Retirement Planning Tax Tips for Entrepreneurs

It’s never too soon to start planning for retirement. Tax minimization can be especially hard for entrepreneurs, who have to keep up with tax law and investment strategies while managing a business

Even if you’ve been doing everything you can to plan for retirement, expenses can add up fast if you’re not prepared in every area. Unfortunately, taxes can be one of the biggest unexpected expenses for retirees.

Retirement planning can be especially challenging for small business owners. It’s easy to focus on growing your business in the present and deprioritize saving for the future. Even more challenging is saving the same amount each month when you’re not sure if you’ll be making the same kind of money from one month to the next.

Keep these considerations in mind when planning for taxes in retirement:

Retirement accounts: Better to pay taxes now or later?

First of all, understand the types of retirement accounts available to you and their advantages. A big benefit of a 401(k), 403(b), or IRA is that you can avoid paying income tax on contributions now. For the self-employed, who may not have access to an employer-sponsored, traditional 401(k), a Solo 401(k) provides similar benefits. These solo accounts are often used by those who run a business with no employee program, and they can cover you and your spouse.

Of course, the above examples are tax-deferred accounts—avoiding income tax now but paying taxes on that income later, when you’re in retirement and receiving distributions.

This is how a Roth IRA can provide big benefits once you’re in retirement. You pay taxes on this money now, so the income you’re receiving in retirement is tax-free. Roth IRAs can be a good option for the newly self-employed or those with new businesses, because they take advantage of the tax bracket you’re in now when you’re starting out, versus when you’re in retirement.

That said, many people start saving for retirement assuming that they’ll be in a lower tax bracket when that time comes. However, that may not always be the case. Required minimum distributions on your tax-deferred accounts require that you start withdrawing money when you’re 70 ½, even if you don’t want to—so this added income can push you into the next bracket if you have significant income from other sources.

A Simplified Employee Pension Plan (SEP-IRA) is another option to consider if you’re an entrepreneur. This account is an IRA that gives business owners a simpler way to contribute to both their own retirement savings and their employees’ retirement savings. You can contribute up to 25 percent of your annual compensation, with a cap of $56,000 in 2019. That’s almost 10 times the amount you can put away with a traditional IRA ($6,000 if you’re under 50, and $7,000 if you’re 50 or older).

However, these accounts are generally better for the self-employed or those with few or no employees, since the percentage of your compensation that you contribute to your plan has to be the same percentage you contribute to your employees’ plan.

Banking on yourself with life insurance

Life insurance isn’t just protection for your loved ones after you’re gone. There are certain benefits that you can take advantage of along the way, including avoiding taxes on investment income. One strategy to help you build your retirement savings but avoid a big tax burden is to use tax-free loans from life insurance earnings. You are essentially borrowing money from yourself instead of a lending institution, and then paying yourself the interest plus repaying the loan to your life insurance policy.

This benefit is possible because your life insurance policy has been financed with money that’s been taxed, meaning its growth and your access to the funds are tax-free. Another benefit is that this money doesn’t have the required minimum distribution requirements that other retirement accounts impose.

Defined benefit plans, cash balance plans, and more considerations

Defined benefits and cash balance plans differ from IRAs and 401(k)s in that they allow you to make larger contributions for retirement. Those contributions lower your income and thus lower your current tax burden.

There are of course many considerations for retirement planning outside of tax obligations, such as creating a will and a healthcare directive and assigning a financial power of attorney. But tax minimization is key, allowing you to realize huge savings that can be used for things like housing, travel, and healthcare in retirement.

Provident CPA & Business Advisors is committed to helping you plan for your future. We help with tax minimization, growth and profit improvement, and succession planning. If you’re a small business owner who needs to develop a smart tax strategy, get in touch with us today to create a plan that’s best for you.

How Technology Is Changing Professional Tax Preparation

Technology is altering every sector, and taxes are no exception. Big strides are being made to revolutionize the field, and more changes are on the horizon

Tax professionals are tasked with updating their practices to meet changing technologies. As a taxpayer, what does this mean for your taxes? What’s already changed, and what can you expect soon?

Here are some of the ways that technology is impacting the tax industry right now, and a look at what might be on the horizon:

Everything paperless

Digitization has drastically changed both business and accounting. A McKinsey Global Survey revealed that more than 8 in 10 respondents said their organizations have made large-scale efforts to take advantage of digital technologies over the last five years.

Offices around the world are committing to a paperless workplace and processes, with almost all documents being stored, created, and transferred online. Tax professionals are also making the move to paperless. What does this mean for taxpayers?

  • Access to important documents from anywhere with an internet connection
  • Ease of document sharing
  • All documents stored securely in one place
  • Tasks can be done quicker and easier

Part of going paperless is embracing cloud computing through common tools like Dropbox, Google Docs,  or iCloud. The key benefit of the cloud—beyond easier file sharing—is that vital tax information is automatically backed up.

