Significant changes in the tax code are expected next year -- or even during the post-election Congressional session -- that could have a big impact on decisions that you -- the small business owner -- make regarding capital expenditures, acquisitions, and simply your overall business operations and strategies.In what is being dubbed the "fiscal cliff", we could be seeing the effects of tax reform at the end of 2012 and into 2013. Due to the 2013 federal tax reform, as a small business, you need to consider making some adjustments in 2012 so that you are in the best position when any sweeping tax code changes roll in. The following provides insight into what your business can do to prepare for the upcoming 2013 federal tax reform.Steps to Prepare for Possible 2013 Tax ReformPreparing for Possible Tax Reform in 2013Significant changes in the tax code are expected next year -- or even during the post-election Congressional session -- that could have a big impact on decisions that you -- the small business owner -- make regarding capital expenditures, acquisitions, and simply your overall business operations and strategies.In what is being dubbed the "fiscal cliff", we could be seeing the effects of tax reform at the end of 2012 and into 2013. Due to the 2013 federal tax reform, as a small business, you need to consider making some adjustments in 2012 so that you are in the best position when any sweeping tax code changes roll in. The following provides insight into what your business can do to prepare for the upcoming 2013 federal tax reform.
- Review current tax operations. The first step to prepare for the 2013 federal tax reform is to review your current tax operations, including examining your accounting methods. Knowing where your tax rates stand right now can help you be better prepared about where they may head in 2013. During the Bush administration, tax cuts put the average tax rate from ordinary income between 10% and 33%. However, these rates may increase up to 39.6% for 2013 for certain levels of ordinary income.
- Decide if accelerating income makes sense. Many businesses typically defer income while accelerating expenses to have a more favorable tax situation. However, this approach may not end up being the best if certain tax code changes are made before the end of 2012. In other words, it may be more prudent for your business to accelerate income into 2012 and defer expenses into 2013 in order to minimize the potential of higher tax rates next year. If you decide to accelerate income, you'll need to fit certain criteria. This includes collecting a bonus before December 31st, selling a home before January 1st 2013, selling any assets with capital gains, billing your customers immediately so your payments come in before the end of 2012, and delaying your 2012 capital expenditures and expenses.
- Convert traditional IRAs to Roth IRA's. Your retirement savings, including IRAs, could result in negative consequences in the upcoming years due to the tax reform. One way to overcome this is to convert any traditional IRAs to a Roth IRA before the end of 2012.
- Consider delaying charitable contributions. If you typically make charitable donations near the end of 2012, consider holding off until January 1st 2013 or later. This will help reduce your taxable income in 2013, rather than being applicable for the 2012 tax year.
- Rebalance investment exposure to increase tax-exempt investments. One of the big hot topics for the 2013 tax reform is the Medicare surtax. This includes the addition of a 3.8% surtax for Medicare for anyone who has income not earned by salary or trade. As a business owner, consider rebalancing your portfolio of investments to increase tax-exempt investments exposure, which will lower your net investment income.
While the entirety of how the tax reform will play out in 2013 is uncertain, in all likelihood some substantial changes are on the horizon. Examine the above considerations to prepare for possible tax reform, and be sure to speak with us about how the possible upcoming tax code changes can impact your business.
Hiring a convicted felon may accomplish more than just giving someone a second chance. In fact, by employing someone who was recently convicted of a felony or released from incarceration for a felony conviction you may qualify for a tax break. Under the federal Work Opportunity Tax Credit, or WOTC, program, employers that hire convicted felons receive an incentive for doing so in the form of a tax credit.The WOTC program is part of the broader 1996 Small Business Job Protection Act. In order to qualify for the credit, the employer must hire someone who was released or convicted within the past year. The amount of the credit will depend on the employee's wages during the first year of employment up to a cap of $6,000 in wages. For employees who work between 120 and 400 hours during the year, the employer will receive a credit equal to 25 percent of the qualifying wages. For employees who worked more than 400 hours, the employer receives a credit equal to 40 percent of the qualifying wages.Along with the federal WOTC program, numerous states also offer a similar program that provides employers with a credit toward their state tax obligation.
