5 Ways to Reduce Your Business Taxes in 2016

Are you looking for ways to save on business taxes this year? Here are five ways to reduce business taxes in 2016.

1. Reimburse Eligible Expenses
Employees and business owners should make sure they are reimbursed for all out of pocket expenses prior to year-end. Reimbursement of expenses to an individual under an accountable plan results in a tax deduction for the business and the reimbursement is non-taxable to the employee. The most common types of reimbursements include mileage, cell phone, meals and entertainment and home office expenses. Under an accountable plan, the individual must have adequate documentation supporting the reimbursement, such as a mileage log or receipts. Any amounts reimbursed or paid under a non-accountable plan could be subject to income taxes on the individual’s tax return.     

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Are you Required to Issue 1099s?

Businesses and individuals with business type activities, such as certain rental activities, are required to issue 1099s to unincorporated vendors who provided services to them during the year.  If you paid another individual, a partnership or an LLC for providing services to your business, you are required to issue them a 1099 by January 31st of each year.  Copies of the 1099s and a transmittal are due to be mailed to the IRS by February 28th each year.  The most common types of 1099s issued are for cleaning services, repairs and maintenance, landscaping, contract labor, rent, interest and professional services provided by unincorporated entities (such as IT companies and accounting firms). 

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IRS Announces Changes to 2016 Tax Season for Individuals

2016 Tax Season Opens on January 19, 2016

The IRS recently announced that individual tax returns will be accepted starting on Tuesday, January 19, 2016.  They will begin processing paper tax returns at the same time.

“We look forward to opening the 2016 tax season on time,” IRS Commissioner John Koskinen said.  “Our employees have been working hard throughout this year to make this happen.  We also appreciate the help from the nation’s tax professionals and the software community, who are critical to helping taxpayers during the filing season” (IRS.gov).

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Congress Makes Some Individual and Business Provisions Permanent

In December 2015, Congress passed a law extending many provisions that had expired at the end of 2014.  Many of these provisions were made permanent, while others will require further Congressional action in the future.

Selected “Business” provisions made permanent are as follows: 

  • Increased Section 179 deduction
  • Research and Experimentation Credit
  • 5 year waiting period for Built-In Gains Tax
  • Qualified Small Business Stock 100% gain exclusion

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Tax Tips for HOAs

Homeowners’ Associations (HOAs) are considered corporations for income tax purposes even if it has not incorporated within its home state. For the most part, HOAs are not created to produce income for members but rather is formed to maintain the common interest of the members. Some things to keep in mind for HOAs are:

  1. An HOA has two types of income, exempt function income and non-exempt function income.

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Year End Individual Planning Considerations

Year-end tax planning provides taxpayers with an opportunity to evaluate potential tax saving measures that can be acted on before it’s too late.   You should consider the following items:

  • General planning considerations that affect most taxpayers
    • Postpone income until 2016 and accelerate deductions into 2015 to reduce current year income taxes.  However, if this is a down year you may want to consider the reverse so you can take advantage of lower tax rates this year.
    • Consider selling investment assets (stocks, mutual funds) at a loss to offset current year capital gains.
    • If you typically take the standard deduction you may want to consider bunching deductions in one year so you can itemize your deductions every other year.
    • Make charitable contributions by 12/31/15.  Donating appreciated stock is a very tax efficient way to make these contributions.  Make sure your contribution is to a qualifying charity (not individuals) and you obtain a valid receipt.

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Deferring Taxes Using a Cost Segregation Study for Real Estate

What is a Cost Segregation Study?  A cost segregation study, is a study performed by a qualified engineering firm to determine what portions of a building are eligible for shorter depreciable lives and accelerated depreciation, thereby deferring income taxes.  IRS regulations require commercial and residential buildings to be depreciated over 39 and 27.5 years respectively.  When real estate is acquired or constructed, absent any other data, the non-depreciable cost of the land is separated from the building and the building is depreciated.

Client Testimonial: "This year, Gordon, Keeter & Co. recommended we have a cost segregation study performed on our new veterinary clinic.  For the first time in years, we are excited about filing our income tax return and taking advantage of the tax savings from the study." - Dr. Melanie Moore, Animal Care Clinic of Concord (pictured at right)

A cost segregation study can be extremely beneficial by accelerating the depreciation expense.  The study determines what portion of the cost of the building is considered personal property to be depreciated between 5 and 15 years.  Amounts determined to be personal property may be eligible for special depreciation allowances, such as bonus deprecation and Section 179.

