Taxes and Equipment Purchases (Segment III)

Preface: If your business generates significant tax liabilities, and if you are purchasing significant amounts of equipment or other capital assets, considering discussing with your tax advisor what an “in-service asset” is for IRS purposes

Taxes and Equipment Purchases (Segment III)

Credit: Jacob M. Dietz, CPA

If the asset was purchased by year end, and fully functional and used by the business by year end, then the asset is likely in service. However, in some cases, the asset can be in service even if not used.

Here is an example found in IRS Publication 946

“Example 1. Donald Steep bought a machine for his business. The machine was delivered last year. However, it was not installed and operational until this year. It is considered placed in service this year. If the machine had been ready and available for use when it was delivered, it would be considered placed in service last year even if it was not actually used until this year.”

In the Donald Steep example, it is interesting to note that just because the equipment was on the company property did not mean that it was in service for depreciation. This could particularly apply to a manufacturing company, where the equipment purchased may not be something that can be plugged in and operated immediately.

On the other hand, it is interesting to note that the Donald Steep example indicated that it did not actually have to be used for it to be in service, if it was “ready and available for use.”

Guidelines on all the complexities of placing fixed assets in service is beyond the scope of this article. If your business is purchasing new assets, and there is a question as to when it is in service, talk to your accountant about the specific facts and circumstances of your situation.

Proper Planning

If your business generates significant tax liabilities, and if you are purchasing significant amounts of equipment or other capital assets, considering discussing with your tax advisor before the year ends. If possible, talk to them early enough that there is time to alter the facts and circumstances to achieve a more favorable outcome if that would be beneficial. When considering and discussing these matters before year end, it can be hard to know exactly what the income will be for the year. Waiting until after the year ends, however, may make it harder for taxpayers to change the facts and circumstances to get the desired results.

For example, assume that Donald Steep had met with his accountant, and the accountant told Donald in October that having his machine in service would benefit him. Perhaps Donald would then have made sure that the machine was “installed and operational” by December.

Alternatively, suppose that Donald Steep already had enough deductions in the current year, and wanted to wait until next year to depreciate the machine. Then he could have made sure that it was not installed and in service.


If a large piece of machinery comes rolling into your business, what thoughts will be running through your mind? Perhaps you will be thinking “I can hardly wait to operate this piece.” Perhaps you will be thinking “This machinery will not be in service until about two weeks from now.” Whatever you are thinking, enjoy the pleasure of being in service to your customers.

Taxes and Equipment Purchases (Segment II)

Preface: Without going into all the tax complexities, in the past sometimes the IRS and tax courts have varying historic stances on the tax implications of when an asset is placed in service. Here’s how it works.

Taxes and Equipment Purchases (Segment II)

Credit: Jacob M. Dietz, CPA

Many business owners dislike rendering taxes to Caesar, so getting a tax break in the current year seems beneficial.

Sometimes, however, a business may choose to wait to place assets in service. Why would you wait to take a tax break? The federal tax system uses different rates for different amounts of income, and certain tax benefits phase out at higher income levels. A taxpayer may aim to have income within certain ranges to take advantage of more favorable tax rates or benefits.

The details of the tax system can be quite complex, but without getting into all the details the tax rates range from 10% to 37%. One important thing to note is that the higher brackets only apply to the higher income. Therefore, if someone had enough income to be taxed at the 37% income bracket, not all their income would be taxed at 37%. For example, some would be taxed at 10%. Taxpayers do not need to worry that if they bump up into a higher bracket that suddenly all their income will be taxed at the higher percentage. Nevertheless, if they bump into a higher bracket, they will need to pay the higher percentage on the income that is in that bracket.

Suppose a business placed many assets in service in the current year, but they do not need all the deductions in the current year. The business owners may fear getting pushed into higher tax brackets in the next year.

What can be done to generate deductions next year? The business could avoid immediately deducting all the equipment in the current year. Instead they could depreciate it over the recovery period. That defers some of the depreciation to next year. If the taxpayer does not take all the expense in one year, then it must be taken over a certain number of years. Exactly how many years is beyond the scope of this article, but the government provides guidance. If it is not all taken in year one, expect it to take multiple years to get the deduction. The remainder is not all deducted in year 2. But what if the taxpayer wants to take it all in year 2? Generally, the taxpayer is not permitted to do this unless the asset is placed in service in year 2.

