Tax Planning

Unveiling the Corporate Transparency Act: A Paradigm Shift Towards Accountability and Integrity

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In an era marked by increasing scrutiny of corporate practices and a growing demand for transparency, the Corporate Transparency Act (CTA) emerges as a pivotal legislative development. Enacted to address concerns related to financial crime, money laundering, and terrorist financing, the CTA represents a significant step towards fostering corporate responsibility and integrity.

Understanding the Corporate Transparency Act

The Corporate Transparency Act, signed into law on December 11, 2020, is a U.S. federal statute designed to enhance corporate transparency and combat illicit financial activities. The primary objective of the act is to expose the beneficial ownership information of certain entities, making it harder for individuals to conceal their identities behind corporate structures.

Key Provisions

  1. Reporting Requirements: Under the CTA, certain companies are obligated to report information about their beneficial owners to the Financial Crimes Enforcement Network (FinCEN). Beneficial owners are individuals who directly or indirectly control a significant portion of the company.
  2. Definition of Beneficial Ownership: The act defines beneficial owners as individuals who hold at least 25% ownership interest in the company, exercise substantial control over its activities, or receive substantial economic benefits from its assets.
  3. Centralized Database: The collected information is stored in a confidential and secure FinCEN database, accessible only by authorized government agencies, such as law enforcement and national security entities.
  4. Exemptions and Exceptions: Certain entities, such as publicly traded companies, are exempt from reporting, while small businesses meeting specific criteria may qualify for an exemption. The act also includes provisions to protect sensitive information and national security interests.

Rationale Behind the Corporate Transparency Act

  1. Combatting Illicit Activities: By unveiling the true owners of companies, the CTA aims to curtail money laundering, financial fraud, and other illicit activities that exploit corporate structures to conceal the origins of funds.
  2. National Security Concerns: The act addresses national security concerns by providing law enforcement agencies with the tools to identify and investigate entities with links to criminal or terrorist activities.
  3. Promoting Fair Business Practices: Increased transparency fosters fair competition by ensuring that companies cannot gain an unfair advantage by operating in the shadows. This, in turn, encourages ethical business conduct and discourages fraudulent practices.
  4. International Cooperation: The CTA aligns with global efforts to enhance corporate transparency. As part of a broader international movement, the act positions the United States as a responsible participant in the fight against global financial crimes.

Challenges and Criticisms

While the Corporate Transparency Act is a crucial step towards creating a more transparent business environment, it has not been without its critics. Some concerns include potential challenges for small businesses in compliance, the risk of data breaches, and the need for ongoing monitoring to ensure the effectiveness of the act.

The Corporate Transparency Act represents a landmark shift towards greater corporate accountability and transparency. By unveiling the beneficial ownership information of certain entities, the act aims to curb illicit financial activities, protect national security, and promote fair business practices. As the business landscape evolves, the CTA stands as a testament to the commitment to building a more just, responsible, and transparent corporate world. Our team is available to assist your business meet the new CTA requirements.

Retirement Plans: A Win-Win Proposition

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Setting up a retirement plan for your small business not only benefits your employees but can also be a savvy financial move for you as a business owner. The government encourages small businesses to provide retirement benefits by offering tax credits, making it more affordable for entrepreneurs to invest in their employees’ future. In this article, we’ll explore the small business tax credit for establishing retirement plans and how it can be a win-win proposition for both employers and employees.

The Benefits of Offering Retirement Plans:

Before delving into the tax credit details, let’s highlight the advantages of offering retirement plans for small businesses:

  1. Attract and Retain Talent: A robust retirement plan can make your business more attractive to potential employees and help retain valuable talent.
  2. Employee Morale and Productivity: Providing a retirement plan can boost employee morale, leading to increased productivity and a positive work environment.
  3. Tax Advantages for Employees: Employees can enjoy tax advantages on contributions to retirement plans, providing an additional incentive to participate.
  4. Competitive Edge: Offering retirement benefits can give your business a competitive edge in the labor market, especially when competing with larger companies.

