Business Taxes

How Qualified Charitable Distributions can Fulfill RMD Obligations

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When saving for retirement, tax advantages play a significant role. Traditional individual retirement accounts (IRAs) and employer-sponsored retirement plans such as 401(k)s offer tax-deferred growth, so you don’t pay taxes on the investment gains — as long as the money stays in your account.

However, the IRS doesn’t want you to avoid paying taxes on these funds indefinitely.

If you’re approaching age of 70½, required minimum distributions (RMDs) will help ensure that you start withdrawing money from your tax-deferred retirement accounts and pay the appropriate taxes on those distributions. But did you know that a qualified charitable distribution (QCD) can fulfill your RMD obligations while avoiding taxes on the distribution?

The ABCs of a QCD

A QCD refers to a taxable distribution that is paid directly from an IRA to a qualified charity. According to the IRS, this includes nonprofit groups that have a charitable, educational, religious, literary or scientific purpose, or that work to prevent child or animal cruelty.

When a QCD is directly paid from your retirement account to an eligible charity, it’s not included in your taxable income, meaning the distribution is tax-free. The giver must be at least 70½ at the time the QCD is made.

Because it’s tax-free, you cannot deduct the QCD on your Schedule A as an itemized deduction. In order to claim that charitable contribution deduction, your total itemized deductions must exceed the standard deduction. Keep in mind, the increased income resulting from the distribution could impact your eligibility for certain tax credits and push you into a higher tax bracket.

Questions regarding qualified charitable distributions? Let us help you with tax planning to minimize your tax burden and make the most of charitable giving. Reach out to the tax experts at Magone & Company or call us today at (973) 301-2300 for an evaluation of your tax situation.

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 Financial Faux Pas for Small Business Owners

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Fifty percent of small businesses fail within five years. Now, that’s a troubling statistic. What goes wrong? Are you making missteps that could lead to financial failure?

Find out the top financial mistakes that are all too common for small businesses — so you can ensure that you’re not caught in the same painful cycle.

Mistake #1: Not sticking to a budget. When you’re caught up in your business, it’s easy to overlook the importance of budgeting, which can lead to disastrous and costly consequences.

A budget provides a roadmap for your business’s financial journey, allowing you to set realistic goals, allocate resources effectively and make informed financial decisions. It also can help you identify potential financial pitfalls before they become major issues.

Mistake #2: Failing to differentiate personal and business expenses. By keeping personal and business finances separate, you not only maintain accurate records, but also protect your personal assets.

In the unfortunate event that your business faces legal issues or bankruptcy, having separate accounts can shield your personal savings, home and other assets from being seized to cover business liabilities. In addition, keeping separate accounts helps simplify your tax reporting, ensuring that you stay compliant and avoid unnecessary penalties.

Mistake #3: Using credit cards to cover business costs. While a credit card can increase your company’s purchasing power, business credit issuers can lower your credit limit and raise your interest rates at any time.

By putting major expenses on a card, you may pay significantly more in the long-run. Instead, business loans may be a smarter option due to lower rates.

Mistake #4: Expanding your headcount too quickly. During an upswing, it may be tempting to quickly to add to your team. But hiring, training and maintaining new staff is a hefty expense that might not be sustainable. And if you have to let them go, creating severance packages and extending insurance benefits also carry a price tag. Unless absolutely necessary, hold off on hiring to see if the growth persists.

Mistake #5: Neglecting to build an emergency fund. Failing to plan for unforeseen circumstances can leave your business vulnerable to financial shocks. Building an emergency fund is essential, providing a safety net to help you weather unexpected expenses, such as equipment breakdowns, legal disputes or economic downturns. Without an emergency fund, you may be forced to rely on credit cards, which can cripple your business’s financial health in the long-run.

Mistake #6: Doing your own taxes. Did you know that 77% of percent of small business owners feel the burden of business taxes? Unless you’re a tax professional, tackling your own business tax return can lead to trouble.

For example, if you claim too many deductions, you may find yourself getting audited. If you don’t claim enough, you could end up owing the government money that you haven’t budgeted for.  There are many variables that can impact your company’s tax circumstances, so it’s your best bet to consult with a trusted business or tax advisor.

