4 Tips on How Small Businesses Can Reduce Taxes

mid section view of a businessman using a calculator in an officeAs 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.

Starting a Side Gig in 2022? Your New Tax Obligations

Business people Having Meeting Around Table In Modern OfficeIt’s not just self-employed individuals who must pay estimated taxes. Here’s what you need to know.

W-2 income tax withholding isn’t perfect. You’ve probably had years when you owed more than you expected to on April 15. Or you were pleasantly surprised to receive a sizable refund. The idea, of course, is to try to come out as even as possible. You can usually do this by adjusting your withholding when you experience a life change like taking on a mortgage or having a baby.

Income taxes are also pay-as-you-go for self-employed individuals – or at least they should be. If you’re striking out on your own by starting your own small business in 2022 or you’re simply taking on a side gig to improve your finances, your tax obligation will change dramatically. Your income will not be subject to employer withholding every week or two. In most cases, you’ll get it all. But the IRS expects you to pay estimated taxes on that income four times a year.

Who Else Must Pay?

There are other situations where you’ll be expected to make quarterly payments. In fact, the only individuals who aren’t required to pay estimated taxes (besides W-2 employees whose withholding is on target) are those who meet all three of these conditions:

  • You owed no taxes the previous tax year (line 24 on your 2021 1040—total tax—is zero, or you weren’t required to file a return).
  • You were a resident alien or U.S. citizen for all of 2021.
  • Your 2021 tax year covered a 12-month period.

tax tips

You’ll find your total tax for 2021 on line 24 of the Form 1040. Notice, too, that line 26 asks for 2021 estimated tax payments.

There are numerous situations where individuals who have payroll taxes regularly withheld on their income may still be required to submit quarterly estimated taxes. For example, did you receive income from rents or royalties? Dividends or interest? Income from selling an asset? Gambling?

If you have an employer who withholds taxes, but you don’t think you’ll be paying enough given the deductions and credits you might receive, you need to plan for estimated taxes. Self-employed individuals are almost always required to submit them.

Special Rules for Some

As with all things IRS, there are many exceptions to the rules regarding estimated taxes. For example, there are special rules for:

  • Fishermen and farmers.
  • Some household employers.
  • Certain high-income taxpayers.
  • Nonresident aliens.

How Do You Estimate Your Quarterly Taxes?

That’s the hard part, especially if you’re new to the world of estimated taxes. There is no magic formula, no way to calculate to the penny what you’ll owe. You’re basically making an educated guess. Since you won’t know for sure what changes to the tax code will be put in place until the end of the year, you can’t be absolutely certain that you might get a particular credit or deduction.

But you know roughly what your income will be for a given quarter once you’re nearing the end of it. Do you have a lot of business-related expenses? Keeping track of those is critical, as they’ll offset your income. If you don’t, you’ll have to budget for a heftier quarterly payment. And you must keep in mind that you’ll be paying self-employment tax – that portion of your income taxes that your employer used to pay.

Once you’ve been self-employed for a full tax year and have seen what your tax obligation was, it will be easier to estimate in subsequent years. But you may have a difficult time your first year.

How Do You Pay Estimated Taxes?

tax tips

Individuals and business that had to pay estimated taxes in 2021 submitted the Form 1040-ES four times. If you’re self-employed in 2022, you’ll need to submit similar vouchers with your payments, unless you’re paying online.

If you’re self-employed and you anticipate owing $1,000 or more in taxes on your 2022 income, you’ll need to file quarterlies using IRS Form 1040-ES vouchers (available on the IRS website) along with a check or money order. There are also ways to pay online using a credit or debit card or direct bank withdrawal. Corporations would file the Form 1120-W if they expect to owe $500 or more.

Estimated taxes for the 2022 tax year are due:

April 18, 2022 (January 1-March 31, 2022)

June 15, 2022 (April 1-May 31, 2022)

September 15, 2022 (June 1- August 31, 2022)

January 16, 2023 (September 1-December 31, 2022)

A Challenging Task

Estimated taxes are not precise. And it may be difficult to set aside money for them if your income is not where you’d like it to be. But as you might expect, the IRS will levy penalties on you if you don’t.

