The Procrastinator’s Guide to Surviving This Year’s Tax Season

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If you’re a procrastinator, tax filing season is probably the worst time of year. With deadlines looming, filling out all those complicated forms and making sense of the ever-changing tax code can seem like an overwhelming task.

But no matter how long you put it off, the April 15th tax filing deadline will arrive, and what you do to get ready will make all the difference. Here are three timely tips you can use to get a jump on tax filing season:

  1. Find last year’s return now. Go ahead, we’ll wait. It’s stressful to hunt for vital information at the last minute, so make sure you have it in hand well before you need it. Your previous return is required to verify your identity — an important step the IRS implemented in the face of growing identity theft and tax filing fraud.
  2. Touch base with your tax professional early. Don’t wait until March to call or email your CPA. Keep them in the loop of any changes since last year’s filing. Did you get married, have another child, sell a business interest, receive PPP funds or withdraw early from a retirement account? Make sure they have the most current filing information to stop easily avoidable errors.
  3. Gather tax forms as they arrive. Facing the tax deadline with a stack of papers is daunting — even for the non-procrastinator. Instead of waiting until everything is ready to go, gather documents as you receive them and save them in a dedicated folder on your computer.

Miss the deadline anyway?
Most often, a decision made deliberately and slowly is preferable to one made in haste. But as a procrastinator, you know things don’t always go as planned.

Last-minute snags may happen despite your best efforts, but you don’t want to mess with the IRS. Keep in mind that filing for an extension doesn’t absolve you of paying the amount you think you owe.

If you’ve missed filing in the past, the NJ CPAs at Magone & Company can help. To learn more about our tax resolution services, give us a call today at (973) 846-8265.

Going Solar: Commercial Building Owners Could Save $1M-$7M Over the System’s Life

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If you’re like most New Jersey residential and business building owners, you’ve become accustomed to multimedia messages prodding you to switch to solar power. Maybe you haven’t acted because you think it’s too expensive. Or maybe you find the incentives confusing.

Interestingly, with some of the top incentives in the nation, New Jersey has become one of the most successful solar locations in the United States. According to SEIA, the national trade association for the US Solar Industry, New Jersey ranks seventh in the nation for cumulative solar electric capacity installed through Q3 2020.

This boom has been fueled by a federal tax credit, thriving state incentives and the decreasing cost of installing solar in comparison to the utility costs NJ building owners are used to.

This is especially true for building owners with large flat roofs and high electricity usage on site.  Aside from the obvious environmental benefits of solar power (reduced air pollution, decreased water usage, better control of climate change), these recent incentives make an investment in solar something that New Jersey building owners might want to consider.

What makes solar a good investment in New Jersey?

  • Thriving state incentive – The current program in place is the TREC (transition renewable energy certificates) program, paying $152 per MWh of solar produced for 15 years.
  • Energy savings – New Jersey has high utility rates above the national average. New Jersey has a “Net-Metering Program” where you get a full retail rate credit for the amount of electricity you send back into the grid with your solar array.
  • Federal tax credit – Currently you can get a 26% federal tax credit for the total cost of installing solar.

How much can I save?

  • Capital purchase – For commercial building owners with large flat roofs, we are seeing payback periods on a solar project between 2-4 years and can save $1,000,000-$7,000,000 over the life of the system. We have seen IRR between 10-20 percent for many of our customers.
  • Power Purchase Agreement (PPA) rate – For commercial building owners with large flat roofs, you can see PPA rates from 1-4 cents/kWh vs the 9-12 cents/kWh you are currently paying the utility. This can translate into $1,000,000-$4,000,000 in savings over the life of the system.

The size of the system, and ultimately the annual returns of a solar array, are highly dependent on how much space you have on your rooftop, parking lot and/or property, what you currently pay the utility, and how much electricity you use on an annual basis.

Right now, the returns are so lucrative,  if you need a roof replacement and/or repairs, these costs can be paid for and/or financed into the solar project.

