Search Results

Have you recently left the job market to raise your kids, care for an elderly parent or pursue personal interests? Regardless of why you left and whether it's temporary or long-term, you might still want to save for retirement while your spouse continues working. If so, tax-favored traditional IRAs and Roth IRAs might be good options for you and your employed spouse to consider. We'll call an IRA set up for a nonworking spouse a spousal IRA. Here are the details. Traditional IRA Contributions When Both Spouses Work What are the limits on traditional IRA contributions if both spouses work? If both spouses participate in tax-favored retirement plans, the restrictive AGI-based traditional IRA deduction phase-out range of $109,000 to $129,000 applies to both spouses for the 2022 tax year. For example, suppose both you and your spouse work, and you both participate in tax-favored retirement plans. If your joint AGI will be $150,000 for 2022, neither you nor your spouse can make a deductible traditional IRA contribution for the 2022 tax year, because your joint AGI exceeds the $129,000 top of the deduction phase-out range. However, if your joint AGI is $109,000 or below, you can make a deductible contribution of up to $6,000 (or $7,000 if you'll be age 50 or older as of December 31, 2022). The same limits apply to your spouse for 2022. Alternatively, if both spouses work but only one participates in a tax-favored retirement plan, the participating spouse's ability to make a deductible traditional IRA contribution for the 2022 tax year is limited by the $109,000 to $129,000 deduction phase-out range. The nonparticipating spouse falls under the more-liberal $204,000-to-$214,000 deduction phase-out range. For example, suppose both you and your spouse work, and your joint AGI will be $200,000 for 2022. Your spouse participates in a tax-favored retirement plan, but you don't. How much can you and your spouse contribute to a traditional IRA? In this scenario, your spouse can't make a deductible traditional IRA contribution for the 2022 tax year because your joint AGI exceeds the $129,000 top of the phase-out range that applies to your spouse. However, your spouse can make a nondeductible contribution of up to $6,000 (or $7,000 of your spouse will be age 50 or older as of December 31, 2022). You can make a deductible contribution because your joint AGI is below the $204,000 starting point for the deductible contribution phase-out range that applies to a working spouse who doesn't participate in a tax-favored retirement plan. You can contribute and deduct up to $6,000 (or $7,000 of you'll be age 50 or older as of December 31, 2022). Nonworking Spouse: Contributing to Your Own Traditional IRA For the 2022 tax year, a nonworking spouse can make a deductible traditional IRA contribution of up to $6,000 (or up to $7,000 if you'll be age 50 or older as of December 31, 2022). However, there are two important qualifications: The couple must file a joint return, and The working spouse must have earned income that equals or exceeds the sum of the nonworking spouse's contribution plus the working spouse's contribution, if any. If the working spouse is covered by a tax-favored retirement plan through a job or self-employment, the deductibility of the nonworking spouse's contribution is phased out for the 2022 tax year between joint adjusted gross income (AGI) of $204,000 and $214,000. If the working spouse isn't covered by a tax-favored retirement plan through a job or self-employment, the nonworking spouse can make a deductible traditional IRA contribution. In this situation, there are no limitations of the couple's joint AGI. Your joint AGI is the sum of all taxable income items and gains, reduced by above-the-line deductions, such as those for: Up to $250 of unreimbursed expenses for K-12 educators, Contributions to a health savings account (HSA), Moving expenses for members of the Armed Forces, The deductible part of any self-employment tax bill, Contributions to self-employed SEP, SIMPLE, and qualified retirement plans, Health insurance premiums for self-employed people, Alimony payments required by pre-2019 divorce agreements, and Up to $2,500 of student loan interest. Working Spouse: Contributing to a Traditional IRA If your working spouse participates in a tax-favored retirement plan, your spouse's ability to make a deductible traditional IRA contribution for the 2022 tax year is phased out between joint AGI of $109,000 and $129,000. If neither you nor your spouse participate in a tax-favored retirement plan through a job or self-employment, you and your spouse can each make a deductible traditional IRA contribution of up to $6,000 for the 2022 tax year, regardless of your joint AGI level. The limit increases to $7,000 for this year if you'll be 50 or older as of December 31, 2022. The same contribution limits apply to your spouse. The only limitation is that you must jointly have enough earned income to at least match the combined amount of your contributions. All the requisite earned income can come from the working spouse. Hypothetical Examples To illustrate how this works, suppose you've left the workforce to be a stay-at-home parent. You and your working spouse file jointly, and you'll have $200,000 of joint AGI this year. All the income is from your spouse's job, and your spouse is covered by a qualified retirement plan at work. You don't participate in any plan in 2022. How much can you and your spouse contribute to a traditional IRA? In this situation, for the 2022 tax year, you, as the nonworking spouse can make a deductible contribution of up to $6,000 to a traditional IRA set up in your name (or $7,000 for this year if you'll be 50 or older as of December 31, 2022). Your joint AGI is below the $204,000 threshold for the phase-out rule that applies to you. Your working spouse can't make a deductible traditional IRA contribution, because your joint AGI exceeds the $129,000 top end of the phase-out range that applies to your spouse. However, your spouse can make a nondeductible contribution to a traditional IRA, subject to the aforementioned contribution limits. Here's another scenario: You were laid off in January. You and your working spouse will have joint AGI of $400,000 for 2022, mostly from your working spouse's self-employment. Your spouse has no retirement plan and you don't participate in any plan for 2022. How much can you and your spouse contribute to a traditional IRA? In this situation, each spouse can make a deductible traditional IRA contribution of up to $6,000 for the 2022 tax year (or up to $7,000 if you'll be age 50 or older as of December 31, 2022). Roth IRA Contributions With Roth IRAs, deductibility isn't an issue. Contributions are made with after-tax dollars and subject to the same annual contribution limits as traditional IRAs. The Roth IRA tax-saving payoff is on the back end. You can withdraw all your Roth account earnings, along with the sum of your annual contributions, federal-income-tax-free after age 59½, if you've had at least one Roth IRA open for over five years. Roth IRA withdrawals that pass these tests are called qualified distributions. However, there are AGI-based limits on annual Roth contributions. Eligibility to contribute to a Roth IRA for the 2022 tax year is phased out between joint AGI of $204,000 and $214,000 for married couples who file joint returns. In addition, you must have enough earned income to at least match the combined amount of Roth contributions by you and your spouse. Again, all the earned income can come from the working spouse. Contributing to a Roth IRA isn't affected by whether you or your spouse participate in a tax-favored retirement plan. Finally, be aware that the $6,000 contribution limit ($7,000 if you'll be age 50 or older as of December 31, 2022) is the combined limit for traditional IRA contributions (whether deductible or not) and Roth IRA contributions for the 2022 tax year. So, if you contribute the maximum to a Roth, you can't contribute anything to a traditional IRA. If you contribute the max to a traditional IRA, you can't contribute anything to a Roth. Consider this tax-smart strategy: If your AGI is too high to make a deductible traditional IRA contribution but low enough to make a Roth contribution, make the Roth contribution instead of contributing to a nondeductible traditional IRA. Why? You can withdraw accumulated Roth account earnings as federal-income-tax-free qualified distributions (assuming you pass the tests for qualified distributions). In contrast, earnings that accumulate in a traditional IRA, including one that was funded with nothing but nondeductible contributions, are fully taxable when withdrawn. We Can Help Leaving the workforce doesn't mean you need to stop saving for retirement. Traditional and Roth IRAs are popular savings tools for working and nonworking spouses alike. Contact your tax 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!

