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2023-tax-limits-answering-your-faqs

2023 Tax Limits: Answering Your FAQs
2023 Tax Limits: Answering Your FAQs 1600 941 smolinlupinco

With just a few weeks to file your 2022 individual tax return (unless you filed an extension), it’s understandable if your 2022 tax bills are of greater concern than your 2023 tax circumstances. 

But it’s still important to become familiar with tax amounts that may have changed for 2023—particularly because, due to inflation, many of these amounts have been raised more than in previous years. (Note, however, that not all tax figures are adjusted on an annual basis. Some only change upon the enactment of a new law.) 

Here are some common questions (and answers) about 2023 tax limits. 

Last year, I didn’t qualify to itemize deductions on my tax return. Will that change this year? 

A law was enacted in 2017 that increased the standard deduction and reduced or eliminated a variety of other deductions, eliminating the tax benefit of itemizing deductions for many people. 

For 2023, the standard deduction amount is: 

  • $13,850 for single filers (compared to $12,950 in 2022)
  • $27,700 for married couples filing jointly (compared to $25,900 in 2022)
  • $20,800 for heads of households (compared to $19,400 in 2022)

If the amount of your itemized deductions, including mortgage interest, is lower than the standard deduction amount, you will not qualify to itemize deductions for 2023. 

How much can I contribute to an IRA this year? 

In 2023, those who are eligible can contribute $6,500 per year up to 100% of their earned income (compared to $6,000 in 2022).  

Those aged 50 or older can make an additional “catch-up” contribution of $1,000 (no change from 2022). 

How much can I contribute to my 401(k) plan through my employer? 

In 2023, you can contribute up to: 

  • $22,5000 to a 401(k) or 403(b) plan (compared to $20,500 in 2022)
  • $7,500 in catch-up contributions if you’re over 50 years old (compared to $6,500 in 2022)

If I hire a cleaner, do I need to withhold and pay FICA tax? 

In 2023, the threshold for which domestic employers must withhold and pay FICA tax for babysitters, house cleaners, and other independent contractors is $2,600 (compared to $2,400 in 2022). 

How much do I need to earn to stop paying Social Security tax? 

In 2023, you will not owe Social Security tax on amounts earned above $160,200 (compared to $147,000 in 2022). However, you must still pay Medicare tax on all amounts earned. 

Can I claim charitable deductions if I don’t itemize? 

Generally, if you claim the standard deduction on your federal income tax return, you cannot deduct charitable donations. In 2020 and 2021, non-itemizers could claim a limited charitable contribution deduction, but this tax break is no longer applicable for 2022 and 2023. 

How much can I gift someone without worrying about gift tax? 

For 2023, the annual gift tax exclusion is $17,000 (compared to $16,000 in 2022). 

Work with a tax professional

These are only a few of the tax amounts that may apply to you in 2023. If you have questions or would like assistance with your tax return, the CPAs at Smolin can help. Contact us to get started. 

business-related-tax-limits-have-increased-for-2023

Business-Related Tax Limits Have Increased for 2023
Business-Related Tax Limits Have Increased for 2023 1488 875 smolinlupinco

A variety of tax limits that affect businesses are indexed on an annual basis. As a result of high inflation, many of these limits have increased more than usual for 2023. 

Here are a few that businesses should keep in mind for 2023:  

Social Security tax

For 2023, the amount of employee earnings subject to Social Security tax is capped at $160,200 (compared to $147,000 in 2022). 

Deductions

For Section 179 expensing, the limit has increased to $1.16 million (compared to $1.08 million), with a phaseout of $2.89 million (compared to $2.7 million).

Income-based phase-out for certain limits on the Sec. 199A qualified business income deduction begins at $364,200 for married couples filing jointly (compared to $340,100). For other filers, this amount is $182,100 (compared to $170,050). 

Retirement plans

Increases for retirement plans are as follows: 

401(k) plans

  • Employee contributions: $22,500 (compared to $20,500) 
  • Catch-up contributions: $7,500 (compared to $6,500) 

SIMPLE plans

  • Employee contributions: $15,500 (compared to $14,000) 
  • Catch-up contributions: $3,500 (compared to $3,000) 

Additional increases

  • Employer/employee contributions to defined contribution plans, not including catch-ups: $66,000 (compared to $61,000) 
  • The maximum compensation used to determine contributions: $330,000 (compared to $305,000) 
  • The annual benefit for defined benefit plans: $265,000 (compared to $245,000) 
  • The amount used to define a highly compensated employee: $150,000 (compared to $135,000) 
  • The amount used to define a key employee: $215,000 (compared to $200,000) 

Additional employee benefits

The qualified transportation fringe-benefits employee income exclusion is $300 monthly (compared to $280). 

