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Small Business Guide to Reducing Your Tax Burden Legally — Part 1: Tax Planning

By |2020-10-08T20:54:48-07:00July 16, 2020|Categories: Taxes|Tags: , , , , , , |0 Comments

Welcome to Part 1 of our 12-part series on how to reduce your tax burden legally. Here in Part 1, we address the first and most important step — tax planning. As the old saying goes, “Failing to plan is planning to fail,” and this is especially true when you are trying to reduce your tax burden legally.

Consider for a moment the first time you drove a car? If you were doing it right, you spent far more time looking where you were going than where you came from. You don’t drive forward staring in the rearview mirror. Unfortunately, that’s how most tax “specialists” are geared. They spend so much time looking back at last year’s finances that they rarely advise their clients to look forward.

They can tell you all about what you earned and spent last year and how much you owe in taxes as a result, but they rarely think to tell you what you should do today to save on taxes next year. Even the few who do tell their clients what to do rarely tell them when or how to do it.

Taking a proactive, forward-looking approach with tax planning can simplify next year’s taxes and save you a considerable amount of money, especially if you’re a small-business owner. Tax planning provides small-business owners with two valuable benefits:

Benefit No. 1: First, tax planning is a key component in your financial protection. As a small to medium size business owner, you have two ways to increase your net profits: financial offense (earning more) and financial defense (spending less). For most small-business owners, taxes are the biggest expense, so a big part of playing financial defense involves reducing the tax burden. And you do that through savvy tax planning.

Benefit No. 2: Second, participating in tax planning almost always ensures results. You can spend a huge amount of time, effort, and money promoting your business with no guarantee of achieving positive results. In contrast, every tax-savings initiative you implement guarantees a return on your investment. But those guaranteed results start with planning. For example, you can’t deduct medical expenses paid out of a medical expense reimbursement plan if you haven’t set up such a plan ahead of time.

To get this series started, indulge us for a moment as we cover how the tax system works here in the United States of America.

Understanding How the Tax System Works

A general knowledge about how the tax system works lays the foundation for understanding specific tax-savings approaches we present later on in this post. Here’s a graphic demonstrating how the tax system works: Continue reading… Continue reading… Continue reading…

Understanding Small-Business Tax Deductions

By |2020-04-15T15:45:42-07:00April 15, 2020|Categories: Taxes|Tags: , , , , , , , , , , , |0 Comments

As part of an effort to mitigate the effects of the spread of the coronavirus known as COVID-19, the Internal Revenue Services has chosen to delay the April 15, 2020 tax filing deadline for most individual taxpayers and businesses to July 15, 2020. Regardless of the deadline, one thing that isn’t expected to change anytime soon is what a business can and cannot claim as a tax deduction. And in today’s post, we offer insight into exactly that — what small businesses can and cannot deduct, regardless of the tax filing deadline.

A deduction (or write-off) is an expense or portion of an expense subtracted from your company’s gross income that reduces the income on which taxes are calculated. Every dollar you claim as a deduction is a dollar less that is subject to federal, state, and local income tax and self-employment tax (Social Security and Medicare).

Small Business Deductions Image

For example, if your effective federal income tax rate is 25 percent, and you pay 15.3 percent in self-employment tax and 5 percent in state and local income tax, every thousand dollars less you report in taxable income is over 450 dollars you save in taxes: (0.25 + 0.153 + 0.05) x $1,000 = 0.453 x $1,000 = $453.

The Tax Cuts and Jobs Act (TCJA), which became effective in 2018, made it less advantageous for taxpayers to itemize personal deductions. However, if you own a small business — such as a sole-proprietorship, limited liability company (LLC), or partnership — you can deduct a broad range of business expenses to lower the taxable income you earn from that business.

Here are a couple tips for claiming business deductions without getting into legal trouble:

  • Seek confirmation from a tax specialist or certified public accountant (CPA) before claiming any business expense as a deduction.
  • Keep accurate, detailed records, including invoices and receipts for all business expenses. (Your CPA can help you find accounting packages and apps to simplify your record-keeping.)