Small Business Tax Credit Overview:

The IRS offers the Small Employer Pension Plan Startup Cost Tax Credit to encourage small businesses to set up retirement plans. This credit is designed to offset the costs associated with establishing and administering a qualified retirement plan. The credit is available for the first three years of the plan and covers 50% of the eligible startup costs, up to a maximum credit of $500 per year.

Eligibility Criteria:

To qualify for the tax credit, small businesses must meet certain criteria:

  1. Number of Employees: The business must have 100 or fewer employees who received at least $5,000 in compensation during the preceding year.
  2. New Plan Requirement: The business must establish a new qualified retirement plan, such as a 401(k) or SIMPLE IRA. Converting an existing plan does not qualify for the credit.
  3. Credit Limitation: The credit is limited to 50% of the qualified startup costs, and the maximum annual credit is $500 for each of the first three years of the plan.

Qualified Startup Costs:

Eligible startup costs that can be claimed for the tax credit include expenses related to the establishment and administration of the retirement plan. These may include:

  1. Educating Employees about the Plan
  2. Setting Up the Plan Trust
  3. Administering Plan Contributions
  4. Providing Information to Employees about the Plan

The Small Employer Pension Plan Startup Cost Tax Credit is a valuable incentive for small businesses to invest in their employees’ financial well-being while enjoying tax benefits. By taking advantage of this credit, you not only contribute to the long-term financial security of your employees but also strengthen your business’s competitive position in the labor market. It’s a win-win proposition that aligns with both your employees’ interests and your business’s financial goals. Consult with one of our tax professionals to explore the specific details and maximize the benefits of this tax credit for your small business.

Understanding Cash Balance Pension Plans: A Comprehensive Guide

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Retirement planning

Retirement planning is a critical aspect of one’s financial future. Among the various retirement savings options, pension plans play a significant role in providing financial security for individuals during their retirement years. One type of pension plan that has gained popularity in recent years is the Cash Balance Pension Plan. This innovative retirement vehicle combines elements of both traditional pension plans and 401(k) plans, offering employees a unique way to save for their golden years. In this article, we will delve into the intricacies of Cash Balance Pension Plans, exploring how they work, their benefits, and considerations for both employers and employees.

What is a Cash Balance Pension Plan?

A Cash Balance Pension Plan is a type of defined benefit pension plan that maintains hypothetical individual employee accounts similar to a 401(k) plan. In a traditional defined benefit plan, the employer promises to pay employees a specific benefit upon retirement, usually based on the employee’s salary and years of service. In contrast, a Cash Balance Plan specifies a hypothetical account balance for each employee, which grows annually with employer contributions and an interest credit. The interest credit can be a fixed percentage or tied to a specific benchmark, such as the Treasury bond rate.

How Do Cash Balance Pension Plans Work?

  1. Employer Contributions: Employers contribute a percentage of the employee’s salary to their individual Cash Balance account. These contributions are mandatory and help the account grow over time.
  2. Interest Credits: The Cash Balance account earns interest credits based on the predetermined rate specified in the plan. This rate can be fixed or variable, often linked to a market index.
  3. Vesting: Similar to traditional pension plans, Cash Balance plans have vesting schedules. Employees become vested in their accrued benefits after a certain number of years of service, ensuring they are entitled to their account balance upon retirement.
  4. Portability: One of the significant advantages of Cash Balance plans is their portability. If an employee leaves the company before retirement, they can typically roll over their Cash Balance account balance into an individual retirement account (IRA) or another qualified retirement plan.

Benefits of Cash Balance Pension Plans

  1. Predictable Retirement Income: Cash Balance plans offer a predictable retirement income, providing employees with a clear understanding of their future financial prospects.
  2. Combining Elements of Defined Benefit and Defined Contribution Plans: Cash Balance plans provide the security of a traditional pension plan while also incorporating individual account features akin to 401(k) plans.
  3. Tax Advantages: Contributions to Cash Balance plans are tax-deductible for employers, reducing their taxable income. Employees also enjoy tax deferral on their contributions and investment earnings until retirement.
  4. Asset Protection: Cash Balance plans are often protected from creditors, providing an additional layer of security for employees’ retirement savings.