Therefore, if a business has enough deductions in year 1, and not enough in year 2, they may want to wait until year 2 to place the asset in service, if they can wait that long without significantly hindering operations. If all the conditions are met, they may be able to fully deduct the equipment in year 2 if placed in service in year 2.

When is the Asset in Service

It can make a significant difference in your taxes depending on when the asset is placed in service. When is it placed in service? That answer can get complex. One of the regulations states that “Property is first placed in service when first placed in a condition or state of readiness and availability for a specifically assigned function.” Without going into all the complexities, in the past sometimes the IRS and courts have sometimes taken a looser and sometimes a stricter stance on when an asset is in service.

Taxes and Equipment Purchases (Segment I of III)

Preface: Purchasing equipment for a business has far broader implications than how much it saves you in taxes. This blog provides understandable and concise narrative on the appropriate tax process to purchasing equipment. 

Taxes and Equipment Purchases

Credit: Jacob M. Dietz, CPA

Did you make a large equipment purchase recently? If so, what thoughts scampered through your mind? Thoughts could range widely, from “operating this is a lot of fun” to “how will I pay this off” to “this will help with my taxes.” Often, business owners think of the tax benefits when purchasing new capital assets, such as a forklift. This article examines how the date in service affects the deduction.


First, let’s examine how deprecation works. Companies deduct certain expenditures immediately as business expenses. Examples can include maintenance, office supplies, etc.

Other expenditures, however, the company capitalizes as an asset. The expense then comes through depreciation or 179 expense. Generally, the full cost of the capitalized asset does get written-off by a business, but sometimes it is over many years. For example, wood product manufacturing equipment can have a 7 year recovery period. In 2019, there are two options, bonus depreciation and 179 expense, that can allow the business to take the full expense of certain assets, such as a forklift, in the first year in service.

Date in Service Matters

The date in service matters because it determines when depreciation starts, and when bonus depreciation and 179 expense can be taken, if applicable. If a business buys a $100,000 piece of equipment and takes 100% bonus depreciation on it, it can make a significant difference if that equipment was placed in service December 31st or January 1st. The difference in expense for the year could be $100,000. If it was placed in service January 1st, however, the deduction is not lost. it is just deferred into the future. A taxpayer generally receives the same amount of write-off for the capitalized asset, but the year and way in which it is taken may be different.

So how does a taxpayer decide when to put an asset in service? There are multiple considerations.

First, when does the taxpayer need the asset? If the asset, a forklift for example, will not be needed for another 3 years because the current forklift is still working fine, then the taxpayer likely should keep using the older forklift instead of replacing it with a new one just to put a new asset in service and get a tax break. Tax breaks and benefits are great, but the tax pros and cons should not be the only factor in the decision.

On the other hand, assume that the business decides that they need a new forklift no later than February. In that situation, if the business wants the tax break earlier, they may speed up the process and purchase the forklift and place it in service in December, rather than waiting until February. Unless cash is too tight, a small adjustment in the schedule could be beneficial because of a quicker tax break.

Another consideration is when does a business want a tax break? Generally, but not always, a business will want the tax break sooner rather than later. The time value of money can contribute to this desire.

Conclusion of Segment I

Capital Gain Deferrals with Installment Sales

Preface: Installment sales, when convenient and permissible, can defer payments on capital gains tax. Talk with your CPA if you are selling property that qualifies for an installment sale to determine if it is right tax plan for the deal.

Capital Gain Deferrals with Installment Sales

Credit: Donald J. Sauder, CPA | CVA

Thinking of selling property with owner financing? Maybe you’re optimized tax plan is an installment sale–a sale of property that occurs when one or more payments occur after the tax year of ownership transfer, and gain is deferred. Deferral is the key word here. If a sale qualifies for an installment sale gain recognition, the deferred gain must be reported with installment sale methods unless your tax accountant elects out of the installment method on the sale in the initial year of filing.