Flexible Spending Account (FSA) healthcare contributions have increased to $3,050 (compared to $2,850). Note that the dependent care contribution limit of $5,000 has remained the same. 

Health Savings Account (HSA) contributions have increased as follows: 

  • Individual coverage: $3,850 (compared to $3,650) 
  • Family coverage: $7,750 (compared to $7,300) 

The catch-up contribution limit of $1,000 has remained the same. 

Questions? Smolin can help 

These are only some of the tax limits and deductions that could affect your business—and additional rules could apply. If you have questions, our CPAs can help. Contact us to get started. 

how-do-auditors-evaluate-accounting-estimates

How Do Auditors Evaluate Accounting Estimates? 
How Do Auditors Evaluate Accounting Estimates?  1600 942 smolinlupinco

When businesses report their finances, they often use accounting estimates determined by management. For example:  

  • Allowance for doubtful accounts
  • Warranty obligations
  • Costs of pending litigation
  • Goodwill impairment
  • Fair values of acquired intangible assets

When auditors evaluate the amounts reported on these financial statements, how do they determine whether those amounts are reasonable? 

Methods used to evaluate accounting estimates

As part of their standard audit procedures, external auditors evaluate accounting estimates. These accounting estimates can be based on a combination of subjective and objective information, resulting in measurement uncertainty. 

Methods include: 

Inquiry

Auditors may inquire about underlying assumptions, or inputs, that were used for making estimates. They will use the information from these inquiries to determine whether the inputs seem complete, accurate, and relevant. 


Estimates based on objective inputs (i.e., published interest rates or percentages from previous reporting periods) are typically less susceptible to bias than estimates based on speculative, unobservable inputs—particularly if management does not have prior experience with similar estimates. 

Testing 

If and when it’s possible, auditors may try to recreate estimates determined by management by using the same inputs, or even their own. If the auditor’s estimate is significantly different from the estimate on the financial statement, they will ask management for an explanation. In cases involving complex items, an independent specialist may also be called in.

Auditors may also compare previous estimates to what occurred after the date of the financial statement, as the outcome of an estimate tends to differ from management’s initial estimate due to errors, unforeseeable circumstances, and/or management bias. 

While estimates that are consistently aligned with what happened later add credibility, those with significant differences may cause an auditor to become more skeptical of management’s current estimates, often necessitating additional audits. 

Updates to auditing processes

In 2018, the Public Company Accounting Oversight Board (PCAOB) published revisions to the requirements for auditing accounting estimates and using specialists (often to support accounting estimates made by management) in audits. 

These revisions were published in: 

Release No. 2018-005

Release No. 2018-005, Auditing Accounting Estimates, Including Fair Value Measurements, is a risk-based standard emphasizing the importance of professional skepticism and the attention to potential management bias among auditors when evaluating estimates made by management. 

Per the updated standard, auditors should consider both corroborating and contradictory evidence obtained during the audit. 

Release No. 2018-006 

Release No. 2018-006, Amendments to Auditing Standards for Auditor’s Use of the Work of Specialists, extends the auditor’s responsibility for evaluating specialists, requiring them to do more than simply obtain an understanding of their work. They must also perform procedures assessing the appropriateness of the company’s data, along with the assumptions and methods used. 

December 2022 analysis report

The PCAOB published a post-implementation review of these updates in December 2022. According to Interim Analysis Report: Evidence on the Initial Impact of New Requirements for Auditing Accounting Estimates and the Auditor’s Use of the Work of Specialists, approximately 33% of surveyed audit firms reported that the new requirements improved auditing practices. Other firms reported that the effects were limited, with no significant consequences on the audit process fees or hours. 

While the newer, more consistent guidance pertains to public companies, these effects filter down to private entity audits that use accounting estimates or depend on specialists. 

Accounting gray areas? Smolin can help. 

