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It's time for year-end tax planning. Every fall, small business owners should review their tax situations to determine steps they should consider to reduce their federal income taxes for the current year — and beyond. Fortunately, no significant unfavorable federal tax law changes are expected this year. So, there's more certainty regarding the tax rules today than this time last year. Here are five ideas to help reduce business taxes for 2022. 1. 100% First-Year Bonus Depreciation for Last-Minute Asset Additions Thanks to the Tax Cuts and Jobs Act (TCJA), 100% first-year bonus depreciation is available for qualified new and used property that's acquired and placed in service in calendar year 2022. So, your business might be able to write off the entire cost of some or all of your 2022 asset additions on this year's federal income tax return and maybe on the state return, too. Consider making additional acquisitions between now and year end. Contact your tax advisor for details on the 100% bonus depreciation break and exactly what types of assets qualify. Important: Under the TCJA, the first-year bonus depreciation percentages for most eligible assets are scheduled to be reduced as follows: 80% for assets placed in service in calendar year 2023, 60% for 2024, 40% for 2025, and 20% for 2026. For certain property with longer production periods, these reductions are delayed by one year. If you're on the fence about making a purchase now or later, you might want to buy the asset and place it in service before year end to take advantage of the 100% bonus depreciation deduction for assets placed in service in 2022. However, if significant tax-rate increases are expected in future years, you could be better off forgoing 100% first-year bonus depreciation and instead depreciating newly acquired assets over a number of years. If tax rates go up, those future depreciation write-offs could be worth more than a current-year 100% write-off. Fortunately, you have until the deadline for filing your current-year federal income tax return, including any extension, to decide whether to write off purchases immediately or depreciate them over time. If your business uses the calendar year for tax purposes, the extended filing deadline is October 16, 2023, for sole proprietorships and C corporations. The extended deadline is September 15, 2023, for partnerships, limited liability companies (LLCs) taxed as a partnerships and S corporations. Extending your return may give you more flexibility to react to future tax developments or expectations about them. 2. Heavy SUV, Pickup or Van Write-Offs The 100% bonus depreciation deal can have a hugely beneficial impact on first-year depreciation deductions for new or used heavy vehicles used over 50% for business. That's because heavy SUVs, pickups and vans are treated for federal income tax purposes as transportation equipment. That means the business-use percentage of the cost qualifies for 100% bonus depreciation if placed in service in calendar year 2022. Specifically, 100% bonus depreciation is available when the SUV, pickup or van has a manufacturer's gross vehicle weight rating (GVWR) above 6,000 pounds. You can verify this by looking at the manufacturer's label that's usually found on the inside edge of the driver's side door where the door hinges meet the frame. If you're considering buying an eligible vehicle, placing it in service before year end could deliver a sizable write-off on this year's return. 3. Timing of Business Income and Deductions If you conduct your business using a pass-through entity — meaning a sole proprietorship, S corporation, partnership or LLC taxed as a partnership — your share(s) of the tax items from the business are passed through to you and reported on your personal return. As year end approaches, evaluate whether you'll be in the same or lower federal income tax bracket in 2023. If you think that will be the case, the traditional year end strategy of deferring taxable income into next year while accelerating deductible expenditures into this year makes sense. Deferring income and accelerating deductions will, at a minimum, postpone part of your tax bill from 2022 until 2023. On the other hand, if you expect to be in a higher tax bracket in 2023, take the opposite approach. If possible, accelerate income into this year and postpone deductible expenditures until 2023. That way, more income will be taxed at this year's lower rate instead of next year's higher rate. 4. QBI Deductions The deduction based on an individual's qualified business income (QBI) from pass-through entities was a key element of the TCJA. The deduction can be up to 20% of a pass-through entity owner's QBI, subject to restrictions that can apply at higher income levels and another restriction based on the owner's taxable income. For QBI deduction purposes, pass-through entities include: Sole proprietorships, Single-member LLCs that are treated as sole proprietorships for tax purposes, Partnerships, LLCs that are treated as partnerships for tax purposes, and S corporations. You can also claim the QBI deduction for up to 20% of qualified REIT dividends and up to 20% of qualified income from publicly traded partnerships. Because of the income limitations on the QBI deduction, year-end tax planning moves can increase or decrease your allowable QBI deduction. For instance, year-end moves that reduce this year's taxable income — such as claiming 100% bonus depreciation deductions or making deductible retirement plan contributions — can reduce this year's allowable QBI deduction. Work with your tax advisor to optimize your overall tax results. 5. Tax-Favored Retirement Plans If your business doesn't already have a retirement plan, now might be the time to take the plunge. Current retirement plan rules allow for significant deductible contributions. For example, if you're self-employed and set up a SEP-IRA, you can contribute up to 20% of your self-employment earnings, with a maximum contribution of $61,000 for the 2022 tax year. If you're employed by your own corporation, up to 25% of your salary can be contributed to your account, with a maximum contribution of $61,000. If you're in the 32% federal income tax bracket, making a maximum contribution could cut what you owe Uncle Sam for 2022 by a whopping $19,520 (32% times $61,000). Other small business retirement plan options include: 401(k) plans, which can even be set up for just one person (called solo 401(k)s), Defined benefit pension plans, and SIMPLE-IRAs. Depending on your circumstances, these other types of plans may allow bigger deductible contributions. Thanks to a change made by the 2019 SECURE Act, tax-favored qualified employee retirement plans, except for SIMPLE-IRA plans, can now be adopted by the due date (including any extension) of the employer's federal income tax return for the adoption year. The plan can then receive deductible employer contributions that are made by the due date (including any extension), and the employer can deduct those contributions on the return for the adoption year. Important: The SECURE Act doesn't change the deadline to establish a SIMPLE-IRA plan. It remains October 1 of the year for which the plan is to take effect. Also, the SECURE Act change doesn't override rules that require certain plan provisions to be in effect during the plan year, such as the provisions that cover employee elective deferral contributions (salary-reduction contributions) under a 401(k) plan. The plan must be in existence before such employee elective deferral contributions can be made. For example, the deadline for setting up a SEP-IRA for a sole proprietorship business that uses the calendar year for tax purposes and making the initial deductible contribution for the 2022 tax year is October 16, 2023, if you extend your 2022 personal tax return. However, to make a SIMPLE-IRA contribution for the 2022 tax year, you must have set up the plan by October 1. So, you might have to wait until next year if the SIMPLE-IRA option is appealing. While you have until next year to establish a tax-favored retirement plan (except for a SIMPLE-IRA), why wait? Get it done this year as part of your year-end tax planning. Contact your tax advisor for more information on alternatives and be aware that if your business has employees, you may have to make contributions for them, too. Small Business Tax Law Changes under the IRA In August, President Biden signed the Inflation Reduction Act of 2022 (IRA). The new law contains several tax-related provisions that generally go into effect after 2022. Here are some key changes that may affect small businesses: Significant revisions to the tax credit for buying electric vehicles, Tax incentives for green commercial construction and renewable energy investments, Extension of the excess business loss limitation for certain businesses for two years, and An increase in the small business payroll tax credit for research costs. In addition, the IRA gives the IRS about $80 billion of additional funding over the next 10 years. As things now stand, the funds will go toward additional staff and technology to help with customer service and "tax enforcement activities." This underscores the importance of substantiating any business deductions and credits claimed on your return, because the odds of being audited may be going up. We Can Help The year-end tax planning picture is much clearer this year than last year. Unless something unexpected happens, these five ideas will work for many small businesses. But there could be additional tax-smart year-end moves that apply to your situation. So, contact your tax advisor to ensure you're covering all the bases. We are committed to being your most trusted Business Advisor.We view every client like a partnership, and truly believe our success is a result of your success! We assist clients with accounting, tax preparation and financial advising in the Bryan and Navasota, Texas, area. Interested in working with us? Fill out a new client inquiry here. We love customer feedback! Please leave us a review here!