Are you a business owner working from home as a sole proprietor or an entrepreneur with a home-based side gig? As long as you meet certain requirements, you may qualify for sizeable home office deductions, including write-offs attributable to everyday household expenses. However, you may be in for an unpleasant tax surprise when you sell your home in the future, due to "recapture" of depreciation on a home office. (See "Beware of the Recapture Provision" at right.) Beware of the Recapture Provision If you eventually sell your principal residence, you may qualify for a tax exclusion of up to $250,000 of gain for single filers ($500,000 for married couples who file joint returns). But there's a catch: You must recapture the depreciation attributable to a home office for the period after May 6, 1997. The recaptured amount is taxable at a 25% rate, which is higher than the maximum long-term gain rate of 20%. Also, the little-known recapture provision technically applies to "allowed" or "allowable" depreciation, so it's imposed on a home sale even if you haven't claimed depreciation in the past. However, there's no recapture if you use the simplified deduction for claiming home office expenses. This is another factor to consider when deciding whether to deduct your actual home office expenses or to use the simplified method. When Tax Opportunity Knocks To qualify for a home office deduction, you must use at least part of your home regularly and exclusively as either: Your principal place of business, or A place to meet or deal with customers, clients or patients in the normal course of business. In addition, you may be able to claim deductions for maintaining a separate structure — such as a barn or shed — where you store products or tools used solely for business purposes. Notably, "regular and exclusive" use means you must consistently use a specific identifiable area in your home for business, although incidental or occasional personal use won't necessarily disqualify you. Also, you don't have to cordon off the area used for business purposes. However, this may be helpful when a room is also used personally for other reasons. When evaluating whether your home office is your "principal place of business," the IRS could challenge deductions if you work at multiple locations. However, your home office will qualify as your principal place of business if it's used regularly and exclusively for administrative or management activities, and you don't have any other fixed location for conducting these activities. This may affect taxpayers in a wide range of professions and industries, including physicians, architects, interior designers and plumbers. How the TCJA Changed Home Office Deductions Suppose you've been working remotely from home during the pandemic as an employee for a company. Previously, people who itemized could have claimed home office deductions as a miscellaneous expense, subject to the 2%-of-AGI rule, if the arrangement was for their employer's convenience. But the Tax Cuts and Jobs Act (TCJA) suspends miscellaneous expense deductions for 2018 through 2025. So, employees currently get no personal tax benefit if they work from home. On the other hand, self-employed individuals still may qualify if they meet either of the tax law requirements. Direct and Indirect Expenses If you qualify for home office deductions, you can write off the full amount of your direct expenses and a proportionate amount of your indirect expenses based on the percentage of business use of your home. Indirect expenses include: Mortgage interest, Property taxes, Utilities (such as electric, gas and water), Insurance, Exterior repairs and maintenance, Home security system fees, and Depreciation or rent under IRS tables. Important: If you itemize deductions, mortgage interest and property taxes may already be deductible. If you claim a portion of these expenses as indirect home office expenses, the remainder is deductible on your personal return. But you can't deduct the same amount twice as a personal itemized deduction and again as a home office expense. Calculating Your Deduction Typically, the percentage of business use is determined by the square footage of your home office. For instance, if you have a 3,000 square-foot home and use a room with 300 square feet as your home office, the applicable percentage is 10% (300 divided by 3,000). Alternatively, you may use any other reasonable method for determining this percentage, such as a percentage based on the number of comparably sized rooms in the home. For example, say you use a room comprising 10% of your home as an office for your business. You spend $5,000 to have the home office painted and carpeted (direct expenses), and you incur another $10,000 in indirect expenses for the entire home. In this case, you can deduct $6,000 [$5,000 plus (10% of $10,000)]. How to Apply the Simplified Method Keeping track of indirect expenses is time-consuming and tedious. Some taxpayers prefer to take advantage of a simplified method of deducting home office expenses. Instead of deducting actual expenses, you can claim a deduction equal to $5 per square for the area used as a home office, up to a maximum of $1,500 for the year. Although the simplified method takes less time to apply than tracking your actual expenses, it generally results in a significantly lower deduction than writing off actual direct and indirect expenses. Going back to the previous example of an office comprising 10% of the home, the simplified method would give you a home office deduction of only $1,500. That's much less than the $6,000 home office deduction that you would have received by tracking actual expenses. Deciding What's Right for Your Home-Based Business Do you qualify for a home office deduction? If so, what's the optimal method for computing your deduction? Contact your tax advisor to address these and other questions related to deducting home office expenses and other self-employed write-offs. 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!

Noncompete agreements are commonly included in business purchase transactions to prevent the seller from competing against the buyer for the term of the noncompete agreement. These arrangements are also sometimes called covenants-not-to-compete or noncompete covenants. Important: Laws regarding noncompete agreements vary from state to state. For example, courts in California generally reject noncompete agreements because state law makes them unenforceable except in limited circumstances. Because noncompete covenants are generally not allowed in the state, California employers often use confidentiality agreements and other types of contracts to protect trade secrets and other information. Still, in many jurisdictions, noncompete covenants can be enforceable if certain conditions are met. The Seller's Perspective The seller of a business must treat amounts allocated to noncompete payments as ordinary income. Ordinary income tax rates are higher than long-term capital gain tax rates. But there's a silver lining for the seller: Noncompete payments aren't subject to the self-employment tax. With an asset purchase transaction, being required to treat noncompete payments as higher-taxed ordinary income will probably cause the seller to want to allocate less of the sale price to the noncompete agreement and more to lower-taxed capital gain assets (such as buildings and land) and lightly depreciated assets (such as recently acquired furniture and fixtures, equipment, and vehicles). In a stock transaction, the seller will probably prefer to allocate more of the sale price to the value of the stock and less to the noncompete agreement. That's because gain from selling stock is treated as lower-taxed long-term capital gain, as long as the stock has been owned for more than one year. In contrast, amounts allocated to noncompete agreements are treated as higher-taxed ordinary income.Noncompete agreements have important tax implications. Here are the details. The Basics The term of a noncompete is usually no longer than five years. However, as the buyer, you or your business entity, must amortize amounts allocated to a noncompete agreement over 15 years. That's a longer amortization period than what's allowed for some other assets. This fact has tax planning implications. Asset Purchases When you buy a business by purchasing its assets, you probably prefer to allocate more of the purchase price to the value of assets that you can write off quickly. Examples include receivables, inventory and fixed assets with short depreciable lives, such as furniture and fixtures, computer gear and software. You probably prefer to allocate less of the price to assets that you must depreciate over long periods. For example, you must depreciate commercial buildings over 39 years, and land can't be depreciated at all. You must amortize purchase price amounts allocated to most intangible assets over 15 years. Examples include customer lists, franchise rights, trademarks and goodwill. Noncompete agreements are amortized over 15 years, too. Asset purchase treatment automatically applies if you (or your business entity) buy a business that has been operated as a sole proprietorship or as a single-member limited liability company (LLC) that has been treated as a sole proprietorship for federal income tax purposes. In these situations, the business assets are considered to be owned by the proprietor, and you (or your business entity) are considered to purchase them directly from that individual. Asset purchase treatment also applies if you (or your business entity) buy a business that has been operated as a partnership or as an LLC that has been treated as a partnership for federal income tax purposes. When you (or your business entity) become the sole owner of the purchased business, there's no longer any partnership for tax purposes, because a partnership must have at least two owners. The same applies to an LLC that has been treated as a partnership for tax purposes. Therefore, you treat the transaction as a purchase of the LLC's assets. Stock Purchases When you buy an incorporated business by purchasing its stock, you probably prefer to allocate more of the purchase price to any noncompete agreement(s) and less to the value of the stock. Why? You can amortize the amount allocated to noncompete agreements over 15 years. In contrast, the amount you allocate to the value of purchased stock generally must remain capitalized until the stock is sold. There are no amortization deductions for amounts allocated to the value of the stock. Stock Purchases Treated as Asset Purchases Under a favorable tax-law exception, you can treat a qualified stock purchase as a purchase of the target corporation's assets by making a Section 338 election, a Sec. 338(h)(10) election or a Sec. 336(e) election. Then, you allocate the purchase price to the assets that you're deemed to have purchased and to any noncompete agreement(s). In this scenario, you probably want to allocate more of the purchase price to the value of assets that you can write off quickly. Examples include receivables, inventory and fixed assets with short depreciable lives, such as furniture and fixtures, computer gear and software. As we explained earlier with asset purchases, you probably prefer to allocate less of the price to assets that you must depreciate over long periods. For example, you must depreciate commercial buildings over 39 years, and land can't be depreciated at all. As stated earlier, you must amortize purchase price amounts allocated to most intangible assets over 15 years. Examples of these are customer lists, franchise rights, trademarks and goodwill. Noncompete agreements are also amortized over 15 years. Specifying Payments in Transaction Documents In the documents for your business purchase transaction, be sure to specify the amount that's allocated to noncompete payments. Otherwise, your 15-year amortization deductions may be called into question by the IRS. For the purchase of a group of assets that comprise a business, any allocation of purchase price to a noncompete agreement must be reported to the IRS on Form 8594, "Asset Acquisition Statement Under Section 1060." This form is filed by both the buyer and seller. Specifically, the maximum amount that can be paid under the noncompete agreement must be reported on the buyer's and seller's respective Forms 8594. The IRS can use this information to spot differing allocations by you and the seller, which could trigger an audit. To avoid unwanted IRS attention, you and the seller should report the same allocations to noncompete payments and purchased assets on your respective Forms 8594. Consider including that as a requirement in the purchase contract. There's apparently no Form 8594 filing requirement when a noncompete agreement is entered into in connection with a stock purchase, unless the transaction is treated as an asset purchase for federal income tax purposes pursuant to a Sec. 338 election, a Sec. 338(h)(10) election or a Sec. 336(e) election. Bottom Line Noncompete agreements have important tax implications for both buyers and sellers. As the buyer, you want to make the most tax-effective purchase price allocations to any noncompete agreement(s) and the value of the business assets or ownership interest(s) that you acquire. The seller's tax objectives may conflict with yours. Negotiating a purchase price allocation that's acceptable to both you and the seller is part of the art of the deal. Your tax advisor can help you work out a deal that'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!