In the following sections, we present a long list of common small-business tax deductions. Continue reading… Continue reading… Continue reading…

Coronavirus and Taxes Frequently Asked Questions

By |2020-03-25T16:03:41-07:00March 17, 2020|Categories: Taxes|Tags: , , |3 Comments

Updated: March 25, 2020 at 4:00 p.m. PT

In an effort to provide relief to individuals and businesses affected by coronavirus (COVID-19), the White House recently announced changes to the traditional 2020 tax filing season. Additionally, California’s state government recently announced similar relief.

With that in mind, below are answers to frequently asked questions about coronavirus and taxes, focusing both federal and California tax filings, as well as our role here at Stees, Walker & Company, LLP.

Q. What’s is Stees, Walker & Company, LLP’s role during this time?

A. Accounting firms such as ours employ personnel who have been designated by the State of California (according to Executive Order N-33-20) as part of the “essential” workforce that is needed right now. Not only are we assisting with current tax season issues for individuals and business entities, but we consider ourselves to be part of the financial front line — ready and able to assist businesses take steps now to successfully get back to work as usual when the State’s stay at home order is lifted.

Q. What is the IRS’ role in the National Emergency Concerning the Novel Coronavirus Disease (COVID-19) Outbreak?

A. Under the Stafford Act, the IRS Disaster Assistance and Emergency Relief Program provides administrative tax relief to taxpayers and tax practitioners affected by a federally declared disaster in areas FEMA identifies for its Individual Assistance to Households and Families Program.

Authorized tax relief and other assistance the IRS is authorized to provide includes:

  • Extending tax return filing deadlines
  • Extending tax payment deadlines
  • Waiving penalty and interest charges normally applied to late filing and payment
  • Providing free copies of tax return transcripts
    • Tax return records are often needed to claim benefits, file insurance claims, replace lost financial records, etc.
  • Expediting amended tax returns claiming a casualty loss and refund resulting from the disaster.

Q. What accommodations has the Internal Revenue Service (IRS) made to help individual and business taxpayers during the National Emergency Concerning the Novel Coronavirus Disease (COVID-19) Outbreak?

A. In addition to the IRS establishing a special section focused on steps to help taxpayers, businesses, and others affected by COVID-19 — on Friday, March 20, 2020, the U.S. Secretary of the Treasury announced that the current federal tax filing deadline has been extended from April 15, 2020 to Continue reading… Continue reading… Continue reading…

Understanding How Shifting Income May Reduce Taxes

By |2020-03-12T15:41:18-07:00March 12, 2020|Categories: Taxes|Tags: , , , |0 Comments

In our previous post — Four Proven Ways to Cut Your Taxes — we highlighted four areas we focus on when seeking to reduce the amount of taxes our clients owe state or federal taxing authorities: shifting, timing, code, and product. In this post, we take a deeper dive into the technique known as shifting, which involves transferring income or assets from a high-tax-bracket person or entity to a person or entity subject to low or zero taxes.

For example, suppose a portion of your business income is taxed at 37 percent, which is currently the highest income tax rate in the U.S. You hire a teenage son and daughter to work for you over the summer and pay each of them $12,400. As a result, you save $24,800 x 0.35 = $8,680 in federal income tax plus any state taxes as well as potentially any amount you would have been required to pay in self-employment tax on that $24,800. Assuming neither child earns more than $12,400, because of the current tax code, they pay nothing in federal taxes. This is a great way to shift business income you don’t need for yourself to your children.

This example illustrates just one of several shifting techniques that can be used to reduce one’s tax burden. Several techniques are available that can be broken down into the following two areas:

  • Business income: In business, the primary objective of shifting is to reduce personal income tax and, in many cases, pay less in self-employment taxes (Social Security and Medicare).
  • Estate planning: In the context of estate planning the objective is to reduce individual income taxes levied on investment income and capital gains while ultimately reducing or eliminating estate taxes. In this post, we touch lightly on shifting the context of estate planning, while in a future post provide more in-depth coverage of this topic.