With year end fast approaching, it's time to consider tax planning moves that may lower taxes for the 2022 tax year — and possibly set you up for tax savings in future years as well. The good news is that it now appears that there won't be any significant unfavorable federal tax changes that will take effect this year or next year. Assuming that's an accurate prediction, the tax planning environment this year end is better than it has been in past years, when Congress was considering unfavorable federal tax change proposals. Fortunately, those changes didn't happen, leaving you with some familiar tax planning strategies to consider. Play the Standard Deduction Game The Tax Cuts and Jobs Act (TCJA) basically doubled the standard deduction amounts. For this year, the standard deduction allowances are: $12,950 for single people and married individuals filing separate returns, $19,400 for people who use head-of-household filing status, and $25,900 for married couples filing jointly. Slightly higher standard deductions are available to those who are 65 or older or blind. If your total itemizable deductions for this year will be close to your standard deduction allowance, consider making enough additional expenditures for itemized deduction items between now and year end to surpass your standard deduction. Those extra expenditures will allow you to itemize and reduce your 2022 federal income tax bill. The 2023 standard deduction allowances will be significantly bigger thanks to a hefty inflation adjustment (that hasn't been announced yet). So, you can claim the bigger allowance next year if you don't itemize. The standard deductions for 2023 will be: $13,850 for single people and married individuals filing separate returns, $20,800 for people who use head-of-household filing status, and $27,700 for married couples filing jointly. The easiest itemizable expense to prepay is your mortgage payment due in January. Accelerating that payment into this year will give you 13 months' worth of itemized home mortgage interest deductions in 2022. Ask your tax advisor to determine whether you're affected by limits on mortgage interest deductions under current law. Next, take a look at state and local income and property taxes that are due early next year. Prepaying those bills between now and year end can lower this year's federal income tax bill, because your total itemized deductions will be that much higher. However, the TCJA limited the amount you can deduct for all state and local taxes to a maximum of $10,000 ($5,000 if you use married filing separate status). However, beware: Prepaying state and local taxes can be unhelpful if you'll owe the alternative minimum tax (AMT) for this year. Under the AMT rules, no deductions are allowed for state and local taxes. So, prepaying these taxes before year end may do little or no tax-saving good for people who are subject to the AMT. While the TCJA eased the AMT rules, so most people are no longer at risk, take nothing for granted. Check with your tax advisor about possible exposure. Other ways to increase your itemized deductions for 2022 include: Make bigger charitable donations this year and smaller donations next year to compensate, and Accelerate elective medical procedures, dental work and expenditures for vision care if you think you can qualify for a medical expense deduction. You can claim an itemized deduction for medical expenses to the extent they exceed 7.5% of your adjusted gross income (AGI). Harvest Gains and Losses in Taxable Investment Accounts If you hold investments in taxable brokerage firm accounts, consider the tax-saving advantage of selling appreciated securities that have been held for over 12 months. The federal income tax rate on net long-term capital gains recognized this year is 15% for most individuals, although it can reach 20% at high income levels. The 3.8% net investment income tax (NIIT) can also kick in at higher income levels. So, the actual federal income tax rate on long-term gains can be 18.8% (15% plus 3.8%) or 23.8% (20% plus 3.8%) for some taxpayers. If you're holding some losing investments — that are currently worth less than you paid for them — consider sellin g them between now and year end to trigger the resulting capital losses. This year-end tax-saving strategy is called harvesting capital losses. Harvested losses can shelter capital gains recognized this year. Sheltering short-term capital gains with harvested capital losses is an especially tax-smart move, because net short-terms gains are taxed at higher federal income tax rates that can reach 40.8% (37% plus the 3.8% NIIT) for high-income taxpayers. If selling some losing investments would cause your 2022 capital losses to exceed your 2022 capital gains, the result would be a net capital loss for the year. It can be used to shelter up to $3,000 of 2022 higher-taxed income from salaries, bonuses, self-employment income, interest income and royalties ($1,500 for married individuals filing separately). Any excess net capital loss can be carried forward indefinitely. A capital loss carryover can be used to shelter short- and long-term gains recognized in future tax years. This can give you extra investing flexibility in the future because you won't have to hold appreciated securities for over a year to get a lower tax rate. You'll pay 0% to the extent you can shelter gains with your loss carryover. If your tax rates go up after this year, capital loss carryovers into 2023 and beyond could turn out to be even more valuable. Important: If you sold a home earlier this year for a taxable gain, as many homeowners did to take advantage of peaking prices, you can offset some or all of that taxable gain with harvested capital losses from selling losing securities. Give to Charity You can make gifts to your favorite charities in conjunction with an overall revamping of your investments in taxable brokerage firm accounts. But there are two tax-smart principles to keep in mind. 1. Don't give away investments that are currently worth less than what you paid for them. Instead, sell the shares and book the resulting tax-saving capital loss. Then, you can give the cash sales proceeds to charity — plus, if you itemize, you can claim the resulting tax-saving charitable write-offs. 2. Donate investments in appreciated securities directly to charity. Why? Because, if you itemize, donations of publicly traded shares that you've owned for over a year result in charitable deductions equal to the full current market value of the shares at the time of the gift. Plus, when you donate appreciated shares, you escape any capital gains taxes on those shares. Meanwhile, the tax-exempt charitable organization can sell the donated shares without owing any federal income tax. Give to Loved Ones The principles for tax-smart gifts to charities also apply to gifts to relatives. That is, you should sell losing investments and collect the resulting tax-saving capital losses. Then give the cash proceeds to loved ones. On the other hand, give appreciated shares directly to relatives. When they sell the shares, they'll probably pay a lower tax rate than you would. Make Charitable Donations from Your IRA IRA owners and beneficiaries who have reached age 70½ are permitted to make cash donations totaling up to $100,000 annually to IRS-approved public charities directly out of their IRAs. You don't owe income tax on these qualified charitable distributions (QCDs), but you also don't receive an itemized charitable contribution deduction. The upside is that the tax-free treatment of QCDs equates to an immediate 100% federal income tax deduction without having to worry about restrictions that can potentially delay itemized charitable write-offs. Contact your tax advisor if you want to hear about the full benefits of QCDs. If you're interested in taking advantage of this strategy for 2022, you'll need to arrange with your IRA trustee or custodian for money to be paid out to one or more qualifying charities before year end. Prepay College Bills If paid for you, your spouse or a dependent, higher education expenses may qualify you for one of the following tax credits: The American Opportunity credit equals 100% of the first $2,000 of qualified postsecondary education expenses, plus 25% of the next $2,000. So, the maximum annual credit is $2,500 per qualified student. The Lifetime Learning credit equals 20% of up to $10,000 of qualified education expenses. The maximum credit is $2,000 per family. For 2022, both higher education credits are phased out if your modified adjusted gross income (MAGI) is between: $80,000 and $90,000 for unmarried people, or $160,000 and $180,000 for married couples filing jointly. Numerous rules and restrictions apply to these higher education credits. If you're eligible for either credit, consider prepaying college tuition bills that aren't due until early 2023 if it would result in a bigger credit this year. Specifically, you can claim a 2022 credit based on prepaying tuition for academic periods that begin in January through March of next year. Go Green The Inflation Reduction Act of 2022 (IRA) provides some tax incentives for you to make energy-efficient improvements to your home, such as solar panels, energy-efficient water heaters, heat pumps and HVAC systems. The new law also extends, increases and modifies a tax credit for new home construction that meets certain requirements. These provisions go into effect after December 31, 2022. So, you might need to delay certain purchases until the 2023 tax year to take advantage of any tax-saving opportunities. Contact your tax advisor for guidance. Also, if you're in the market for a new or used vehicle, the IRA provides tax credits for buying certain "green" vehicles. Under the IRA, starting on January 1, 2022, the plug-in vehicle credit will be called the "clean vehicle credit" and the manufacturer limitation on the number of vehicles eligible for the credit will be eliminated. Important: The IRA changes how the clean vehicle credit is calculated. Specifically, a vehicle must meet critical mineral component requirements and battery requirements, plus final assembly of the vehicle must take place in North America. There are also price and income limitations. Starting in 2023, this credit isn't available to taxpayers with MAGI over: $150,000 for single people, $300,000 for married couples filing jointly, or $225,000 for heads of households. If you have income above these levels and you're contemplating a clean vehicle purchase, consider doing it before year end to qualify for the credit — but make sure that the vehicle you choose meets the qualifications and isn't made by a manufacturer that's already reached the 200,000-vehicle sales cap. In addition, starting in 2023, used vehicles may qualify for a lesser federal tax credit if they meet certain requirements. The credit for used green vehicles isn't available if the lesser of your MAGI for the year of purchase or the preceding year exceeds: $75,000 for single people, $150,000 for married couples filing jointly, or $112,500 for heads of households. Unlike the credit for new cars, no requirements regarding final assembly or materials and components sourcing apply. Additional limitations do apply. For example, you generally can't claim the credit more often than every three years. Is a Roth IRA Conversion Right for You? Converting a traditional IRA into a Roth account is a tax-smart move when you expect to be in the same or higher tax bracket during your retirement years than you're currently in. However, beware: There's a current tax cost for converting. A conversion is treated as a taxable liquidation of your traditional IRA followed by a nondeductible contribution to the new Roth account. But if you put off converting until some future year, the tax cost could be higher if tax rates go up or the value of your account is higher. After the conversion, the income and gains that accumulate in the Roth account, along with qualified withdrawals, will be federal-income-tax-free. In general, qualified withdrawals are those taken after you've: Had at least one Roth account open for more than five years, and Reached age 59½, become disabled or died. With qualified withdrawals, you (or your heirs) avoid having to pay higher tax rates that might otherwise apply in future years. While the current tax hit from a Roth conversion is unwelcome, it could turn out to be a relatively small price to pay for some insurance against higher future tax rates. Contact Your Tax Pro Consult with your tax advisor to discuss these and other federal (and state) tax planning moves that may apply to your situation for 2022. We are committed to being your most trusted Business Advisor.We view every client like a partnership, and truly believe our success is a result of your success! We assist clients with accounting, tax preparation and financial advising in the Bryan and Navasota, Texas, area. Interested in working with us? Fill out a new client inquiry here. We love customer feedback! Please leave us a review here!