Here’s how an installment works. Suppose Marvin sold his Selingsgrove farmland to Will for $2 million, to be paid in equal installments over 10 years, plus interest. Let’s say Marvin’s basis in the farmland was $1 million, and the deed was mortgage free. Marvin would receive a payment for $200,000 in the first year of sale and prorate his capital gain over the 10-year payment period. This would therefore result in stretching the deferral of tax payments on capital gains of $1 million ($2 million sale price minus $1 million basis). Marvin would report the sale of property on IRS Form 6252 with the following parameters: on IRS Form 6252, Marvin’s CPA would report the sale with a description of the property and selling price, and calculate the gross profit with the contract price ratio for the gain percentage on the installment sale (50% = $2 million/$1 million). In this example, would report $100,000 (50% of $200,000) of capital gain on his tax return in the first year of sale, versus $1 million. This would reduce his tax burden from $250,000 of capital gains tax in the year of sale to say only $25,000.

Now let’s look at depreciation recapture if the property had a $1 million building. All depreciable installments sales must report the depreciation recapture in the year of sale. If Marvin sold the farmland with a building with Section 1250 Property, buildings such as a barn or house, and the depreciation accumulated on the building was $200,000, Marvin would need to pay tax on the entire depreciation recapture of $200,000 in the year of sale. This is income recapture reported on IRS Form 4797.

Special caution: if you sell property with payment from an irrevocable escrow fund for the remaining payments, the gain must be reported and capital gains tax paid in the year of sale because payment is guaranteed.  Installment sales to related parties with depreciable property is permitted only under the exception that no benefit will be derived from the sale.

In certain instances, partnership interests can be sold with the installment sale methods as a single capital asset. The gain or loss on accounts receivable and inventory will be deferred, but the ordinary income or loss and depreciation recapture will be taxed in the year of sale. The capital assets such as goodwill can be sold on the installment basis with deferred gain. To optimize tax planning, talk with your CPA before beginning to sell your business.

Installment sales cannot be used for sales of inventory, dealer sales, stock or securities traded on an exchange or installment obligations, such as a purchaser’s obligation to make future payments that can be in form of notes, mortgages, or other evidence of debt.

In summary, installment sales, when convenient and permissible, can defer payments on capital gains tax. Talk with your CPA if you are selling property that qualifies for an installment sale to determine if it is right for the deal.


Professional Employer Organizations and Your Business

Preface:  Professional employer organizations permit an option for businesses to outsource the human resource functions of their business. Read further to learn why a professional employer organization benefits certain enterprises. 

Professional Employer Organizations and Your Business

Credit: Donald J. Sauder, CPA | CVA 

As an employer, you understand the various responsibilities of hiring, keeping, and managing your workforce. The human resource responsibilities can require more time than many business owners should give. Professional employer organizations are co-employer organizations that perform the human resource function for businesses; they are an outsourcing of the responsibilities of human resources.

Professional employer organizations rules differ from state to state, but are similar. There are more than 800 professional employer organizations in the United States, with more than two million employees participating.

With a professional employer organization your business has no responsibility for payroll filings, benefit packages, and tax reporting of forms 941 or W-2. Professional employer organizations can often obtain better rates than a mid-size employer when shopping for benefits packages. Professional employer organizations also keep your business in compliance with federal workplace legislation.

Some states recognize professional employer organizations as co-employers, assuming responsibilities for legal rights and duties of employees at the employees’ working location. These states also make your business responsible for any unpaid payroll taxes not funded to the IRS. So if you use a professional employer organization, check them out thoroughly. Request their audited financial statement to assess the financial strength of the organization and interview management to gain the level of trust necessary for a good outsourcing relationship.

Specifically, professional employer organizations handle only the human resource function– payroll, tax and workplace compliance, and record keeping. The client company is still in charge of managing employee responsibilities, on-site supervision, and tools for employees; the employees are outsourced for human resource management only. Professional employer organizations permit your business to have a professional human resources department even if you are only a small business, but you will pay a premium on your leased labor for this benefit. Businesses that contract with professional employee organizations think this additional cost is a wise expense. The main difference to your employees is the name on the W-2 for tax filings.

One specific benefit of professional employee leasing organizations is in specialty employment tax areas, such as FICA taxes. Employees who are exempt from social security tax for religious reasons may be subject to FICA taxes if working for an employer. A specialty professional employee leasing organization structured for this exemption from FICA tax may permit the employer to save the FICA payment to the IRS and permit the employee to keep the savings, too. This can be a combined tax savings of 15.2% per year on wages up to the social security tax limit. The cost to involve a qualifying professional employer organization is small compared to the combined benefit to the employer and employee.

If you think a professional employer organization may be a fit for your company’s human resource management, talk with your trusted tax advisor. Compare the additional expenses and the dollar savings on reduced administrative burdens.