Because they involve a high level of subjectivity and judgment, accounting estimates and fair value measurements may be susceptible to misstatement. It can be particularly challenging to predict metrics that determine these accounting estimates. As a result, more auditor focus is required today than in previous, more stable accounting periods.  

It’s critical that you’re prepared to provide comprehensive documentation to support your estimates during the upcoming audit season. Need some assistance? Contact us to work with a knowledgeable accounting professional. 

5-reasons-to-outsource-your-accounting-needs

5 Reasons to Outsource Your Accounting Needs
5 Reasons to Outsource Your Accounting Needs 1600 941 smolinlupinco

CPA firms don’t just do audits and tax returns. They’re also available to help with your everyday accounting needs, from advisory services to payroll and sales tax filing. 

Is it time for your business to outsource its accounting needs? Here are five reasons you should hire a CPA. 

1. Professional insights

When you outsource your accounting to a knowledgeable CPA, you gain access to professional tax, legal, and financial advice. This helps your business remain compliant with rules and regulations while also avoiding costly errors resulting from misunderstanding complex policies. 

An accounting firm will offer you a second set of eyes, giving you the peace of mind that your company’s books accurately reflect your company’s performance. A CPA can also help streamline your accounting processes and assist you with accurately recording complex financial transactions. 

2. Scalable services

Your financial situation is bound to evolve, and a CPA will allow you to scale services up or down as needed. 

If you’re a start-up business, you won’t need to worry about outgrowing your bookkeeper or training them to take on more advanced accounting and tax tasks. And if you take on a major project—a new product launch or a merger with a strategic buyer, for example—your CPA has the knowledge and experience to guide you toward the best possible financial outcome. 

Additionally, if you unexpectedly lose your CFO, outsourcing can be a helpful temporary fix while you look for a suitable replacement (especially in today’s tight labor market). 

3. Cost-efficiency

By outsourcing to a CPA, you can save money on payroll taxes and insurance costs related to hiring an in-house accountant. Additionally, thanks to economies of scale with software purchases and usage, CPAs can likely provide some accounting service at a more affordable rate than your firm can on its own or with independent service providers. 

4. Convenience

When you delegate your accounting needs to a CPA, your team is freed up for other tasks such as marketing, product development, and more. Outsourcing will also free up resources for higher-value tasks—such as negotiating with prospects or focusing on client relationships—that can increase cash flow and optimize your organization’s efficiency. 

5. Confidence

When you involve a knowledgeable accounting professional in your business, you gain confidence with stakeholders if you plan to borrow money or solicit investment capital. 

When you hire a CPA, you also demonstrate that your business is committed to keeping accurate records and accessing the professional knowledge needed to handle complex matters. 

Outsource your accounting needs to Smolin

Could you benefit from outsourcing your daily accounting tasks? Whether you’re looking for a temporary or permanent CPA, we can offer a cost-effective service plan that works with—and adapts to—your current and future business needs. Contact us to get started. 

7-ways-secure-act-could-affect-your-small-business

7 Ways SECURE 2.0 Could Affect Your Small Business
7 Ways SECURE 2.0 Could Affect Your Small Business 1600 942 smolinlupinco

Does your small business have a retirement plan? Even if it doesn’t, you may start to see beneficial changes as a result of the Setting Every Community Up for Retirement Enhancement 2.0 Act (SECURE 2.0), which was signed into law in December 2022. 

Built upon the original SECURE Act of 2019, SECURE 2.0 will take effect over several years. Some of its provisions may affect small businesses. 

1. Automatic retirement plan enrollment

The SECURE 2.0 law will require 401(k) plans beginning after December 31, 2024, to automatically enroll employees once they become eligible (though employees will have the choice to opt out). 

The initial automatic enrollment amount would be between 3-10%, with the amount increasing by 1% each year until it reaches between 10-15%. 

Note that all current 401(k) are grandfathered into the act, and certain small businesses may be exempt. 

2. Coverage for part-time employees

The original SECURE Act requires that employers allow part-time employees to participate in their 401(k) plans, provided they meet one of the following requirements:

  1. One year of service and at least 1,000 hours worked, OR
  2. Three consecutive years of service with at least 500 hours worked 

Beginning after December 31, 2024, SECURE 2.0 will reduce the three-year rule to two years. It will also extend the long-term, part-time coverage rules to ERISA 403(b) plans. 