Remote work has become more common in recent years, and the COVID-19 pandemic has resulted in employers realizing that many jobs can be done from home. Some remote workers even work in a different state than where their employers are based. These employees may have opted to move to states with lower or no income taxes, but they — and other remote employees now working across state lines — may find themselves shouldering unexpected state income tax liabilities. Convenience Rule Generally, you incur state income tax liability based on where you're physically present while earning the income. So, logically, if you're living and working in a different state than where your employer is located, you'd expect to pay state income taxes only in the state where you live. But the "convenience rule" applies in the following seven states: Arkansas, Connecticut, Delaware, Massachusetts, Nebraska, New York, and Pennsylvania. Under this rule, if your job is based in the state, but you choose to live in a different state as a matter of convenience — not because your employer requires you to live there — you must pay income tax in the state where the employer is based. As a result, remote employees could end up paying state income taxes in both the state where they live and the state where their employer is based. Say, for example, that you work for a company located in New York but decide to move to another state for personal reasons. You'll still need to pay New York state income taxes on your compensation. Plus, you might be on the hook for taxes in your state of residence on the same income. Some states offer a credit against your tax liability there for income taxes paid to other states. But not all states do so, and the credit amounts can vary. Moreover, you might not get a full credit if the amount of taxes paid in the employer's state exceeds the amount of your liability on that compensation in your home state. In other words, if you work for a company in a high-income tax state and live in a low-income tax state, your home state credit won't be dollar-for-dollar if the credit isn't refundable. You may have selected your new home hoping to reduce or eliminate state income taxes but wind up with no such savings because you still owe taxes in your previous state. Withholding Review One way to avoid a double-taxation punch would be to persuade your employer to open a legitimate office in your state. However, that isn't an option for most remote workers. The best defense, therefore, is a good offense — that is, adjusting your withholding so you don't receive a tax bill because you haven't paid enough throughout the year. When it comes to tax withholding, your employer is required to deduct the proper amount from every check. But it's up to you to provide it with the necessary information to determine the proper amount. Take care to notify your employer of your state of residence so the proper amounts can be withheld for the proper state(s). Legal Landscape The rules related to the taxation of remote workers could be poised for change in the near future. States and the federal government are reassessing laws and regulations in light of the significant increase in remote work. Some states are getting more aggressive as they eye shrinking coffers due to employees departing their states but not their employers. These states may be looking into — or have already implemented — legislation that would allow them to collect state income taxes from nonresidents who work for in-state employers. For example, California taxes nonresidents on so-called "California-source income." And more states are considering enacting the convenience rule. At the federal level, Senator John Thune (R-SD) and Senator Sherrod Brown (D-OH) introduced the Remote and Mobile Worker Relief Act last year. If enacted, the legislation generally would prohibit states from taxing or requiring withholding on nonresidents who are present in the state for fewer than 30 days. A similar measure was introduced in the House. Another bill would limit the ability of states to impose the convenience rule on nonresidents for periods when they aren't physically present in the state. No action has yet been taken, but these bills demonstrate that taxation of remote workers is on Congress's radar. We Can Help The different rules in each state form a complicated web that can trip up well-intentioned taxpayers. Contact your tax advisor to help you sort out and comply with your obligations in all of the relevant tax jurisdictions. 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 federal tax code's self-employment tax provisions were enacted long before the existence of limited liability companies (LLCs). As LLCs became increasingly popular, an important question arose: How do the self-employment tax rules apply to LLC members? Despite IRS attempts to make the issue go away, that question still exists for LLCs with several members, which we'll call "multi-member LLCs." Limited vs. General Partners Members of multi-member LLCs that are classified as partnerships for federal income tax purposes are treated as partners for federal income tax purposes. So, as a general rule, the same federal income tax rules (including the self-employment tax rules) that apply to partners also apply to LLC members who are treated as partners. (For the rules that apply to LLCs with only one owner, see "Clear Rules for Single-Member LLCs" at right.) To understand the self-employment tax issue for LLC members that are treated as partners, we must start with the longstanding special self-employment tax rule for limited partners. Under that special rule, a limited partner includes in his or her self-employment income only guaranteed payments from the partnership for services rendered to the partnership. Guaranteed payments are payments that are determined without regard to the partnership's income. They're often called "partner salaries." The special self-employment tax rule for limited partners is beneficial to them because they typically don't receive any guaranteed payments for services (partner salaries). Therefore, they typically don't owe any self-employment tax on their shares of partnership income. In contrast, a general partner must include his or her share of the partnership's net income from business activities in self-employment income. Therefore, general partners usually owe self-employment tax on their shares of net partnership income. The favorable special self-employment tax rule for limited partners was enacted long before LLCs existed. Can LLC members claim they're limited partners for self-employment tax purposes because they're not personally liable for the LLC's debts? If the answer is yes, they could avoid self-employment tax by simply not taking any guaranteed payments. Instead, they could simply take random self-employment-tax-free distributions to collect their shares of the LLC's cash flow. While that's arguably a viable position, the IRS will likely disagree in the event of an audit. History of IRS Guidance The IRS issued two sets of proposed regulations in 1994 and 1997 on how the self-employment tax could apply to limited partners. Both generated controversy by proposing that these individuals would be required to pay self-employment tax on their shares of partnership income in addition to any guaranteed payments for services. The same treatment would have applied to LLC members who are treated as partners for federal income tax purposes. The proposed rules were criticized for attempting to impose new taxes on affected individuals without the benefit of supporting legislation. Congress agreed and prohibited the release of any temporary or final regulations on the subject before July 1, 1998. That date has long since passed, and nobody believes that the proposed regulations — which are still on the books — have any validity at this point. No further regulations have been issued on the subject. Sizable Tax Hit For 2022, the self-employment tax rate is 15.3% on the first $147,000 of net self-employment income (gross income from self-employment minus expenses allowed for self-employment tax purposes), including net self-employment income passed through to you from an LLC. That rate is comprised of: 12.4% for the Social Security tax component of the self-employment tax, plus 2.9% for the Medicare tax component. Above the $147,000 threshold, the Social Security tax component goes away. But the 2.9% Medicare tax continues before rising to 3.8% at higher self-employment income levels ($200,000 if you're unmarried or $250,000 if you're married and file a joint return). The 3.8% rate consists of the regular 2.9% Medicare tax plus the 0.9% additional Medicare tax on higher income people. For example, Michelle's share of the net income from an LLC that operates a business is $200,000. To determine her self-employment tax liability, Michelle must multiply her net income from the LLC ($200,000) by 92.35%. The result is $184,700. So, her self-employment tax bill will be $23,584 [($147,000 times 12.4%) + ($184,700 times 2.9%)]. Important: In calculating your net self-employment income, you don't get to deduct contributions to a self-employed retirement plan, the deduction for a portion of your self-employment tax or the deduction for self-employed health insurance premiums. Annual Adjustments for Inflation Every year, the Social Security tax ceiling goes up based on inflation. In turn, your self-employment tax bill goes up. In August 2021, the Social Security Administration issued the following projected ceilings for 2023 through 2027: $156,000 for 2023, $162,900 for 2024, $168,600 for 2025, $173,300 for 2026, and $180,600 for 2027. These numbers may be alarming enough. But the actual ceilings could be significantly higher due to higher-than-expected inflation. Contradictory IRS Positions The IRS takes the position that individual members of a multi-member LLC that's classified as a partnership for tax purposes owe self-employment tax on their shares of the LLC's net business income. In other words, the IRS claims that the aforementioned limited partner exception doesn't apply to LLC members, even though they generally have no