For some time now, the media has highlighted the so-called "Great Resignation," where legions of people have left their former jobs. If you're among those who've resigned or you're thinking about quitting, you may be considering a shift to self-employment. Before making the leap, though, you need to consider several factors that could be pros or cons, depending on your circumstances. Being Your Own Boss The notion of being your own boss is often a major draw for those contemplating self-employment. You may dream of not having to sit through unproductive meetings, deal with difficult co-workers, comply with a dress code, or follow inefficient processes and procedures. But it's inaccurate to say the self-employed don't have to answer to anyone — they still must answer to customers or clients who often have thoughts on how their work should be performed. Of course, if you're self-employed, you generally can pick and choose your customers or clients. Unlike traditional employment, you can turn down work you don't like or don't feel is in your wheelhouse. But keep in mind that you'll have to land new business yourself. That type of networking and hustle requires time away from actual paid work. You're also responsible for any advertising and marketing, as well as other administrative tasks, such as accounting and collections. You can outsource certain tasks — such as creating a website or preparing sales and income tax returns — but you'll have to pay for those services. In addition, some people truly need the structure of a workplace to do their best work. They count on their manager and co-workers to keep them on track. Cash Flow Traditional jobs come with regular paydays, and you're typically paid the same amount every time. You have no such guarantees when you're self-employed. You could experience significant ebbs and flows in income, especially early on, before you're established. This can create trouble when bills come due, particularly if clients drag their feet on payment or skip out altogether. You can reduce such risk by pursuing diverse clientele, negotiating long-term contracts and engaging in careful budgeting. It's also prudent to set aside an emergency fund or line of credit that can help when cash is tight. Self-employed people have the luxury of setting their own prices. If you're in a competitive industry, you may be limited in the prices people are willing to pay. But, if you develop a good reputation, customers or clients might seek you out and willingly pay a premium. Scheduling Matters Self-employment can mean you aren't chained to an eight-hour workday or other schedule set by someone else — or to a specific location. You often can work at home, in a coffee shop or while traveling. Once your business is established, you may be able to scale it to work as little or as much as you like. You also free up the time you'd otherwise spend on commuting (and save on the associated costs). This flexibility makes it easier to schedule around other priorities, including time with friends and family, exercise, and other hobbies. For example, you can work while your kids are at school or sleeping. However, this can be a trap for the unwary. Flexibility makes it difficult to separate your work and personal lives. So, it's important to set boundaries if that's important to you. Even though you always have some work to do, find time to relax. Self-discipline is essential. And be aware that many self-employed people wind up working more than they ever did as employees. Taxes When it comes to taxes, there's good news and bad news. On the one hand, you can claim a wide variety of business-related expenses that you can't as an employee, including: Equipment, Tools, Office furniture, Supplies, Insurance, Phone and internet, Business-related vehicle expenses, Part of your expenses for business meals and travel, and Part of your rent or mortgage and utilities. On the other hand, you'll pay more in payroll taxes. As an employee, you and your employer split the payroll taxes (Social Security and Medicare). If you're self-employed, your payroll tax liability typically doubles, because you also must pay the employer portion of these taxes. The 12.4% Social Security tax applies to earned income up to the Social Security wage base of $147,000 for 2022. There's no limit on the 2.9% Medicare tax. The employer portion of self-employment taxes paid (6.2% for Social Security tax and 1.45% for Medicare tax) is deductible above the line. Important: Above-the-line deductions reduce your adjusted gross income (AGI) and your modified AGI (MAGI). These figures may help you qualify for other tax breaks. You also might owe 0.9% additional Medicare tax if your net earnings from self-employment exceed $200,000 ($250,000 for married filing jointly and $125,000 for married filing separately). Because there's no employer portion of this tax, the additional Medicare tax doesn't double for the self-employed. But this also means that no portion of the tax is deductible above the line against self-employment income. Self-employed workers also have to file Form 1040-ES to pay quarterly estimated taxes. These taxes are generally due on April 15, June 15, September 15 and January 15 of the following year. If you fall behind, you'll owe interest and penalties. Benefits The lack of employee benefits is a substantial downside to self-employment. You might miss paid leave, health insurance and retirement contributions. You'll need to earn more to cover those yourself. But you can plan vacation and other time off around your slow times and take more time than a boss might give you. The Affordable Care Act and subsequent federal legislation have made individual health insurance more affordable. Plus, you can deduct 100% of health insurance costs for yourself, your spouse and your dependents, up to your net self-employment income. You also can deduct contributions to a retirement plan and, if you're eligible, a health savings account for yourself. And you can tailor benefits to your specific needs — you aren't stuck with the options offered by an employer. Think It Through You have much to weigh if you're considering self-employment. Some determinations — like whether you have the requisite self-discipline — you need to make on your own. But your CPA can help you evaluate the potential financial and tax consequences. We are committed to being your most trusted Business Advisor.We view every client like a partnership, and truly believe our success is a result of your success! We assist clients with accounting, tax preparation and financial advising in the Bryan and Navasota, Texas, area. Interested in working with us? Fill out a new client inquiry here. We love customer feedback! Please leave us a review here!

Most people already understand the tax rules for individual charitable donations, including generous deductions that may be available to itemizers when they give cash or property to charity. But your business may also reap tax rewards for helping out a qualified charitable organization. Though the rules for business entities are similar to those for individuals, there are a few twists and turns to consider. Of course, the benefits aren't strictly limited to taxes. In addition to helping a worthy cause, you may build valuable goodwill within your community that can trickle down to the bottom line. Keeping that in mind, here's a brief overview of the main tax rules for charitable donations made by a business. How to Qualify for Deductions For starters, deductions can be claimed by various types of business entities — including corporations, partnerships and limited liability companies (LLCs) — but write-offs for pass-through entities are claimed by the individual owners on their personal tax returns. Accordingly, for these purposes, we'll limit this discussion to charitable contributions made by C corporations. As with individuals, donations must be made to qualified IRS-approved charitable organizations in order for them to be deductible. Your company can't write off donations to not-for-profits that don't meet the requirements even if your intentions are good. For example, if your business donates money directly to a family in your community that's experienced a tragedy, it gets no deduction for your direct contribution. Important: Your business must keep detailed records of charitable donations. Retain the records for at least three years in case the IRS challenges a write-off. Limits on Deductions Currently, individuals may deduct monetary contributions of up to 60% of adjusted gross income (AGI). The excess above the 60%-of-AGI limit may be carried over for up to five years. C Corporations have an annual deduction limit, too. Prior to 2020, the limit was generally 10% of the corporation's taxable income for the year, subject to a five-year carryover. However, legislation enacted in 2020, during the onset of the pandemic, upped the ante for monetary contributions to 25% of taxable income. This relief was subsequently extended through 2021. Furthermore, the percentage limit is 100% for qualified disaster relief contributions made in cash during the period spanning January 1, 2018, through February 25, 2021. The 25% limit on qualified contributions made in cash for 2020 and 2021 is applied first without regard to any qualified disaster relief contribution. Excess contributions above the 25% limit could also be carried forward for up to five years. Important: There's some sentiment in Congress for extending the higher 25% limit again. This could be addressed in year-end legislation. However, under current law, the rule has reverted to 10% of taxable income for 2022 and thereafter. Temporary Enhancements At various times, Congress has authorized enhanced tax deductions for charitable contributions by corporations. But these breaks have generally been temporary . For example, legislation providing tax breaks for gifts of food inventory expired after 2021, although it's possible this tax break could be revived. However, one enhanced deduction is permanently on the books. Normally, deductions for property donated to charities are limited to the fair market value of the property less the amount that would constitute ordinary income if sold. However, a business entity (including a pass-through entity) that donates inventory can deduct an amount equal to the basis of property, plus one-half of its unrealized appreciation, up to twice the amount of basis. To qualify for this tax break, the donation must be made for the care of infants, the ill or the needy. Be aware of the following three key definitions under the tax code: 1. Infant . This term refers to a minor child as determined by state law. Care of an infant involves parental functions addressing the physical, mental and emotional needs of an infant. 2. An ill person . This is someone who requires medical care. For this purpose, medical care is the alleviation or cure of an existing illness, including care of the physical, mental or emotional needs of the ill. 3. A needy person . This is someone who lacks the necessities of life due to suffering poverty or temporary distress. The care of the needy must be for the alleviation or satisfaction of an existing need or a temporary need for shelter and food arising from a natural disaster. Give with Your Head and Your Heart C corporations can maximize the tax benefits for making charitable contributions through astute planning. Remember that the law in this area is continuing to evolve. Contact your tax professional with any questions or to find out about any significant developments and how your tax situation could be affected. Should You Play the "Matching Game?" There's a way that C corporations can benefit charities without shouldering the entire load. If it suits your purposes, your company may set up a program where it agrees to "match" donations by employees, up to a specified annual limit or a percentage of contributions. Everybody wins when companies play the matching game: Employees can deduct their contributions, the company can deduct its contributions and a deserving charity gets money to help achieve its mission. For example, suppose your company establishes a one-to-one match with a $1,000 limit. If an employee contributes $500 to a qualified charity in 2022, the company would also contribute $500. If an employee donates $1,200 in 2022, your company's donations would be limited to $1,000. Employee donation matching programs generally provide a list of IRS-approved charities to which they'll match employee donations. It's important to choose reputable charities that are experienced in these endeavors and are likely to appeal to a wide range of employees. Organizations that have a track record of participating in employer matching programs can provide paperwork to help launch your company's program and handle your record keeping requirements going forward. Contact your tax advisor to discuss whether the matching game makes sense for your situation. We are committed to being your most trusted Business Advisor.We view every client like a partnership, and truly believe our success is a result of your success! We assist clients with accounting, tax preparation and financial advising in the Bryan and Navasota, Texas, area. Interested in working with us? Fill out a new client inquiry here. We love customer feedback! Please leave us a review here!