Communication methods

Technologies are updated and introduced all the time, and taxpayers expect their accountants and tax professionals to adapt. This includes having the option to conduct video conferences and greater communication online or via text message. Features like chatbots and virtual assistants will likely make their way into common use in the tax industry as well, spurring more efficient and timely answers to key taxpayer questions.

Online dashboards are becoming more and more popular, where clients can view their data and important information in an easy-to-use format that’s created after data analysis. These data visualization tools give taxpayers transparency about their tax information and fees, as well as various compliance requirements.

Cybersecurity risks

One big factor in the changing technology used in accounting is online security and safety. Tax season continues to be a major opportunity for cybercriminals to get their hands on personal and financial information. Unfortunately, hackers are continually altering their approaches to get around new safeguards.

The IRS recommends that taxpayers employ security software on their devices, such as firewalls and anti-virus protection, ensuring that it automatically updates and is always running. It’s also smart to encrypt tax documents that are stored on computers and to use strong passwords for accounts.

The IRS also advises taxpayers not to share personal information unless it’s being sent to a trusted source, to learn how to detect “phishing” emails and scam “vishing” calls, and to avoid downloading attachments when they’re sent from an unknown source.

Artificial intelligence and data analytics

Artificial intelligence (AI) is revolutionizing all industries on a global level. In the realm of taxes, the ability to sift through big data to provide detailed reports and analytics is a potentially huge benefit for taxpayers and tax professionals alike.

AI can ensure that necessary compliance requirements and any rules and regulations are being met, plus ensure that security procedures are in place. Errors or misstatements, whether they’re related to mistakes or malicious activity, can be detected and corrected with automation.

Machine learning detects patterns in large amounts of data which can be analyzed faster and speed up informed decision-making. As with many industries, AI has the potential to make tax preparation more efficient, and substantial cost savings will be seen once certain complex processes become simpler and faster.

According to the Journal of Accountancy, organizations should implement processes that document and capture more granular data to prepare for the coming changes that AI will bring to the tax industry. This will enable the technology to quickly take over existing uniform processes that currently take quite a bit of time. The SVP & CDO for Intuit, Ashok N. Srivastava has posited that machine learning and AI will provide key information that will vastly help those on both sides of tax preparation.

You should work with tax professionals who are aware of new technologies and how they impact the tax industry. From the latest communication methods to simple, secure document sharing and data collection, digital transformation is improving tax-preparation techniques—and it will continue to do so in the future.

To discuss your options with a tax professional, contact the team at Provident CPA & Business Advisors today.

Why Mother Nature Is a Potential Tax Nightmare

Natural disasters can devastate more than the building your business operates from. They can also destroy your tax records. What recourse does your business have?

If a disaster strikes and records are destroyed and assets lost, it could mean a major tax nightmare for your business. Tax obligations, including proof of loss, filing, and payment deadlines can put a major burden on impacted businesses and individuals.

This is why the IRS promotes disaster preparedness as well as offers tax credits for those who have been impacted by a natural disaster. Here’s what you need to know.

What happens if a natural disaster hits?

If some or all of your records are destroyed in a disaster in addition to the property, the IRS suggests following certain steps to obtain the information you need to reconstruct your records.

For property damage, the IRS suggests taking photographs and videos right after the disaster to help “establish the extent of the damage” as soon as possible. Then, contact the insurance company and mortgage company, review all of your policies, and even get in touch with any contractors who may have done work and may still have records about the work they did to the property. The IRS also suggests:

  • Obtaining written accounts from those who were familiar with the property
  • Getting loan paperwork from the applicable institution

For business-record loss, you should take the following steps:

  • Make lists of inventories
  • Ask suppliers for copies of invoices
  • Obtain copies of bank statements
  • Obtain copies of all previous tax returns
  • Sketch the former business property if no photos or videos are available

Getting started on these tasks right away will help you rebuild your business quickly.

Tax credits for those impacted by natural disasters

The IRS offers some tax relief for those impacted by a natural disaster. Affected taxpayers include individuals, business entities or sole proprietors, or shareholders in an S Corporation who had records necessary to meet a tax deadline located in a disaster area.

Casualty loss deduction

The casualty loss deduction is a major tax break provided by the law and applies to casualty losses due to damage, destruction, or loss of property from any sudden, unexpected, or unusual event.

This deduction is generally claimed in the year of the disaster, but victims of natural disasters can file an amended tax return for the previous year to deduct the loss, instead of waiting until the year ends in which the disaster occurred. This helps them have a lower tax obligation for that previous year, meaning they can better afford to pay for the recovery process.

Tax extensions

Because looming deadlines can be hard for businesses to meet when they’ve just been hit by a disaster, the IRS offers tax extensions for filing and paying taxes. Also, businesses can have additional time to send in their payroll taxes and returns, and penalties and interest are waived.

If you haven’t yet experienced damage from a natural disaster, there are steps you should take now to prepare in advance.

What can you do to prepare for a disaster?

