Being aware of your tax situation and where you can avoid paying it could bring considerable savings to both individuals and businesses.
Insurance is a necessity because it protects you from uncertainty. Without this safety net in place, you could end up with out-of-pocket expenses that take you a lifetime to repay. With apologies to Benjamin Franklin, “death and taxes” are the only certainties in life.
But there is undoubtedly a way to minimize the latter part of that idiom. Specific tax considerations go hand-in-hand with insurance premiums and benefits, and you’ll want to learn where you can avoid paying tax and where it’s a requirement.
Tax savings are available to both individuals and businesses that depend on the type of insurance. So let’s look at the ways you might save on your next tax bill:
Tax savings for employees
On a personal level, learning how your taxes and insurance policies are connected can save you money now and in the future.
When it comes to employer-paid life insurance, the premiums paid on these policies count as taxable income, but only if the plan covers an individual for over $50,000. When a policy becomes larger than that number, the premiums are exposed to federal taxation for the excess.
If you have disability insurance, things are a little more complicated, and you’ll have to consider your options carefully. The gist is that self-employed individuals can deduct insurance premiums on policies that cover business overhead while sick or disabled, but not on policies that cover lost wages.
In addition, if you deduct your overhead-covering premiums from your taxes, the benefits you receive become taxable income. If you don’t deduct the premium, however, the benefits aren’t taxable. Carefully decide whether or not to deduct your insurance premiums based on your situation.
Disability benefits are also taxable if your employer pays for your disability insurance. Basically, if you get sick and receive disability benefits, you’ll pay income tax on them.
From a healthcare standpoint, employees who don’t have access to group health coverage can fund a healthcare savings account and receive tax savings. Through this account, you can put tax-deductible money away for medical expenses and then withdraw it, tax-free, when you need it. This policy is like investing in personal medical insurance, and you get tax benefits along with it.
There are many ways for individuals to use insurance for tax benefits, so make sure you’re up to date on the latest rules and regulations to maximize your savings.
Business insurance tax considerations
Things are a little more complicated when buying business insurance, and tax savings (and penalties) could come in various ways.
For starters, if you have a global presence, you’ll likely want a policy in every country where you have operations, so it’s consistent with local insurance regulations and tax law.
These insurance considerations are also essential for taxes because if you go with a U.S.-based insurance company that isn’t licensed to insure you in a foreign country, the IRS could view any reimbursement you see as taxable income. Depending on your organization’s configuration and the amount of your payout, you could be on the hook for paying up to 21% on this income.
You could also have to pay taxes or financial penalties in the country where the loss occurred, putting you even further in the hole.
As a rule, you should purchase an insurance policy in every country in which you’re operating to avoid these tax problems if you need to file a claim.
Loss of key personnel
You can protect all kinds of things with business insurance, including the loss of key personnel. The idea is that if an influential individual within the organization passes away or otherwise becomes incapable of working, your insurance will offset some of the financial casualties associated with that loss.
As far as taxes go, you cannot deduct your premiums as a business expense because your organization is a beneficiary of the payout. At the same time, the company isn’t responsible for paying federal income on the proceeds.
Property and liability insurance
Your business will undoubtedly have property and liability insurance because these policies protect the organization from significant losses, many of which will be outside your control.
You are permitted to deduct the premiums for this insurance from your taxes because they’re considered ordinary and necessary expenses for tax purposes. If the reimbursement you receive is less than your financial loss, the difference also becomes tax-deductible.
Life insurance for employees
We went over some life insurance considerations for employees, but it also has tax considerations for the organization.
If you’re offering to pay life insurance premiums for your employees, it could go a long way toward attracting high-quality talent. The more you provide for workers, the easier it gets to retain this talent for years to come, as well.
From a tax standpoint, C corporations can deduct these premiums from their taxes because they won’t benefit from the payout. As mentioned before, this rule only covers policies with payouts up to $50,000. After that, the excess costs count as taxable wages for your employees.