As interest rates rise and economic uncertainty abounds, many people have decided to lease their homes rather than buy them outright. But some renters may have a road to home ownership — through a lease with the option to buy. Such arrangements offer advantages to both renters (lessors) and landlords (lessees). Regardless of which side of the transaction you're on, you need to be aware of the potential tax consequences. Nuts and Bolts In addition to monthly rent, a lessee with an option to buy generally pays an upfront option fee and/or monthly option fees that will count toward the purchase price if the lessee exercises the option. At the end of the lease, the lessee can obtain a mortgage for the balance of the price or opt out, thereby forfeiting the option fees. These arrangements give potential buyers who currently lack the funds for a down payment or the credit rating for an affordable mortgage a path to ownership. Lessees can check out a house and a neighborhood before committing. Plus, the buyout is usually specified in the lease. So, if the value of the home increases during the term of the lease, the lessee could benefit from a lower price that was previously agreed to. There are upsides for lessors, too. They may be able to collect higher monthly payments and a higher price overall than from a traditional sale. The arrangements also expand the pool of potential buyers at a time it might be shrinking. Plus, lessees with an option to buy have a financial incentive to take care of the property. Tax Treatment Lease payments are treated as rental income for the lessor, taxed at the applicable ordinary income rate. If the lessee exercises the right to buy, any payments the lessor/seller receives after the date of sale are considered part of the purchase price. When the lessee has paid option fees on top of rent throughout the lease term, the lessor shouldn't recognize those extra fees until the option is exercised or expires. At that point, they're recognized as either 1) capital gain (as part of the purchase price) if the option is exercised, or 2) ordinary income if the option lapses. If the lessee exercises the option, option payments are included when calculating the tax basis for the property. This will reduce the tenant/buyer's capital gains liability (if any) if the property is later sold for a profit. Note that the lessor also could have some tax consequences at the state or local level. For example, the lessor might lose a property tax homestead exemption and protections from rate increases that are reserved for owners who use their properties as their principal residences. Traps for the Unaware These tax treatments assume the IRS recognizes the arrangement as a lease, rather than a sale. That's not always the case. Certain characteristics may prompt the IRS to recharacterize the transaction as a sale, which comes with different tax treatments for the buyer and the seller. Situations that might draw unwelcome IRS attention include: Contractual incentives make it very likely the "lessee" will exercise the option. The lease payments are significantly higher than fair market rent in the area. (That is, they more closely resemble mortgage payments than rent.) The lessee pays property taxes, insurance, maintenance and repair expenses. The purchase price is below fair market value. The aggregate lease and option payments approach the fair market value of the property. The lessee is required to make such substantial improvements to the property that the investment could be recouped only by purchasing it. The lease payments are credited against the option price. The IRS will look at the totality of the circumstances, as well as the parties' intent. If the IRS deems the arrangement to be a sale, the lease and option payments are considered part of the purchase price. The IRS assumes that ownership transferred when the original agreement was executed — as opposed to at the end of the lease — so the seller isn't entitled to deductions for property taxes, insurance and other expenses. If the property wasn't the seller's principal residence and the seller owned it at least one year before selling, the seller treats the income from the sale as long-term capital gains (or ordinary loss), which are taxed at lower rates than ordinary income. If the home was the seller's principal residence, the seller may qualify to exclude up to $250,000 of that gain from income ($500,000 if you're married and file a joint tax return). The buyer can claim deductions for property taxes and similar expenses, as well as mortgage interest. The portion of the "lease payments" not considered interest is treated as part of the purchase price and used to compute the property's tax basis. Proceed with Caution A lease with an option to buy offers many potential advantages, especially in a rocky housing market. It's not without tax risk, however. Consult your tax advisor to determine if the arrangement could pay off and help you avoid the potential tax traps when structuring the deal. We are committed to being your most trusted Business Advisor.We view every client like a partnership, and truly believe our success is a result of your success! We assist clients with accounting, tax preparation and financial advising in the Bryan and Navasota, Texas, area. Interested in working with us? Fill out a new client inquiry here. We love customer feedback! Please leave us a review here!

Inflation is up 8.3% year over year, according to the latest data from the U.S. Bureau of Labor Statistics. Many factors — including supply chain disruptions, multi-trillion-dollar government spending packages, the war in Ukraine and economic fallout from the COVID-19 pandemic — have contributed to higher prices at the gas pumps, on the grocery shelves and elsewhere, as compared to the same time last year. Most American households are feeling the pinch. But you can take proactive measures to improve your financial picture during these uncertain economic times. Consider the following 10 practical suggestions: 1. Follow an evolving budget. If your monthly cash outflows exceed your inflows, a budget can help you live within your means. Break down your budget into the main categories for incoming funds and outgoing expenses. You'll quickly see if you've sprung a leak that needs patching. This shouldn't be a one-time exercise. You'll need to continuously fine-tune your budget as circumstances change. Also, don't forget to set aside a "rainy day" fund for unexpected costs, such as a broken dishwasher or car repairs. 2. Spend less on groceries. An easy way to save money is to curb impulse buying at the grocery store. Do you really need all those perishable items that may spoil or products that will likely remain in your cupboard until you eventually throw them out? Shop with a list and try not to deviate too much. You might even save money overall by shopping online, even with delivery fees. Also take advantage of coupons, customer reward programs and other incentives that make sense for your household. For example, if your local grocery store has a big sale on ground turkey this week, you could plan to have turkey burgers on Monday night and turkey spaghetti later in the week — then you could freeze a pound to use in two weeks. Buying based on weekly sales flyers, especially for meats, fruits and other higher-priced items, can dramatically lower your weekly food bill. 3. Pay down or consolidate debt. People with excessive credit card debt may fall into a rut that's hard to escape, especially when the Federal Reserve is increasing rates. After the Fed's second consecutive 0.75% rate increase in July, the Federal funds rate is at its highest level since December 2018. This is the rate that commercial banks lend reserve balances to each other overnight on an uncollateralized basis. Every time the so-called "Fed funds rate" goes up, the prime lending rate goes up — along with the annual percentage rate (APR) on your credit cards. If your budget shows that a healthy chunk of your monthly cash outflows are credit card payments, focus on whittling down what you owe. If possible, consolidate debts with a single source that offers a reasonable rate. Depending on the size of your outstanding balance, it could take months or even years to chip away at your debt — but a consistent, disciplined approach will pay off over the long run. 4. Scale back on luxuries. The current economic outlook warrants cuts in discretionary items. For instance, if you had planned to take multiple vacations within the next year, consider skipping one of the trips. Along the same lines, if you frequently eat dinners out at expensive restaurants, go out for lunch instead, which is generally cheaper. And do you really need that $7 cappuccino every morning? 5. Lower your tax bill. Paying taxes to Uncle Sam is a necessary evil, but you might owe less with some astute year-end tax planning. For example, you could contribute pre-tax dollars to a tax-deferred retirement plan (up to the applicable limit), which lowers your taxable income. Or you could reap a sizable tax credit for making energy-efficient home improvements, such as installing solar panels, energy-efficient water heaters, heat pumps and HVAC systems. Another option: If you're short on cash, you could simply gather household items that you no longer need and donate them to charity. Generally, itemizers can deduct the fair market value of the donated goods. Review your situation with your professional tax advisor. 6. Shop around. If you're like most people, you're probably loyal to certain brands, products and stores. In fact, you may purchase certain items on a regular basis without even thinking about how much they cost. Consider lower-cost alternatives. In many cases, you can spend less without compromising quality. Many grocery stores offer generic or private-label products next to branded products on the shelves. Unbranded products usually are manufactured by smaller companies without large marketing budgets or by the same companies that make branded products. 7. Negotiate prices. Most people don't pay sticker price for a new vehicle at the showroom, so why accept the stated price for other goods and services? You may be surprised to find that some vendors are willing to trim their fees to keep your business. Examples include cellphone plans, cable and internet packages, landscaping, and home repairs. It doesn't hurt to ask — the worst they can do is say no. 8. Drive smarter. Gas prices have dropped slightly from their mid-year highs in most parts of the country, but it still costs a pretty penny to fill your tank. Simple but effective ways to reduce gas consumption include: Combining errands to reduce the number of trips, Avoiding trips during peak traffic times, Minimizing idle time by shutting off your engine when waiting, Checking tire pressure regularly, Limiting air conditioning usage, and Walking or bike riding whenever possible. Also consider using GPS apps to help you find the fastest route, along with fuel apps to help you find the cheapest gas in your area. 9. Earn more money. Lowering expenses is only one side of the equation. You can also help stem the tide of rising prices by generating more income. The simplest way to do this is to ask for a pay raise or work a little overtime at your job. Alternatively, it might be time to update your resume and hunt for a new job that pays more or provides more generous benefits. Or you might find a "side hustle" that can supplement wages from full-time employment — just be sure not to violate any noncompete agreements you've signed for your day job. 10. Consider rental options. If you have a vacation home or even unused space in your primary residence — for example, a basement apartment that your kids occupied in their teen years — you could lease it to bring in some extra cash. Likewise, people who live in areas with seasonal events, such as a golf tournaments or music festivals, could temporarily relocate and rent their homes to attendees at a premium. This income is tax-free if you rent for less than two weeks per year (but you can't deduct rental expenses either). Inflation is expected to continue at least through the end of 2022. The sooner you can get your finances in check, the better prepared you'll be to weather whatever the economy has in store. Contact your financial advisor for other creative solutions that could work for your situation. We are committed to being your most trusted Business Advisor.We view every client like a partnership, and truly believe our success is a result of your success! We assist clients with accounting, tax preparation and financial advising in the Bryan and Navasota, Texas, area. Interested in working with us? Fill out a new client inquiry here. We love customer feedback! Please leave us a review here!