So the time just might be right to invest in solar. It’s not as expensive as you may have thought (in fact, it’s likely to be a huge money saver). And the proper partner, such as Pfister Energy, can simplify the once-confusing incentives that make going solar an attractive alternative.

At no cost to you, Pfister Energy can help analyze your property by designing an array, analyzing your utility bill, and presenting you with a financial analysis on how much solar can save you over the next 15-25 years.

Sean Quin is Vice President, Strategy & Business Development for Pfister Energy, Inc. Founded in 2005, Pfister Energy is an industry leader in solar project development, construction and operations.  Pfister Energy has more than 225MW of solar electric power installed in the U.S.

Four Secrets of a Tax Preparer: What You Don’t Know Can Cost You

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Tax time will be here before you know it. If your return is a simple one, you may be up to preparing and filing yourself. But if your situation is somewhat complicated, seeking the help of a qualified professional may be a smart move.

When you look to hire a professional, keep in mind that training, certifications and expertise can greatly vary from one tax preparer to another. And what you don’t know about them can leave you on the hook for a hefty tax bill.

#1. Many tax preparers lack tax-specific training or expertise. Just because an employee of a large tax preparation company is allowed to complete tax returns doesn’t make them an expert. In fact, the only pre-requisite for obtaining the required preparer tax identification number (PTIN) to file taxes on your behalf is the completion of a simple form — one that takes about 15 minutes to fill out.

Before you engage any tax professional, ask questions about their specific training, qualifications and expertise. Find out how long they’ve been preparing returns, ask about audits they’ve been involved in, and share your personal tax situation. Above all, ensure that you’re confident with their ability to handle your tax return properly.

#2. They very likely won’t be preparing your return. It’s an open secret in the world of tax preparers that returns are prepared in stages. That means the owner of the firm or the most experienced professional will probably not be the one who initiates your return. Instead, a junior associate will likely enter your income information and other relevant data, identify potential deductions and tax credits and give your return a quick review. Once that’s done, a senior advisor or tax preparer verifies the return and signs off on it.

The sheer number of tax returns that experienced firms handle during a busy season makes this multi-step process necessary, but it’s important to know how things work. At Magone & Company, we’ve honed a rigorous quality assurance process to ensure your return gets the right level of attention. Read what our tax clients have to say.

#3. They may not research unusual deductions and tax breaks. Your tax preparer will typically apply the most common deductions and tax credits to your return — things like deductions for educational expenses and health care costs, as well as earned income or retirement tax credits, etc. But what they may not do is research more unusual tax credits and deductions, even if they could potentially save you money.

Keep in mind your accountant is not a mind reader. Without documentation and/or mention of situations such as property held in trust or part ownership of a business, it’s difficult to identify the best way to proceed to minimize your tax burden.

Discuss situations like these with your tax preparer. You may need to pay an extra research fee or renegotiate the cost of preparing and filing your return, but the tax savings could be well worth the extra cost.

#4. CPA doesn’t mean tax relief pro. When clients get into tax trouble or get behind on paying their tax debt, they often turn to the very same tax pro that prepared the return. Unfortunately, most CPAs and tax preparers are not skilled in tax relief.

Tax relief means they know all the available IRS programs to settle your tax debt or give you favorable payment terms that don’t drown you in penalties and interest. Even if they think they know, they may not be experienced in negotiating with the IRS on your behalf.

Get tax season off to a solid start
Tax season may look a little different this year, but you can count on the tax professionals at Magone & Company to provide you with straightforward, socially distanced tax preparation. To learn more about our virtual services, call our office at (973) 301-2300.

Failure to Plan for Business Succession Equals Failure to Succeed

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You’ve spent most of your career building your business to be your legacy. You’ve reached a pinnacle, feeling secure in the knowledge that you’ve laid the cornerstone for future success.

So how can you ensure that legacy stays intact? Succession planning.

For many business owners, succession planning can be an uncomfortable topic to engage in, because it’s often associated with mortality or worse, loss of control.