In summary, professional employer organizations permit an option for businesses to outsource the human resource functions of their business. These organizations handle payroll filings, tax compliance, record keeping, and compliance with federal workplace rules. Some businesses can benefit from professional employer organizations. Talk with your tax advisor if you have interest in this option for your business.

Where Will Ideas Lead Your Marketplace?

Preface: Most good ideals are the result of building on existing ideas or working together via collaboration to develop ideas. Good ideas take time and energy to develop. Good ideals lead to great ideas.

Where Will Ideas Lead Your Marketplace?

Credit: Donald J. Sauder, CPA | CVA

Innovation will always be with us. Insights leading to extraordinary developments in civilization have been occurring before the day a group of men built a truly preposterous boat called the Ark. The Ark was a fabulously good idea in its time, but so innovative that it drew ridicule towards the one in charge of building it. The first lesson to learn from history–when someone has an idea you think is preposterous, don’t ridicule them. Instead, say something like, “That is a unique idea.”

Good ideas take time to become great ideas. In 1799 Sir George Cayley presented the first design for a fixed-wing aircraft. Numerous attempts were made to implement Sir George Cayley’s idea during the next century. On December 17, 1903 in Kitty Hawk, North Carolina, Wilbur and Orville Wright made the first controlled, sustained power flight. This led to the development of aircraft into a useful means of transportation.

Airplanes have developed significantly since 1903. Today billionaires fly in private Boeing 757s with a $100 million price tag. If that isn’t surprising, consider Saudi Prince Al-Waleed Bin Talal’s “Flying Palace,” a specially-designed luxury Airbus A380 for $500 million. Sir George Cayley’s idea in 1799 has followed a path of incredible innovation to today. Where will innovation lead in the next century for your marketplace?

Let’s bring this to a practical level. Most good ideas are the result of building on other ideas or working together to develop ideas. Good ideas take time and energy to develop. Good ideas lead to great ideas. The idea for the Ark came to Noah for a reason, and he put all his energy into implementing that idea, just like Wilbur and Orville Wright put all their energy into their building and flying an airplane.

Microsoft isn’t a business developed from a flash of insight. Years of tinkering with mainframe computers in high school led Paul Allen and Bill Gates to see what computers could do in a developing world. A vision developed over time–a computer on every desk and in every home, with Microsoft software, of course. Microsoft was incorporated on April 4, 1975.

In 1977, Ken Olsen is famously quoted, “There is no reason for any individual to have a computer in his home.” An engineer who co-founded Digital Equipment Corporation in 1957, Ken helped build computerized flight simulators and was an accomplished pilot, a very intelligent entrepreneur and engineer. Ken was named by Fortune magazine as America’s most successful entrepreneur in 1986. Avoiding fancy trappings, he kept a simple office in an old mill building, and when his staff built a modern and lavish office he refused to use it. In 2011 he was listed as #6 on the list of top 150 innovators and ideas from MIT. When you think about innovators in the computer industry, however, Olsen probably isn’t a name that comes to mind. But his ideas were key to developing the technology innovation that spurred Microsoft’s vision.

Microsoft believed in ideas such as flight simulators being so commonplace that they could be used for young people’s entertainment. Microsoft developed ideas that people like Ken Olsen engineered years earlier.

Consider the innovation in the agriculture industry in the recent century, from plows to no-till drills; or communication and mobile phones; and yes, there is more innovation in science laboratories and on CAD (computer-aided design) software files for the future. Where will those ideas lead your marketplace?

In summary, have a great vision and purpose for your business. Strive to further that purpose and vision every day, because future innovative ideas are sure to take your business industry to places which today you may think are impossible.

Flagstone Crossings To Lower Taxes: What Entity is Right (Segment III)

Preface: Selecting the right entity car for optimized taxes is complex. Appropriately choosing an entity for your business, that will support a lower tax burden often requires collaboration with your tax advisor. Flipping a coin is not advised.

Flagstone Crossings To Lower Taxes: What Entity is Right (Segment III)

Credit: Donald J. Sauder, CPA | CVA

Partnership entities are an association of two or persons taxed on a Form 1065 for Federal purposes. They can be general partnerships, limited partnerships, or multi-member LLC’s. The organization is a pass-through entity that does not pay income tax at the entity level but instead passes the profit and losses through to the company’s “partners” on a Form K-1 that is filed with the individual 1040s.