Business borrowers aren't just facing higher interest rates today. The terms of new loans have also become more restrictive. Nearly a quarter of senior loan officers reported tighter standards for commercial and industrial loans in the Federal Reserve's second-quarter survey on bank lending practices. As banks rein in their lending practices, it's important for business owners to put their best foot forward when they apply for credit. Here's how to position your business in the best possible light on a loan application and negotiate favorable loan terms. Fed Survey Findings The top tightening measure banks currently are employing is charging premiums on high-risk loans. That measure was mentioned by 20% of respondents to the Federal Reserve's July 2022 Senior Loan Officer Opinion Survey on Bank Lending Practices . Other tightening measures include raising the cost of credit lines, widening the spread over the bank's cost of funds and increasing collateral requirements. In addition, the survey identified the following key reasons for implementing more restrictive lending practices: A more uncertain economic outlook, A reduced tolerance for risk, Deteriorating industry-specific problems for the borrower, Reduced liquidity in secondary loan markets, and Increased concerns about the effects of legislative changes, supervisory actions or changes in accounting standards. Loans officers expect even greater volatility in the second half of 2022. They project borrowers' debt-servicing capacities could worsen as inflation persists and collateral values fall. However, demand for commercial and industrial loans is expected to remain high, despite rising interest rates and tighter credit practices. Loan Application Basics If you need money to grow or maintain your business, it's important to understand how the loan application process works. It starts with four basic questions: How much money do you want? How do you plan to use the loan proceeds? When do you need the funds? How soon can you repay the loan? Your loan officer will also ask about your company's previous sources of financing. So, you'll need to explain your business and how it's been financed to date. This includes your personal cash infusions, forgone salaries and sweat equity, as well as any equity contributions from friends, family members and outside investors. Two Options Banks generally offer two types of financing: 1. Lines of credit. A line of credit is primarily used to meet working capital fluctuations. It's generally considered short term, and banks may expect repayment within the next year. In practice, however, most businesses keep their revolving credit lines open for many years, occasionally drawing and repaying funds based on operating cash flow. 2. Asset-based loans. These loans are for specific items. They usually fund equipment purchases or plant expansions. With asset-based loans, the length of the loan is usually tied to the life of the asset that's financed, and that asset is usually pledged as collateral for the loan. Banks generally don't allow business owners to finance 100% of an asset purchase. Instead, you'll probably be expected to contribute a reasonable down payment. Loan Package When applying for a loan, lenders want serious borrowers who are invested in their businesses and aware of their financial condition and performance. Don't go into your lender's office empty-handed. Instead, bring a comprehensive loan package that includes: A narrative "statement of purpose," Three years of business financial statements (including balance sheets, income statements and statements of cash flow), if available, Three years of business tax returns, if available, Personal financial statements and tax returns for all owners, Appraisals for assets pledged as collateral, Your business plan, and Prospective financial statements. Loan officers have seen all kinds of business plans and financial projections — and they know how to critically evaluate the underlying assumptions. Where possible, support your assumptions with market data and research. It's important to be realistic about your strengths and market opportunities, while being forthcoming about your weaknesses and potential threats to your growth. If your lender thinks you'll make a viable borrower, your application will be given to the bank's underwriting committee. Underwriters will have greater confidence in your historic and prospective financial statements if they're prepared by a CPA and conform to U.S. Generally Accepted Accounting Principles (GAAP). Also, remember that this list is just a starting point. Underwriters may ask for additional information, such as interim financial statements, lease agreements and marketing brochures. Underwriters don't approve every loan application, especially when the demand for new loans is high. But don't give up if one bank turns you down. Ask why the application was denied, fix the problem and try again. Also don't be afraid to shop around. Viable borrowers could receive multiple offers, allowing them to pick the option with the most favorable terms. Diligence Pays Working with your financial advisors can increase your chances of getting approved and help you negotiate the best possible loan terms. They're familiar with the loan application process and can help you compile a comprehensive loan package, as well as prepare realistic business plans and prospective financial statements. Learn the 3 Cs of Lending Underwriters will assess the following three key factors when deciding whether to approve or deny your loan application: 1. Character. The strength of the management team — its skills, reputation, training and experience — is a key indicator of whether a business loan will be repaid. Banks also look at the company's track record with creditors, including its credit score and trade references from key suppliers. The latter tend to be submitted by businesses without established credit histories and those that deal with smaller suppliers that don't report to credit agencies. 2. Capacity. Underwriters want to know how you'll use the loan proceeds to increase cash flow enough to make loan payments by the maturity date. To determine your ability to repay the loan, lenders will evaluate past and projected financial statements, as well as your business plan. 3. Collateral. This term refers to the assets pledged in the event that you don't generate enough incremental cash flow to repay the loan. It's a lender's back-up plan in case your financial projections fall short. Examples of collateral include real estate, savings, stock, inventory and equipment. Additionally, an owner's personal credit will be factored into the lending decision for a private business, and the bank will likely require a personal guarantee from the owners. So, expect to share personal financial details and put your personal assets on the line to secure the debt, even if your business is incorporated. We are committed to being your most trusted Business Advisor.We view every client like a partnership, and truly believe our success is a result of your success! We assist clients with accounting, tax preparation and financial advising in the Bryan and Navasota, Texas, area. Interested in working with us? Fill out a new client inquiry here. We love customer feedback! Please leave us a review here!

The average cost of a data breach has risen to a record high, according to a new study by the independent research firm Ponemon Institute. The study found that the global average cost grew from $4.24 million per incident in 2021 to $4.35 million in 2022, an increase of roughly 2.6%. Moreover, the global average cost has increased 12.7% compared to the 2020 average of $3.86 million. These trends are alarming. What's your organization doing to fortify its defenses against cyberattacks? Best Practices Cyber data — including financial records, sensitive customer information and employee files stored on the cloud or on the company's technology devices and networks — is one of the most valuable assets many organizations own. Each year, management should evaluate what's being done to protect these intangibles, where vulnerabilities exist and how to make the assets more secure. Consider applying the following cybersecurity best practices. Vet your vendors. Hacks are often perpetrated through the victim's small or midsize vendors. That's because smaller companies often lack the resources to put strong security measures in place — and hackers are ready, willing and able to take advantage. Some companies limit outside access to their computer networks, refusing supplier and customer requests to share data. Others require vendors to verify their network security protocols. Some companies are establishing cybersecurity ratings — similar to credit scores — based on the amount of traffic to a company's website coming from servers that are linked to cybercrime. As those ratings become more refined, managers may choose to avoid doing business with high-risk customers and suppliers. Limit access. Companies often have more devices connected to the internet than management realizes. Moreover, when employees take devices out of the office or work from home, they expose data to less-than-secure home networks and public hotspots that provide wireless internet access. Evaluate which devices need to be connected to the internet and take steps to minimize off-site risks. Consider limiting which employees can work from home, educating employees about the risks of cyber breaches and installing encryption software on devices that link to external networks. Encryption may create compatibility issues when sharing data with other companies and slow down data transmission. But it can be a powerful and cost-effective tool in the battle against cybercrime. Adopt a continuous-improvement mindset. Protecting against cyberthreats is an ongoing challenge, not a one-time event. Every time a software, hardware or application manufacturer releases an update or patch, install it immediately on every device in a systematic fashion. Why? Hackers constantly troll for the latest patches and updates because they show where vulnerabilities exist. If hackers are nimble, they can exploit these vulnerabilities to steal data before customers have a chance to install the fix. Another useful prevention strategy is requiring periodic changes to log-in passwords. Hacked passwords can cause a domino effect, because people tend to use the same password for multiple accounts. Some companies also use a security question or require users to authenticate their identity using a smartphone as another layer of verification. Cover your assets. Another popular security measure is cyber liability insurance. Professional and general business liability insurance policies generally don't cover losses related to a hacking incident. Cyber liability insurance can cover a variety of risks, depending on the scope of the policy. It typically protects against liability or losses that come from unauthorized access to your company's electronic data and software. Instead of purchasing a standalone cyber liability policy, you might be able to add a cyber liability endorsement to your errors and omissions policy. Not surprisingly, the coverage through the endorsement isn't as extensive as the coverage in a standalone policy. Seek outside help. Cybersecurity is an important task that few organizations can handle exclusively in-house. Consider seeking outside resources to reinforce your current information technology (IT) policies and procedures. For example, a growing number of small and midsize companies use outside computer security companies to evaluate vulnerabilities in their networks and test how well in-house IT professionals are securing their networks. More Alarming Statistics The Ponemon Institute has been studying cyberattacks for the last 17 years. The latest version of its annual study, Cost of a Data Breach Report 2022 , was published in July. In addition to estimating the average cost of a data breach for the 12-month period ending in March 2022 ($4.35 million), the study breaks down of the average cost as follows: Cost category: Average cost Lost business (including business disruption and revenue losses from system downtime, cost of lost customers and acquiring new ones, reputation losses and diminished goodwill) : $1.42 million Detection and escalation (such as forensic and investigative activities, assessment and audit services, crisis management, and communications to executives and boards): $1.44 million Post-breach response: $1.18 million Notification: $0.31 million Note: The reported costs for ransomware attacks exclude any ransom paid to the perpetrator. Other eye-opening trends from the report include: 83% of organizations have experienced more than one data breach, 60% of victim-organizations increased their prices because of the breaches, 19% of breaches occurred because of a compromised business partner, and 45% of breaches were cloud-based. The study also found that ransomware attacks are increasingly prevalent. In 2022, nearly one in five breaches involved ransomware, an increase of 41% from 2021. In addition, the report showed that breaches related to remote working arrangements cost an average of $600,000 more per incident than those that didn't involve remote working. This is an important statistic to remember when deciding whether to allow employees to work from home. The average cost of a data breach varies significantly, depending on the organization's industry and where it's located. For example, the report includes responses from 17 industrialized nations, but the country with the highest average cost is the United States ($9.44 million in 2022). And, of the 17 industries covered by the study, the sector with the highest average cost is health care ($10.1 million in 2022). The runner-up industries were: Financial ($5.97 million), Pharmaceutical ($5.01 million), Technology ($4.97 million), and Energy ($4.72 million). This is the twelfth consecutive year that the United States and the health care industry have topped their respective lists. For More Information Risk assessment is also an important part of year-end audit procedures. Accountants are familiar with ways to identify and reduce cyber-risks. Failure to protect valuable intangibles against the risk of cyberattacks can turn these valuable assets into costly liabilities. We are committed to being your most trusted Business Advisor.We view every client like a partnership, and truly believe our success is a result of your success! We assist clients with accounting, tax preparation and financial advising in the Bryan and Navasota, Texas, area. Interested in working with us? Fill out a new client inquiry here. We love customer feedback! Please leave us a review here!