personal liability for the entity's debts, just like limited partners. Meanwhile, the IRS continues to take the contradictory position that members of multi-member LLCs that are treated as partnerships for tax purposes must be treated as limited partners for purposes of applying the passive activity loss (PAL) rules. The IRS position is grounded in the fact that LLC members have limited liability for the entity's debts, like limited partners. This is an unfavorable limitation for LLC members, because stricter PAL rules apply to limited partners. In other words, the IRS takes anti-taxpayer positions on both the self-employment tax issue and the PAL issue — even though the underlying reasoning is contradictory. Tax Court Weighs In In a 2017 decision, the U.S. Tax Court noted that neither the tax code nor any regulatory authority defines the term "limited partner" for purposes of the limited partner self-employment tax exception. Nevertheless, the court opined that the LLC members (the taxpayers in the case) weren't limited partners within the ordinary meaning of the term and were, therefore, ineligible for the limited partner exception. ( Vincent Castigliola v. Commissioner , TC Memo 2017-62.) The taxpayers were attorneys who operated as members of a professional LLC that was classified as a partnership for tax purposes. There was no written LLC operating agreement or any other evidence showing that the members' management powers were limited. All the members participated in management by collectively making decisions regarding such matters as: Their distributive shares of LLC income, Borrowing money, and Hiring, firing and compensating employees. All the members supervised associate attorneys and signed checks for the LLC. According to the Tax Court, because all members had the same rights and responsibilities, they held positions analogous to those of general partners. Therefore, the taxpayers were ineligible for the limited partner exception, and all the income passed through to them by the LLC (in addition to guaranteed payments received by them) was subject to self-employment tax. The taxpayers had taken the position that they owed self-employment tax only on guaranteed payments received from the LLC. Essentially, the Tax Court in Castigliola took it upon itself to define the term limited partner for purposes of eligibility for the limited partner self-employment tax exception. After two failed IRS attempts to issue regulations on the subject and IRS reluctance to issue any other authoritative guidance on the subject, it seems questionable that the Tax Court had the power to do so unilaterally. And the IRS continues to take the position that LLC members should be treated as limited partners for PAL purposes. Therefore, while the Castigliola decision certainly isn't good news for those who wish to take the position that LLC members are eligible for the limited partner exception, the decision should perhaps be viewed with skepticism. What's Right? In light of the Castigliola decision, assuming that active LLC members are eligible for the limited partner self-employment tax exception is an aggressive position. But that position is still supported by 1) the statutory language on the self-employment tax treatment of limited partners, 2) the IRS's position that LLC members should be treated as limited partners for PAL purposes, and 3) the fact that, to this day, no authoritative IRS guidance on the subject of LLC members' eligibility for the limited partner exception has ever been issued. Contact your tax professional to help understand how the self-employment tax rules apply to the members of your LLC. 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 total amount of outstanding student loan debt is estimated at approximately $1.75 trillion, including $1.59 trillion in federal student loans. It's also estimated that 43.2 million student borrowers owe an average of roughly $39,000 each. The good news is that, in some cases, student loan balances can be forgiven or even paid off by employers. Here are the federal income tax consequences for student loan borrowers who are lucky enough to have that happen. COD Tax Basics The general federal income tax rule states that a taxpayer's gross income includes cancellation of debt (COD) income, unless a statutory exception applies. The availability of these exceptions depends on various factors, such as the use of the loan proceeds and the borrower's financial situation at the time the COD event occurs. For example, the so-called "insolvency exception" provides that a taxpayer can exclude COD income to the extent the taxpayer is insolvent when the eligible event occurs. A taxpayer is insolvent when his or her liabilities exceed the fair market value of his or her assets immediately before the COD event. Similarly, the so-called "bankruptcy exception" applies to debts that are discharged in bankruptcy proceedings. Another exception stipulates that COD income from certain forgiven student loans is excludable. To qualify for this exception, the loan document must state that all or part of the student loan debt will be canceled if the student works for a certain period of time in a specified profession for a specified type of employer. Essentially, this is a public service requirement. ARPA Provision For 2021 through 2025, the American Rescue Plan Act (ARPA) grants federal-income-tax-free treatment to full or partial discharges of the following types of student loans: Loans provided expressly for post-secondary educational expenses if the loan was made, insured, or guaranteed by 1) the United States, or an instrumentality or agency thereof, 2) a state, territory, or possession of the United States or the District of Columbia, or any political subdivision thereof, or 3) an educational institution as defined for purposes of the federal income tax credits for higher education expenses, Any private education loan as defined by the Truth in Lending Act, and Loans made by educational institutions that qualify as charities for purposes of the federal income tax itemized deduction for charitable donations. To illustrate, suppose your $25,000 student loan that was insured by the federal government was forgiven last year. Under the ARPA provision, this was a federal-income-tax-free event, and you'll owe nothing extra to Uncle Sam with your 2021 tax return. DOE Federal Student Loan Discharge Procedures Under the Defense to Repayment procedure, the U.S. Department of Education (DOE) is required to discharge certain federal student loans if a student-borrower establishes, as a defense against repayment, that the school's actions would give rise to a cause of action against the school under applicable state law. While there's no statutory provision that specifically allows federal-income-tax-free treatment for COD income that results when loans are discharged under the Defense to Repayment procedure, a student loan borrower may be able to exclude COD amounts under other tax-law exceptions, such as: The ARPA provision explained above, The insolvency exception, and The bankruptcy exception. COD amounts also may be excluded under IRS-provided nonstatutory exceptions that are issued from time to time. For example, a few years ago, the IRS granted tax relief for forgiven loans owed by students who attended schools owned by Corinthian Colleges. Under the "closed school" procedure, the DOE can discharge a federal student loan when the student was attending a school at the time it closed or if the student withdrew within a certain period before the closing date. There's a statutory exclusion from taxable gross income for COD income from federal student loans that are discharged under the closed school discharge procedure. Therefore, a borrower whose loan is discharged under this procedure shouldn't report the related COD income as taxable gross income on his or her tax return. Employer Section 127 Plan Payments The CARES Act allowed federal-income-tax-free treatment for payments made by employer-sponsored Section 127 educational assistance plans towards student loan debts of participating employees. Between March 28, 2020, and December 31, 2020, up to $5,250 per-employee per year could have been paid out (toward principal or interest) with no federal income tax hit for the employee. Employers could deduct the payments. The Consolidated Appropriations Act (CAA) was signed into law on December 27, 2020. The CAA included the Taxpayer Certainty and Disaster Tax Relief Act of 2020. This law extended the break for qualifying student loan debt payments made under employer Sec. 127 plans through December 31, 2025. To illustrate, let's assume that, this year, you received the good news that your company's Section 127 plan paid $5,250 towards your student loan balance. Thanks to the provision explained above, this was a federal-income-tax-free event, and you'll owe nothing extra to Uncle Sam with your 2022 tax return. Other Employer Payments Towards Student Loans Apparently, it's becoming a more common compensation practice for employers to pay off student loans incurred by their employees. Some employers are finding it's an attractive benefit when competing for qualified applicants in today's tough labor market. When employer repayment happens, it's not a COD event. Instead, it's a taxable compensation event. Student loan amounts that are paid off by employers are simply treated as additional salary compensation amounts received by the affected employee (student loan borrower). As such, these amounts are subject to federal income and employment taxes and possibly state income tax depending on where you live. For example, your company just announced that it would pay up to $10,000 towards student loan balances of eligible employees. You qualify for this deal. The $10,000 payment will count as additional 2022 taxable income with the tax results explained above. For More Information If you or a loved one will benefit (or have already benefited) from discharges of student loans or payoffs by employers, it's important to understand the federal income tax implications. Contact your tax advisor if you have questions or want additional information.

