Year-end Tax Planning for Small Businesses

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The year-end is a busy time for small businesses — from finalizing your books to forecasting for the year ahead. But it’s also a key time to take action to help lower your taxes. Read on for tax-saving strategies that may help your business save this year and next:

  • Did you know that taxpayers (excluding corporations) may receive a deduction of up to 20% of their qualified business income? If your taxable income exceeds $340,100 for a married couple filing jointly, the deduction may be limited based on paid W-2 wages, the unadjusted basis of qualified property (e.g. machinery and equipment) and whether you’re engaged in a service-type business or trade (e.g. accounting, law, health or consulting). Note that the limitations are phased in for those with taxable income up to $50,000 above their threshold, as well as for joint filers with taxable income up to $100,000  above the threshold. You may be able to claim a portion or all of this deduction by accelerating deductions or deferring income. You may also boost your deduction by increasing W-2 wages before year-end.
  • Compared to earlier years, more small businesses can use the cash method of accounting, rather than the accrual method. Your business may prefer this method as it’s easier to shift income to other years. To qualify, you must satisfy a gross receipts test, ensuring that your average annual gross receipts don’t exceed $27 million.
  • Excluding large corporations, a corporation that expects a small net operating loss (NOL) for 2023, and substantial net income in 2024, may accelerate a portion of its 2024 income or defer a portion of its 2023 deductions to create a small amount of net income for 2023.
  • The liberalized business property expensing option may give you an opportunity to save if your business possesses property and off-the-shelf computer software that’s depreciated. It covers interior improvements to a building, such as elevators, HVAC, security systems and more. For tax years beginning in 2022, the expensing limit is $1,080,000, while the investment ceiling limit caps at $2,700,000.
  • Your business may also can claim a 100% bonus first-year depreciation deduction. The 100% write-off is permitted without any proration based on the length of time that an asset is in service. It applies to machinery and equipment purchased used (with some exceptions) or new if purchased and placed in service this year, and for qualified improvement property, described in the expensing deduction.
  • To expense the costs of certain lower-cost assets, materials and supplies, you may take advantage of the de minimis safe harbor election, also known as the book tax conformity election). To qualify, the cost of a unit of property can’t exceed $5,000 if you have an applicable financial statement (AFS). The cost of a unit must not exceed $2,500 if there’s no AFS.
  • For optimal tax affect, you may choose to strategically time employees’ year-end bonuses. Cash-basis employers may deduct bonuses in the year paid, while accrual-basis employers may deduct bonuses in the accrual year, as long as the bonus is paid within two months following the end of the employer’s tax year. If you’re an accrual employer looking to defer deductions to a higher-taxed year in the future, you may change your bonus plan before year-end to establish the payment date after the 2.5-month window.

At Magone & Company, our goal is to get you thinking about potential moves that can minimize your small business’s tax liability now and in the future. For tax planning guidance or assistance, 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 tax situation. 

CPA Firm Checklist: Choosing the Right Professional for Your Tax Needs

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As a hardworking taxpayer, it can be challenging to navigate the complexities of the tax system, while ensuring you’re making the most of a favorable tax situation. That’s where a Certified Public Accountant (CPA) comes in.

What sets CPAs apart from other tax specialists? CPAs are licensed, certified professionals who have achieved specialized higher education and extensive training in tax laws, regulations and preparation. They’re also required to complete annual Certified Professional Education (CPE) to maintain their certification.

But does that mean a CPA is the right fit for you? Here are some factors to consider when choosing a tax professional:

Experience and specialization. How long have they been in practice? Do they have any additional certifications? How have they helped other clients with similar challenges? These factors can give you confidence in their ability to provide you with accurate and reliable tax advice. Ask for client testimonials and referrals to get a better sense of their track record and performance.

Look for CPAs who specialize in areas that align with your needs. For example, if you’re a dental practice owner, you may benefit from a firm with experience providing tax services to similar businesses in your industry.

According to Magone & Co client and business owner, Kristi T., “In addition to filing our tax returns, the advice and guidance they provide for my businesses at a CFO level is truly valuable. The team is professional, pleasant, knowledgeable and proactive to help me with my business needs.”

Communication. Effective communication is key to any professional relationship. You want a firm that values open and transparent communication, actively listens to your concerns, explains complex tax concepts in laymen’s terms, and provide personalized advice that’s tailored to your needs. (Remember, you’re not the tax expert; they are.)

Availability. Consider a firm’s responsiveness and availability. Are they prompt in returning your calls and emails? Do they schedule regular meetings to review your financial situation and discuss any changes? Is there a set timeline of when your needs will be met? It’s essential to make sure all parties are on the same page, so you feel assured they’ll be there to assist you.

Security. All CPA firms should have proven strategies and procedures in place to safeguard your personal information. Is there a secure process for uploading documents? Are there encryption systems to regulate access to the data? Be sure you have peace of mind knowing who has access to your files.