For federal gift and estate tax purposes, an individual who's entitled to receive a gift or bequest (inheritance) is presumed to accept the gift or bequest unless it's expressly disclaimed (refused). For purposes of this article, we'll call the person who's entitled to receive the gift or bequest the "intended donee." Unless the intended donee's refusal to accept a gift or bequest takes the form of a qualified disclaimer, the intended donee is treated as passing along the gift or bequest to the next person in line as a gift. If that happens, it will use up part or all of the intended donee's unified federal gift and estate tax exemption ($12.06 million for 2022). In contrast, when the intended donee makes a qualified disclaimer, no gift is deemed to have been made and the intended donee becomes "the disclaimant." A disclaimant doesn't use up any of the unified federal exemption by refusing a gift or bequest. Why Might You Want to Disclaim a Gift or Bequest? In most circumstances, you wouldn't want to disclaim a gift or bequest. But, say you're financially set while your sibling is struggling to make ends meet. You might want to disclaim part or all of a gift or bequest so that your sibling — who's the next person in line and who really needs it — receives the disclaimed money or asset. See "Possible Scenarios for Disclaimers" at right for additional situations where a disclaimer might be advisable. How Do You Make a Tax-Smart Qualified Disclaimer? If the intended donee of a property interest makes a qualified disclaimer with respect to the property, the property is treated as if it had never been transferred to the disclaimant. Therefore, there's no federal gift tax, estate tax or generation-skipping transfer tax impact for the disclaimant. Instead, the disclaimed property, which could be cash, is considered to pass directly from the donor (the maker of the original gift or bequest) to the person who has become entitled to receive the property as a result of the qualified disclaimer. For example, Bill recently lost his mom, Betty, to cancer. Betty's will bequests $1 million to each of her two sons, Bill and Phil. Bill is set financially, so he decides to make a qualified disclaimer of the cash that he'd otherwise receive from Betty's estate. That way, his share of the estate will go to his brother Phil who's the estate's co-beneficiary, and there would be no impact on Bill's unified federal gift and estate tax exemption. Phil, who lost his small business during the pandemic, is grateful for Bill's generosity. A qualified disclaimer must meet the following five requirements: It must be an irrevocable and unqualified refusal to accept an interest in the disclaimed property. The refusal must be in writing. The written refusal must be given to the donor or other applicable party (such as the executor of the estate that's the donor) by the applicable deadline. The disclaimant must not have accepted any interest in or any benefits from the disclaimed property at the time of the disclaimer. As a result of the disclaimant's refusal, and without any direction from the disclaimant, the disclaimed interest must pass to some other person. Can You Make a Qualified Disclaimer of a Partial Interest? The disclaimer of all or an undivided portion of a separate interest in property (severable property) can potentially be a qualified disclaimer even if the disclaimant has another interest in the same property. However, the disclaimed interest must have been created by the donor. The disclaimant can't be the person who created the separate interest. Severable property is defined as property that can be divided into separate parts, each of which, after severance, maintains a complete and independent existence. Here are some examples of qualified disclaimers of partial interest severable property: Under recently deceased Dad's family trust, son Brock is to receive 5,000 shares of Alpha Corporation stock. Brock disclaims 2,500 of the shares in favor of his sister Angela, who's an equal co-beneficiary of Dad's trust. Aunt Sally dies. Her will leaves all of her valuable personal effects — consisting of paintings, antique furniture, jewelry and a coin collection — to her daughter Delaney. Delaney disclaims two of the paintings and all of the jewelry in favor of her sister Grace, who's entitled under the will to receive whatever doesn't go to Delaney. Dad's estate leaves a 640-acre farm to his son Ernest. Ernest disclaims 210 identifiable acres in favor of his brother Fritz, who's entitled under Dad's will to receive whatever doesn't go to Ernest. A disclaimer of an undivided interest in property can be a qualified disclaimer if it otherwise meets the qualified disclaimer rules. An undivided interest must consist of a percentage or fraction of each substantial interest in the property in question. Also, it must extend over the entire term of the interest in the property and in other property into which that property is converted. For example, Dad gives the income from a farm to his daughter, Beta, for life. The remainder of the income is to go to his grandson, Gamma. Beta disclaims 40% of the farm income in favor of Gamma. Beta's disclaimer can be a qualified disclaimer if the applicable rules are met. Can a Disclaimant Direct Who Gets Disclaimed Property? A disclaimer isn't a qualified disclaimer unless the disclaimed interest passes without any direction on the part of the disclaimant. A disclaimant is treated as directing the transfer of the disclaimed interest if there's an express or implied agreement that the interest be given or bequeathed to a person specified by the disclaimant. Are Verbal Disclaimers Allowed? A qualified disclaimer must be written and timely. The document needs to identify the interest in property being disclaimed, and the disclaimant or a legal representative must sign it. What's the Deadline for Making a Disclaimer? A disclaimer is a qualified disclaimer only if the required written document is delivered to the donor (or the donor's representative) by no later than nine months after the later of: The day on which the transfer creating the interest is made, or The day the disclaimant reaches age 21. If applicable state law requires that a disclaimer be filed earlier than the aforementioned deadlines, the disclaimer must comply with the earlier state-law deadline to be considered timely for federal tax purposes. On the other hand, a state-law deadline for disclaiming property won't extend the federal tax deadline. For example, Texas has no deadline for disclaimers as long as they're made before accepting the property. However, the nine-month rule still applies for federal tax purposes. The nine-month period for making a qualified disclaimer is determined with reference to the transfer that creates the disclaimant's interest in the property. For gifts, a transfer occurs when there's a completed gift for federal gift tax purposes. What's the Tax Impact of a Nonqualified Disclaimer? Disclaimers that don't meet the requirements for a qualified disclaimer are treated for federal tax purposes as gifts by the disclaimant to the person who becomes entitled to the property as a result of the disclaimer. The IRS addressed this issue in Private Letter Ruling 200901013. Here, the children of the settler (creator) of a trust made nonqualified disclaimers of their interests in the trust, which resulted in property passing to the settler's grandchildren. The IRS concluded that the transfers resulting from the disclaimers were gifts from the children to the grandchildren. So, the children were subject to federal gift tax on the transfers. Possible Scenarios for Disclaimers A gift or bequest may turn out to be ill-advised for various reasons. If so, a qualified disclaimer can potentially be used to correct the misbegotten gift or bequest without adverse tax effects for the disclaimant. (See main article for a full explanation.) Here are some situations — besides when an intended donee simply doesn't want a gift or bequest — where a qualified disclaimer could be helpful. Property depreciates in value. Property can sometimes depreciate drastically within the nine-month period for making a qualified disclaimer. Had the donor retained the property, it could have been sold for a tax-saving capital loss. Or if the donor had waited to give away the property, the value of the gift would have been lower for federal gift tax purposes. A qualified disclaimer by the intended donee can effectively erase the gift and put the property back in the hands of the donor with no tax harm done. Donor remorse. After making a gift, the donor might have regrets for various reasons. If the intended donee will cooperate by making a qualified disclaimer, the ill-considered gift can effectively be erased. Donee dies unexpectedly. The intended recipient of a gift may die unexpectedly shortly after the gift. Had the donor known that the recipient would die shortly after the gift, the donor wouldn't have made it. If the executor of the recipient's estate makes a qualified disclaimer with respect to the gifted property, the gift is effectively negated. Warning: The executor of the gift recipient's estate generally has a fiduciary duty to act in the best interests of the estate's beneficiaries. The executor should determine whether making a qualified disclaimer would violate this fiduciary duty. For example, Pedro is an avid collector of classic cars. He owns a 1953 Edsel in perfect condition. In August 2022, Pedro gives the beloved car to his son, Alonzo, who's also an avid car collector. Alonzo's wife, Bella, doesn't care about cars, classic or otherwise. Alonzo dies unexpectedly in October 2022. As the sole heir to Alonzo's estate, Bella would inherit the Edsel. The executor of Alonzo's estate is concerned that she'd sell the car and is sure that Alonzo wouldn't want the car to be sold. After confirming that he wouldn't be violating any fiduciary duty to Bella under applicable law, the executor makes a qualifying disclaimer of the gift of the Edsel to Alonzo. As a result, Pedro retains ownership of the car. For More Information As you can see, the tax rules for disclaimed gifts and bequests can be complicated. If you have questions about making a qualified disclaimer, contact your tax advisor. Your tax pro can help ensure you meet all the requirements if you decide that a qualified disclaimer is right for your situation. We are committed to being your most trusted Business Advisor.We view every client like a partnership, and truly believe our success is a result of your success! We assist clients with accounting, tax preparation and financial advising in the Bryan and Navasota, Texas, area. Interested in working with us? Fill out a new client inquiry here. We love customer feedback! Please leave us a review here!

