Archives for March 2024

Keep More Money in Your Business: Are You Claiming All Eligible Tax Deductions?

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How should I structure my business for tax efficiency? It’s a question we hear often from business owners and entrepreneurs. And the answer? That depends…

Whether you choose to operate as a sole proprietorship, C-corporation, S-corporation, partnership or LLC, there are unique deductions that can lower your taxable income and keep more money in your business. Here’s a quick overview of each:

Sole proprietorships. As a sole proprietor, you have the freedom and flexibility to run your business as an individual. This business structure comes with its own set of tax deductions that can help save you some cash, including:

  • The home office deduction. If you use a portion of your residence exclusively for your business, you can deduct expenses like rent, mortgage interest, utilities and insurance.
  • Self-employment tax. You’re responsible for paying both the employer and employee portions of Social Security and Medicare taxes. However, you can deduct the employer portion of these taxes when calculating your business’s net income.
  • Personal vehicle use. If you use your personal car for business purposes, you can deduct gas, maintenance and insurance or other related expenses.
  • Professional fees. Any expenses considered ordinary or necessary for your business — such as legal or accounting fees — can be written off on your tax return.

C-corporations. Unlike sole proprietorships paying individual income tax, businesses operating as a C-corporation must pay corporate taxes — which can also be beneficial when it comes to deductions:

  • Employee wages and benefits. C-corporations can deduct the full amount of employee salaries, bonuses and benefits as ordinary and necessary business expenses. This deduction not only helps reduce your taxable income but also can help to attract and retain top talent by offering competitive compensation packages.
  • Business travel and entertainment expenses. This deduction includes airfare, hotel accommodations, meals and even some client entertainment expenses.
  • Research and development (R&D) tax credit. If your business invests in R&D activities, you may be eligible for a tax credit that can significantly reduce your tax liability.

S-corporations. S-corporations, also known as “small business corporations,” offer exclusive tax advantages to minimize your liability:

  • Qualified Business Income (QBI) deduction. Under this deduction, business owners can deduct up to 20% of their qualified business income on their taxes.
  • Expenses related to employee benefits. This includes health insurance premiums, retirement plan contributions and other fringe benefits provided to employees. Additionally, S-corporations can deduct business-related expenses such as advertising, professional fees and office supplies.

Partnerships and LLCs. Partnerships and LLCs, also known as “pass-through entities,” allow profits and losses to flow through to the individual partners or members, who then report them on their personal tax returns. Deductions include:

  • Self-employment tax. This one is exclusively available to partners and LLC members. Similar to sole proprietors, these individuals can deduct the employer portion of their self-employment taxes when calculating their taxable income.
  • Expenses related to employee wages and benefits. This deduction covers salaries, bonuses and benefits provided to employees. You can also deduct ordinary and necessary business expenses such as rent, utilities, professional fees and advertising costs.

Boost your bottom line

When it comes to taxes, every dollar saved can add up to a significant amount of cash. Keep in mind, there are other tax deductions that eligible businesses can make, regardless of structure — from charitable donations to health insurance to retirement plan contributions.

We know that’s a lot to take in when you’re just starting out. Choosing (or changing) your entity type is a big decision, so be sure you’re getting professional guidance. Reach out if we can help.

This document is for informational purposes only and should not be considered tax or financial advice. Be sure to consult with a knowledgeable financial or legal advisor for guidance that is specific to your tax situation.

Perks for Parents: Tax Tips to Help Families Maximize Their Savings

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Tax season is officially upon us, and there’re no escaping it. The IRS has its hand out to collect a portion of your taxable income. The good news? If you have children, there are credits and strategies that can help you save more of your money this year and in years to come.

Parents, be sure to take advantage of the following opportunities that apply:

Open tax-advantaged accounts. Does your employer offer a Health Savings Account?

Specifically designed for medical expenses, you can enjoy several tax advantages by making tax-deductible contributions to your account, which reduces your taxable income. Plus, any interest or earnings on the account are tax-free, and withdrawals made for qualified medical expenses are also tax-free.

If you’re thinking ahead to paying for your children’s higher educations, a 529 plan allows money to grow in a tax-deferred account. It can be withdrawn tax-free for qualified, education-related expenses at colleges, vocational programs and apprenticeships. The funds from a 529 plan may even be applied toward up to $10,000 in student loan debt.

Claim credits exclusively for families. Eligible New Jersey residents can boost their refund by claiming a Child Tax Credit on their NJ-1040. For tax year 2023, you may receive up to $1,000 for each dependent child who’s five or under.