Considerations for Employers and Employees

For Employers:

  1. Cost Predictability: Cash Balance plans offer more predictable costs for employers compared to traditional defined benefit plans, making them an attractive option for businesses seeking stable retirement benefit expenses.
  2. Employee Retention: Offering a Cash Balance plan can enhance employee retention by providing a valuable retirement benefit that incentivizes long-term commitment to the organization.

For Employees:

  1. Understanding the Plan: It is crucial for employees to fully understand how their Cash Balance plan works, including the interest credit rate, vesting schedule, and portability options. Seeking guidance from a financial advisor can be immensely beneficial.
  2. Maximizing Contributions: Employees should aim to maximize their contributions to the Cash Balance plan, especially if the employer offers matching contributions, to make the most of the retirement savings opportunity.

Cash Balance Pension Plans offer a compelling retirement savings solution, blending the security of traditional defined benefit plans with the individual account features of 401(k) plans. For both employers and employees, understanding the nuances of these plans is vital to maximizing their benefits. As with any financial decision, careful consideration and consultation with financial experts can help individuals and businesses make informed choices that secure a stable and prosperous retirement future.

To learn more about how your business can benefit from such startegy you call us a to schedule a consultation with our experts.

Section 179: Unlocking Tax Benefits for Business Investments

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In the world of business, staying competitive often requires making strategic investments in equipment, machinery, and technology. However, these investments can be costly, putting a strain on a company’s finances. That’s where Section 179 of the Internal Revenue Code comes into play. Section 179 is a tax provision that offers significant benefits to businesses by allowing them to deduct the full cost of qualifying assets in the year of purchase, rather than depreciating them over several years. In this article, we will explore the details of Section 179 and its potential advantages for businesses.

Understanding Section 179

Section 179 was established by the United States government to encourage businesses to invest in capital assets and stimulate economic growth. It allows businesses to deduct the full cost of qualifying property and equipment purchased and put into service during the tax year, up to a specified limit. This deduction can be claimed instead of depreciating the assets over time.

Qualifying Property and Equipment

To qualify for the Section 179 deduction, the assets must meet certain criteria. These criteria include:

  1. Tangible Personal Property: Section 179 applies to tangible personal property such as machinery, equipment, computers, furniture, and vehicles used for business purposes.
  2. Acquired for Business Use: The assets must be purchased, financed, or leased for use in the active conduct of a trade or business.
  3. Placed in Service: The assets must be put into service during the tax year for which the deduction is being claimed.

Limitations and Thresholds

Section 179 has both deduction limits and spending thresholds. For 2023, the following limits are in place:

  1. Maximum Deduction: The maximum deduction allowed under Section 179 is $1,160,000. This means that businesses can deduct up to $1,160,000 of the cost of qualifying property from their taxable income.
  2. Spending Cap: The total cost of qualifying property purchased in a tax year cannot exceed $2,890,000. If a business exceeds this spending cap, the Section 179 deduction begins to phase out on a dollar-for-dollar basis until it is fully phased out at $4,050,000.

Benefits and Advantages

The Section 179 deduction offers several benefits for businesses, including:

  1. Immediate Tax Savings: The most significant advantage of Section 179 is the ability to deduct the full cost of qualifying assets in the year of purchase. This can result in significant tax savings by reducing taxable income and lowering overall tax liability.
  2. Cash Flow and Budgeting: By allowing businesses to deduct the full cost upfront, Section 179 helps improve cash flow and budgeting. Rather than spreading deductions over several years, businesses can free up capital to reinvest in other areas of their operations.
  3. Encourages Investment: Section 179 serves as a powerful incentive for businesses to invest in new equipment, technology, and machinery. The ability to deduct the full cost upfront makes investing in capital assets more financially feasible and encourages economic growth.
  4. Competitive Advantage: By leveraging the Section 179 deduction, businesses can stay competitive by acquiring state-of-the-art equipment and technology, leading to improved efficiency, productivity, and customer satisfaction.
  5. Simplicity and Flexibility: Section 179 is relatively straightforward to understand and apply, making it accessible to a wide range of businesses. It also allows businesses to choose which assets to deduct, providing flexibility in optimizing tax strategies.