Congress has passed the Inflation Reduction Act (IRA) and President Biden signed it into law on August 16. The $740 billion law contains many tax breaks and raises revenue through a new minimum tax on large, profitable corporations and an excise tax on stock buybacks. It's intended to reduce the U.S. deficit by about $300 billion. Other revenue would come from stricter enforcement of tax compliance by the IRS. Here are some highlights of the new legislation. 15% Corporate Alternative Minimum Tax The IRA imposes a new 15% corporate alternative minimum tax on the adjusted financial statement income of applicable corporations. The minimum tax will apply if it exceeds the taxpayer's regular tax including its base erosion and anti-abuse tax for the tax year. The alternative minimum tax can be thought of as a "book minimum tax" because the starting point of the calculation is a corporation's average annual adjusted financial statement income that includes financial statements prepared in accordance with generally accepted accounting principles. This is different from the previous calculation of the corporate alternative minimum tax rules, where the starting point was taxable income. An applicable corporation is any corporation (other than an S corporation, regulated investment company, or a real estate investment trust) that meets an average annual adjusted financial statement income test for one or more earlier tax years that end after December 31, 2021. A corporation meets the income test if its average annual adjusted financial statement income for the three-tax-year period (determined without regard to loss carryovers) ending with the tax year exceeds $1 billion. Other rules apply. This provision is effective for tax years beginning after December 31, 2022. How many businesses are affected? In an analysis, the Joint Committee on Taxation estimated that about 150 taxpayers would be subject to the corporate minimum tax annually. Excise Tax on Corporate Stock Repurchases The IRA generally imposes on each "covered corporation" a tax equal to 1% of the fair market value of any stock of the corporation that's repurchased by the business during the tax year. A "covered corporation" is any domestic corporation with stock traded on an established securities market. The 1% excise tax applies to repurchases of stock after December 31, 2022. Clean Vehicle Tax Credit The current tax credit for qualified plug-in electric vehicles is significantly revised in the IRA. Currently, a taxpayer can claim a maximum credit of $7,500 for each new qualified plug-in electric drive vehicle placed in service during the tax year. Certain vehicle requirements must be met. Currently, the credit phases out beginning in the second calendar quarter after a manufacturer sells more than 200,000 plug-in electric drive motor vehicles for use in the U.S. after 2009. Under the IRA, the plug-in vehicle credit has been renamed the clean vehicle credit and the manufacturer limitation on the number of vehicles eligible for the credit has been eliminated after December 31, 2022. However, the new law changes how the clean vehicle credit is calculated. Specifically, a vehicle must meet critical mineral component requirements and requirements that the batteries must be made in America. There are also price and income limitations. The clean vehicle credit isn't allowed for a vehicle with a manufacturer's suggested retail price above $80,000 for vans, SUVs and pickups, and above $55,000 for other vehicles. A clean vehicle credit isn't allowed if a taxpayer's modified adjusted gross income for the current or preceding tax year exceeds $150,000 for single filers, $300,000 for married couples filing jointly and $225,000 for heads of household. Due to all these requirements, auto manufacturers and dealers are complaining that many electric vehicles and buyers won't qualify for the tax credit. Previously Owned and Commercial Vehicles The IRA also contains a tax credit for used plug-in electric vehicles purchased after 2022. The tax credit is $4,000 or 30% of the vehicle's sale price, whichever is less. There are also price and income limitations. An eligible previously owned clean vehicle is one with a model year that's at least two years earlier than the calendar year when a taxpayer acquires it. In addition, the IRA adds a new commercial clean vehicle credit for qualified vehicles acquired and placed in service after December 31, 2022. The credit is a component of the general business credit. Residential Energy Improvements Individual taxpayers can also receive tax breaks for home energy efficiency improvements, such as solar panels, energy-efficient water heaters, heat pumps and HVAC systems. The new law also extends, increases and modifies a tax credit for new home construction that meets certain requirements. Provisions Related to Climate, Energy and Health Care The legislation includes many new, extended and increased tax credits intended to incentivize both businesses and individuals to boost their use of renewable energy. For example, it provides tax credits to private companies and public utilities to produce renewable energy or manufacture parts used in renewable projects, such as wind turbines and solar panels. Clean energy producers that pay a prevailing wage also may qualify for tax credits. In addition, the IRA allows Medicare to negotiate the price of prescription drugs and prohibits future administrations from refusing to negotiate. It also caps the annual out-of-pocket drug costs of Medicare enrollees at $2,000 and monthly insulin costs at $35 — and provides them free vaccines. Additional provisions to rein in drug costs include a requirement that pharmaceutical companies that raise the prices on drugs purchased by Medicare faster than the rate of inflation rebate the difference back to the program. The IRA also should reduce health care costs for Americans who obtain coverage from the federal Health Insurance Marketplace. It extends the expansion of subsidies — in the form of refundable premium tax credits — through 2025. These subsidies were scheduled to expire at the end of 2022. Increase in Qualified Small Business Payroll Tax Credit for Research Another provision in the IRA would boost the payroll tax credit for increasing research activities. Currently, a qualified small business (QSB) may elect to take part of the research credit as a payroll tax credit against its employer FICA tax liability. A QSB must have gross receipts of less than $5 million and meet other requirements. An eligible business with qualifying research expenses can then opt to apply up to $250,000 of its research credit against its payroll tax liability. Under the IRA, beginning after December 31, 2022, a QSB can choose to apply another $250,000 in qualifying research expenses (for a total of $500,000) against its payroll tax liability. Stay Tuned These are only some of the provisions in the legislation. The IRS will be issuing guidance about these and other provisions in the coming months. We'll continue our coverage of the law in future articles. Contact us if you have questions about your situation. The CHIPS Act Is Signed into Law On August 9, President Biden also signed the CHIPS and Science Act into law. This is a semiconductor manufacturing and economic competitiveness package that includes an investment tax credit for semiconductor manufacturing facilities and equipment. The $280 billion law includes more than $52 billion for U.S. companies producing computer chips, as well as a tax credit for investment in chip manufacturing. Taxpayers can elect to treat the credit as a payment against tax. The credit is provided for property placed in service after December 31, 2022, and for which construction begins before January 1, 2027. We are committed to being your most trusted Business Advisor.We view every client like a partnership, and truly believe our success is a result of your success! We assist clients with accounting, tax preparation and financial advising in the Bryan and Navasota, Texas, area. Interested in working with us? Fill out a new client inquiry here. We love customer feedback! Please leave us a review here!

The 2022 tax year is well underway, and year end will be here before you know it. Summer is a good time to take proactive steps to help reduce the current year's tax bill. Here are some federal tax-planning strategies to consider. Managing Gains and Losses in Taxable Investment Accounts It's been a wild year in the stock market. You may have collected some capital gains and suffered some capital losses. You also might have some gains and losses that you have yet to realize from investments you still hold in taxable brokerage firm accounts. If you have such unrealized gains and losses, consider the tax advantage of selling appreciated securities that have been held for over 12 months. The federal income tax rate on long-term capital gains recognized in 2022 is only 15% for most people, but it can reach a maximum of 20% at high income levels. The 3.8% net investment income tax (NIIT) can also potentially apply to gains that will be taxed at the 15% and 20% rates. To the extent you have capital losses that were recognized earlier this year or capital loss carryovers from pre-2022 years, selling winners this year won't result in any tax hit. In particular, sheltering net short-term capital gains with capital losses is a major tax-saving opportunity because net short-terms gains would otherwise be taxed at higher ordinary income rates, which can reach 37% plus another 3.8% for the NIIT. What if you have some losing investments that you'd like to unload? Taking the resulting capital losses this year would shelter capital gains, including high-taxed short-term gains, from other sales this year. If selling a batch of losers would cause your capital losses to exceed your capital gains, the result would be a net capital loss for the year. That net capital loss can be used to shelter up to $3,000 of 2022 ordinary income from salaries, bonuses, self-employment income, interest income, royalties and other sources ($1,500 if you use married filing separate status). Any excess net capital loss from this year is carried forward indefinitely. Having a capital loss carryover go into next year could turn out to be a good deal: The carryover can be used to shelter both short-term gains and long-term gains recognized next year and beyond. This can give you extra investing flexibility in those years because you won't have to hold appreciated securities for over a year to get a preferential tax rate. In addition, having a capital loss carryover into next year to shelter short-term gains recognized next year and beyond can be advantageous, because the top two federal rates on net short-term capital gains recognized in 2023 through 2025 are 35% and 37% (plus the 3.8% NIIT, if applicable). Sharing Investments with Loved Ones and Charities If you're feeling generous, you may want to make gifts to some relatives and/or charities. These gifts can be made in conjunction with an overall revamping of your taxable account stock and equity mutual fund portfolios. Keep these tax-smart gifting principles in mind. Gifts to loved ones. Don't give away shares that are currently worth less than what you paid for them. Instead, you should sell the shares and book the resulting tax-saving capital loss . Then, you can give the cash sales proceeds to your relative or loved one. On the other hand, it's a good idea to give your loved ones shares that are currently worth more than what you paid for them. Most likely, they'll pay lower tax rates than you would pay if you sold the same shares. Relatives in the 0% federal income tax bracket for long-term capital gains and qualified dividends will pay a 0% federal tax rate on gains from shares that were held for over a year before being sold. For purposes of meeting the more-than-one-year rule for gifted shares, you can count your ownership period plus the gift recipient's ownership period. Even if the shares have been held for a year or less before being sold, your relative will probably pay a much lower tax rate on the gain than you would. Gifts to charities. The principles for tax-smart gifts to relatives also apply to donations to IRS-approved charities. That is, you should sell shares that are currently worth less than what you paid for them and collect the resulting tax-saving capital losses . Then you can give the cash from the sale to charity and claim the resulting tax-saving charitable deductions (assuming you itemize). Following this strategy delivers a double tax benefit: You recognize tax-saving capital losses plus tax-saving charitable donation deductions. On the other hand, you should donate shares that are currently worth more than what you paid for them instead of giving away cash. Why? Because if you itemize, donations of publicly traded shares that you have owned over a year result in charitable deductions equal to the full current market value of the shares at the time of the gift. Plus, when you donate these shares, you escape any capital gains taxes on them. So, this strategy also delivers a double tax benefit: You avoid capital gains taxes and receive a tax-saving charitable contribution deduction, assuming you itemize. Meanwhile, the tax-exempt charitable organization