraw cash from your closely held corporation at a minimum tax cost? The simplest way is to distribute cash as a dividend. However, a dividend distribution isn’t tax-efficient since it’s taxable to you to the extent of your corporation’s “earnings and profits.” It’s also not deductible by the corporation.
Five Alternatives
Fortunately, there are several alternative methods that may allow you to withdraw cash from a corporation while avoiding dividend treatment. Here are five areas where you may want to take action:
1. Capital Repayments. To the extent that you’ve capitalized the corporation with debt, including amounts you’ve advanced to the business, the corporation can repay the debt without the repayment being treated as a dividend. Additionally, interest paid on the debt can be deducted by the corporation. This assumes that the debt has been properly documented with terms that characterize debt and that the corporation doesn’t have an excessively high debt-to-equity ratio. If not, the debt repayment may be taxed as a dividend. If you make future cash contributions to the corporation, consider structuring them as debt to facilitate later withdrawals on a tax-advantaged basis.
2. Salary. Reasonable compensation that you (or family members) receive for services rendered to the corporation is deductible by the business. However, it’s also taxable to the recipient. The same rule applies to any compensation in the form of rent that you receive from the corporation for the use of property. In both cases, the amount of compensation must be reasonable in relation to the services rendered or the value of the property provided. If it’s excessive, the excess will be nondeductible and treated as a corporate distribution.
3. Loans. You may withdraw cash from the corporation tax-free by borrowing from it. However, to avoid having the loan characterized as a corporate distribution, it should be properly documented in a loan agreement or a note and be made on terms that are comparable to those on which an unrelated third party would lend money to you. This should include a provision for interest and principal. All interest and principal payments should be made when required under the loan terms. Also, consider the effect of the corporation’s receipt of interest income.
4. Fringe Benefits. Consider obtaining the equivalent of a cash withdrawal in fringe benefits that are deductible by the corporation and not taxable to you. Examples are life insurance, certain medical benefits, disability insurance and dependent care. Most of these benefits are tax-free only if provided on a nondiscriminatory basis to other employees of the corporation. You can also establish a salary reduction plan that allows you (and other employees) to take a portion of your compensation as nontaxable benefits, rather than as taxable compensation.
5. Property Sales. Another way to withdraw cash from the corporation is to sell property to it. However, certain sales should be avoided. For example, you shouldn’t sell property to a more than 50% owned corporation at a loss, since the loss will be disallowed. And you shouldn’t sell depreciable property to a more than 50% owned corporation at a gain, since the gain will be treated as ordinary income, rather than capital gain. A sale should be on terms that are comparable to those on which an unrelated third party would purchase the property. You may need to obtain an independent appraisal to establish the property’s value.
Keep Taxes Low
If you’re interested in discussing any of these approaches, contact us. We’ll help you get the most out of your corporation at the minimum tax cost.
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Jill Wrensch, EA
D 715.384.1989
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Tax Tip Tuesday - Video Short |
New IRS Schedule K-2 & K-3
In 30 seconds, we cover what you need to know about the new IRS schedule K-2 and K-3.
Beginning with the 2021 tax year Partnerships and S Corporations will be using Schedules K-2 & K-3 to report partners' or shareholders' total distributive share of items with international relevance, including U.S. source income.
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Businesses Can Still Deduct 100% Of Restaurant Meals |
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Business owners, 2022 is well underway. So, don’t forget that a provision tucked inside the Consolidated Appropriations Act suspended the 50% deduction limit for certain business meals for calendar years 2021 and 2022. That means your business can deduct 100% of the cost of business-related meals provided by a restaurant.
As you may recall, previously you could generally deduct only 50% of the “ordinary and necessary” food and beverage costs you incurred while operating your business. Now you can deduct your full eligible costs. What’s more, the legislation refers to food and beverages provided “by” a restaurant rather than “in” a restaurant. So, takeout and delivery restaurant meals also are fully deductible.
However, some familiar IRS requirements still apply. The food and beverages can’t be lavish or extravagant under the circumstances. The meal must involve a current or prospective customer, client, supplier, employee, agent, partner or professional advisor with whom you could reasonably expect to engage in the due course of business. And you or one of your employees must be present when the food or beverages are served.
Entertainment expenses still aren’t deductible, but meals served during entertainment events can be deductible if charged separately. If food or beverages are provided at an entertainment activity, further rules apply. In addition, in November of last year, the IRS issued guidance on per diems related to the temporary 100% deduction for restaurant food and beverages. Contact us for further details.
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Colleen Scherpereel
D 262.404.2115
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Could You Have to Pay a Parent's Nursing Home Costs? |
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Given the steep cost of nursing homes, planning for long-term care is critical. This holds true not only for you, but also possibly for aging parents if they’re still in your life.
One important question to consider is whether you could be held financially responsible for your parents’ nursing home bills if they can’t afford to pay them. The answer is: It’s possible, but unlikely.
Filial Responsibility Laws
More than half of the states have “filial responsibility” laws, under which adult children are responsible for their parents’ medical bills if their parents are unable to pay. These laws are rarely enforced, for several reasons. For one thing, nursing home expenses usually are covered by Medicare or Medicaid. Also, most filial responsibility laws require a court to consider the children’s ability to pay before imposing liability.
In rare cases, however, an adult child may be held responsible for his or her parents’ nursing home bills. This might be the case, for example, if a parent doesn’t yet qualify for Medicare and has just enough financial resources to be disqualified from Medicaid.
It’s also possible for Medicaid eligibility to be delayed by several months — or even years — if the applicant made certain gifts or other asset transfers within a five-year “look-back” period. Nursing homes may be able to seek payment from the adult children of a patient who has made such disqualifying asset transfers to them during the look-back period.
Even if you’re not directly responsible for your parents’ nursing home bills, you may end up contributing to their care indirectly through Medicaid’s estate recovery process. This allows Medicaid to recoup funds it spent on your parents’ care from their estates after they die, which could thus reduce the amount of your inheritance.
Financial Complexities
Caring for aging parents is a difficult task that can lead into many financial complexities. If your parents are receiving, or may soon receive, nursing home care and have limited funds, consult an attorney. A qualified legal advisor can help you determine whether you’re potentially responsible for their bills. An attorney can also investigate whether your parents’ assets are exposed to the Medicaid estate recovery process and whether strategies are available to limit your liability.
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Steve Arnold, CPA, EA, Certified QuickBooks Online Proadvisor
D 507.453.5962
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More Resources from CPA-HQ |
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Entrepreneurs be aware: Not all start-up expenses can be deducted on your federal tax return right away. Some may have to be amortized over time.
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Get More Worms by Filing Your Taxes Early
They say the early bird gets the worm. Early federal income tax filers may get a couple worms. This article discusses two benefits to filing early
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3 Financial Lessons of the Pandemic
This article discusses three financial lessons that may be learned from the pandemic.
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