Good news: You just found out that your high school senior son or daughter will be receiving a sizeable scholarship at a prestigious university next fall. But what are the tax consequences? In most cases, scholarships awarded to students are exempt from federal income tax, assuming certain conditions are met. Comparable rules apply to fellowships for doctorate programs. However, there are some situations where a scholarship or fellowship results in taxable income that students must report on their federal income tax returns. The Basics Generally, your child won't have to pay any tax on a scholarship that goes toward obtaining a college education. It doesn't matter if the money is coming from the school itself or another source. To qualify for the tax exemption, the following three requirements must be met: The child is a degree candidate at an eligible educational institution. This is an institution with a regular faculty and curriculum and a regularly enrolled body of students. The scholarship is used to pay for qualified expenses. This includes tuition and fees, books and related costs like supplies or equipment required for specific classes. However, it doesn't cover room and board, travel and research costs. The award doesn't represent wages for teaching, research or other work. In some cases, only a portion of the scholarship is exempt from tax. For instance, suppose your child receives a $25,000 award, where $15,000 goes to tuition and $10,000 to room and board. In this case, only $15,000 is excluded from tax. The remaining $10,000 is treated as taxable income. For these purposes, a "degree candidate" is defined as someone who: Attends a primary or secondary school or is pursuing a degree at a college or university, or Attends an educational institution that 1) provides a program that's acceptable for full credit toward a bachelor's or higher degree, or offers a program of training to prepare students for gainful employment in a recognized occupation, and 2) is authorized under federal or state law to provide such a program and is accredited by a nationally recognized accreditation agency. Scholarships are fully taxable to the student who isn't a degree candidate at an eligible institution. A scholarship or fellowship is also taxable if it represents compensation. For example, suppose your child in graduate school is required to serve as a teaching assistant to qualify for a $20,000 award. In this situation, the entire amount is taxable, even if part or all of the money goes to tuition. The university will generally provide Form W-2 to the student, stating the income amount that must be reported on their federal income tax return. What about athletic and music-performance scholarships? The rules in this area are continuing to evolve, but currently these amounts are generally exempt from tax, even if the school reasonably expects the student to participate in a particular activity. Generally, the scholarship must continue even if the recipient is injured or simply chooses not to participate. Exceptions There are, however, a few exceptions to the general rules requiring taxation of scholarships and fellowships when the student renders services in exchange. Notably, the IRS has said that payments made through the GI Bill aren't considered to be scholarships, so they don't constitute taxable income. Moreover, if your child participates in the National Health Service Corps Scholarship Program or the Armed Forces Health Professions Scholarship and Financial Assistance Program, the payments are generally exempt from tax if the amounts are used to pay qualified expenses. There's also an exception for qualified tuition reductions received by employees of an educational organization. Graduate students who receive tuition reductions or waivers in exchange for teaching or research activities need not report these benefits as income. Similarly, tuition reductions enjoyed by an educational organization's employees or their family members are tax-free, provided the program doesn't discriminate in favor of highly compensated employees. Keep in mind that student loans clearly aren't scholarships. Therefore, loans are subject to a different set of rules. Kiddie Tax Complications The kiddie tax may throw an extra wrinkle in the rules for taxing scholarships. Be careful to avoid adverse tax consequences. Briefly stated, the kiddie tax applies to "unearned income" above an annual threshold that's received by a dependent child under age 19 or a full-time student under age 24. The annual income threshold for 2022 is $2,300, up from $2,200 in 2021. If the kiddie tax comes into play, the excess is taxed at the top tax rate of the child's parents — not the child's tax rate — regardless of the source of the income. Currently, the top federal tax rate on ordinary income is 37%. Clearly, if income is received by a student for a fellowship where their services are compensated and are reported on Form W-2, the grant constitutes taxable "earned income" and doesn't cause any kiddie tax problems. However, if a scholarship is used for purposes other than for qualified expenses, the amount is generally considered to be unearned income. This may occur, for example, if your child is awarded a scholarship for room and board. Don't forget to factor this into your tax calculations for the year. Also, be aware that taxable scholarships may actually increase a higher education credit. Bottom Line The federal tax rules for scholarship awards can be confusing. Before you start counting on your student's apparent good fortune, you may want to meet with your professional tax advisor to determine the tax ramifications for your family. 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!