When you refinance an existing mortgage loan on your home, you often have to pay points as part of the refinance process. One point is equal to one percent of the loan amount. For example, if the loan is for $200,000, then one point is equal to $2,000. As you can see, the amount paid in points can add up fast. The borrower typically agrees to pay points in exchange for a lower interest rate. The good news is that you may be able to claim a tax deduction for the points you pay to refinance your loan. Let's look at some of the basics of tax deductions for points paid on a refinance loan.Unlike a primary mortgage, you cannot claim the entire amount paid in points during the year in which the points were paid.As a general rule, you must spread out the amount paid in points over the life of the loan. For example, if you paid $5000 in points on a 30 year refinance, you would be entitled to deduct $13.89 for each month ($5000/360) or $166.67 per year.You may be able to deduct more during the first year if you use some of the proceeds from the loan to make improvements to the property. In that case, you may deduct the amount associated with the percentage of the loan used for improvements in the first year. For example, if you refinanced a $200,000 loan but you used $20,000 of the proceeds to make improvements, you may deduct $200 in the first year which represents the amount you paid in points on the $20,000.If you later refinance again, you can deduct the entire amount left that you paid in points from your original refinance during the year that you refinance again unless you refinance with the same lender.
As a small business owner, you are likely always looking for a way to minimize your tax obligation and maximize your productivity. Hiring a veteran may be a way to accomplish both of those goals at one time.The Internal Revenue Service, or IRS, offers employers a credit when they hire an unemployed veteran under the Work Opportunity Tax Credit, or WOTC, program. A for-profit company can earn up to a $9,600 credit while a not-for-profit can earn up to a $6,240 credit. The amount of the credit depends on a number of factors including the length of time that the veteran was unemployed prior to being hired, the number of hours the veteran works during the first year of employment and the wages paid to the veteran during the first year of employment. An employer that hires a veteran who has a service-related disability may qualify for the maximum credit amount.The credit is applied when the employer files taxes at the end of the year; however, an employer must request certification for the credit within a short time after hiring the veteran. Certification must be requested by completing IRS Form 8850 with the state workforce agency.
As a small business owner, you are likely always looking for a way to minimize your tax obligation and maximize your productivity. Hiring a veteran may be a way to accomplish both of those goals at one time.The Internal Revenue Service, or IRS, offers employers a credit when they hire an unemployed veteran under the Work Opportunity Tax Credit, or WOTC, program. A for-profit company can earn up to a $9,600 credit while a not-for-profit can earn up to a $6,240 credit. The amount of the credit depends on a number of factors including the length of time that the veteran was unemployed prior to being hired, the number of hours the veteran works during the first year of employment and the wages paid to the veteran during the first year of employment. An employer that hires a veteran who has a service-related disability may qualify for the maximum credit amount.The credit is applied when the employer files taxes at the end of the year; however, an employer must request certification for the credit within a short time after hiring the veteran. Certification must be requested by completing IRS Form 8850 with the state workforce agency.