Section 179 of the Internal Revenue Code is a valuable tax provision that offers significant benefits to businesses. By allowing the immediate deduction of qualifying assets, it encourages investment, improves cash flow, and provides a competitive advantage. However, it’s important to consult with one of our tax professionals to understand the specific eligibility requirements, limitations, and any changes to the law since the publication of this article. Leveraging Section 179 can be a smart financial move for businesses looking to make strategic investments while maximizing tax savings.

Top Tax Benefits of Real Estate Investing

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Real Estate

Real estate investing comes with significant tax benefits. Find out how to identify the top tax strategies for maximum benefit and how to use them to your advantage come tax time.

As with all deductions, consult your tax accountant for the most up-to-date on what is/is not allowed regarding tax deductions related to real estate investing.

Self-Employment / FICA Tax

First and most straightforward, you can avoid payroll tax if you own rental property. That’s because the income from your rental property is not considered earned income. In addition to avoiding tax outright, there are numerous deductions available to real estate investors.

Expense Deductions

Real estate expenses directly related to your investment, such as property tax, insurance, mortgage interest, and maintenance or management fees, are deductible. These actual expenses are typical deductions the IRS considers “ordinary and necessary” to sustaining your real estate investment. However, a few deductions to which you may be entitled are often overlooked.

If you spend time traveling to and from your investment property, those miles may be deductible.

You also may be able to deduct non-mortgage interest fees related to your investment property. For example, loan or credit card interest incurred in connection with your investment property are deductible business expenses. Legal and other professional fees directly associated with the investment property are also deductible.

Depreciation

Suppose you have real estate investment property that produces income. In that case, you can deduct depreciation of that property as an expense. The depreciation deduction lowers your taxable income.

The IRS sets the life expectancy of real estate – 27.5 years for residential property and 39 years for commercial property – which determines the deduction to which you are entitled.

Incentive Programs

Some incentive programs make it possible to defer real estate taxes. For example, a 1031 exchange allows real estate investors to avoid paying capital gains taxes when selling an investment property and reinvesting in a replacement property. Investors can reinvest proceeds from the sale of one property into another property. This transaction must occur within a specified time to avoid capital gains taxes (the taxes on the growth of an investment when it is sold).

Suppose your real estate property qualifies as an “opportunity zone,” a low-income or disadvantaged parcel. You may be able to further defer capital gains tax, grow your capital gains, or entirely avoid capital gains.

These perks are time-dependent, which is something your qualified accountant can help you navigate.

Capital Gains

So, what if you sell your real estate investment property? Suppose you can wait until you’ve held the property for at least one year. In that case, you may be able to pay a much lower capital gains tax than if you sold sooner, or you could avoid capital gains altogether. That’s because holding onto a property for more than one year makes it a long-term investment. With that, you will pay a lower capital gains tax rate. If your income is under a certain amount (check with your accountant because these rates tend to change year to year), you may be able to avoid the tax entirely.

Qualified Business Income (QBI) Deduction

More commonly known as the pass-through deduction, this tax break encourages entrepreneurship. This deduction allows certain entities to deduct up to 20 percent of their business income. So, businesses like LLCs, S-corps, and sole proprietorships benefit. You may be wondering how this type of deduction helps real estate investors. If you own rental properties, you technically operate a small business by IRS standards. Therefore, you are entitled to the pass-through deduction. The deduction also benefits real estate investment trust investors (REITs) because REITs are technically considered pass-through entities. The deduction is not scheduled to end until 2025, so there’s still time to take advantage of this deduction.