For example, Magone & Co client, Nadja D. shares, “I currently reside outside the U.S. and have to coordinate two tax returns. I love the process that they have in place as I can securely submit everything electronically, which is a huge help. It’s a very well-organized office.”

Pricing structure. Get a clear picture of the value a CPA firm delivers and your potential return on investment. Inquire about their pricing structure and services included in their fees. Does the firm wish to build an ongoing consultative relationship, or do they seem solely interested in transactional services such as tax return preparation?

Consider the value of a financial and tax team that knows your unique situation, understands your priorities, meets with you regularly and can proactively seek out opportunities to lower your tax burden and get you closer to your financial goals faster.

For example, if you fall into the “sandwich generation,” you may find yourself simultaneously caring for aging parents while putting kids through college. CPAs who also hold the CFP financial planning designation can help you sort out strategies that don’t put your own retirement at risk.

The bottom line

Look for a firm that treats you as more than just a number — one that has a genuine interest in serving you. We’d love to see if Magone & Company is the right fit for you, so reach out today for a consultation.

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.

Understanding Earnouts: The M&A Negotiating Tool with Tax Consequences

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After a lull in 2022, merger and acquisition (M&A) activity has picked up this year as expected. However, due to ongoing economic uncertainty, earnouts are likely to play a big role in many deals — which may carry significant tax consequences.

Also known as a contingent consideration, an earnout is a mechanism that promises future payments to the seller in addition to an upfront payment.

The ins and out of an earnout

Today, the gap between what sellers want and what buyers are willing to pay has widened due to several valuation variables — expected cash flows, pricing multiples and rates of return.

Earnouts can help bridge the valuation gap and facilitate deal making by offering a contingent payment that the seller only receives when specific performance targets are met by an agreed-upon date. For example, 10% of the purchase price might be contingent on whether an acquired company meets a specific revenue or earnings target over a two-year period.

Dueling tax treatments
Depending on how a deal is structured, earnout payments may be treated as either part of the purchase price or compensation to the seller for services rendered.

If an earnout is deemed part of the purchase price, it’s taxed at the capital gains rate, generally 15% or 20%. The 3.8% net investment income tax also may apply in this situation. However, if it’s considered compensation, it’s taxed at the applicable ordinary income rate, which can be as high as 37%. (Plus, it’s subject to payroll taxes.)

The characterization of an earnout affects the buyer, too. An earnout that’s treated as compensation is immediately deductible. On the other hand, the earnout must be capitalized and amortized over time if it’s considered a deferred payment on the purchase price.

Compensation vs. purchase price
Several factors can indicate whether an earnout is part of the purchase price or compensation for the seller’s services:

  • Is the seller required to perform services to receive the earnout payment?
  • Are they receiving separate reasonable compensation for those services?
  • Is the seller’s employment required for the entire earnout period?
  • Is the earnout paid even if the seller is terminated?
  • How does the earnout amount compare with reasonable compensation for the seller’s services?

Another important consideration is whether there’s any evidence of intent in documentation related to the transaction. For example, does correspondence show a difference of opinion on the target’s valuation and, in turn, the purchase price? Did the deal close after an earnout was added? Does the letter of intent connect the earnout to the seller’s continued employment?

Do your due diligence
When buying or selling a business, always consult with your tax advisor to ensure the transaction documents and structure reflect the intended tax results. The professionals at Magone & Company can help you navigate M&As to help achieve the most favorable tax position. Call us today at (973) 301-2300 for a specific evaluation of your 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.

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.

New Tax Scam Regarding Unclaimed Refunds

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The IRS is cautioning taxpayers of a new scam with the promise of unclaimed refunds.

This phishing scam requests sensitive information, including a photo of your driver’s license, your Social Security number and banking details, in order to steal your identity.

Here are the warning signs:

Suspicious mailer. The scam is sent via a delivery service in a cardboard envelope printed on IRS letterhead. It contains an “important notice” regarding an unclaimed refund. The letter prompts you to fill out personal details and submit it to a filing agent in order to obtain your refund.

Poor grammar, inconsistent capitalization, mixture of fonts. For example, the letter requests: “A Clear Phone of Your Driver’s License That Clearly Displays All Four (4) Angles, Taken in a Place With Good Lighting.”

Awkwardly worded phrases. Poorly written directions include: You’ll Need to Get This to Get Your Refunds After Filing. These Must Be Given to a Filing Agent Who Will Help You Submit Your Unclaimed Property Claim. Once You Send All The Information Please Try to Be Checking Your Email for Response From The Agents Thanks”

Stopping financial fraud in its tracks

If you receive a suspicious letter, do not contact the number on the letter. Instead, report the potential scam to phishing@irs.gov. You may also call the IRS’s main phone number at (800) 829-1040.

If you have questions about protecting your own or your business’ identity, reach out to the knowledgeable CPAs at Magone & Company. Our extensive fraud protection expertise can help keep your personal information under wraps. Give us a call today at (973) 301-2300.