Year-round tax planning can help you in this critical area. We’ll be happy to set aside time to consult with you about estimated taxes. We’re also available to do tax preparation and to look at how your taxes fit into your overall financial situation. Contact us soon to get a jump on the 2022 tax season — or to finish up 2021.

Starting a Side Gig in 2022? Your New Tax Obligations

It’s not just self-employed individuals who must pay estimated taxes. Here’s what you need to know.

W-2 income tax withholding isn’t perfect. You’ve probably had years when you owed more than you expected to on April 15. Or you were pleasantly surprised to receive a sizable refund. The idea, of course, is to try to come out as even as possible. You can usually do this by adjusting your withholding when you experience a life change like taking on a mortgage or having a baby.

Income taxes are also pay-as-you-go for self-employed individuals – or at least they should be. If you’re striking out on your own by starting your own small business in 2022 or you’re simply taking on a side gig to improve your finances, your tax obligation will change dramatically. Your income will not be subject to employer withholding every week or two. In most cases, you’ll get it all. But the IRS expects you to pay estimated taxes on that income four times a year.

Who Else Must Pay?

There are other situations where you’ll be expected to make quarterly payments. In fact, the only individuals who aren’t required to pay estimated taxes (besides W-2 employees whose withholding is on target) are those who meet all three of these conditions:

  • You owed no taxes the previous tax year (line 24 on your 2021 1040—total tax—is zero, or you weren’t required to file a return).
  • You were a resident alien or U.S. citizen for all of 2021.
  • Your 2021 tax year covered a 12-month period.

tax tips

You’ll find your total tax for 2021 on line 24 of the Form 1040. Notice, too, that line 26 asks for 2021 estimated tax payments.

There are numerous situations where individuals who have payroll taxes regularly withheld on their income may still be required to submit quarterly estimated taxes. For example, did you receive income from rents or royalties? Dividends or interest? Income from selling an asset? Gambling?

If you have an employer who withholds taxes, but you don’t think you’ll be paying enough given the deductions and credits you might receive, you need to plan for estimated taxes. Self-employed individuals are almost always required to submit them.

Special Rules for Some

As with all things IRS, there are many exceptions to the rules regarding estimated taxes. For example, there are special rules for:

  • Fishermen and farmers.
  • Some household employers.
  • Certain high-income taxpayers.
  • Nonresident aliens.

How Do You Estimate Your Quarterly Taxes?

That’s the hard part, especially if you’re new to the world of estimated taxes. There is no magic formula, no way to calculate to the penny what you’ll owe. You’re basically making an educated guess. Since you won’t know for sure what changes to the tax code will be put in place until the end of the year, you can’t be absolutely certain that you might get a particular credit or deduction.

But you know roughly what your income will be for a given quarter once you’re nearing the end of it. Do you have a lot of business-related expenses? Keeping track of those is critical, as they’ll offset your income. If you don’t, you’ll have to budget for a heftier quarterly payment. And you must keep in mind that you’ll be paying self-employment tax – that portion of your income taxes that your employer used to pay.

Once you’ve been self-employed for a full tax year and have seen what your tax obligation was, it will be easier to estimate in subsequent years. But you may have a difficult time your first year.

How Do You Pay Estimated Taxes?

tax tips

Individuals and business that had to pay estimated taxes in 2021 submitted the Form 1040-ES four times. If you’re self-employed in 2022, you’ll need to submit similar vouchers with your payments, unless you’re paying online.

If you’re self-employed and you anticipate owing $1,000 or more in taxes on your 2022 income, you’ll need to file quarterlies using IRS Form 1040-ES vouchers (available on the IRS website) along with a check or money order. There are also ways to pay online using a credit or debit card or direct bank withdrawal. Corporations would file the Form 1120-W if they expect to owe $500 or more.