Have you compiled a list of New Year's resolutions for your small business in 2022? Resolutions don't have to be limited to your personal life. Consider how you can improve in the upcoming year in your role as a small business owner. Of course, everyone's list will be different. But here are eight common aspirations that usually make good business sense. 1. Learn to Do Something New The skills and talents you bring to the table have helped you get to where you are today. But that doesn't mean that there's no room for improvement. Stepping outside your comfort zone by learning a new skill could serve your business well. It could be a managerial attribute or a function relating to your industry or profession. For example, an owner with a background in sales or engineering might benefit from an accounting or tax seminar put on by the company's CPA firm. This also sends a strong signal to your employees that you're not above self-improvement. Practice what you preach. Plus, while taking outside classes, you may make contacts — such as a lender, an investment advisor or a prospective new employee — that could benefit your business down the road. 2. Delegate Small Stuff to Other Employees Are you the kind of leader who tries to do too much? Wearing too many hats for too long can lead to financial and emotional distress. Instead, delegate some tasks to qualified staff members. Here are several helpful hints: Provide instructions. You can't expect your workers to be mind readers. Assign jobs to the best people. Don't just give the work to the first person you see in the hallway. Establish goals. Not only outline your objectives, but also inform employees about your expectations for how the job gets done. Show some trust. Let employees know you have their backs. Keep the lines of communication open. Allow some leeway. Don't insist that it must be "your way or the highway." Employees may be motivated by their increased responsibilities. Thus, delegating work can turn into a win-win situation. 3. Promote Your Business All Year Long Did you finish out 2021 on a high note? Whether you've continued an existing operation during the pandemic or pivoted to a new undertaking, keep the pedal to the metal. That means you should keep promoting your business in a variety of ways. Focus on activities that can improve the bottom line both now and in the future. Some small businesses don't have a dedicated marketing department. If that's the case, consider hiring an outside marketing expert. Then coordinate your in-house and external resources. 4. Review Your Business Plan Regularly You've probably spent a lot of time working on your business plan for 2022. Don't just let your hard work languish in a desk drawer or hard drive until next year end. Review it regularly to determine whether you're accomplishing your objectives. Consider implementing a "rolling" approach. This allows for adjustments based on what's happening in your business and marketplace — and it makes the process more adaptable, accurate and timely. Companies with rolling budgets typically prepare their budgets four quarters ahead. Then, at the end of each quarter, they update the numbers for the next three quarters and add a new fourth quarter. With a rolling budget, you've always got a real-time plan for the next 12 months. So, this approach encourages management to be more forward-looking and responsive. 5. Join a Targeted Networking Group Networking is an ongoing process — especially if your business relies heavily on referrals to generate revenue. Consider taking a more formal approach in 2022 by joining a specific networking group for this purpose. Networking groups are usually targeted to your geographic area or members of a certain industry or profession. The contacts you make within the group can pay off with future referrals or related business activity. What's more, participating in the group may trigger ideas for new product lines, best practices, recruitment efforts or marketing campaigns. 6. Set Realistic Goals When setting financial goals for the new year, owners often put undue pressure on themselves and their employees. If you set the bar too high and fail to reach it, you or your staff my grow frustrated or even angry. On the other hand, you don't want to shoot too low. When that happens, employees will merely go through the motions. Find the proper balance for your company's situation. Be realistic about what you can accomplish. It's OK to issue a challenge that will require some hard work and dedication as long as it's reasonable. 7. Give Back to the Community Not all goals are financially driven. Sometimes business owners strive to make a difference in their local communities or focus on a specific issue that's near and dear to the owner's heart. Your business can play a prominent role in charitable endeavors. Start by finding a nonprofit organization that aligns with your goals. Then join in its efforts — and encourage your employees to follow suit. If you don't have time to volunteer, make a donation that counts. Being charitable also has a side benefit: You'll be sowing seeds of goodwill with the public (including potential customers). Boost the value-added potentials by sharing your charitable endeavors on social media and your company's website. 8. Set Aside Time for Yourself Business owners who are all work and no play risk more than just being dull. You may wake up mid-year feeling burned out and overextended. Give yourself a break. For instance, you may schedule specific time each week to spend with your family. Likewise, engage in extracurricular activities — like joining a tennis club, taking a photography class or reading a book — that give you pleasure. If you're overly consumed by your business, you won't be able to enjoy the fruits of your labor. Make this year about both your company and you. For More Ideas This may be a daunting list. But as the familiar Chinese proverb states, a journey of a thousand miles begins with a single step. Happy New Year! 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!

It's almost time to ring in the New Year — and many people are looking forward to putting 2021 in the rearview mirror. While New Year's resolutions often focus on eating less and exercising more, you should also give some thought to your financial fitness. Here are seven ways to introduce more discipline and vigor into your financial regime. 1. Review Your Investment Portfolio Although we've enjoyed a bull market so far in 2021, there are no guarantees that this trend will continue. Given the inherent volatility of equity securities, you can't afford to "rest on your laurels" from this year. Two key principles can help meet your investment objectives: Diversification . Spread investment dollars among different types of categories — such as stocks, bonds, real estate, digital assets, precious metals and cash — to reduce your overall risk. Asset allocation . Divide your holdings based on a set percentage for each category. Since each category features varying returns and risk, they're likely to perform differently over time. Of course, you should also factor in your personal aversion to risk and any potential tax implications. When appropriate, reallocate investments to reflect changing circumstances. 2. Save for Retirement Studies show that many Americans are behind in saving for their retirement — and many people fail to project for their needs long enough into the future. Will you have enough to sustain a comfortable lifestyle through your golden years? You can bolster your nest egg by contributing to retirement plan vehicles, including employer-sponsored 401(k) plans and IRAs. For 2022, you can defer up to $20,500 to a 401(k) ($27,000 if you're age 50 or older). Plus, your employer may provide matching contributions for participants. Alternatively, your company may offer benefits through other plans, such as SEPs, SIMPLEs, or pension or profit-sharing plans. Similarly, for the 2022 tax year, you can contribute up to $6,000 to any combination of traditional or Roth IRAs ($7,000 if you're age 50 or older). These savings can supplement a qualified plan. However, contributions to Roth IRAs are also limited based on your income. 3. Convert a Traditional IRA to a Roth IRA Contributions to a traditional IRA may be wholly or partially tax-deductible, but distributions are taxed at high ordinary income tax rates. Conversely, contributions to a Roth are never deductible, but payments are 100% tax-free from a Roth in existence at least five years. If you expect tax rates to be higher (or the same) when you take distributions than they currently are, a Roth IRA might be a worthwhile long-term strategy. A Roth conversion sets you up for future tax-free payouts. But there's a major downside: If you convert to a Roth IRA, you'll owe tax on the converted amount. In an ideal world, you would execute a conversion in a low tax year to minimize taxes. Alternatively, you could spread out a conversion over a series of years to reduce overall tax liability. If you convert a traditional IRA in stages, you may pay less tax overall because more of the transferred amount will be taxed at lower rates under our graduated tax rate system. Converting a traditional IRA to a Roth IRA isn't an all-or-nothing deal. You can transfer as much or as little of the money in your traditional IRA account as you like. Keep an eye out for potential tax rate changes that could affect your thinking. Today's favorable individual federal income tax rates are set to expire in 2026. However, they could change sooner depending on legislative developments. Important: Certain high-income individuals are prohibited from directly contributing to a Roth IRA. But there's currently no income limit on converting a traditional IRA to a Roth IRA — even billionaires can do it. 4. Start College Savings Programs If you've got children (or grandchildren), the rising cost of college is probably a concern. For the 2021-2022 school year, the College Board estimates that the average annual cost of tuition and fees was $10,740 for in-state students at public four-year universities — and $38,070 for students at private not-for-profit four-year institutions. These estimates don't include room and board, books, supplies, transportation and other expenses a student may incur. Who's going to pay for college in your family — and how? Fortunately, there are several college savings options at your disposal. Significantly, a Section 529 plan offers favorable tax treatment to participants. Other tax breaks may be available on the state level. Investigate your options carefully. 5. Manage Your Debt Carrying a certain amount of debt — such as taking on a mortgage on a principal residence — can be beneficial. But too much leverage — for example, excessive student loans and credit card balances — can prevent you from ever getting ahead. To rein in your debt, start by eliminating irresponsible spending sprees that add to the debt you've already accumulated. Then start chipping away at the debt in a logical fashion. Typically, you should pay off the debts with the highest interest rates first. When it makes sense, you might consolidate debts through one or two loans with reasonable rates. In many cases, you can negotiate a lower rate for a larger consolidated debt than for multiple smaller loans. 6. Trim the Fat from Your Monthly Budget Every household should establish a monthly budget for the year — and stick to it. A budget is especially helpful if you plan to reduce your debt. Budgeting has taken on new meaning as inflation has soared in 2021. The costs of certain essential items, including heat, gas, coffee, meat and other everyday goods, is expected to continue increasing in 2022. Factor rising costs into your budget. Keep track of cash going in and out of your bank accounts through a spreadsheet, ledger or other device. This can pinpoint the types of shortfalls that may have hurt you in the past. Resolve to save more and spend less. 7. Create (or Amend) Your Estate Plan Begin estate planning by inventorying your assets, including: Cash, digital assets and marketable securities, Insurance policies, Business interests, Automobiles and Real estate. Jewelry, artwork and other personal assets also can possess significant monetary (and sentimental) value. The difference between your assets and liabilities is your net taxable estate. After identifying and valuing your assets and liabilities, it's time to draft (or review) your will. If you die without having a will, state laws will govern the distribution of your assets — and the care of any minor children and dependents. That may not coincide with your intentions. Likewise, if you have an outdated will, you might give assets or assign care of dependents to people who are no longer in your life — or you might leave some loved ones out in the cold. So, it's critical to bring your will up to speed in 2022. For instance, your will may have to be revised for: Birth and deaths, Marriages and divorces, Loss of a job or retirement, Moves to a new state, and Changes in federal and state tax laws. Depending on your situation, a short codicil might suffice, or you may have to replace an existing will with a new one. Once you've tackled your will, you can move on to big-picture estate planning objectives. You can transfer as much as $12.06 million in 2022 (up from $11.70 million for 2021) of assets without incurring federal gift or estate tax. That doesn't include the annual gift tax exclusion of $16,000 per year per recipient for 2021 (up from $15,000 for 2021). Estate tax is calculated on the net value of the deceased's assets as of the date of death — or on the alternate valuation date, which is six months later. Federal estate tax rates are currently as high as 40%. Quite a few states also impose estate or inheritance tax at a lower threshold (and possibly with a different lifetime gift exemption or portability provision) than the federal government does. In addition to outright gifts, you can minimize estate tax with other estate planning tools. Examples include qualified terminable interest property (QTIP) trusts, Crummey trusts and family limited partnerships. These tools can also help you achieve other estate planning objectives, such as professional asset management, protection against creditors' claims and preservation of the portability provision in generation-skipping transfers and remarriages. Important: Today's generous $12.06 million exemption is scheduled to be rolled back in 2026. Hope for the Best, Plan for the Worst The last few years have taught us to expect the unexpected. Even if you make good on your New Year's resolutions, health issues, unemployment and other unforeseen events could cause financial trouble. You can lessen the impact by setting up a rainy-day fund equal to at least six months of salary. Start 2022 off right. Contact your financial advisors about setting realistic financial resolutions 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!