1.  Back up documents

Important documents such as bank statements, tax returns, and insurance policies, should be stored safely and securely, but also backed up regularly. Hard copies should be stored in a waterproof container and there should be another set of these documents stored in another location.

Electronic backups should also be incorporated into your disaster preparedness strategy. These documents could then be retrieved after the event. Just make sure that scans are also stored in a secure online format.

2.  Create a list of assets

Taking photographs of your property and assets can help you in the event of a disaster. Also, create lists of all of your business’s valuables and what they’re worth. Update this regularly.

3.  Update emergency plans

Your business should update its emergency plan at least once a year, and whenever there are new employees hired, a location is changed, or another company change occurs. This ensures that everything is up-to-date and ready in case disaster strikes.

You need to ensure that your business is ready for the worst. Losing important records and assets can be a big headache, especially when it comes to your tax obligations. Prepare in advance to ease your tax burden, and make sure you take advantage of applicable tax credits if something does occur.

If you have questions about your disaster recovery plan or your tax obligations after a disaster, get in touch with Provident CPA & Business Advisors.

Why Are So Many Tax Refunds Unclaimed?

More than a billion dollars is out there waiting to be claimed. Unfortunately, many businesses don’t know they may be entitled to a share of it

Each year before tax time, the IRS announces the amount of unclaimed money it’s holding due to people not properly filing their tax returns. In early 2019, the IRS said there were still unclaimed income tax refunds for the tax year 2015 to the tune of nearly $1.4 billion, and they estimate that there are 1.2 million taxpayers who still didn’t even file a tax return that year.

So, why is there so much in unclaimed funds? And what can you do to ensure you claim what you’re owed?

Where does that money come from?

If the government gets too much tax from individual paychecks or taxpayers otherwise overpay, the only way taxpayers will get those funds back is if they file a tax return at the end of the year and it has the correct information, such as address and payment details. Otherwise, they have three years from the tax return date to clear up any info or file the return and claim the refund. After that three year is up, the money becomes the property of the U.S. Treasury.

So why don’t people claim their tax refunds? There are a few answers, as two tax experts told CBS News earlier this year:

  • Some individuals simply aren’t educated about how to file a return or even the necessity of doing it.
  • Sometimes individuals believe that a smaller refund isn’t worth the fee taxpayers will have to pay a tax professional. So, they’ll avoid claiming their money even if they know they overpaid on taxes.
  • Some taxpayers may want to stay unknown to the IRS, whether due to debts they owe to the government, immigration status, or other reasons.

Another reason that the IRS is sitting on refunds could simply be that a taxpayer has forgotten about their refund and hasn’t done anything to follow up on the money they were supposed to receive. This can happen if a taxpayer provided incorrect bank account information or has a new address, for example.

When businesses can get a tax refund

It’s important to understand the different business structures and when you may be able to claim a tax refund.

A C-corporation is a type of business structure in which the owners or shareholders are taxed separately than the business income. This is the most prevalent type of corporation, and because the profits are taxed both at the corporate level and the personal level, a double tax occurs. However, there are benefits of a C corporation, one of which is the ability to reinvest any revenue back into the company at a lower tax rate.

Other business structures, such as S corporations or LLCs, separate the business’s assets from its owners, but they don’t see that double taxation since income is only taxed once.

Because profits of C corporations are taxed separately than their owners, these businesses are the only type of business that is eligible to receive a tax refund. As with an individual, if the C corporation paid more estimated tax throughout a year, it can technically get a tax refund. This would also be true if your business paid too much-estimated tax on payroll or sales taxes.

Sole proprietorships, S corporations, partnerships, and LLCs are pass-through entities because tax passes to individual tax returns. So, if you run a sole proprietorship, for example, you’ll report your business earnings on your normal individual tax return.

As an LLC business owner, the only way you’d get a tax refund is if your total payments and withholding are more than your total tax liability on your return.

Remember that as a small business owner, it’s not always positive to get a tax refund. If you get money back, that means you overpaid and could have been earning interest on those funds in the interim. This could also interrupt your cash flow.

Filing a tax return

You should never wonder whether you are owed money if you file a proper tax return—and self-employed individuals must file a return if they made over $400 that year. Not doing so comes with some stiff penalties and other consequences.

Beyond the basic legal necessity, it keeps your financial record updated and could help protect you against identity theft. When you file a return using your social security number, that prevents someone else from filing a fraudulent tax return with your number. Even if you’re only now filing for previous years, doing so could still uncover that there had been a fraudulent tax return years back.

When your tax return is past due, it’s important to file it ASAP. Otherwise, you’ll stack up interest charges and late payment penalties.

Finally, if you’re self-employed and you don’t file a federal income tax return, the income you earned won’t be reported to the Social Security Administration—and you thus won’t get the credits toward your social security or disability benefits.

Provident CPA & Business Advisors help successful professionals, entrepreneurs, and investors get more out of their business and work less. Typically, our clients reduce their taxes by 20 percent or more and create tax-free wealth for life. Contact us for expert advice on tax planning and business strategy and discover how we help businesses exceed expectations.