Estimated taxes for the 2022 tax year are due:

April 18, 2022 (January 1-March 31, 2022)

June 15, 2022 (April 1-May 31, 2022)

September 15, 2022 (June 1- August 31, 2022)

January 16, 2023 (September 1-December 31, 2022)

A Challenging Task

Estimated taxes are not precise. And it may be difficult to set aside money for them if your income is not where you’d like it to be. But as you might expect, the IRS will levy penalties on you if you don’t.

Year-round tax planning can help you in this critical area. We’ll be happy to set aside time to consult with you about estimated taxes. We’re also available to do tax preparation and to look at how your taxes fit into your overall financial situation. Contact us soon to get a jump on the 2022 tax season — or to finish up 2021.

Hiring An Independent Contractor? Your Tax Obligations

First time hiring an independent contractor? Here’s what you need to know about taxes.

Two months ago in this column, we explained the differences between employees and independent contractors. The IRS has strict rules that you must follow when you make this distinction because there are very different tax rules for each type of worker.

If you’re hiring an independent contractor for the first time, here’s the good news: Your income tax obligations are much simpler than they’d be if you were bringing on a new employee. You are not responsible for withholding and submitting payroll taxes to the IRS and state agencies. You simply pay the compensation that you and your worker have negotiated.

Here’s a look at the forms you and your independent contractor will need to complete.

The W-9

tax tips

Independent contractors must complete a W-9 before they can get paid by you.

Where employees have to fill out a Form W-4 form to get paid by their employers, independent contractors are required to enter tax-related data on a Form W-9. This is a very simple document, requiring only the taxpayer’s:

  • Name, address, and business name (if different).
  • Business entity type (sole proprietor, partnership, LLC, etc.).
  • Taxpayer Identification Number (TIN). This will most likely be your contractor’s social security number, though in rare cases, it may be an employer identification number (EIN).
  • Signature and date signed.

You or your independent contractor can print out a copy of the W-9 here. He or she can either send you a completed paper copy or scan it and email it to you. As the employer, you’ll use this information to report your independent contractor’s annual income. The IRS advises you to keep this form for four years in case it has questions at a later time.

Form 1099-NEC

Before tax year 2020, nonemployee compensation was reported in Box 7 of the Form 1099-MISC. Now, though, there is a separate form for it: the Form 1099-NEC. If you paid someone who is not your employee $600 or more during the tax year, you must complete this form. You’ll need to submit one copy to the IRS, one to state taxing agencies, and one to the contractor by January 31 of the year following the year the income was earned.

tax tips

You’ll need several copies of the 1099-NEC for distribution.

In addition to the taxpayer’s name, address, and TIN, and your TIN (account number is optional), you must include the following information on the Form 1099-NEC:

  • Box 1 should contain the total that you paid the independent contractor during the tax year (nonemployee compensation)
  • If the Box 2 is checked, it signifies that you sold $5,000 or more in consumer products to the contractor for resale, on a buy-sell, a deposit-commission, or other basis. The contractor should report income from these sales on the Form 1040’s Schedule C.
  • Box 3 is not currently being used by the IRS.
  • If you withheld federal income tax from the contractor’s payments, as is required when he or she does not supply a TIN, you must report it in Box 4.
  • Boxes 5-7 would only be used if you withheld state income tax.

You can see an example of the Form 1099-NEC here, but you can’t just print or scan and email all of the copies needed. Copy A goes to the IRS, and the other copies go to state tax departments and the independent contractor. You must have an official IRS version of Copy A because it needs to be scanned by the agency. The other copies can be downloaded and printed.

The Form 1099-NECs that you send to the IRS must be accompanied by Form 1096, Annual Summary and Transmittal of U.S. Information Returns. We’ll tell you more about acquiring and preparing all of these forms as the deadline for the 2021 tax year gets closer. Your relationship with your independent contractor should be fairly uncomplicated where taxes are concerned. But if you’re dealing with a situation that causes you to question your handling of it, please let us help. We can also advise you on your classification of your new hire (independent contractor vs. employee), a distinction that the IRS takes very seriously. As always, we’re available to help with year-round tax planning and eventual preparation and filing.