3. Matching contributions for employees with student loan debt

Under SECURE 2.0, employers will be allowed to make matching contributions to 401(k)s and certain other retirement plans for “qualified student loan payments.” 

This means that, after December 31, 2023,  your employees who cannot afford to save for retirement due to student loan debt repayments will still be able to receive matching employer contributions into their retirement plans. 

4. “Starter” 401(k) plans

The SECURE 2.0 law will allow employers that don’t sponsor retirement plans to offer “starter” 401(k) plans—or safe harbor 403(b) plans—to employees. This would require all employees to be enrolled at a 3-15% of compensation deferral rate by default. 

The annual deferral limit would be the same as the IRA contribution limit, with an additional $1,000 in catch-up contributions beginning at age 50. This provision will take effect starting December 31, 2023. 

5. Pension plan tax credit

As of December 31, 2022, SECURE 2.0 increases the tax credit for eligible small employer pension plan start-up costs. This incentivizes businesses to establish and offer retirement plans. 

6. Higher catch-up contributions

Participants in certain retirement plans can currently make additional catch-up contributions once they reach age 50 or older, with a limit of $7,500 for 401(k) plans in 2023. With SECURE 2.0, this catch-up contribution limit will increase to the greater of $10,000 or 150% of the regular amount for individuals between the ages of 60-63. 

This provision will take effect for taxable years beginning after December 31, 2024, with increased amounts being indexed for inflation after December 31, 2025. 

The catch-up amounts for SIMPLE plans will also increase. 

7. Military spouse tax credit

Effective in 2023, SECURE 2.0 offers a new tax credit for eligible small employers for each military spouse participating in their defined contribution plan. 

Questions about how the SECURE 2.0 law could affect your small business? Contact us

These are only some of the changes resulting from SECURE 2.0. If you have questions about how the new law could affect your small business, our CPAs can help. Contact us to get started. 

cash-tax-or-accrual-basis-whats-the-right-accounting-method-for-your-business

Cash, Tax, or Accrual Basis: What’s the Right Accounting Method for Your Business?
Cash, Tax, or Accrual Basis: What’s the Right Accounting Method for Your Business? 1594 938 smolinlupinco

One of the most critical aspects of running a business is having access to timely, accurate financial information. When it comes to tracking your business’s financial performance, there are several accounting methods to choose from—but how do you know what’s right for your situation? 

Here’s an overview of cash, tax, and accrual basis accounting to help you determine what’s right for your business. 

Cash basis

Startups and sole proprietorships often default to the cash method of accounting because of its simplicity. It also provides an immediate look at all available funds, which tends to suffice for small businesses with finances that aren’t overly complicated. 

While the recordkeeping process is easy, cash basis accounting can make it difficult to get an accurate picture of your finances, as transactions are only recorded when money changes hands. For example, if you bought a new computer using credit, you would only record it as an expense after paying for it in cash. (Note that this method is also not suitable for tax purposes.) 

You can often tell whether a company is using cash basis accounting by looking at its balance sheet, which won’t report accrual-basis items like accounts receivable, prepaid assets, accounts payable, or deferred expenses. 

Tax basis

Companies that want to minimize their tax liability may choose to use tax basis accounting, where transactions are only recorded when they relate to tax. With this reporting option, you use the same accounting method for both book and tax purposes. 

This can also be beneficial for businesses that don’t have complicated financial affairs and who don’t require up-to-date financial information. 

Accrual basis

As your business grows, it will have more complex reporting requirements. Larger companies may decide (or be required to) to use the accrual method of accounting, where revenue is recognized when earned (regardless of when it’s received), and expenses are recognized when incurred (rather than paid). This method matches revenue to corresponding expenses in the proper period, which helps with accurately evaluating growth and profit margins over time and against competitors. 

Businesses that issue financial statements under U.S. Generally Accepted Accounting Principles (GAAP) are required to use this accounting method—and most lenders and investors prefer this method due to its reliability for long-term financial planning purposes. 

An additional benefit of accrual basis accounting is that it can help manage cash flow. For example, timely financial data helps negotiate payment terms with suppliers, plan for significant expenses, and forecast future cash needs. 

Not sure which method is right for your business? Contact us

Choosing the right accounting method for your business is not a decision that should be made lightly. You need to consider your financial needs and accounting skills, and whether the methods used in the past have served you well. You may even choose to use a hybrid approach, incorporating elements from multiple methods. 

