Category Archives: Tax and Financial News

Everyone’s an Owner

January 1, 2018

tax reclassification, Republican bill, minimize taxes using the new tax structureSome experts are predicting that the recent tax legislation will create a ton of new business creation and activity – just not the kind that lawmakers originally intended. These people are predicting a surge in efforts for reclassification and the organization of cover companies by employees so they can have their salaries recognized as business income, significantly lowering their tax burden as a result.

A central tenant of the Republican bill is that it reduces both corporate and pass-through business tax rates. Corporate profits are now taxed at only 21 percent, and owners of pass-through companies will get to take a 20 percent deduction. While these same experts predict it will take some time to adapt, they believe that as lawyers and accountants delve into the new rules, they will find ways to minimize taxes for their clients using the new tax structure.

A group of tax law professors and lawyers wrote a paper on various ways imaginative and wealthy individuals can use the preferential business tax treatment to reduce their taxes. This academic paper is entitled “The Games They Will Play: Tax Games, Roadblocks, and Glitches Under the New Legislation” (available for download via SSRN), and it chronicles how they believe individuals in various fields and scenarios will create or turn themselves into small businesses to take advantage of the new tax structure.

Below is a brief synopsis of the different strategies. As always, remember that each situation is unique and you should consult your tax professional before implementing any of these strategies – this is definitely not a DIY type of situation.

Partnership Game Changers

Some of the paper’s authors believe that people will transform themselves into self-employed contractors or partnerships, thus turning their wages into pass-through profits and entitling them to the 20 percent deduction.

The IRS lays out pretty strict guidelines on who can be classified as an independent contractor, with a bias toward workers being treated as W-2 employees – so this isn’t a simple path. The most likely candidates are individuals in certain professions, such as law firms. One example given is that associates (partners would already receive the pass-through treatment) could create an LLC and then be hired by the firm. There are provisions that prevent guaranteed payments from qualifying for the deduction; however, many feel these regulations are weakly written and might only apply to S corporations.

Split the Difference

Another strategy professional service pass-through can use is to split their companies into parts. One part would perform the services portion of the business, while the other would own the real estate and/or any productized revenue streams. Separating the service portion of the business would allow the other segments to qualify for profit deductions where they would not otherwise if they were comingled.

Self-Incorporation

Initially, many believed the easiest way to arbitrage the new tax rate structure would be to organize a corporation.

Currently, however, most entrepreneurs avoid forming corporations due to double taxation (profits are taxed at both the corporate level and then again as dividend distributions). The reduced corporate rate of 21 percent combined with the top dividend rate of 20 percent means that even taxpayers in the top brackets will do better not incorporating; however, opportunities for interest earning investments are still available.

Conclusion

Change often means opportunity when it comes to tax law. The new tax law substantially shakes up business taxation, and as professionals sort through the finer details, new strategies will emerge for some taxpayers.

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The Most Wonderful Time of the Year – Tax Planning Season

December 1, 2017

Tax Planning 2017, Taxes 2017, Tax Preparation 2017Now is the time to focus on year-end tax planning. Careful and strategic planning can help minimize your tax bill and maximize what you keep. Given the uncertainty and sweeping scope of proposed tax law changes, planning is both more complex and more important than ever this year. Below, we discuss five year-end tax planning strategies you can use to maximize how much of your own money you keep.

Play the Timing Game

Why pay taxes now if you can delay it until next year? Income deferral is difficult for W-2 employees, but the self-employed and freelancers have a lot more room to plan. Businesses and the self-employed who operate on cash basis accounting (as opposed to accrual basis) can delay invoicing customers and clients until late December. For cash basis taxpayers, your income is taxable only if you receive it before year end, so delaying invoicing means you won’t get paid until early January.

Remember that you want only to defer income if your tax bracket next year will be the same or lower. If you know you will be in a higher tax bracket next year, then you might want to do the opposite and move as much income into 2017 as possible. Unfortunately, with the proposed tax bracket changes, this might be a difficult planning decision as both the current and new rules, if any, will likely impact your decision.

Speed Up Deductions

Similar to deferring income, you might want to accelerate deductions.

Any deductions where you impact the timing – such as charitable deductions – are good choices. Remember to keep proper records to document the contributions regardless of the amount. Also, consider donating stocks or property that has appreciated in value in lieu of cash to receive a higher tax benefit.

Other deductions that are good options to pull into 2017 include estimated state income taxes due January 15 and property taxes due early next year.

There are two important points to keep in mind. First, pulling deductions into 2017 can be a big mistake if you are impacted by the alternative minimum tax. Second, if a new tax bill passes and eliminates some or all of the itemized deductions, then this might be your last chance to benefit by accelerating them into 2017.

Harvesting Isn’t Just For Farmers

The stock markets are up big so far this year, so a lot of people have gains instead of losses. However, certain sectors, such as commodities, haven’t done so well. If a portion of your investment portfolio is down from where you purchased, you might want to harvest those losses to offset gains from other investments and reduce your taxable income.

The general rule is that you can deduct losses up to the amount of your capital gains, plus an additional $3,000 – and then roll over any excess losses to be used in future years. Just make sure your tax strategy aligns with your overall investment goals.

Take Your Retirement to the Max

Maxing out your 401(k) contributions can help you avoid significant taxes. If you have the financial means, see if you can contribute extra before year end. Self-employed individual 401(k) owners can make their “employer” contributions up until April 17, 2018. Another option is to contribute to an IRA; however, this isn’t as time sensitive. You can contribute to an IRA all the way up to the initial tax filing deadline still deduct the amount against 2017 income.

Make Tax Planning Less Taxing

The cost of hiring a tax professional to assist you in navigating the complexities and challenges of tax planning is also something you can write off if you itemize your deductions. Again, like many other itemized deductions, this one could disappear under the proposed tax plans – so now’s the time to invest in consulting an expert.

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