Split-dollar life insurance policies, where you and a worker share the insurance costs and payout benefit, are not eligible for deductions because the company stands to profit from the plan.
The assistance you need
When you’re unsure about your taxes and whether or not a premium is deductible, you’ll want an expert on your side. Provident CPA & Business Advisors is standing by to answer your tax questions and offer professional advice. Contact us to learn more about our tax strategy services.
It’s never too early to start preparing for retirement, including when it comes to taxes
Whether you’ve just entered the workforce or have recently retired, saving and planning for retirement is an ongoing process. Though 57 percent of Americans say that saving for retirement is their top financial priority, nearly 19 percent of people over age 65 are still working either part- or full-time. Many people start planning too late, or just don’t take the right steps to succeed once the time comes.
While taking any step toward retirement savings is important, one of the most significant components is learning the tax pros and cons for each of your options. Making the right moves can end up saving you a lot of money in the long run.
These suggestions will help you optimize your tax strategy:
Analyze tax brackets and expenses
A first step in optimizing taxes in retirement is understanding what tax bracket you’re in—or which one you plan to be in. Then, take a look at your expenses. What can you cut back on? Try to lower your costs to stay in a lower tax bracket, and you won’t need to withdraw larger sums from retirement savings accounts. Withdrawing less, of course, means that you’ll pay less tax.
Understand Social Security income tax
Social Security income tax is different than regular income tax. If your Social Security income is over $25,000, or $32,000 for married couples, it will be taxed. Up to half of this type of income could be taxed, and up to 85 percent, if your income is $34,000 or above ($44,000 or higher for married couples).
These numbers are calculated based on adding your other retirement income to half of your Social Security income. So, to avoid paying these taxes, make sure you know how to balance all of your retirement income effectively. Working with a tax professional can help you understand the requirements.
If you have significant medical expenses in retirement, you may qualify for itemized deductions for the unreimbursed eligible medical expenses that are over 10 percent of your adjusted gross income. Eligible expenses could include necessary aids and equipment, visits to your doctor, testing, or Medicare premiums.
Take advantage of charity tax breaks
You’ll be required to pay income taxes on distributions from your traditional IRA. But if you can live without some of that income, you can opt to donate funds directly to a charity. These charitable contributions won’t count toward your income, so you won’t have to pay income taxes on them.
Another route is to donate securities to charity. You can then deduct the amount of the appreciated investment, which is more tax-advantageous than selling the investment and then giving a portion to charity.
Contribute to retirement accounts while in “retirement”
If you’re retirement-age but still working, you are likely still able to contribute to a 401(k) to save for later retirement years. You can make those contributions and defer paying taxes on them now.
Another option is to put money into a Roth IRA. You’ll have to pay taxes on contributions now, but this avoids paying them when you’re withdrawing from the account.
Required minimum distributions
Once you reach 70½, required minimum distributions from applicable retirement accounts begin. Make sure you’re withdrawing the right amount regularly. Otherwise, you’ll have to pay a steep penalty, which is 50 percent of the required withdrawal amount. This is a big mistake with expensive consequences.
Careful, long-term tax planning
It’s essential to not only analyze your current tax bracket but to make projections for the future based on how tax rates will change. Long-term tax planning allows you to manage your sources of income to save the most possible. You will better understand when to withdraw money from which accounts, and how to manage your investments to limit taxes.
Work with a tax professional
When you’re creating a tax strategy for retirement, an experienced professional who knows the rules can help you pay the least amount legally possible.
Provident CPA & Business Advisors offers tax minimization services that can help you devise an effective tax-minimization strategy. We also offer tips on retirement savings and succession planning strategies for your business.
Contact Provident today with questions and to learn more about our services.
Entrepreneurs want to save every cent they can. Here are 5 pieces of advice, whether you’re an established operator or just starting out.