Take charge of your finances now — before it’s too late

The professionals at Magone & Company can help you navigate debt traps, business taxes and smarter financial management practices to help keep your business afloat. Call us today at (973) 301-2300 for a specific evaluation of your situation.

6 Tax Refund Myths: Setting the Record Straight

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While tax season is still months away, it’s always top of mind with the Magone & Company team — keeping up on tax law changes, helping clients with tax planning strategies and brainstorming ways to make the filing season as simple and painless as possible.

In our roles as tax professionals, we hear a lot of myths and misconceptions from clients — when to file, what constitutes a “good” return and whether or not to adjust your withholding amount. Falling victim to misinformation could jeopardize your finances or worse, leave you in hot water with the IRS.

Protect yourself (and your money) by dispelling these 6 tax refund falsehoods.

MYTH #1: The bigger the refund, the better.

A large refund isn’t always indicative of a positive financial situation. It just means you’re paying the government too much throughout the year. A tax refund is essentially the return of an interest-free loan provided to Uncle Sam.

By overpaying, you’re lending money without earning any interest on it. This is money that you could’ve used over the course of the year for necessary expenses. And just like individual taxpayers, a hefty return could be bad news for businesses, too.

MYTH #2: You don’t need to adjust withholding for tax year 2023 if you received a refund this year.

It’s important to double check your withholding amount every year, especially if you:

  • Received a large tax refund last year
  • Got married, divorced or had a child (birth or through adoption)
  • Claim the child tax credit
  • Have high income or a complex tax return
  • Are a dual-income family
  • Have dependents age 17 or older

The Tax Withholding Estimator tool can help you determine if you’re withholding the right amount. Remember, withholding takes place throughout the year, so it’s in your best interest to make adjustments as soon as possible.

MYTH #3: The IRS legally has to pay the refund shown on your tax return.

Not so fast. There are several reasons why your refund amount may differ from the amount that was originally calculated — from simple math errors to deductions for past due amounts (child support or student loan payments).

Keep in mind, you’ll receive a letter from the IRS, as well as the Department of Treasury’s Financial Management Service .to alert you to an adjustment in the amount of your refund.

MYTH #4: Amending your return automatically triggers an audit.

This misconception can prevent you from correcting errors or making necessary adjustments to your tax filings. In reality, the IRS encourages amended returns as it allows for accurate reporting and ensures that you’re paying the correct amount of tax.

When making changes, it’s important to maintain accurate documentation and provide supporting evidence, including records of income and deductions.

MYTH #5: The IRS has access to your bank account if you received an electronic refund.

Electronic filing is one of the fastest ways to get your refund — and it’s also secure, meaning the IRS does not gain access to your account.

What about if you owe money? The IRS is not able to withdraw money from your account. Rest assured, if you have unpaid back taxes you will be officially notified by postal mail.

MYTH #6: If you file an extension, you don’t have to pay any amount owed by April 15. An extension to file is not an extension to pay.

You’re still required to estimate the taxes you owe and submit that payment on time. Your return, along with any additional taxes owed, must be filed by October 15 of the same tax year.

Never mind the myths

By debunking these myths, you can navigate next tax season with increased confidence, ensuring your finances are in good shape. If you have any questions, reach out to the knowledgeable CPAs at Magone & Company for tax-related expertise. Give us a call today at (973) 301-2300.

 

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.

IRS No Longer Processing ERC Claims

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You have heard or seen on various media outlets that businesses are not taking advantage of the Employee Retention Credit (ERC). However, many companies offering assistance with filing for the credit are taking advantage of the public and making claims where none exists, all while collecting a hefty percentage of the claim.

The money that can be allegedly obtained seems too good for small business owners to pass up — and it most likely is.

In a press release, the IRS  identified several warning signs (red flags) of aggressive ERC marketing, including:

  • Unsolicited calls or advertisements mentioning an “easy application process”
  • Promoter stating they can determine ERC eligibility within minutes or claiming that a business qualifies for the ERC before any discussion of your tax situation
  • Large upfront fees to claim the credit,
  • Fees based on a percentage of the ERC refund obtained

We applaud the IRS’ recent announcement putting an immediate moratorium on processing new ERC claims through at least the end of the year. This decision comes amid rising concerns about a flood of improper claims, putting small business owners at financial risk. You could be in a much worse position if required to repay the credit (along with penalties and interest) than if you never claimed it in the first place.