Storing Your Tax Records

Tax wording on wooden cubes with US dollar coins and bag.Once you’ve filed your tax return, you may be tempted to clean house and get rid of some of your old records that are taking up space. The guidelines that follow will help you decide which items can go and which should stay in your files.1

Income and Expenses

Keep for at least three years after the date you file your return (or its due date, if later) the records proving your income and expenses, such as:

  • Form(s) W-2
  • Form(s) 1099
  • Form(s) K-1
  • Bank and brokerage statements
  • Canceled checks or other proof of payment

Three years is generally considered a minimum. If you can, consider keeping these items six years, the IRS’s time limit for auditing a return when income is substantially understated and no fraud exists.

Investments

You’ll need your investment records to figure your gains and losses when you sell the investments. After you’ve sold an investment, continue to retain your records for as long as you keep the other items supporting the tax return on which you report the sale (three or six years). Investment records include statements showing when you purchased the investment, the purchase price, brokerage commissions, and any reinvested dividends.

Residence Purchases and Improvements

Hold on to closing statements and other paperwork related to the purchase of your principal residence for use when you eventually sell the home. Put records of any home improvements you’ve made in the file, too. While many homeowners won’t have a taxable gain when they sell their homes because of the $250,000 ($500,000 for married couples) exemption, special circumstances, such as renting out your home or having a home office, could result in a taxable profit.

Your Tax Returns

Maintain one or more permanent files with important personal documents, including your tax returns. If you don’t file a return, the IRS can assess tax at any time. You’ll need a copy of your return in case the IRS has no record of your filing.

1This communication is not intended to be tax advice and should not be treated as such. Each individual’s tax situation is diferent. Contact your tax professional to discuss your personal situation.

Our team of tax planning and income tax preparation professionals can help you save on taxes. Contact us to request a consultation, or give us a call today at 775-332-4201 and ask for Mark Bailey for more information.

What is the Employee Retention Tax Credit (ERTC)?

Notebook with tax credit sign on a table. Business concept.Eligible employers are entitled to an Employee Retention Tax Credit (ERTC) of up to 70 percent of the first $10,000 in wages and certain health care plan expenses paid per employee for each of the first two quarters of 2021 according to the New Stimulus Act.

What is the Employee Retention Tax Credit (ERTC)?

Designed to incentivize businesses to keep employees on the payroll during the pandemic, the ERTC is a fully-refundable tax credit that is part of the federal government’s COVID-19 relief plan. As part of this plan, the New Stimulus Act includes the Taxpayer Certainty and Disaster Tax Relief Act of 2020, which became effective January 1, 2021. This Act amends and extends the former ERTC and the availability of advance payments of the tax credits under the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

Is My Company Eligible for the ERTC?

Previously, employers could only take advantage of the Paycheck Protection Program (PPP) OR the ERTC, so the ERTC was not widely used. However, Congress revised this provision to make both plans available to qualifying businesses.

As of December 2020, small businesses (with 500 or fewer employees) that suffered a revenue reduction in 2020 can claim the ERTC. A revenue reduction specifically means a business experienced a decline in gross receipts by more than 20 percent in any quarter of 2020 compared to the same quarter in 2019. (Note this is a change from the previous ERTC rule that required a gross receipts decline of at least 50 percent.)

Further, the tax credit applies to employers, including tax-exempt organizations, that conducted business during 2020 and were forced to fully or partially suspend operation during any quarter due to government orders related to COVID-19, according to the Internal Revenue Service (IRS).

How is the Maximum Amount of ERTC Determined?

As mentioned, under the New Stimulus Act, eligible employers are entitled to a tax credit equal to 70 percent of the first $10,000 in wages and qualifying health plan expenses paid per employee for each of the first two quarters of 2021 (up to $14,000).

Note that the combined maximum $14,000 credit for the first two quarters of 2021 is available even if the employer previously received the $5,000 maximum credit for wages paid in 2020.