A knowledgeable tax advisor can help you find the right solution. Contact us to learn more. 

financial-reporting-tips-for-nonprofits

Financial Reporting Tips for Nonprofits
Financial Reporting Tips for Nonprofits 1488 875 smolinlupinco

Financial reporting isn’t just about profits. A lot that falls under the umbrella of accounting, from preparing budgets and monitoring finances to paying invoices and managing payroll tax—and nonprofits can certainly benefit from formal accounting processes. 

If you’re a nonprofit entity, consider whether your accounting processes are managed as efficiently as possible. Not sure where to start? Check out these helpful tips. 

Create invoicing policies and procedures

If you’re unsure of where to start, take a look at your invoicing. Do you have policies and procedures for monthly cutoffs of recording vendor invoices and expenses? 

One option is to require that all invoices be submitted within one week of the month’s end. Otherwise, you may spend valuable time waiting on weigh-ins from employees or other departments—and ultimately, delaying the completion of your financial statements. 

By reconciling balance sheet amounts each month, you may also be able to save time at the end of the year by catching and correcting any errors early. It’s also helpful to reconcile your accounts payable and accounts receivable ledgers to statements of financial position. 

An extra tip: when you have multiple invoices to process, it’s best to set aside a block of time to enter invoices and cut checks all at once. 

Streamline data collection

Accounting clerks and bookkeepers need a variety of information to enter vendor bills and donor bills into your accounting system. One way to make this process more efficient is to design a coding cover sheet or stamp to collect information on the invoice or donor check copy. This helps to route invoices pending approval into a folder that lists your nonprofit’s general ledger account numbers—that way, the person entering data doesn’t have to look them up every time. 

In your cover sheet or stamp, you should also include a place for invoice payment approvals. For example, multiple-choice boxes can be used to indicate the cost centers to which amounts should be allocated. 

Be sure that the invoice’s payment is also documented for reference, and that your development staff provides details for donor gifts before recording them in the accounting system. 

Make the most of your accounting software

If you’ve purchased an accounting software package, there’s a chance you’re not taking advantage of all the tools it has to offer. Have you invested enough time to learn the full functionality of your software package? If not, consider hiring a trainer to review all of its functions and teach you and your team shortcuts and other time-saving tricks.

It’s also helpful to standardize the financial reports that come from your accounting software, so you don’t have to spend extra time modifying them to meet your organization’s needs. Not only will this reduce input errors, but it will also offer helpful financial insight at any point—not just at the end of the month.

Your accounting software can also help you automatically perform standard journal entries and payroll allocations. For example, many systems can automate payroll allocations to certain programs or vacation accrual reports. That said, be sure to review any estimates against the actual figures every so often, and always adjust to the actual amount before closing your books at the end of the year. 

Monitor your processes

If they’re not consistently monitored, even the most robust accounting processes can become inefficient over time. Every so often, assess your processes for any tedious or labor-intensive steps that could be automated, or steps that don’t add value and could be removed altogether. 

Additionally, make sure that the department responsible for overseeing your finances—CFO, treasurer, or finance committee, for example—reviews monthly bank statements and financial statements promptly. The earlier you catch errors or unexpected amounts, the better. 

Need more tips? 

If you’re interested in learning more about how to improve the accounting function at your nonprofit, our knowledgeable advisors are here to help. Contact us to learn more.

5-ways-to-update-your-accounting-practices

5 Ways to Update Your Accounting Practices
5 Ways to Update Your Accounting Practices 1594 938 smolinlupinco

When you think about the internal workflows and processes of your business, are you able to pinpoint why you do things a certain way? If the answer is “because we’ve always done it that way,” it might be time to make some changes. 

In fact, with all of the new developments in the financial and accounting realm, sticking to those traditional methods may actually be costing your business in terms of efficiency and cash flow alike. 

Here are five ways to keep your accounting processes and systems up-to-date. 

1. Streamline the payables process

When it comes to managing your accounts payable, using traditional paper processes could be costing you valuable time (and money). With automated technology solutions, you can streamline the process to improve efficiency, reduce costs, enhance security, and even obtain early payment discounts. 