Deductions like QBI and others on this list, such as depreciation and expense deductions, mean that real estate investment can significantly reduce tax liability. Speak to your qualified accountant or CPA to help you navigate the often tricky waters of tax deductions. The professionals make it their business to be in the know about the latest tax law changes, updates, and deductions. With the right professional on your side, you’ll be able to take full advantage of all the tax breaks you’re legally entitled to.

4 Tips on How Small Businesses Can Reduce Taxes

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As a small business owner, tax liability is the money you owe the government when your business generates income. With changing laws and gray areas regarding deductions, exemptions, and credits, it’s no wonder small business owners rank taxes at the top of the list of the most stress-inducing aspect of business ownership. To reduce that stress, taxes shouldn’t be something to focus on only at year’s end. Use these tips on reducing your business tax year-round and see your taxes and stress level decrease!

1. Business structure

Your company’s business structure is how it is organized – it answers questions like who is in charge, how are profits distributed, and who is responsible for business debt. The most common business structures are:

  • Sole proprietorships have one owner who takes all profits as personal income. The owner is personally liable for any business debts.
  • Partnerships are structured like sole proprietorships but can have an unlimited number of owners.
  • C corporations have unlimited shareholders who each own part of the company. Profits are distributed as dividends between them. Owners are not personally liable for business debts.
  • S corporations are structured like C corporations, but the number of shareholders is capped at 100.

In addition to affecting how a business operates, business structure impacts how much a company pays in taxes. The U.S. tax code is complex and includes four main tax categories:

  • Income tax – paid on profits
  • Employment tax – employee Social Security and Medicare contributions
  • Self-employment tax – Social Security and Medicare contributions for self-employed individuals
  • Excise tax – special taxes for specific goods and services like tobacco, alcohol, etc.

IA sole proprietorship or partnership is a good idea for businesses wanting tax simplicity. For those with less than 100 owners, an S corporation might be the right fit and best tax option. Again, business structure and tax laws are complex and are best determined by a qualified, experienced accountant.

2. Net Earnings

Net earnings (i.e., net income or profit) is the gross business income minus business expenses. Regardless of the business, it begins with gross income (the income received directly by an individual, before any withholding, deductions, or taxes), and allowable expenses are deducted to arrive at net income. How this figure is calculated is dependent upon business structure.

Net earnings are used to calculate business income taxes. Again, the calculation process differs slightly for different business structures. It is best to seek a professional to help with net earnings calculations for the proper calculation and maximum legal deductions.

3. Employ a Family Member

One of the best ways for small business owners to reduce taxes is hiring a family member. The (IRS allows a variety of options for tax sheltering. For example, suppose you hire your child, as a small business owner. In that case, you will pay a lower marginal rate or eliminate the tax on the income paid to your child. Sole proprietorships are not required to pay Social Security and Medicare taxes on a child’s wages. They can also avoid Federal Unemployment Tax Act (FUTA) tax. Consult a trusted accounting professional for details about the benefits of hiring your children or even your spouse.

4. Retirement contributions

Employee retirement plans benefit employees, but they can also be good for your small business. Employer contributions to an employee retirement plan are tax-deductible. They can also carry an employer tax credit for setting up an employee retirement plan. Again, this is a task an accountant can handle for you. They can guide you on retirement plan choices based on your business’s situation, employees, and other factors.

As a small business owner, you can deduct contributions to a tax-qualified retirement account from your income taxes (except for Roth IRAs and Roth 401(k)s). Sole proprietors, members of a partnership, or LLC members can deduct from their personal income contributions to their retirement account.

As with any tax situation, consulting your trusted accounting professional is always best. They are up to date on the latest tax laws, information, and allowable deductions. By being aware of ways your small business can reduce taxes, you can bring these topics up with your accountant, discuss the best options for you, and be prepared long before tax time rolls around.

Contact our tax professionals to learn more about how you can control tax exposure for your small business.