Partnerships vehicles provide flexibility to the allocate income, ownership, voting rights, and provide multi-owner features without the tax incorporation features. Partners received guaranteed payments for services instead of a W-2 as from a corporation. Ordinary income from the partnership is often subject to FICA taxes on the individual partner’s 1040 if they are active in the company. For tax purposes, this is a significant tax characteristic and decision maker between an S-Corporations and multi-member LLCs.

General partnerships are easy to setup, but often not advised since there is easier affordable liability protection with a multi-member LLC. General partnerships, however, permit an increased ability to raise capital, but because both debts and liabilities are attached to partners, hold certain risks.

Multi-member LLC’s are often considered a hybrid of a partnership and corporation. Since the profits pass through to members on a Form K-1, the tax benefits are often appreciated. Also, members have limited risk with liability on debts and the investment; they can also participate in management, permit corporations and partnerships to be members, and do not have restrictions on the number of active or inactive members.

Partnership tax flexibility and conventional attributes are a commonly debated tax topic among advisors. One such feature is treating partners as employees.

Quoting from Noel Brock’s 2014 article:  Treating partners as employees: Risks to consider

This error can have many tax consequences, not the least of which is the mistaken tax treatment of the partner’s income as wages subject to Federal Insurance Contributions Act (FICA) taxes under Sec. 3101, Federal Unemployment Tax Act (FUTA) taxes under Sec. 3301, and income tax withholding under Sec. 3402 (called employment taxes in this article), instead of self-employment income subject to self-employment tax under Sec. 1401 (Self-Employment Contributions Act (SECA)), which is not subject to wage withholding.

When Congress enacted the 1954 Code, it provided that a partnership could be an aggregate of its partners or a separate entity. Where no view of partnership taxation was adopted by a given Code provision, the view that was “more in keeping with the provision” should prevail. One Code provision that treats a partnership as a separate entity from its partners that was adopted in the 1954 Code is Sec. 707(a). It provides that, if a partner engages in a transaction with his or her partnership in other than his or her capacity as a member of the partnership, the transaction will, except as otherwise provided in Sec. 707, be treated as a transaction occurring between the partnership and one who is not a partner. Sec. 707(a) introduced the possibility that, given the right circumstances, a partner may hold the dual status of partner and employee in a single partnership.

Of note, is the numerous state Departments of Revenue that are now also looking at this tax perspective of employees as partners with increased scrutiny. The risks are substantial for established partnerships. Appropriate tax counsel and awareness of any tax risk are advised.

Selecting the right entity for your business startup is a tax decision that could include unknown long-term ramifications for any business owner. Say, partnerships, LLC, Corporation or sole proprietor? Agreed, Saint John Paul the Great said it well “The future starts today, not tomorrow.” 

This blog is only a summary of the pertinent features to tax planning for entity selection. Getting it right is not as easy as it seems because tax laws are complicated. Making the best decision for your business, that will support a lower tax burden requires collaboration with your tax advisor. Flipping a coin is not advised.

Flagstone Crossings To Lower Taxes: What Entity is Right (Segment II)

Preface: “I think it is very interesting in the beginning chapter of the story of Jesus, tax payments are an integral part at his arrival.” Quote from a Bible reader.

Flagstone Crossings To Lower Taxes: What Entity is Right (Segment II)

Credit: Donald Sauder, CPA | CVA

S-Corporations are selected for entrepreneurial businesses often for the asset protection of the corporate umbrella, in addition to lower FICA taxes. Since S-Corporations do not have FICA taxes assessed on net earnings with pass-through profits, and therefore no entity-level income taxes, numerous entrepreneurs can find substantial benefit in the S-Corporation election. An S-Corporation is a C-Corporation or corporate entity registered with the Department of State with that files with the IRS a Form 2553 that changes the tax structure upon approval. This tax advisor prepared form will convert the corporate level taxes to pass-through earnings on Form K-1 similar to a partnership.

The advantages of an S-Corporation with the asset protection feature under the corporate umbrella, hold risks for certain corporate activities from a legal term known as “piercing the corporate veil.”

“Piercing the corporate veil” refers to a situation in which courts put aside limited liability and hold a corporation’s shareholders or directors personally liable for the corporation’s actions or debts. Veil piercing is most common in close corporations.