Automatic payables systems can scan invoices and post them automatically based on the purchase or invoice number. Then, the payables clerk—or whoever is responsible for reviewing the invoice—can cross-reference the invoice and approve it for electronic payment based on terms negotiated with the vendor. 

2. Implement daily reconciliation

Many accounting firms wait until the end of the month to reconcile their bank accounts—but it doesn’t have to be this way. By reconciling accounts on a daily basis using automation software, you can catch in-transit payments that have been cashed but not recorded. And by eliminating that crunch at the end of the month, you can speed up other monthly closings. 

This also keeps you from having to wait for standard monthly entries that remain the same—depreciation, prepaid expenses, and property tax or insurance accruals, for example. By starting your end-of-month closing process sooner, you can improve the accuracy and timeliness of your financial statements while also taking some of the pressure off of your accounting staff. 

3. Use p-cards

Consider issuing corporate purchase cards, or p-cards, to at least one employee in each department to cover travel and entertainment expenses, or small items under $100 or so. This way, your accounting department can make a single payment for multiple purchases, rather than processing multiple small-dollar checks. 

As an added perk, most p-cards offer points and cash-back rewards that your team can take advantage of when paying back expenses. 

4. Digitize your processes

When you go paperless, you can lower expenses, increase efficiency, and maintain compliance—all in a way that’s more environmentally friendly. And when you use an electronic document management system, you can save significant amounts of physical storage space and reduce the time it takes to create and modify documents. 

While you may not be able to go completely paperless, there are plenty of documents and processes that can be digitized: contracts, invoices, payables, payroll documents, and employee records, for example. 

Consider implementing document management software solutions to help you convert your processes from paper to digital. 

5. Make the most of your accounting software

With ever-changing policies and practices, it’s more important than ever to use your accounting software to help you stay compliant and financially sound. This could involve making better use of your current account system or switching over to new software. Keep in mind that, as your firm grows, you will likely need more advanced functionality. 

To optimize your accounting software, start by making a list of your requirements, from types of activities to reporting. Then, cross-reference those needs with your software features to ensure that they’re all being met. You’ll also want to prioritize remote access so that your team can securely access real-time project information from anywhere. 

Look for integrations with other software and platforms, too, such as timecard entry and project management software, or third-party payroll software that can be used with minimal manual data entry.

Ready to upgrade your accounting practices? 

If your accounting firm’s processes and systems have been the same for years, it’s likely time for an upgrade—and our knowledgeable accounting advisers can help. Contact us to learn more.

pros-and-cons-of-c-corporations-for-business-entities

Pros and Cons of C Corporations for Business Entities
Pros and Cons of C Corporations for Business Entities 1275 750 smolinlupinco

If you’re launching a new business venture, you may find yourself wondering which type of company to create—and more specifically, whether a C corporation is the right option for you given your unique situation and goals. There are many advantages and disadvantages of doing business as a C corporation that are important to consider. 

What is a C corporation?

As a C corporation, your business is treated and taxed separately from you as its principal owner (unlike with an LLC). This protects you from the debts of business while also allowing you to control day-to-day operations and corporate acts like redemptions, acquisitions, and liquidations. 

As an added perk, the corporate tax rate is currently 21%—lower than the highest non-corporate tax rate. 

How to ensure your corporation is treated as a separate entity

For your business to be treated and taxed separately from you as an individual, you must follow the legal requirements of your state. For example: 

  • Filing articles of incorporation
  • Adopting bylaws
  • Electing a board of directors
  • Holding organizational meetings
  • Keeping meeting minutes

Compliance with these requirements, along with the maintenance of an adequate capital structure, will keep you from risking personal liability for business debts.

Pros and cons of C corporations 

If you’re unsure whether a C corporation is the right legal structure for your business, it’s important to explore both sides of this model. 

Advantages

On a tax-favored basis, a C corporation can be used to provide fringe benefits and fund qualified pension plans. While subject to certain limitations, the corporation can deduct various benefit costs (such as health insurance and group life insurance) without negative tax consequences. 

When it comes to raising capital from outside investors, a C corporation also offers significant flexibility—it can have multiple classes of stock, each with different rights and preferences that can be tailored to the needs of an individual along with potential investors. For those who decide to raise capital through debt, interest paid by the corporation is deductible. 