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Investment Real Estate Ownership Options

We often are asked if investment real estate should be acquired personally, through a limited liability company (LLC), partnership or corporation.  Our answer always depends on the facts and circumstances of the situation.  Below we have detailed some of the pros and cons related to owning investment real estate personally or through a business entity.  However, in order to answer the question we must define and insure we are dealing with what is truly considered investment real estate.

Investment real estate is real estate acquired with the intention of holding for long term appreciation in value and/or rental real estate.  Real estate acquired for the purpose of resale or development is not considered investment real estate.   

Because LLCs and partnerships are treated the same for income tax purposes, we will generically refer to LLCs below.  LLCs and corporations can provide limited liability protection.  However, in order to maintain the liability shield, certain formalities need to be followed, such as a separate checking account and annual minutes.  Also certain states have specific requirements.  In North Carolina an annual report and fee is required.  

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Small Business Retirement Plan Options

If you’re a small business owner, retirement might be the furthest thing from your mind as you manage the everyday details of your business. However, retirement planning is extremely important to your future and the sooner you begin the easier it is to reach your goals.

There are several options for small business owners, but in this article we will focus on the four most common options we see used by our small business clients: The SIMPLE IRA, SEP IRA, solo 401K and Safe-Harbor 401(k).  

The SIMPLE IRA:
The Savings Incentive Match Plan for Employees IRA (SIMPLE IRA) works for employers with less than 100 employees who earn at least $5,000 annually. This plan is easy and affordable to set up and maintain, and allows for higher contributions than traditional or ROTH IRAs. For 2015, employees can contribute $12,500 for the year, or $15,500 if age 50 or older.  Employers have two contribution options: 1) Match employee elective deferrals dollar for dollar up to 3% of wages (can be reduced to as low as 1% in any two out of five years) or 2) Contribute 2% of wages (up to $260,000) for all employees (including nonparticipants). Contributions by the employer are mandatory, regardless of profitability of the business.   

It is important to remember, if you would like to open a SIMPLE IRA account, it needs to be done by October 1st of the current tax year in order to make a tax-free contribution for that tax year.  One potential downside is early withdrawal penalties could be as high as 25% of the accounts balance if taken within the first two years of participation in the plan, and 10% thereafter.

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Are You Getting the Most Out of Quickbooks for Your Business?

The most common off the shelf accounting software used today is QuickBooks.  Many of our clients use QuickBooks to record their business’s income and expenses.  QuickBooks was designed to be user friendly and allow users with little or no experience to summarize accounting data.  We honestly feel QuickBooks can be a wonderful tool in assisting business owners with their accounting needs.  However, many users are not realizing the true benefits and capabilities of QuickBooks because it has not been set up properly. 

QuickBooks has a desktop version that allows a lot of customization and reporting options and while online versions may not allow for all of the flexibility, it will allow you to login from any internet connection and have immediate access to all of your accounting data.  The online version requires a monthly fee while the desktop version, once purchased is good for a number of years unless you are using the payroll module and need to update your payroll tables annually.  QuickBooks also allows for single users on a single machine or a multi-user license can be acquired.  Each user can have a unique login and password limiting their access to certain functions and reports within the software.     Some of the things QuickBooks can help you with are:

  • Business Management – Profit and loss statements, balance sheets, budget vs. actual reports, historical data, etc., allow you to monitor how your business is doing on a timely basis.
  • Customers and Receivables – QuickBooks will allow you to set up all of your customers’ information within the software. You then have the ability to set your billing preferences on a customer by customer basis, such as payment terms, billing method (printed invoice, emailed invoice), and sales tax rate charged based on the customer’s sales tax district.

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Accounting Systems: How should I keep track of the income and expenses for my business?

One of the most common questions from our clients is:  How should I keep track of the income and expenses for my business?

Every business is unique and the accounting system for your business should be appropriate for your size and operations.  A small business that has a limited number of transactions each month may not need any formal type of accounting system.  All of their needs may be accomplished simply by recording all of the transactions in a check register during the year to be periodically or annually summarized.  We always recommend that a business have a separate checking account for all business transactions.  When separate accounts are maintained, it makes summarizing business transactions easier and more efficient because personal transactions have not been combined with business transactions, reducing the potential for inaccurate reporting.

Many of our clients depend on us to assist them in selecting an accounting system that is efficient and cost effective while meeting their accounting, tax preparation and reporting needs.  Often clients want or need a computerized accounting package.

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Health Reimbursement Arrangement’s (HRA’s) - $100 per day excise tax begins 7/1/15

The Affordable Care Act (more commonly referred to as Obama Care) has been and continues to be a big challenge to understand and implement.  Therefore, many employers are not in compliance. The IRS has recently issued some guidance and transition relief as it relates to certain types of HRA’s, for employers with fewer than 50 full-time equivalent employees. 