In addition to the aforementioned changes to the ERTC, the wage period has been extended. Under the New Stimulus Act, qualified wages are those paid after March 12, 2020 up until July 1, 2021. The previous cutoff date was January 1, 2021.

What are Qualified Wages?

Qualified wages are wages, compensation, and qualified health plan expenses paid by an eligible employer after March 12, 2020 and before July 1, 2021 for time that the employee did not provide services due to a full or partial COVID-19-related government suspension of operations OR a 20 percent or greater decline in gross receipts.

For specific determinants, see sections 3121(a) and 3231(e) of the Internal Revenue Code.

The determination of qualified health plan expenses is the same as qualified health plan expenses for the Family and Medical Leave Tax Credit under the Families First Coronavirus Response Act.

Number of Employees Matters

Under the CARES Act, companies with 100 or fewer employees were eligible for the ERTC; however, under the New Stimulus Act, the threshold increased to 500 employees. In other words, for the first two quarters of 2021, a company with 500 or fewer employees is eligible for the ERTC. This is true whether those employees are working or not.

Other Notable Changes to the ERTC

  • Previously, governmental entities were not eligible for the ERTC under the CARES Act; however, under the New Stimulus Act this tax credit is available to state or local run colleges, universities, and organizations providing medical or hospital care.
  • While the New Stimulus Act allows businesses with a PPP loan to qualify for the ERTC, the tax credit may not be claimed on wages paid with the PPP loan that has been or will be forgiven.

As always, seek counsel from your trusted accountant, tax preparer, or CPA to be certain your business is in compliance with current laws related to the ERTC or any tax matter.

Our team of tax planning and income tax preparation professionals can help you save on taxes. Contact us to request a consultation, or give us a call today at 775-332-4201 and ask for Mark Bailey for more information.

Employee Retention Tax Credit (ERTC)

Eligible employers are entitled to an Employee Retention Tax Credit (ERTC) of up to 70 percent of the first $10,000 in wages and certain health care plan expenses paid per employee for each of the first two quarters of 2021 according to the New Stimulus Act.

What is the Employee Retention Tax Credit (ERTC)?

Designed to incentivize businesses to keep employees on the payroll during the pandemic, the ERTC is a fully-refundable tax credit that is part of the federal government’s COVID-19 relief plan. As part of this plan, the New Stimulus Act includes the Taxpayer Certainty and Disaster Tax Relief Act of 2020, which became effective January 1, 2021. This Act amends and extends the former ERTC and the availability of advance payments of the tax credits under the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

Is My Company Eligible for the ERTC?

Previously, employers could only take advantage of the Paycheck Protection Program (PPP) OR the ERTC, so the ERTC was not widely used. However, Congress revised this provision to make both plans available to qualifying businesses.

As of December 2020, small businesses (with 500 or fewer employees) that suffered a revenue reduction in 2020 can claim the ERTC. A revenue reduction specifically means a business experienced a decline in gross receipts by more than 20 percent in any quarter of 2020 compared to the same quarter in 2019. (Note this is a change from the previous ERTC rule that required a gross receipts decline of at least 50 percent.)

Further, the tax credit applies to employers, including tax-exempt organizations, that conducted business during 2020 and were forced to fully or partially suspend operation during any quarter due to government orders related to COVID-19, according to the Internal Revenue Service (IRS).

How is the Maximum Amount of ERTC Determined?

As mentioned, under the New Stimulus Act, eligible employers are entitled to a tax credit equal to 70 percent of the first $10,000 in wages and qualifying health plan expenses paid per employee for each of the first two quarters of 2021 (up to $14,000).

Note that the combined maximum $14,000 credit for the first two quarters of 2021 is available even if the employer previously received the $5,000 maximum credit for wages paid in 2020.

In addition to the aforementioned changes to the ERTC, the wage period has been extended. Under the New Stimulus Act, qualified wages are those paid after March 12, 2020 up until July 1, 2021. The previous cutoff date was January 1, 2021.

What are Qualified Wages?