Tax-time doesn’t always need to be a big bite out of your bottom line. There are a variety of methods available to entrepreneurs which can represent significant savings, either immediately or over time. Take a look at five of them:
Capitalize on start-up benefits
Expenses quickly mount for start-up businesses. Even researching how to get an enterprise off the ground can take time and money. Federal law supports entrepreneurs by providing research and development deductions when that research results in the successful opening of a business. This benefit does not apply if the research does not result in a business being launched.
Research and development deductions allow entrepreneurs to deduct up to $5,000 of start-up expenses during their first year in business. The remainder of the start-up costs can be deducted over a period of years in equal installments. Expenses which qualify for this deduction are:
- Salaries/Wages/Employee training
- Investigating possible sites for a business
- Consultancy fees
- Product or market research
- Ordering supplies
Claiming on wear and tear and depreciation
The Modified Accelerated Cost Recovery System is how the IRS calculates the depreciation of business assets. Except for land, the IRS deems most tangible property as depreciable.
Wear and tear on buildings (providing they are owned by the taxpayer and used for an income-producing activity for longer than a year), furniture, equipment, vehicles, and machinery all qualify, as do some intangible properties like computer software, patents, and copyrights. Depreciation can be claimed overtime or taken in a lump sum.
The Tax Cuts and Jobs Act made some amendments in 2018 to depreciation claims made on business premises, automobiles, and personal-use items. These changes were particularly valuable to small business owners, as they allowed them to expand their scope of expenses. Entrepreneurs can catch up on all changes via the IRS website.
Claim deductibles on hospitality and travel
Entrepreneurs can deduct 50 percent of dining and entertainment costs, provided they are incurred when entertaining business guests. Always record the names of the individuals present and the business discussed to provide the IRS with complete records. Retaining all receipts will accurately record the time, place, and cost of the entertainment/meal.
Travel expenses are fully tax-deductible and apply to a wide range of related expenses. Entrepreneurs operating their own vehicle can claim for fuel, repair, and insurance expenses as well as a number of miles traveled in that year.
Claiming by the mile uses the standard mileage rate released annually by the IRS. Entrepreneurs selecting this method must use it for the first year, after which they may switch to the actual expense method. This considers operating costs for the vehicle multiplied by the percentage of business use.
It’s essential to keep receipts for all travel expenses including hotel/lodging costs like room rates, meals, and telephone calls. Entrepreneurs can use an app which accurately tracks miles traveled to provide proof to the IRS.
Claim on your home office
If you’re regularly and exclusively using part of your home as an office, you could qualify for this deduction. It must be your principal place of business; entrepreneurs generally can’t have another office elsewhere on business property, but some exceptions do occur. Alternatively, space must be used to meet with clients. This deduction also applies to extended and free-standing parts of your property such as garages, studios, and barns.
How much you’ll be able to deduct depends on two things: the size of the space and whether you apply a simplified calculation or a regular one. The simplified option allows for deductions on home office space up to 300 square feet at $5 per square foot. The regular method requires determining the expenses of the home office such as mortgage interest, utilities, or repairs.
The regular method is typically based on the percentage of the home being used for business, so it’s necessary to know that number when applying for a deduction. This is achieved by dividing the square feet of the office by that of the entire home.
A 2,000 square foot home with an office of 200 square feet equals 10 percent of the home used for business, equating to a 10 percent tax deduction toward maintaining your home.
Get advice from the professionals
Staying current on tax deductibles can be a full-time job for entrepreneurs. Around 80 percent of all Americans missed an important change when filing 2018 taxes, meaning they could lose out on a refund. It can be even more costly when a business makes a mistake.
The IRS also adds a late payment penalty on the outstanding amount if a tax return error results in owing more tax than you filed. The penalty rate is 0.5 percent a month up to 25 percent of the total amount owed. Businesses will also be charged daily interest until the total is paid.
We don’t recommend going it alone on your taxes to cut down on expenses. Working with Provident CPAs is an investment that could save you a great deal of money and time in the future. Our collective experience lowers taxes legally and ethically, helping our clients take control of their finances and get closer to prosperity.