Income Shifting in Business

If you own a business, you have three ways to use income shifting to reduce your tax bill: Continue reading… Continue reading… Continue reading…

How to Calculate Your Tax Bill — Simplified

By |2020-03-11T05:00:33-07:00March 10, 2020|Categories: Taxes|Tags: |0 Comments

To most taxpayers, taxes and how they’re calculated are a mystery. Consisting of 70,000+ pages, the Internal Revenue Code (aka, the Commerce Clearing House [CCH] Standard Federal Tax Reporter) is complicated, and when you’re filling out the forms (on paper, online, or in a tax program), determining what you’re being asked and how to supply the correct information can be both challenging and frustrating. Every so often, a politician expresses a vision of a time when our tax returns will fit on a postcard, but that never happens. (As an aside, the shortened version was attempted with the 2018 tax year and was an unmitigated disaster — the result… the tax return went from two pages to eight pages. In 2019, it was shortened to five pages. Simple, right!?)

Fortunately, people like me who’ve spent five years in college studying accounting and taxes, and countless hours since leaning about the practical application of Title 26 of the United States Code (i.e., the Internal Revenue Code), are available to help you navigate this minefield. We’ve been trained to quickly analyze taxable situations, however simple or complex, and complete our clients’ returns in a way so as to minimize their tax burden.

Still, you can benefit by understanding the fundamentals of how tax bills are calculated. In this post, I explain the process in plain and simple terms.

Seven Steps to Calculate Your Tax Bill

Calculating your tax bill is a seven-step process. Here I present the overall process and then take a deeper dive into each step. Before going there, however, below is a 30,000-foot overview of the seven-step process to calculating your tax bill:

Steps to Calculate Tax Bill

While that may sound like a lot of gibberish to you, to someone like me, it’s music to my ears. Starting with Step No. 1, here’s the deeper dive I promised:

Step 1: Calculate total income

The IRS wants to know how much money you have received over the course of the year — your total income. Total income includes money received from the following sources:

  • Earned income from wages, salaries, commissions, and tips
  • Profits from business and self-employment
  • Interest and dividends
  • Capital gains from the sale of property held for investment
  • Income from pensions, IRAs, and annuities
  • Rents, royalties, and income from flow-through entities
  • Alimony (from agreements finalized before January 1, 2019)
  • Gambling winnings
  • Barter proceeds
  • Illegal income (yes, you’re required to disclose income from illegal activities)

Income from certain sources is generally tax exempt, although you may still be required to report it, including the following: Continue reading… Continue reading… Continue reading…

4 Proven Ways to Cut Your Taxes

By |2020-03-03T19:30:04-08:00March 4, 2020|Categories: Taxes|Tags: , , , , , |0 Comments

As an individual, business owner, or investor, you leverage the power of compounding returns to grow wealth exponentially. Using a different approach, you can slash your taxes by layering four distinct tax-cutting strategies. Applying one strategy alone delivers good results, applying two strategies in tandem improves results, and applying all four maximizes your tax savings and increases your net worth. With every added layer, you not only keep more of your money, but also have more to invest to reap the rewards of compounding returns.

This post reveals four key tax-cutting strategies and explains how to leverage them, alone and together, to maximize your savings.

Shifting

Shifting involves moving taxable income from a higher tax rate person or entity to a lower one; for example, from a parent to a child, from an adult child to a parent, from a sole proprietorship to a corporation. In many cases, shifting delivers the added benefit of moving taxable income to a less audited entity, as well. Changing your business entity from sole proprietorship to S-Corporation opens the door to more tax strategies, lower tax rates, and lower audit rates.

Keep in mind that if you don’t specify an entity for your business, sole proprietorship, the least tax efficient, is the default chosen for you. Instead of letting the government default to that choice, make it yourself and take control of your tax rates.

Timing

In the tax world, timing isn’t everything, but it is certainly valuable in helping to reduce one’s tax burden. Timing strategies generally defer taxes to future dates to take advantage of lower future rates or utilize the time value of money. The most obvious tax strategy related to timing involves deferred tax instruments, such as individual retirement plans and 401Ks. Continue reading… Continue reading… Continue reading…

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