Qualified wages are wages, compensation, and qualified health plan expenses paid by an eligible employer after March 12, 2020 and before July 1, 2021 for time that the employee did not provide services due to a full or partial COVID-19-related government suspension of operations OR a 20 percent or greater decline in gross receipts.

For specific determinants, see sections 3121(a) and 3231(e) of the Internal Revenue Code.

The determination of qualified health plan expenses is the same as qualified health plan expenses for the Family and Medical Leave Tax Credit under the Families First Coronavirus Response Act.

Number of Employees Matters

Under the CARES Act, companies with 100 or fewer employees were eligible for the ERTC; however, under the New Stimulus Act, the threshold increased to 500 employees. In other words, for the first two quarters of 2021, a company with 500 or fewer employees is eligible for the ERTC. This is true whether those employees are working or not.

Other Notable Changes to the ERTC

  • Previously, governmental entities were not eligible for the ERTC under the CARES Act; however, under the New Stimulus Act this tax credit is available to state or local run colleges, universities, and organizations providing medical or hospital care.
  • While the New Stimulus Act allows businesses with a PPP loan to qualify for the ERTC, the tax credit may not be claimed on wages paid with the PPP loan that has been or will be forgiven.

As always, seek counsel from your trusted accountant, tax preparer, or CPA to be certain your business is in compliance with current laws related to the ERTC or any tax matter.

Keeping Up With Your IRA: Tax Season Checklist

accountant working in officeIf you’re one of the millions of American households who owns either a traditional individual retirement account (IRA) or a Roth IRA, then the onset of tax season should serve as a reminder to review your retirement savings strategies and make any changes that will enhance your prospects for long-term financial security. It’s also a good time to start an IRA if you don’t already have one. The IRS allows you to contribute to an IRA up to April 15, 2021, for the 2020 tax year.

This checklist will provide you with information to help you make informed decisions and implement a long-term retirement income strategy.

Which Account: Roth IRA or Traditional IRA?

There are two types of IRAs available: the traditional IRA and the Roth IRA. The primary difference between them is the tax treatment of contributions and distributions (withdrawals). Traditional IRAs may allow a tax deduction based on the amount of a contribution, depending on your income level. Any account earnings compound on a tax-deferred basis, and distributions are taxable at the time of withdrawal at then-current income tax rates. Roth IRAs do not allow a deduction for contributions, but account earnings and qualified withdrawals are tax free.1

In choosing between a traditional and a Roth IRA, you should weigh the immediate tax benefits of a tax deduction this year against the benefits of tax-deferred or tax-free distributions in retirement.

If you need the immediate deduction this year — and if you qualify for it — then you may wish to opt for a traditional IRA. If you don’t qualify for the deduction, then it’s almost certainly a better idea to fund a Roth IRA.

Case in point: Your ability to deduct traditional IRA contributions may be limited not only by income, but by your participation in an employer-sponsored retirement plan. (See callout box below.) If that’s the case, a Roth IRA is likely to be the better solution.

On the other hand, if you expect your tax bracket to drop significantly after retirement, you may be better off with a traditional IRA if you qualify for the deduction. You could claim an immediate deduction now and pay taxes at the lower rate later. Nonetheless, if your anticipated holding period is long, a Roth IRA might still make more sense. That’s because a prolonged period of tax-free compounded earnings could more than make up for the lack of a deduction.

Traditional IRA Deductible Contribution Phase-Outs

Your ability to deduct contributions to a traditional IRA is affected by whether you are covered by a workplace retirement plan.

If you are covered by a retirement plan at work, your deduction for contributions to a traditional IRA will be reduced (phased out) if your modified adjusted gross income (MAGI) is:

  • Between $104,000 and $124,000 for a married couple filing a joint return for the 2020 tax year.
  • Between $65,000 and $75,000 for a single individual or head of household for the 2020 tax year.

If you are not covered by a retirement plan at work but your spouse is covered, your 2020 deduction for contributions to a traditional IRA will be reduced if your MAGI is between $196,000 and $206,000.

If your MAGI is higher than the phase-out ceilings listed above for your filing status, you cannot claim the deduction.