Provident CPA and Business Advisors offer a wide range of services in tax, accounting and beyond. Our core focus is to help professionals achieve financial freedom and build a better business. Get in touch today to start strengthening your finances.
A record number of American business owners are selling up. It pays to know what this means for your next tax return if you’re ready to close a deal.
More people than ever are looking to become their own boss in 2019, so if you’re ready to sell your business, you may find no shortage of takers. New sales records were set in 2016–2017 and these were again broken in 2018. But achieving a truly successful sale means navigating the best ways to avoid taking a hit on taxes. Here are some key things to consider before closing a deal.
The money from your business sale is subject to income tax
This is the first thing to consider in order to minimize losses to the IRS. Selling your business doesn’t mean it’s no longer a source of income because it will make you money when it changes hands.
The type of business being sold—LLC, sole proprietorship, S Corp, or partnership, etc.—affects how much tax you pay, as does selling your business as assets or as stock certificates. In any case, business owners must declare the full amount gained from the sale on their next income tax return.
Consider closing the sale through installments or deferred payments
Business owners may be reluctant to accept anything less than the entire purchase price at closing. This is understandable and removes the risk that a buyer might default on installments, but it isn’t always possible, as many deals mandate a structured, incremental buyout. It’s also not necessarily the best tax move. Accepting all sales proceeds in a single year will land you in a higher tax bracket.
Agreeing to installments over several years can lower the tax liability of your business sale since you pay much of the tax over time as you get the payments. In such a competitive buyer’s market, offering installments could also make your business more attractive to buyers who won’t have to pay everything at once.
Installments also mean you remain part of the operation until closure. This keeps the original owner around to offer advice and ensure things are being run properly, which minimizes performance risk and lowers the likelihood of the buyer defaulting on installments.
Where you live could be a tax advantage (or a liability)
Your state of residency is a benefit or a burden when selling your business because state and local income tax can be applied on top of federal taxes.
Stock sales are generally more favorable than asset sales in this scenario. If your business makes an asset sale it will typically owe taxes in the state or states where it has assets, sales, or payroll, or has gained income in the past. Stocks, on the other hand, are usually taxed in the state of residence.
This means that a business owner living in the “right” state (and choosing an all-stock sale) could avoid a significant tax bite. Of all states, only nine are exempt from income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.
Business owners making an all-stock sale while living in any of those could avoid tax entirely, even if the company does business in another state. In addition, stocks are generally immune from the transfer, sales, and use taxes.
Your sale could qualify as totally tax-free
When one C or S corporation buys another, it’s possible to set the deal up as a capital gains tax-free merger. One way to do so is through a stock exchange or “corporate reorganization.”
The “buyer” and the “seller,” in this instance, can swap stocks in their respective companies until the buyer is in full possession of the other’s business. This can avoid income tax completely since a stocks-for-stocks exchange classifies as non-cash assets.
Sellers must receive a certain percent of the buyer’s stock (typically between 40 and 100 percent) for this kind of deal to go through. Two important notes here:
- Even if sellers get off tax-free on a stock exchange, they’ll still be taxed later if they choose to sell the shares.
- Federal law prohibits selling shares gained in this manner for a set period if the seller wants to hold on to that tax-free status.
For taxes filed in 2020, many taxpayers will pay 15 percent long-term capital gains tax if they’ve been holding new shares for over a year and decide to sell. The standard income tax rate will apply if they choose to sell new shares they’ve held for a shorter time.
The corporate reorganization process is complex and laid out in Section 368 (a) of the Internal Revenue Code. If your business wishes to go this route, it’s vital to speak to a qualified CPA who can guide you safely through it.
Each of the above suggestions are potential tax implications; everything has its own element of risk and there are frequently exceptions to rules. Connect with Provident CPAs to get the full picture on which sales solution will save your business the most come tax time.
Provident CPA and Business Advisors offer a wide range of services in taxes, accounting, and beyond. Our core focus is to help professionals achieve financial freedom and build a better business. Get in touch today to start strengthening your finances.