As such, courts typically require corporations to engage in egregious actions to justify piercing the corporate veil. In general, this misconduct may include abusing the corporation (e.g., the intermingling of personal and corporate assets) or having [inadequate funds] at the time of incorporation. 

To fulfill the strand component, the corporation must be 1 of 3 things:

•The alter ego of the parent corporation or its shareholder(s)
•The corporation is used to avoid legal limitations upon natural persons or corporations
•The corporation is a sham to perpetrate a fraud.

Further, the court stated that “actual fraud” occurs when all 4 of the following take place:

•”a party conceals or fails to disclose a material fact within the knowledge of that party.”
•”the party knows that the other party is ignorant of the fact and does not have an equal opportunity to discover the truth.”
•”the party intends the other party to take some action by concealing or failing to disclose the fact.”
•”the other party suffers injury as a result of acting without knowledge of the undisclosed fact.”

A thorough analysis of all features is advised in any tax scenario for purposes of preventing the umbrella from blowing away.

Further to the benefits of S-Corporations in the pass-through taxation, and characterization of income in the form of tax-free distributions to shareholders. Also, the cash method of accounting is permissible in qualifying instances, and the entity has a higher sense of credibility from the legacy of corporation case law. Adding to the S-Corporation features, up to 100 shareholders are permissible with one class of stock, and conversion to the S-Election status are often easy, and maybe too easy, for either multi-member LLC’s, SMLLC’s, or C-Corporations. It is advised to counsel with a tax advisor before deciding the election of an S status for any business.

Looking at the detractors to the S-Corporation include corporate formalities and reports, board minutes and legal formalities within the State of domicile, and tax risks of termination of the S-Election status, restriction to 100 shareholders, one class of stocks, and salary requirements for shareholders who provide services to the business. Therefore payroll is required for S- Corporation who have only one or several shareholder-employees. The Tax Cuts and Jobs Act results in the following changes to S-Corporations that are now applicable.

S-Corp vs. C-Corp: How They Differ (and How to Decide)

The Tax Cuts and Jobs Act—which you might know as the Trump tax plan—will bring changes to both C-corp and S-corp taxation. The new laws take effect when business owners file their taxes in 2019 (for the business’s 2018 year).

There are two main things that small businesses need to know about the new rules:

The corporate income tax rate for C-corps has been cut from 35% to 21%.

Owners of S-corporations and other pass-through entities (like LLCs, sole proprietorships, and partnerships) will be able to deduct 20% of business income on their personal tax returns. This deduction expires in 2025 unless Congress extends the law.

It depends, says John Blake, CPA, and partner with New Jersey-based accounting firm Klatzkin & Company, LLP. He explains, “This will have to be analyzed on a case-by-case basis. In the tax reform, Congress built in the 20% deduction for pass-through entities such as S-corps to make up for the lower C-corp tax rates.”

What the New Law Means for S-corps

The 20% deduction for S-corps and other pass-through entities lets you save money. Businesses with less than $157,500 in annual income (for single filers) or $315,000 (for married joint filers) can take full advantage of the deduction.

There are limits to the deduction based on the type of business, the amount of income, and the number of wages you pay to employees. Professional service businesses like lawyers and doctor’s offices have the most limitations.”

Same as there are varying opinions on hat choices, the right entity choice for optimized tax results is specific and unique for entrepreneurial ventures. The author suggests that the development of the smorgasbord menu for tax entity features would provide specific customization for entrepreneurs. Of course, this is in addition to the idea that firefighters and first-responders are entitled to an additional tax credit or tax rate benefit for the dedicated purpose of necessary community service.

Next, we will delve into partnership taxation for entrepreneurs.


Flagstone Crossings To Lower Taxes: What Entity is Right

Preface: Shining some sunlight on the business landscape, the Tax Cuts and Jobs Act of 2017, one favorite from the Trump law revisions, has brought surprising and welcome lower tax costs for all business owners, and nearly all selections of tax entities. This blog provide a perspective on what entity maybe right for your business.

Flagstone Crossings To Lower Taxes: What Entity is Right?

Credit: Donald J. Sauder, CPA | CVA

Say, taxes have never been plain or simple. Yet, maybe one day in the future; right? No risks in business owners envisioning that day? Let’s add the Canadian English expression “eh” to that question as a reader’s (and writer’s) agreement.