Many businesses are having trouble recruiting and retaining qualified workers today. Nearly 90% of employers reported difficulty filling open positions, according to a recent survey conducted by the Society for Human Resource Management. The report entitled, "The COVID-19 Labor Shortage: Exploring the disconnect between businesses and unemployed Americans," also found that 73% of respondents have seen a decrease in applications for hard-to-fill positions, including hourly, entry-level and midlevel nonmanagerial positions. Only 6% expect labor shortages to diminish by year end. The hardest hit sectors are manufacturing, hospitality, food service and health care. Labor concerns are expected to worsen in sectors — like retail and food service — that traditionally experience a spike in revenue during the holidays season. If your small business is currently understaffed, you might want to consider hiring your spouse as an official employee, especially if he or she is already familiar with the job. In addition to filling an open position, this move can pay off through various tax-saving benefits. Here are seven ways hiring your spouse can chip in with tax savings. 1. Retirement Savings If certain requirements are met, an employer can deduct contributions made to a qualified retirement plan on behalf of its employees, including your spouse. For instance, if your company has a 401(k) plan in place in 2021, your spouse can elect to defer up to $19,500 ($26,000 if age 50 or older) for the year, in addition to any matching contributions by the company. Typically, a company will match up to 3% of compensation that's deferred. (For 2022, the maximum contribution amounts are increasing to $20,500 ($27,000 if age 50 or older). Contributions compound in the account on a tax-deferred basis until withdrawals are made. This is a good way for your spouse to save for retirement independently. 2. Business Travel Expenses In the normal course of events, you can't deduct travel expenses attributable to a spouse when he or she accompanies you on a business trip. This is a nondeductible personal expense. But the tax outcome changes if your spouse is a bona fide employee of the company and travels with you for business reasons. As a result, your company can write off your spouse's business-related travel expenses, such as airfare or other transportation, lodging and 50% of the cost of meals (100% for restaurant-provided meals in 2021 and 2022). Plus, the benefit is tax-free to your spouse. The same basic rules apply if your spouse goes on a business trip alone. 3. Health Insurance Premiums If you're currently paying to cover your spouse under the company's health insurance plan, you may be able to shift more of the cost to the company if your spouse is an employee. The company can deduct all the health insurance premiums it pays on behalf of your spouse — just like it can for other employees. Similarly, you can deduct 100% of the cost if you operate a self-employed business. 4. Additional Health Care Breaks You might take the tax breaks for health insurance a step further with a Health Reimbursement Arrangement (HRA) if you operate a C corporation or you're self-employed. If certain requirements are met, the company may reimburse your spouse for out-of-pocket medical expenses and health insurance premiums, while the costs are deductible by the company. This is a win-win situation. Likewise, if your spouse is covered by a qualified high-deductible health plan, he or she can contribute pretax income to an employer-sponsored Health Savings Account (HSA) or make deductible contributions above the line to the HSA. Your business can also contribute to your spouse's HSA. For 2021, the contribution limits are $3,600 for self-only coverage and $7,200 for family coverage. Your spouse may contribute an additional $1,000 if he or she is age 55 or older. As with an IRA, earnings in the HSA may accumulate without current tax. Withdrawals for qualified medical expenses are tax-free, and unused balances can be carried over from year to year. Alternatively, your spouse can redirect pretax income to an employer-sponsored Flexible Spending Account (FSA) up to an annual limit (not to exceed $2,750 for plan years beginning in 2021). In some cases, your business can also contribute to your spouse's FSA. The plan pays or reimburses qualified medical expenses without any tax. If your spouse has an HSA, an FSA is limited to funding certain permitted expenses. Unused amounts at the plan year's end are generally forfeited, although the plan may provide a 2½-month grace period or a carryover of $550 to next year. 5. EAPs When a spouse joins the team as a bona fide employee, he or she may want to sharpen business skills. This may be particularly true if your spouse has been out of the regular workforce for several years. Your company can send your spouse back to school part-time with an educational assistance plan (EAP). Generally, qualified education expenses of up to $5,250 a year that are paid or reimbursed through the EAP are deductible by the company and tax-free to the employee-spouse. But the plan can't discriminate in favor of the company's higher-ups. 6. Vehicles It's likely that you and your spouse currently drive your own cars. Although you may derive tax benefits for your vehicle's business use, your spouse's expenses are purely personal and nondeductible. However, if your spouse is employed by your company, you may be entitled to business deductions under a complex set of rules, including limits on so-called "luxury car" write-offs. It may even pay to buy a third car. 7. Group-Term Life Insurance An owner's spouse is entitled to the same group-term life insurance coverage as other company employees (typically, equal to three or four times the individual's salary). Under long-standing tax rules, the first $50,000 of employer-paid group-term life insurance coverage is tax-free to the employee. Plus, any additional coverage is taxable at relatively low rates. Thus, having your spouse work for the company provides more insurance protection for your family. Important: S corporation owners generally can't deduct fringe benefits like group-term life insurance for any employee owning 2% or more of the company. This rule is extended to coverage for an employee-spouse. Other complicated rules apply to partners in a partnership and limited liability companies. Right for Your Business? Before you hire your spouse to work at your company, there are other tax repercussions to consider, including income and payroll taxes your spouse will have to pay on wages and the resulting increase in taxable income on a joint tax return. However, this usually works out to be a good deal overall for a couple where one spouse is the business owner. Meet with your professional tax advisor to discuss whether this strategy would be beneficial 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!