Roth IRA Contribution Phase-Outs

Your ability to contribute to a Roth IRA is affected by your MAGI. Contributions to a Roth IRA will be phased out if your MAGI is:

  • Between $196,000 and $206,000 for a married couple filing a joint return for the 2020 tax year.
  • Between $124,000 and $139,000 for a single individual or head of household for the 2020 tax year.

If your MAGI is higher than the phase-out ceilings listed above for your filing status, you cannot make a contribution.

Should You Convert to Roth?

The IRS allows you to convert — or change the designation of — a traditional IRA to a Roth IRA, regardless of your income level. As part of the conversion, you must pay taxes on any investment growth in — and on the amount of any deductible contributions previously made to — the traditional IRA. The withdrawal from your traditional IRA will not affect your eligibility for a Roth IRA or trigger the 10% additional federal tax normally imposed on early withdrawals.

The decision to convert or not ultimately depends on your timing and tax status. If you are near retirement and find yourself in the top income tax bracket this year, now may not be the time to convert. On the other hand, if your income is unusually low and you still have many years to retirement, you may want to convert.

Maximize Contributions

If possible, try to contribute the maximum amount allowed by the IRS: $6,000 per individual, plus an additional $1,000 annually for those age 50 and older for the 2020 tax year. Those limits are per individual, not per IRA.

Of course, not everyone can afford to contribute the maximum to an IRA, especially if they’re also contributing to an employer-sponsored retirement plan. If your workplace retirement plan offers an employer’s matching contribution, that additional money may be more valuable than the amount of your deduction. As a result, it might make sense to maximize plan contributions first and then try to maximize IRA contributions.

Review Distribution Strategies

If you’re ready to start making withdrawals from an IRA, you’ll need to choose the distribution strategy to use: a lump-sum distribution or periodic distributions. If you are at least age 72 and own a traditional IRA, you may need to take required minimum distributions every year, according to IRS rules. This age was increased from 70½, effective January 1, 2020. Account holders who turned 70½ before that date are subject to the old rules.

Don’t forget that your distribution strategy may have significant tax-time implications if you own a traditional IRA, because taxes will be due at the time of withdrawal. As a result, taking a lump-sum distribution will result in a much heftier tax bill this year than taking a minimum distribution.

The April filing deadline is never that far away, so don’t hesitate to use the remaining time to shore up the IRA strategies you’ll rely on to live comfortably in retirement.

1Early withdrawals (before age 59½) from a traditional IRA may be subject to a 10% additional federal tax. Nonqualified withdrawals from a Roth IRA may be subject to ordinary income tax as well as the 10% additional tax.

Our team of tax planning and income tax preparation professionals can help you save on taxes. Contact us to request a consultation, or give us a call today at 775-332-4201 and ask for Mark Bailey for more information.

Are Opportunity Zones an Opportunity for You?

Two Businesswomen Meeting In OfficeCreated by the TCJA in 2017, opportunity zones are designed to help economically distressed areas by encouraging investments. This article contains an introduction to the complex details of how these zones work.

The IRS describes an opportunity zone as “an economically-distressed community where new investments, under certain conditions, may be eligible for preferential tax treatment.” How does a community become an opportunity zone? Localities qualify as opportunity zones when they’ve been nominated by their states. Then, the Secretary of the U.S. Treasury certifies the nomination. The Treasury Secretary delegates authority to the IRS.

The Tax Cuts and Jobs Act added opportunity zones to the tax code. The IRS says opportunity zones are new, although there have been other provisions in the past to help communities in need with tax incentives to spur business.

The new wrinkle is how opportunity zones are designed to stimulate economic development via tax benefits for investors.