The primary purpose of life insurance is to pay a death benefit – almost always tax free – when the insured dies. We’re all familiar with the need to insure the life of a breadwinner to protect a spouse and children from financial catastrophe. But business owners have some special needs to address, too, over and above their role as breadwinners for their families. Let's take a closer look at the use of life insurance in a business context.Life Insurance as an Employee BenefitYou can buy life insurance for your employees as an employee benefit, similar to any other benefit, under Section 7702 of the Internal Revenue Code. Generally, the law lets business owners deduct the premiums for up to $50,000 of term life insurance for their employees. This is important in a society where employees are more and more used to getting insurance coverage from work. In some cases, this coverage may be the only life insurance a worker has.Funding Buy Sell AgreementsIf you have a business with one or more partners or other shareholders who are active in managing or running your business, you should have a buy-sell agreement in place. In a nutshell, this is a written agreement that the survivor will purchase the deceased partner's interest in the business for cash from the deceased's estate – and that the deceased's estate will sell.If you fail to create a buy-sell agreement, you may find yourself in business with your partner's spouse. Or worse, your partners' spouse's lawyers. Your partner's heirs may have no expertise in or interest in running your business, which could create big problems down the road. They will still be entitled to your ex-partner's share of any dividends or distributions from the business, and will demand their fair share of cash even though they may contribute little or nothing to the business's operation. A buy-sell agreement protects both sides by ensuring the heirs get the cash they need, while you get to continue running the business. And where does the cash to fund the agreement come from? Life insurance. Each partner can own a policy on each of the other partners, or the business itself can own the policy. Key Person InsuranceDoes your business have a key salesperson, manager or technician who is so productive, or so crucial to your operation, that it would severely damage your business if this person were to unexpectedly pass away? If so, you have an insurable interest in that individual, and you may want to consider owning a policy on him or her. If the worst happens, the policy will provide your business with enough cash to keep functioning while you search for, hire and train a replacement. This could cost tens or even hundreds of thousands of dollars.Bonus PlansSome life insurance policies – specifically ‘permanent' insurance policies such as whole life or universal life policies, build cash value. The policy owner can use this cash value for any purpose. In some cases, you can structure a plan to award the cash value to a key employee as a bonus after a certain number of years of service. This so-called "golden handcuffs” plan gives your top employees a powerful incentive to stay with your company, and as time goes by, it gets very difficult for competitors to "poach" your key people.Supplemental Retirement PlanningCash value plans can also be a great way for you to supplement your retirement income, without all the many restrictions that come with standard retirement plans such as 401(k)s and IRAs. You can restrict life insurance-based retirement plans to owners and executives, for example, to supplement your other retirement savings. By purchasing a modest-sized death benefit, and funding the policy with substantial premiums, you can build significant cash value over time. You can use this for retirement or even as a source of reserve capital for your business. You don't have to wait until you are age 59 1/2 to use the money. Or you can simply keep the policy in force and use it for the purpose for which it was designed: Life insurance. There are nearly as many ways to use a life insurance policy to benefit a business or business owner as there are businesses. Every business is different.
Long term care insurance provides a daily benefit in case the insured needs custodial care for a chronic medical condition. This is incredibly important, because neither major medical plans, nor Medicare, provides significant benefits for this kind of care.For example: Suppose you or one of your workers suffered a stroke. The workplace major medical plan would cover hospitalization costs, and possibly prescriptions and durable medicalgoods, depending on your policy.But once a disabled stroke victim leaves the hospital, but still needs help handling the basic activities of daily living (ADLs), the major medical insurance doesn't cover that. If you or your worker needs help with things like feeding, toileting, transferring, eating, drinking or dressing, that's got to come out of pocket - or out of a long-term care insurance policy.Disability insurance doesn't cover long term care. All disability insurance does is replace a fraction of the victim's income prior to being disabled. So the insured may have some income coming in, but it's not generally sufficient to cover the costs of long-term care, which can range up to $200 per day and more, in some markets, for full-time nursing home care.By making long term care available in the workplace, you are helping your employees with a valuable benefit that they may not have thought to get on their own. In some cases, carriers will simplify the application process for group long term care plans.In addition, your business can also qualify for a tax deduction: Generally, long term care insurance premiums you incur to begin and sustain a group long term care insurance plan are deductible as an ordinary business expense. However, some special rules may apply, depending on whether you are an S-corporation, C-corporation or LLC.Improved morale and retention.Differentiation from other employers. Long term care is not as commonly offered as other benefits. Productivity. If you extend coverage to include family members, and an employee has a loved one who needs long term care, your valued employee may have to take time off work to provide it. If coverage is in place, your employee can direct care for that loved one, and not have to provide it herself. This keeps her on the job and productive.This also applies to your family members, as well. If you have your spouse covered, you won’t need to be providing care yourself. You can hire someone to handle the day-to-day care, leaving you free to run your business. Likewise, your spouse won’t have to be the one providing all the day to day care for you.Wealth Protection.Long term care is vital for business owners as well. If you own an ongoing business, chances are good you will not qualify for Medicaid. That results in a potential long term care cost of $80,000 or more every year that must come out of your pocket. You may have to sell your business assets in a fire sale to raise money to pay long term care costs. Long term care insurance coverage protects your business and your retirement savings from being rerouted to pay for care.