HRA’s covered under this transition relief are plans in which the employer either 1) reimburses an employee for some or all of the premium expenses incurred for an individual health insurance policy or 2) directly pays a premium for an individual health insurance policy covering the employee.

The IRS has agreed to waive the $100 per day excise tax for these types of arrangements from 1/1/14 – 6/30/15 for employers with fewer than 50 full-time equivalent employees. Beginning 7/1/15, employers who continue with these types of arrangements may be liable for the $100 per day excise tax for non-compliance. Please note, this transition relief does not apply to stand-alone HRAs or other arrangements to reimburse employees for medical expenses other than insurance premiums and therefore the excise tax may already apply.

If you have questions regarding these types of arrangements and would like to discuss further please contact us.

Important Fixed Asset, Repairs, and Depreciation Changes Effective for 2014

IRS

Over the past several years, the IRS has been updating rules related to accounting for and the tax treatment of amounts paid for materials and supplies, capital expenditures, and repairs and maintenance, referred to as the "tangible property regulations". Although we feel the new regulations, that became effective January 1, 2014, are more favorable for most taxpayers, additional work may be required to complete your 2014 tax return. The IRS is requiring taxpayers be in compliance with the revised tax laws beginning with the 2014 tax year. Thus, you are likely required to change your method of accounting to be in compliance. Also, there are several annual elections that may need to be made with your tax return.
 
Whenever a taxpayer changes their method of calculating taxable income, the IRS deems they have a "change in accounting method" and must request the IRS approve their change by filing Form 3115. Form 3115 explains the reason for the change, the previous method used versus the new method, and reports the cumulative effect of the change on taxable income. If the adjustment is a negative income adjustment, the taxpayer takes the additional deduction on the current year return. If the adjustment results in a positive income adjustment, you are allowed to report the additional income over a four year period to minimize the tax burden. Form 3115 is required even if the change is due to change in the tax law.

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Beware of Fraudulent Communications from IRS Imposters

IRS

The Internal Revenue Service has issued several recent consumer warnings on the fraudulent use of the IRS name or logo by scamsters trying to gain access to consumers’ financial information in order to steal their identity and assets. Please keep in mind that the IRS does not send emails. They also rarely contact taxpayers by telephone, usually only in cases of an existing issue that you are already aware of.  The primary method of communication used by IRS to contact taxpayers is the U.S. Postal Service.  

Additionally, it is important to remember that the IRS never asks for credit card information over the telephone, and does not collect taxes by telephone or email. They notify taxpayers of balances due, including pending liens and garnishments through IRS notices sent via U.S. Postal Service.    

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Ways to Reduce Your 2015 Taxes

The following are suggested tax tips to reduce your 2015 taxes and help you be better prepared for amounts that may be due with your 2016 return.

Adjust Withholdings and Estimates

Taxpayers should look at whether their withholdings and estimated tax payments are sufficient to cover their 2015 tax liability.  If a taxpayer owes with their 2014 return, it is generally easier to adjust withholdings and pay a little along, during the year, rather than having a big tax bill in April.  Further, if you owe on your 2015 tax return, you could be subject to penalties for inadequate withholdings and estimated tax payments.  

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Significant Deductions That You Can Still Make After the End of the Year

There are tax deductions available for taxpayers even if paid after year end.

Individual Income Taxes:

IRA Contributions
Eligible taxpayers can fund IRAs through April 15, 2015 and still get a tax deduction for the contribution on their 2014 tax return.  The annual contribution limit is $5,500 for taxpayers under 50.  Taxpayers over 50 are allowed an additional $1,000 catch-up contribution.  Tax deductible contributions can be limited if you or your spouse are covered by another retirement plan.

HSA Contributions
Taxpayers who have a HSA type of health insurance plan can fund their Health Savings Accounts through April 15, 2015 and still get a tax deduction on their 2014 tax return.  

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How to Keep Usernames and Passwords Secure

In the electronic age we live in, with a login for everything from your bank account to your medical records, it is important to keep usernames and passwords unique and as secure as possible to protect your confidential information.  You should not use the same username and password for multiple logins.  Passwords should include upper and lower case letters, numbers and symbols.  Passwords should be changed periodically.  With the number of logins today, it can be impossible to remember numerous unique logins.  One method to keep track of all your confidential information is through a password management app that can be downloaded to your mobile device. 