Always consult a trusted tax advisor before applying for credits or filling out any paperwork that may cost you in the long run.

Business Owners: Don’t Fall for the ERC Scam

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Your business has likely been the recipient of many robocalls telling you that you’re missing out on the Employee Retention Credit (ERC). Callers promise eligibility and a fast, easy application process. Don’t fall for it, says the IRS.

The ERC (also known as the ERTC) is a tax credit that was introduced during COVID to make it easier for struggling employers to keep employees on the payroll. It was available to eligible employers for qualified wages paid from March 12, 2020 – October 1, 2021 (recovery start-up businesses qualified through December 31, 2021).

Like many pieces of pandemic-era legislation, ERC parameters changed several times, which makes claiming the credit not as straightforward as these cold callers make it out to be.

Third parties typically charge significant upfront fees, without bothering to explain that your business may not be eligible after all. If that’s the case,  your business will not only need to return the refund. You’ll also incur costs to amend your employment tax returns, and may even be subject to penalties and interest.

Don’t fall victim to this or any other scam. If you need to confirm eligibility for this or any other possible tax credits, please get in touch.

Looking for legit tax-saving opportunities? Check out our Small Business Guide to Mid-year Tax Planning.

Small Business Guide to Mid-year Tax Planning

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Want to lower your next income tax bill? Here are some mid-year tax planning strategies for small businesses:

Establish a retirement plan for employees
If your business doesn’t already offer a retirement plan, now’s the time as current rules allow for significant deductible contributions. If you’re self-employed and set up a SEP plan for yourself, you can contribute up to 20% of your net self-employment income with a maximum contribution of $66,000 for 2023. If you’re employed by your own corporation, you may contribute up to 25% of your salary with a maximum contribution of $66,000 for 2023.

Leverage depreciation tax breaks
Current federal income tax rules allow first-year depreciation write-offs for eligible assets placed in service during your business’s current tax year:

  • Depreciation deductions for passenger cars, as well as heavy or light SUVs, pickups and vans used over 50% for business
  • Section 179 deductions for qualifying personal property used for business
  • First-year bonus depreciation for qualified new and used property

Time your business income and deductions for maximum savings
Deferring income into next year while accelerating deductible expenditures into this year makes sense if you expect to be in the same or a lower tax bracket next year, because it effectively postpones part of your tax bill from 2023 until 2024. And after the inflation adjustments to 2024 rate bracket thresholds, the deferred income might be taxed at a lower rate. On the other hand, if you expect to be in a higher tax bracket in 2024, take the opposite approach.

Maximize the qualified business income (QBI) deduction
The deduction based on QBI from pass-through entities was a key element of 2017 tax reform. For tax years through 2025, the deduction can be up to 20% of a pass-through entity owner’s QBI, subject to restrictions that may apply at higher income levels. For QBI deduction purposes, pass-through entities are defined as sole proprietorships, single-member LLCs that are treated as sole proprietorships for tax purposes, partnerships, LLCs that are treated as partnerships for tax purposes and S corporations.

Claim the gain exclusion for qualified small business stock
Don’t overlook the 100% federal income tax gain exclusion privilege for eligible sales of Qualified Small Business Corporation (QSBC) stock that was acquired after September 27, 2010. QSBC shares must be held for more than five years to be eligible for the gain exclusion break.

Employ family members
Hiring family members can be a useful strategy to reduce overall tax liability. If the family member is a bona fide employee, the taxpayer can deduct the wages and benefits, including medical benefits, paid to the employee on Schedule C or F as a business expense, thus reducing the proprietor’s self-employment tax liability. In addition, wages paid to your child under the age of 18 are not subject to federal employment taxes, will be deductible at your marginal tax rate, are taxable at the child’s marginal tax rate, and can be offset by up to $13,850 (your child’s maximum standard deduction for 2023).

Questions? Reach out to Magone & Company
Our goal is to get you thinking about potential moves that can minimize your small business’s tax liability before the end of the year. If you have questions or would like our expertise in evaluating your business’s best tax planning options, give us a call at (973) 301-2300.

This document is for informational purposes only and should not be considered financial advice. Be sure to consult with a knowledgeable tax adviser regarding your taxes.