Have kids in daycare? If you pay for child care while working or looking for work, you might be able to claim the Child and Dependent Care Credit on your return. This gives you a tax break on qualified expenses like summer camp or before/after school care. Kids must be under the age of 13 to qualify, unless they’re incapable of caring for themselves due to physical or mental conditions. Keep in mind, you must have a New Jersey taxable income of $150,000 or less to qualify.

Another valuable tax credit for families is the Earned Income Tax Credit (EITC). The EITC assists low and moderate-income families with a refundable tax credit based on your income, filing status and the number of qualifying children you have. Depending on your circumstances, the EITC can result in a significant tax refund.

Maximize deductions. Families can take advantage of several deductions to lower their taxable income. One common deduction for families? Mortgage interest. If you own a home and have a mortgage, you can deduct the interest you pay on that loan. When you’re in the early years of your mortgage, your savings can be substantial as the majority of your payments go toward interest. Additionally, families can deduct state and local taxes, including property taxes, which can further reduce your tax liability.

Have dependents pursuing higher education? There’s also a deduction for qualified education expenses for eligible students. This deduction allows you to deduct up to $4,000 of qualified expenses, such as tuition and fees. Parents may also deduct interest payments on certain student loans from qualified lending institutions.

Planning to save can really pay off

With a little bit of planning and knowledge, you can help your family keep more of your hard-earned money. Taking steps to optimize your tax situation is an important aspect of your family’s overall financial planning. Not sure where to start? The professionals at Magone & Company can help. Reach out to learn more.

This document is for informational purposes only and should not be considered tax or financial advice. Be sure to consult with a knowledgeable financial or legal advisor for guidance that is specific to your unique circumstances.

6 Reasons the IRS Might Zoom in on Your Business’s Finances

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Did you know that something as simple as a math error or an unsigned form could invite unwanted attention from the IRS? Even if you have no intention to evade taxes or find loopholes, if there’s something on your return that makes the IRS take a second look, an audit of your business may be inevitable.

When it comes to dealing with the IRS, honesty is always the best policy. Learn some of the top audit triggers for businesses — and tips on keeping Uncle Sam at bay.

Excessive deductions. As a business owner, you’re entitled to deduct certain expenses to lower your taxable income. But don’t overdo it. If your deductions appear disproportionately high compared to your income, the IRS might suspect you’re padding your expenses. So what constitutes a legitimate business expense? The cost of goods sold, rent, salaries and business-related travel are generally deductible. The key is to keep accurate records of all your business expenses, making sure every deduction is backed by appropriate documentation like receipts, invoices or mileage logs.

Consistent business losses. It’s normal for businesses to experience losses, but reporting losses year after year can catch the IRS’s attention. They might suspect that your business is more of a hobby — and hobbies don’t qualify for business tax deductions. To avoid this trigger, you must be able to demonstrate what’s called a profit motive. For example, this could be a business plan indicating how and when you expect to become profitable, or records showing that you’re treating your business seriously by maintaining regular hours, keeping accurate financial records or investing in professional development.

Sizeable charitable donations. If you’re not generating a significant amount of income, any large charitable donations can raise eyebrows. Be sure to document every generous gift with related receipts and any supporting materials to help prove you have the best intentions. And remember, contributions must be made to qualified organizations that meet IRS guidelines for your business to claim a deduction.

Home office deductions. In the post-pandemic world of work, more people than ever are clocking in from home. But the IRS knows that even if you’re running your business from home a few days a week, that doesn’t mean you’ll necessarily qualify for the home office deduction. Do your due diligence and ensure your home office fits the bill as your principal place of business, meeting these IRS guidelines.

Large cash transactions. Dealing with wads of cash? The IRS is watching. The agency requires businesses to report cash transactions exceeding $10,000, and all businesses must comply with reporting requirements. It’s not just cash transactions that need to be reported. The rule applies to cash equivalents like cashier’s checks, money orders and bank drafts, too.

Personal use of a work vehicle. If you think you can pick up the kids at school or run errands in your business vehicle, the IRS may be on to you. You may derive tax benefits for your vehicle’s business use, but if you’re also using it for personal business, you’ll need to account for it on your taxes. Keep a detailed record of your mileage and gas costs pertaining to your vehicle’s usage. Keep a calendar to record the purpose and the mileage of each trip, every time you get behind the wheel.

As a business owner, your focus should be on growing your business — not worrying about an audit. Reach out to the CPAs at Magone & Company to ensure you’re on track for IRS compliance.

This information is provided for educational purposes and should not be construed as financial or legal advice. Please consult your accountant or attorney for advice specific to your situation.