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Internal Controls You Can Implement To Prevent Fraud

Business owners who are victims of internal fraud or embezzlement are usually victimized by trusted employees or family members.  Generally, the person committing the fraud is someone who has worked for the business a long time, a friend, or a family member the business owners and managers feel they can trust because of the long standing relationship.  Every business should have good internal controls to limit exposure to theft.  Below are some things business owners can do to protect their assets.

  1. Check signatures:  All checks should be signed and mailed by someone other than the person preparing the check.
  2. All mail should be received by someone other than the person processing payments or paying invoices.
  3. All bank statements should be opened and reviewed by an owner.  Often they are mailed to the owner’s home address.  When reviewing the statement, review the check image for appropriate signatures and the validity of vendors.
  4. Bank reconciliations should be prepared by someone other than the person recording accounting transactions and reviewed by management.
  5. Sales and accounts receivable collections should be reconciled to deposits.
  6. Accounting employees should be required to take annual vacations.  Often embezzlement is discovered when the employee is away from the office and is not able to cover up issues that arise in their absence.
  7. Businesses should take periodic inventory counts to ensure amounts are being sold legitimately.
  8. All fixed assets should be verified against depreciation schedules to ensure items are not disappearing.
  9. All new employees should be subjected to a background check and credit check.  Employers should consider updating background checks and credit checks for employees.
  10. Management needs to have the ability to monitor all email accounts, the ability to log in to all workstations, voice mails, etc.  Employees should understand these are company accounts and management has the right to monitor these resources.

5 Year-End Planning Considerations for Individuals

  1. Sale securities with losses to offset current year capital gains.  A net capital loss (prior year capital loss carryovers plus current year net capital gain or loss) up to $3,000 can be deducted against ordinary income in the current year.

  2. Make charitable contributions by year end.  This is a good time to clean out some old items you do not use anymore.  Be sure to get a receipt.  You should also consider donating appreciated assets (i.e. stocks, bonds, land).

  3. Increase the contribution to your retirement plans and IRAs.

  4. Bunching of itemized deductions.  If your itemized deductions are just below the standard deduction you may benefit from “bunching” your deductions.  For example:  You could pay your 2014 real estate taxes in January of 2015 and your 2015 real estate taxes in December 2015.  This may allow you to itemize your deductions every other year.

  5. Review your FSA (flexible spending account) funding for 2015 so you get the most out of this benefit.  These designated contributions are required to be established prior to January 1 and cannot be changed unless you experience a qualifying family status change.

Year-End Considerations for Businesses

As year-end approaches business owners and managers should be preparing for year-end.  Year-end planning is crucial to minimize 2014 taxes, comply with year-end reporting and leave you in the most favorable position going into 2015.

Minimizing 2014 taxes is important but owners and managers should consider what their expectations are for 2015 when deciding whether to accelerate expenses in 2014 to minimize taxes or to defer purchases until 2015 for a larger tax benefit overall.

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New Sales Tax Rules

Effective October 1, 2014, new sales tax rules went into effect in North Carolina for service contracts.  Service contracts are defined as a contract where the obligor under the contract agrees to maintain or repair tangible personal property or a motor vehicle.  Examples include extended warranty contracts, maintenance agreements, and repair contracts.

Service contracts on real property are excluded from the sales tax.  Additionally, a service contract on tangible personal property which has been permanently attached to the real estate is exempt from being subject to the sales tax unless the service contract is entered into at the time of the sale prior to the asset becoming permanently attached to the real property.  An example would be purchasing a garage door opener and simultaneously purchasing a service contract prior to having the opener installed.  A service contract purchased after the installation would be exempt.

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Preparing and Paying for College

Saving for College

When saving for college parents typically use one of the following four investment plans:

1) 529 plans
These plans provide a tax benefit of not taxing the growth on the account as long as the funds are used for qualifying educational expenses.
2) Invest in accounts owned by the parents
These are taxed at the parents’ income tax rate but can be used for other purposes if not needed for college.
3) Invest in accounts owned by the child
These are taxed some at the child’s income tax rate and some at the parents’ rate.  The drawback is the funds are owned and controlled by the child when they reach the age of majority (typically age 18).
4) Invest through a trust
Trusts allow for a lot of flexibility and control by the grantor (contributor) to the trust

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4 Ways to Simplify Your Finances

Consolidating Accounts
Many people have bank accounts and investment accounts at multiple locations.  By combining these type accounts you reduce the amount of paperwork you receive and the number of advisors you are dealing with.
Automating Payments
For many people paying your monthly bills is a dreaded chore.  Having your bill payments automatically drafted or setting up automated bill payments through your financial institution is a great way to save time.

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