Choosing the right entity for your business startup is a tax decision with what could include unknown long-term ramifications for any business owner. Getting it right is not as easy as it seems. Making the best decision for your specific tax attributes, that will support a lower tax burden usually requires collaboration with your tax advisor. Often, optimized preplanning can easily pay big dividends with lower future year tax costs. Then again, time has always brought change, and with that change tax law revisions. Flipping a coin is not advised.

Shining some sunlight on the business landscape, the Tax Cuts and Jobs Act of 2017, one favorite from the Trump law revisions, has brought surprising and welcome lower tax costs for all business owners, and nearly all selections of tax entities. With those regulation revisions, in this blog we’d like to discuss some of the current applicable tax planning features for entrepreneurs 2019.

Sole Proprietorship or Single Member LLC’s

Independent contractors, entrepreneurial startups, and business ventures with only one owner can organize as a Schedule C tax entity. The taxes are filed with the owners 1040 tax filing. While this is the simplest approach to entity taxation, because it doesn’t require an independent and additional business tax filing, FICA taxes are always assessed on all earnings for both the employer and employer in a higher tax costs, exemplified in a coffee and tea type tax filing for higher income earners. Rates begin above 15% for FICA and income tax costs are added on top as an additional 15% to 30% for most tax payers.

Taxpayers who are FICA tax exempt, with an approved Form 4029 exemption, have a solid and favorable tax structure with the Schedule C in single owner businesses. A Single Member LLC (SMLLC) is taxed the same as a Sole Proprietorship, but has the LLC legal umbrella with the State Department. Talking with an attorney with regards to this optimal legal decision is advised.

A SMLLC also is eligible for the 199A deduction, that is a 20% deduction on qualified taxable earnings up to $207,500 for singles, and $415,000 for married filers. Certain service professions are excluded from the 20% deduction from 199A, but for the majority of cornerstone small businesses in the United States, the deduction substantially lowers tax costs with the current tax laws.

Quoting excerpts from here’s an example of the applicable 199A for a SMLLC.

The basic Section 199A Qualified Business Income pass-through deduction is 20% of net qualified business income which is huge. If you make $200,000, the deduction is $40,000 times your marginal tax rate of 24% which equals $9,600 in your pocket.

(2) DETERMINATION OF DEDUCTIBLE AMOUNT FOR EACH TRADE OR BUSINESS. The amount determined under this paragraph with respect to any qualified trade or business is the lesser of-

(A) 20 percent of the taxpayer’s qualified business income with respect to the qualified trade or business, or

(B) the greater of-

 (i) 50 percent of the W-2 wages with respect to the qualified trade or business, or

 (ii) the sum of 25 percent of the W-2 wages with respect to the qualified trade or business, plus 2.5 percent of the unadjusted basis immediately after acquisition of all qualified property (in other words, prior to any depreciation).

Wilma makes $100,000 in net business income from her sole proprietorship but also deducts $5,000 for self-employed health insurance, $7,065 for self-employment taxes and $10,000 for a SEP IRA. These are not business deductions- they are adjustments on Form 1040 to calculate adjusted gross income. Her deduction is the lessor of 20% of $100,000 (net business income) or 20% of her taxable income, which could be less. This might change as the IRS clarifies.

Barney owns three rentals with net incomes of $20,000 and $5,000, with one losing $8,000 annually. These are aggregated to be $17,000. He would deduct 20% of $17,000.

Yes, 199A regulations are very complex, and as new chapter to the tax laws, there are many regulation nuances that require tax advisor guidance for assurance of accurate tax compliance, including services, rentals, and other applicable tax planning attributes. Yet for SMLLC’s or sole proprietorships this tax deduction now saves and lowers single owner business taxes. It is also applicable to partnerships and S-Corporations as we will examine next.

Construction Financing for your Business

Preface: Tom Jordan, Market President, Lancaster, Univest Bank and Trust Co. provides this weeks sponsorship contribution with the art of financing for business construction projects.

Construction Financing for your Business

Are you considering building your own building or doing a major renovation to your current building? If so, this article provides insight on the process of working with a bank to fund your project. When providing funds to support construction financing, the bank assumes the risk associated with the customer’s ability to successfully complete a proposed project on time and within budget. To monitor each project’s progress, costs and loan disbursements, the bank has an established construction loan administration process. This process is essential to effectively controlling construction risk and providing the client, contractor and bank with a predictable and smooth process…..

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