  • A Qualified Opportunity Fund is an investment vehicle set up as a partnership or corporation for investing in eligible property located in a qualified opportunity zone. A limited liability company that chooses to be treated either as a partnership or corporation for federal tax purposes can organize as a QOF.
  • Investors can defer taxes on any prior gains invested in a QOF until whichever is earlier: the date the QOF investment is sold or exchanged or Dec. 31, 2026.
  • If the QOF investment is held longer than five years, there is a 10 percent exclusion of the deferred gain.
  • If the QOF investment is held for more than seven years, there is a 15 percent exclusion of the deferred gain.
  • If the QOF investment is held for at least 10 years, the investor is eligible for an increase in basis on the investment equal to its fair market value on the date that the QOF investment is sold or exchanged.
  • You don’t have to live, work or have a business in an opportunity zone to get the tax benefits. But you do need to invest a recognized gain in a QOF and elect to defer the tax on that gain.
  • To become a QOF, an eligible corporation or partnership self-certifies by filing Form 8996, Qualified Opportunity Fund, with its federal income tax return.

The first set of opportunity zones covers parts of 18 states and was designated on April 9, 2018. Since then, there have been opportunity zones added to parts of all 50 states, the District of Columbia and five U.S. territories. More details are available on the U.S. Treasury website. Or see the IRS website for more information.

Our team of tax planning and income tax preparation professionals can help you save on taxes. Contact us to request a consultation, or give us a call today at 775-332-4201 and ask for Mark Bailey for more information.

“Extender” Legislation Impacts Individuals and Small Businesses

Woman Working From Home Using Laptop On Dining TableThe federal spending package that was enacted in the waning days of 2019 contains numerous provisions that will impact both businesses and individuals. In addition to repealing three health care taxes and making changes to retirement plan rules, the legislation extends several expired tax provisions. Here is an overview of several of the more important provisions in the Taxpayer Certainty and Disaster Relief Act of 2019.

Deduction for Mortgage Insurance Premiums

Before the Act, mortgage insurance premiums paid or accrued before January 1, 2018, were potentially deductible as qualified residence interest, subject to a phase-out based on the taxpayer’s adjusted gross income (AGI). The Act retroactively extends this treatment through 2020.

Reduction in Medical Expense Deduction Floor

For 2017 and 2018, taxpayers were able to claim an itemized deduction for unreimbursed medical expenses to the extent that such expenses were greater than 7.5% of AGI. The AGI threshold was scheduled to increase to 10% of AGI for 2019 and later tax years. Under the Act, the 7.5% of AGI threshold is extended through 2020.

Qualified Tuition and Related Expenses Deduction

The above-the-line deduction for qualified tuition and related expenses for higher education, which expired at the end of 2017, has been extended through 2020. The deduction is capped at $4,000 for a taxpayer whose modified AGI does not exceed $65,000 ($130,000 for those filing jointly) or $2,000 for a taxpayer whose modified AGI is not greater than $80,000 ($160,000 for joint filers). The deduction is not allowed with modified AGI of more than $80,000 ($160,000 if you are a joint filer).

Credit for Energy-Efficient Home Improvements

The 10% credit for certain qualified energy improvements (windows, doors, roofs, skylights) to a principal residence has been extended through 2020, as have the credits for purchases of energy efficient property (furnaces, boilers, biomass stoves, heat pumps, water heaters, central air conditions, and circulating fans), subject to a lifetime cap of $500.

Empowerment Zone Tax Incentives

Businesses and individual residents within economically depressed areas that are designated as “Empowerment Zones” are eligible for special tax incentives. Empowerment Zone designations, which expired on December 31, 2017, have been extended through December 31, 2020, under the new tax law.

Employer Tax Credit for Paid Family and Medical Leave

A provision in the tax code permits eligible employers to claim an elective general business credit based on eligible wages paid to qualifying employees with respect to family and medical leave. This credit has been extended through 2020.

Work Opportunity Tax Credit

Employers who hire individuals who belong to one or more of 10 targeted groups can receive an elective general business credit under the Work Opportunity Tax Credit program. The recent tax law extends this credit through 2020.

For details about these and other tax breaks included in the recent law, please consult your tax advisor.

Our audit and assurance team can assist you with audits, reviews and compilations. Contact us to request a consultation, or give us a call today at 775-360-2017 and ask for Christy Horgan for more information.