Disadvantages

Since it’s taxed as a separate entity, all of the corporation’s items of income, credit, loss, and deduction are calculated at the entity level, arriving at taxable corporate profit or loss. This means that, for new businesses, one potential disadvantage of a C-corp is that losses can be trapped at the entity level and not deducted by owners (unless they expect to generate profits in the first year). 

Another potential disadvantage is that C corporation earnings can be subject to double taxation: once at the corporate level, and again when distributed to you. That said, this risk is minimal, since most corporate earnings will be attributed to your efforts as an employee and the corporation can deduct all reasonable salary paid to you. 

Not sure if a C corporation is the right choice? Contact us.

While a C corporation might be the appropriate choice at this time, you may be able to apply to become an S corporation in the future if it’s more appropriate for your business. 

If you have any questions or would like assistance exploring the best type of legal structure for your business, our knowledgeable advisors can help. Contact us to learn more. 

end-of-year-tax-planning-for-individuals

End-of-Year Tax Planning for Individuals
End-of-Year Tax Planning for Individuals 1600 941 smolinlupinco

As we approach the end of the year, it’s important to start thinking about ways to lower your tax bill for 2022. One of the first steps you can check off your list? Determine whether you’ll take the standard deduction or itemized deductions for the year. 

Because of the high standard deduction amounts for this year—$25,000 for joint filers, $12,950 for single filers and married couples filing separately, and $19,400 for heads of household—many taxpayers won’t itemize their deductions. Also, note that many itemized deductions have been reduced or eliminated under current law. 

Those filers that do itemize can deduct medical expenses exceeding: 

  • 7.5% of adjusted gross income (AGI)
  • State and local taxes up to $10,000
  • Charitable contributions
  • Mortgage interest on a restricted debt amount

Unless they exceed your standard deduction, however, these deductions won’t save you money on your taxes. 

Working around deduction restrictions

By applying a “bunching” strategy to either push or pull discretionary expenses and charitable contributions into a tax-advantageous year, some taxpayers may be able to work around deduction restrictions. For example: if you’ll have itemized deductions for this year but not next, consider making two years’ worth of charitable contributions at one time. 

Keep reading for more ideas on how to work around deduction restrictions. 

Postpone income until 2023

By postponing income until next year and accelerating deductions into this year, you can claim larger 2022 tax breaks that are phased out over various AGI levels. 

These include: 

  • Deductible IRA contributions
  • Child tax credits
  • Education tax credits
  • Student loan interest deductions

Postponing income may also appeal to taxpayers with changed financial circumstances who anticipate being in a lower tax bracket in 2023. That said, some individuals may find it beneficial to accelerate income into 2022, especially if they anticipate being in a higher tax bracket next year. 

Convert a traditional IRA into a Roth IRA

Eligible individuals may want to consider converting a traditional IRA into a Roth IRA by the end of the year—particularly those with IRA-invested stocks or mutual funds that have lost value. 

Note that this conversion will increase your income for the current year, potentially reducing tax breaks that would otherwise be subject to phaseout at higher AGI levels. 

Account for the NIIT

For high-income individuals, it’s important to consider the 3.8% net investment income tax (NIIT) on certain unearned income—3.8% of the lesser of net investment income (NII), or excess of modified AGI (MAGI) over a threshold amount.

That threshold amount is: 

  • $250,000 for joint filers or surviving spouses
  • $125,00 for married individuals filing separately
  • $200,000 for others

Your desired approach to minimize or eliminate that 3.8% surtax will depend on your estimated NII and MAGI for the year. Note that NII does not include IRA (or most retirement plan) distributions. 

Defer bonuses

If you anticipate a bonus coming your way this year, it may work in your favor to speak to your employer about deferring it until early next 2023. 

Make qualified charitable contributions from a traditional IRA

Those who will be 70.5 years of age or older by the end of 2022 should consider making this year’s charitable donations through qualified contributions from a traditional IRA. This is especially advantageous for those who don’t itemize deductions. 

As these distributions are made directly from your IRA, the contribution amount is not included in your gross income or deductible on your tax return. 

Account for annual gift tax exclusions

Gifts of up to $16,000 made to each recipient can be sheltered by the annual gift tax exclusion if they are given before the end of the year. 

Need more ideas? Speak with a tax professional

These are just a few of the ways that you can save taxes this year. Contact us to work with a seasoned tax professional who can help you determine the best next steps for your situation.

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