Our advice? Put aside the discomfort and make a plan. That way, you have time to consider possible successors and invest in either training or hiring to fill critical skill or knowledge gaps.

Think of succession planning as a business will
Preparing for your departure — whatever the reason — can save your loved ones (either involved family heirs or your employees) from having to make up their own roadmap as they learn to drive.

Continuity is not accidental. It also signals to any investors or shareholders what the intention is for the direction of the company.

Without a well-structured, formal succession plan in place, you’re risking:

  • Unprepared or unsuitable leadership
  • Disputes for control/direction of the company
  • Unnecessary legal fees and protracted proceedings
  • A reshaped or ignored company vision
  • Financial instability
  • Inability to retain/recruit top talent

A pre-emptive consultation with a qualified CPA can help to alleviate most corporate headaches and reorganizing pains that can arise during a leadership change. Otherwise, it can be a protracted, contested tangled mess of lawyers and more CPAs, costing your company far more than if you planned a smooth exit.

And nobody wants that for a legacy.

President Signs COVID-19 Relief Act

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The President signed the COVID-19 Relief Act Sunday night. Echoing a previous post, a lot of uncertainty has been resolved. However, all may not be good in Mudville.

The deductibility of Paycheck Protection Program (PPP) loan expenses is generally seen as a positive result.  However, there is one catch.

If you are a shareholder in an S-Corporation or a member or partner in an LLC or partnership and you do not have basis (i.e., amounts at risk), the loss may not be deductible. Why? Because your PPP loan has not been forgiven in 2020, but will most likely be forgiven in 2021, which creates a mismatch of positive and negative basis adjustments.

The end result will be non-deductibility of your loss, which will be carried forward to 2021 when your loan is actually forgiven.  If you have enough basis, this will not be an issue for you and you can rest easy.

C-Corporations have no issue as it will create a Net Operating Loss (NOL) for future or carryback use.

Magone & Company clients who are concerned about deductibility should call us at (973) 301-2300 to discuss.

Entity Type Selection: Structuring for Long-Term Success

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A question we frequently hear from entrepreneurs and business owners is, “How should I structure my business for tax efficiency and business operations?” But one size does not fit all. The answer is dependent mostly on your goals for the company.

There are essentially four options to structure your business:

  • A traditional C-Corporation
  • An S-Corporation
  • A Partnership/LLC
  • A Sole Proprietor

Each entity has its own advantages and disadvantages regarding tax efficiency, types of owners and vulnerability of personal assets to creditors. Here’s a short rundown:

Sole Proprietorship
This is one of the simplest forms of business, but subjects you to the most risk. Owners have direct and sole control in the business making decisions. There is no separation of personal and business affairs. Raising capital may be difficult as banks typically depend on prior-year income to dictate the conditions of any loans, becoming stricter for businesses just getting started.

The tax return is filed with the business owner’s own personal return with a form Schedule C, mitigating the financial burden of filing a separate tax return for the business. Income is subject to the taxpayer’s ordinary income tax rates, with an additional 15.3% for self-employment tax (Social Security and Medicare) on the net business income. One-half of the self-employment tax is deducted to arrive at adjusted gross income on the personal income tax return.

Partnership/LLC
Partnerships can be as simple as a handshake between two entrepreneurs. A General Partnership gives all partners unlimited liabilities. A limited partnership requires at least one partner to manage the day-to-day activities, known as the General Partner, making them susceptible to unlimited liability. The remaining partners are passive investors with no part in management. Limited Partners still receive certain rights, such as voting about important issues.

An LLC requires more paperwork. You must file Articles of Incorporation and pay a fee with the state. LLCs must also file annual reports disclosing any changes in location, ownership or operations. LLCs are similar to a Limited Partnership as all partners receive limited liability.