A price increase is sometimes unavoidable — and now might be one of those times as many businesses are dealing with cost increases, supply chain bottlenecks and labor shortages. The key to implementing a price hike with minimal loss of customers is timing. It's hard to be the first one in your industry to raise your prices. If others don't follow suit, your business could be in the embarrassing position of having to rescind price increases and determining other ways to make ends meet. Here are some key considerations when weighing the pros and cons of increasing your prices. Customer Loyalty The first step is to gauge customer loyalty. Some companies have built a base of loyal customers who are willing to pay a premium for their brands. Others have a customer base that's made up of bargain hunters who would be willing to switch brands to save a few dollars. How do you know how loyal your customers are? Ideally, you've been monitoring their purchasing patterns over the years, and watching how they respond if you or a competitor has a "sales event." Depending on the nature of your business and your ability to monitor customer behavior, you can also gauge loyalty by how long customers have been patronizing your business. If there's significant customer turnover and you increase prices, your business could be in a vulnerable position. Another consideration is the nature of what you sell. If it's a basic necessity and you dominate your market, your customers might have little choice but to accept a price increase. And even if you sell "luxury" products and services, you might also be in a good position to raise prices to the extent that your customers have an abundance of disposable income and aren't price sensitive. Of course, that wouldn't hold true for cost-conscious buyers of nonessential products. 4 Questions Once you've laid the groundwork for assessing the likely impact of a price increase, you can move to the next round of analysis by answering these four questions: Which products or services should I raise prices on? How much should prices increase? When should the price increases take affect? Should I notify customers about increases, and, if so, how do I explain the increases? These questions must be considered in light of how much you're being squeezed in the current business environment. The more urgent the situation, of course, the less flexibility you have. In deciding which items to raise prices on, consider the potential cash flow impact. The most immediate effects will come from increasing prices on high-volume products. However, if you're selling some high-volume, low-priced "loss leader" items to draw in customers who'll also buy more profitable items and that strategy is working, go easy on raising prices on those bargain items. (See "Responsive Pricing" at right.) Generally, gradual, selective price increases are less noticeable to customers than an across-the-board price increase. But in some cases, a one-time "tear-off-the-Band-Aid-quickly" price hike, not to be repeated in the short term, can make sense if accompanied by an explanation that customers can accept. Alternatively, you can refresh your product or service offerings and then charge a premium for "new-and-improved" versions that cost you about the same as the old ones. Now or Later The current attention on inflation and other unfavorable external market conditions may provide a good cover for your business to increase its prices, especially if others in your industry are raising prices, too. By tying your increases to, say, an increase in the consumer price index, or average gas prices, you can help justify a price increase to your customers — and they'll likely appreciate your transparency. Your financial advisors can help evaluate where price increases would be most impactful. They can also recommend alternative or supplemental business moves you can make to keep your business secure in these uncertain times. 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!

While stock values have mostly gone up so far this year, bull markets don't last forever. And the price of a particular stock can fluctuate up or down, independent from the market's overall trend line. When you make what turns out to be an ill-fated stock investment in a taxable investment account, the saving grace is you can usually claim a tax-saving capital loss deduction (within limits) when you sell. But that's not always the case: The wash sale rule can disallow your tax savings. Here's how the dreaded wash sale rule works. The Basics A loss from selling stock or mutual fund shares is disallowed for federal income tax purposes if you buy substantially identical securities within the 61-day period that begins 30 days before the date of the loss sale and ends 30 days after that date. The theory is that the loss sale and the offsetting purchase of substantially identical securities within the 61-day period amount to an economic "wash." Therefore, you're not entitled to any loss deduction, and the tax savings that would ordinarily result from the loss sale are disallowed. When you have a disallowed wash sale loss, the loss doesn't just vaporize, except when your IRA or controlled corporation acquires the substantially identical securities (explained below). Instead, the general rule is that the disallowed loss is added to the tax basis of the substantially identical securities that triggered the wash sale rule. Then, when you eventually sell those substantially identical securities, the extra basis reduces your tax gain or increases your tax loss. In effect, the disallowed loss becomes a deferred loss that's accounted for when you sell the substantially identical securities. Hypothetical Example To help you understand how the wash sale works, suppose you bought 1,000 Beta Bank shares on July 1, 2021, for $20,000 using your taxable account at a brokerage firm. The value of the stock plummets. You thought you could harvest a tax-saving $8,000 capital loss by selling the shares on December 15, 2021, for $12,000 ($20,000 basis minus $12,000 sales proceeds equals $8,000 loss). You plan to use that loss to shelter an equal amount of 2021 capital gains. After you thought you had secured the tax-saving loss, you then reacquire 1,000 Beta shares on December 19, 2021, for $12,200, because you still like the stock. Sadly, the wash sale rule disallows your anticipated $8,000 capital loss deduction. Instead, the disallowed loss increases the tax basis of the substantially identical securities. Therefore, the tax basis of the Beta shares you acquire on December 19, 2021, increases to $20,200 ($12,200 cost plus $8,000 disallowed wash sale loss). Two Ways to Beat the Rule Avoiding the wash sale rule is only an issue when you want to sell a stock or security to harvest a tax-saving capital loss, but you still want to own the stock or security because you think it will appreciate from the current price. One way to defeat the wash sale rule is with a "double up" strategy. You buy the same number of shares in the stock you want to sell for a loss. Then you wait 31 days to sell the original batch of shares. When all is said and done, you've made your tax-saving loss sale, but you still own the same number of shares as before and can therefore still benefit from the anticipated appreciation. For example, you want to sell the 1,000 Zeta shares that you currently own for a 2021 tax-saving loss. But you don't want to give up on the stock. So, on November 21, you buy 1,000 more Zeta shares. Then you can sell the original batch of 1,000 shares for your tax-saving loss anytime between December 22 and December 31. The wash sale rule is avoided because December 22 is more than 30 days after November 21. You can achieve the same goal with a less expensive alternative approach: Buy a cheap call option on the stock you want to sell for a 2021 tax loss. Then wait more than 30 days to sell the stock. For example, you currently own 1,000 Yazoo shares that you want to sell before year end to harvest a tax-saving 2021 capital loss. But you don't want to give up on the stock. It might only cost $100 to buy a January 2022 call option for 1,000 Yazoo shares, while buying 1,000 actual shares might cost $10,000 or more. Say you buy a call option for 1,000 shares on November 21. You can sell your 1,000 Yazoo shares that you currently own anytime between December 22 and December 31 and claim a tax-saving capital loss on your 2021 return, because you successfully avoided the wash sale rule. Make sure to wait at least 31 days before selling the Yazoo shares, because the call option and the stock are considered substantially identical securities for purposes of the wash sale rule. Important: To use either of these strategies, you must act on or before November 30, 2021, to have enough time to make a 2021 loss sale without triggering the wash sale rule. No Creative Workarounds Some people have tried to come up with creative workarounds for the wash sale rules by purchasing substantially identical securities through an IRA or an account owned by a related party. But the IRS won't fall for these tricks. According to the IRS, using a traditional or Roth IRA to buy substantially identical securities within 30 days before or after a loss sale in your taxable brokerage account will trigger the wash sale rule. Even worse, the IRS says you can't increase the tax basis of your IRA by the disallowed loss. The disallowed loss simply disappears. What happens if you sell stock for a loss, and then your spouse buys identical stock within the forbidden 61-day period? The wash sale rule would clearly apply if you file your tax return jointly. And the IRS has issued guidance that says the wa sh sale rule applies even if you and your spouse file separate returns. The IRS also says the wash sale rule applies if a corporation that you control purchases substantially identical securities. Seek Professional Advice If you're hoping to harvest a tax-saving capital loss before year end and you have questions, please contact us. We can discuss ways to reduce your taxes and reposition your portfolio. 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!