can sell the donated shares without owing anything to the IRS. Converting a Traditional IRA into a Roth The best profile for a Roth conversion is if you expect to be in the same or higher tax bracket during your retirement years. The current tax hit from a conversion done this year may turn out to be a relatively small price to pay for completely avoiding potentially higher future tax rates on the account's earnings. If your traditional IRA balance has taken a beating in the stock market, the tax hit from converting now will be lower than when the market was at its peak. Important: Years ago, the Roth conversion privilege was a restricted deal. It was only available if your modified adjusted gross income was $100,000 or less. That restriction is gone. Your tax advisor can help you evaluate the wisdom of the Roth conversion idea. Taking Proactive Measures to Reduce AMT The Tax Cuts and Jobs Act (TJCA) significantly reduced the odds that you'll owe the alternative minimum tax (AMT) through 2025. The law significantly increased the AMT exemption amounts and the income levels at which those exemptions are phased out. The following table summarizes the AMT exemptions and phaseout ranges for 2022: ​ Unmarried Individuals Married Couples Who Files Jointly Married Individuals Who Files Separately AMT Exemption Amount $75,900 $118,100 $59,050 Phaseout Starts At $539,900 $1,079,800 $539,900 ​Completely Phased Out At $843,500 $1,552,200 $776,100 So, who will be subject to the AMT? Various interacting factors come into play when evaluating whether the tax will apply. In addition to high income levels, other risk factors that could trigger an AMT liability under current law include exercising "in-the-money" incentive stock options and receiving interest from "private activity bonds." In addition, the AMT may be an issue for sole proprietors and owners of other pass-through businesses that write off significant depreciation from older assets that are subject to pre-TCJA depreciation schedules. Even if you still do owe the AMT, you'll probably owe considerably less than before the TCJA changes went into effect. Nevertheless, it's still critical to evaluate year-end tax-planning strategies in light of the AMT rules. Because the rules are complicated, you may want some assistance. We are committed to being your most trusted Business Advisor.We view every client like a partnership, and truly believe our success is a result of your success! We assist clients with accounting, tax preparation and financial advising in the Bryan and Navasota, Texas, area. Interested in working with us? Fill out a new client inquiry here. We love customer feedback! Please leave us a review here! Eye on Estate Planning Thanks to the Tax Cuts and Jobs Act (TCJA), the unified federal estate and gift tax exemption for 2022 is currently $12.06 million or effectively $24.12 million for a married couple. Even though these whopping exemptions may mean that you're not currently exposed to the federal estate tax, your estate plan may need updating to reflect the current tax rules. Also, we don't know how long the current historically generous federal estate and gift tax exemption will last. As the tax law currently reads, lower pre-TCJA exemption amounts are scheduled to return in 2026 (unless Congress acts to extend them). If that happens, the unified exemption could fall back to around $8 million, depending on inflation. (The $8 million figure is just a guess at this point.) The current federal estate tax rate is 40%, but it was higher years ago. That's why making big gifts now, under today's favorable tax rules, could be a tax-smart idea. Proposed Clawback Rules High net-worth individuals should consider making big gifts now — while the estate tax rules are taxpayer friendly. Proposed regulations issued in late 2018 stipulate that people who make large gifts in 2018 through 2025 and benefit from the ultra-generous unified federal estate and gift tax exemptions for those years wouldn't be penalized if the exemptions revert back to the lower pre-TCJA amounts after 2025. If that scenario materializes, a decedent's federal estate tax exemption would be the greater of: The TCJA exemption amount that was used to shelter earlier gifts, or The exemption amount that's allowed in the post-TCJA year of death. For example, in 2022, when the unified federal estate and gift tax exemption is $12.06 million, Alpha makes $10 million of taxable gifts. (These gifts are in excess of the $16,000 per-recipient annual gift tax exclusion for 2022.) Alpha passes away in 2026, and the unified exemption has reverted back to only $8 million. He leaves behind an estate with a fair market value of $5 million. What's the 2026 federal estate tax liability for Alpha's estate? According to the proposed regulations, the $10 million of taxable gifts made in 2022 are added back to Alpha's $5 million date-of-death estate resulting in a gross estate of $15 million. The estate tax liability of Alpha's estate would then be calculated using a $10 million unified exemption. His estate would owe federal estate tax on $5 million ($15 million gross estate minus $10 million exemption). So, the $10 million of taxable gifts made while the larger TCJA unified exemption was in place wouldn't increase the 2026 federal estate tax liability. How would the tax situation differ if Alpha instead gives away $12.06 million in 2022 (the full amount of the unified federal estate and gift tax exemption under current law)? In this situation, his remaining estate in 2026 would be only $2.94 million ($15 million minus $12.06 million). To calculate the 2026 federal estate tax liability for the estate, the $12.06 million of taxable gifts made in 2022 are added back to Alpha's $2.94 million date-of-death estate resulting in a gross estate of $15 million. According to the proposed regulations, the estate tax liability would then be calculated using a $12.06 million unified exemption. Alpha's estate would owe federal estate tax on $2.94 million ($15 million gross estate minus $12.06 million exemption). So, the $12.06 million of taxable gifts made while the larger TCJA unified exemption was in place wouldn't increase the 2026 federal estate tax liability. Beyond Taxes You may need to make some adjustments to your estate plan for reasons that have nothing to do with taxes, such as changes in your health, personal goals and family situation. Contact us if you need an estate-planning tune-up.

Are you new to self-employment? Working for yourself doesn't mean you must forego tax-advantaged retirement savings. In addition to contributing to a traditional IRA, there are two basic retirement plan options that may make sense for self-employed individuals: Simplified Employee Pensions (SEPs) and SIMPLE IRAs. Here are the pros and cons of these plans. Important: For purposes of this article, the term "self-employed" means you're a sole proprietor, the sole owner of a single-member limited liability company (LLC) that's treated as a sole proprietorship for tax purposes, a partner or a member of a multi-member LLC that's treated as a partnership for tax purposes. Option 1: SEPs SEPs are stripped-down retirement plans mainly intended for the self-employed. In effect, a SEP is a defined-contribution plan. As such, the maximum deductible contribution for the 2022 tax year is $61,000. But your contribution is limited to 20% of net self-employment (SE) income reduced by the deduction for half of your self-employment tax (SE tax). So, the maximum deductible SEP contribution for the 2022 tax year is the lesser of: $61,000, or 20% of net SE income from Schedule C of your Form 1040 or Schedule K-1 if you're a partner or an LLC member treated as a partner reduced by the deduction for half of your SE tax. There are several key advantages to using a SEP: If you have a healthy amount of SE income, you can make large annual deductible SEP contributions — potentially up to $61,000 for the 2022 tax year. With that said, you would need at least $305,000 of net SE income to claim the maximum deduction (20% of $305,000 is $61,000). There's no requirement to contribute anything for a particular year. So, in years when cash is tight, you can contribute a small amount or nothing. In years when you're flush, you can contribute the maximum allowable amount. For a one-person business, a SEP is easy to set up with the help of your financial and tax advisor. The required paperwork can be completed in a few minutes. You can establish a SEP and fund the account as late as the extended due date of the Form 1040 for the year in which the initial deduction is claimed. For example, if you're a sole proprietor who extends your calendar-year 2022 Form 1040 to October 17, 2023, you have until that date to establish the SEP and make the initial contribution, which you can then deduct on your 2022 Form 1040. On the other hand, you can establish and fund your SEP anytime between now and then if you extend your 2022 return. Plus, once your SEP is established, there are essentially no administrative details to worry about. But there are also some downsides to consider. For example, if you have one or more employees, annual employer SEP contributions may be required for any employee who 1) is at least age 21, 2) has worked for you during at least three of the past five years, and 3) receives at least $650 of compensation. Because all employer contributions vest immediately, an employee can leave at any time without losing any of his or her SEP money. For that reason, SEPs generally aren't a great idea for businesses with more than a few trusted employees. Contributions on behalf of employees are deductible by you, as the employer. In addition, some other types of plans may permit larger contributions, depending on your circumstances. Bottom line: Because of their simplicity and flexibility, SEPs are often the best choice when only you, the self-employed business owner, will be covered by a tax-advantaged retirement plan. Option 2: SIMPLE IRAs As a self-employed small business owner, you can set up a SIMPLE IRA plan. For the 2022 tax year, you can make a deductible contribution of up to $14,000 of net SE income to your SIMPLE IRA account. In addition, you can make a so-called "matching contribution" of up to 3% of SE income. When you have only a modest amount of net SE income, the maximum deductible contribution to a SIMPLE IRA may be considerably larger than what would be allowed under the other tax-advantaged retirement plan flavors. For example, suppose you'll have $40,000 of net SE income for 2022. You can make combined deductible contributions of up to $15,200 for the 2022 tax year: $14,000 plus $1,200 matching contribution (3% times $40,000). In contrast, the most you could contribute to a SEP would be only $8,000 (20% times $40,000). For the 2022 tax year, an additional "catch-up" contribution of up to $3,000 is allowed if you'll be 50 or older as of December 31, 2022. So, if the person in the previous example will be 50 or older by year end, he or she could contribute up to $18,200 for the 2022 tax year. Like with a SEP, contributions to a SIMPLE-IRA are completely discretionary. A SIMPLE IRA is easy to set up using plan documents that your tax and financial advisors can provide, and you're not required to file any annual reports with the government. But there are some downsides to choosing a SIMPLE IRA, including: You must set up a SIMPLE IRA by October 1 of the year for which you want to make your initial deductible contribution. So, if you want to make a contribution for the 2022 tax year, you've got to make your move by no later than October 1, 2022. However, the contribution itself can be made as late as the extended due date of your 2022 Form 1040. If you have employees, contributions may have to be made for them, and those contributions become 100% vested immediately. Other types of plans allow larger annual deductible contributions to your account if you have significant SE income. For instance, with a SEP, you could contribute up to $61,000 for the 2022 tax year if you have net SE income of $305,000 or more this year. Bottom line: If you want to maximize annual deductible contributions, a SIMPLE IRA can be considerably the best retirement plan option when your business generates only a modest amount of SE income. If you're 50 or older, you can make additional catch-up contributions to sweeten the tax-saving deal. Keep It Simple … For Now If you're new to the world of self-employment, it's easy to become intimidated by the menu of tax-advantaged retirement plan options. SEP and SIMPLE-IRA retirement plan options are two options that are easy to set up and administer. As your business grows, you might consider switching to a more sophisticated retirement plan alternative that can allow bigger annual deductible contributions. Contact your tax and financial advisor to determine what's right for your situation. We are committed to being your most trusted Business Advisor.We view every client like a partnership, and truly believe our success is a result of your success! We assist clients with accounting, tax preparation and financial advising in the Bryan and Navasota, Texas, area. Interested in working with us? Fill out a new client inquiry here. We love customer feedback! Please leave us a review here!