If a member of an LLC dies or files bankruptcy, the LLC will dissolve. An advantage of a Limited Partnership is that a majority of remaining partners could vote to keep the business alive rather than terminate. Be aware that not all 50 states have a uniform treatment of an LLC. For example, some states limit the type of entities that may register as such, which can cause confusion for multi-state operations.

The form 1065 tax return is filed and partners receive form K-1 dictating their share of income or losses based on ownership percentages. Partners are provided guaranteed payments for services rendered or capital contributed rather than wages. Income is flowed through and taxed at the individual level at ordinary income tax rates.

For members active in day-to-day operations, the guaranteed payments and income from the partnership are subject to self-employment tax. General partners can use losses to offset other ordinary income. Any limited partner’s income will not be subject to self-employment tax, but is treated as passive. Passive losses may only offset passive income for tax purposes. Shareholders may take distributions in any manner partners agree.

S-Corporation
Incorporating as an S-Corporation becomes a bit more formal. Owners are required to file incorporation documents with their respective state, but not every state recognizes S-Corporation status. These states will tax the entity as a C-Corporation, meaning there will be double taxation. Shareholders are limited to 100 and they may only be U.S. citizens, U.S. residents and certain types of trusts.

S-Corporations are flow-through entities with income taxed at the individual level, but income retained by the corporation is not subject to the 15.3% self-employment tax like a sole proprietorship or partnership. Owners are required to take a “reasonable” salary based on the industry’s norm, with 2% shareholders being susceptible to taxability of various fringe benefits such as health insurance.

S-Corporations give shareholders limited liability, but also allows all shareholders to actively participate in the business. Owners are only liable for the capital they contributed into the corporation. It is important to separate personal and business assets so as to not “pierce the corporate veil” subjecting business debts to personal liability. Shareholders receive a form K-1 for their respective share of income and losses. Distributions, to the extent there are any, must be in proportion to ownership percentage to avoid termination of the S-corporation election.

C-Corporation
C-Corporations are similar to S-Corporations as the incorporation needs to be filed with their respective jurisdiction. Unlike other entities, owners’ personal assets are completely segregated from the assets of the corporation. Owners will typically take a salary as a form of payment. Form 1120 is filed and income is currently taxed at a flat 21% at the corporate level. Distributions are allocated to owners as taxable dividends. These dividends are taxed a second time at the individual level (double taxation). The tax rate depends on whether they are deemed ordinary or qualified; the maximum rate is 37% for ordinary and 20% for qualified.

With the incoming Biden administration, a new tax code change may be in the works. If implemented, the corporate tax rate of 21% will increase to a flat 28%. A minimum tax on corporations with book income over $100 million would also be incorporated. It would be structured similarly to an alternative minimum tax. This may make incorporating as an S-Corporation more favorable tax-wise depending on the threshold of income that would flow through to owners. The maximum individual tax rate would increase from 37% to 39.6%.

Weighing your options
A partnership must have at least two partners. A general partnership gives all partners unlimited liability, a limited partnership provides limited liability to all except at least one partner, and an LLC offers limited liability to all. Partnership entity type will be contingent on what capacity all partners are to be involved. Partnerships are more favorable for situations where you may not make consistent revenue, allowing you to take distributions as needed.

S-Corporations are more advantageous when revenue is more consistent. It gives owners the capability to take an annual salary, with distributions complementing any additional funds needed by the owners. A corporation provides the most division of personal and business assets as courts are able to “pierce the corporate veil” of S-Corporation, leaving shareholders susceptible to some type of limited liability.

Your choice of entity depends on your individual situation and plans moving forward. I would argue that most businesses begin as a sole proprietor — they have an idea and turn it into a profitable situation. Once they start buying assets and investing more into the business, it may be a good idea to incorporate as an S-Corporation. Soon enough, the company will be electing C-Corporation status and will be taken public with an Initial Public Offering.

All things being equal, it is important to have trusted advisors behind you at every stage of your business. At Magone & Company, our advisory services can help you select the best alternative based on your goals. We can also assist in implementing strategies to make the most tax-efficient choices.