Business Tax Planning - Noteworthy Considerations
TAXABLE FRINGE BENEFITSGenerally, you must report the value of benefits you provide to your staff as employees’ taxable income—unless explicitly excluded by the IRS. This includes certain employee discounts on goods or services, parking subsidies of up to $280, company services at cost, and benefits of small value items, such as modest holiday gifts, minimal personal use of office equipment, or occasional company parties. The value of more substantial benefits must be included in taxable income. This includes things like personal use of a company car or a country club membership.
FAMILY MEMBERS ON PAYROLL
Consider adding your spouse or children to your payroll to help maximize business tax deductions. When you add your spouse to your roster, he or she may be entitled to make IRA contributions, or participate in your company’s retirement plan. Also, you can provide your spouse with family health insurance coverage, which will increase the business deduction for premium payments. And if you’re self-employed, any wages you pay children under age 18 are not subject to Social Security or Medicare taxes. Of course, your kids must work to earn the wages.
HOME OFFICE DEDUCTION
Self-employed business owners who use their home as their principal place of business and use a portion of their residence as a dedicated office (or warehouse/ storage) space can claim the home office deduction. You can deduct a portion of your mortgage interest, property taxes and insurance, and utilities equal to the percentage of your home’s square footage that’s dedicated to business use. Alternatively, the simplified method allows a maximum $1,500 deduction, depending on square footage used.
When reimbursing employees for business expenses, ensure that you receive adequate documents and receipts. All documentation should include the business purpose of the expense, and the relationship of the person for whom expenses were incurred.
When the time comes to sell your company, the tax consequences can have a major impact on the transaction’s profit. Consider an installment sale if the buyer lacks sufficient cash or will pay a contingent amount that’s based on the company’s performance. Installment sales have tax advantages, such as spreading the gain over many years to avoid triggering the Net Investment Income Tax or short-term capital gains. However, there can be drawbacks, including the recapture of depreciation in the year of the sale or increasing tax rates in future years. Of course, tax consequences are only one of many important considerations when planning to sell your business.
RESEARCH AND DEVELOPMENT (R&D) TAX CREDITS
The R&D tax credit has been around since the early 1980s and benefits U.S. businesses in various sectors, including manufacturing and distribution, software and technology, healthcare, construction, and consumer products. The amount of the credit is based on a company’s qualified research expenses and consists of wages, supplies used in the R&D process, and 65% of third-party contract research. Research must be completed in the U.S. and meet the IRS Four-Part Test. Your state may have its own R&D credit, so speak with your tax professional to find out if your business would be eligible.
DEFERRED PAYROLL TAXES
If your company utilized the CARES Act to elect to defer paying certain employment taxes for 2020, you should have made your first installment payment by December 31, 2021 and the remainder needs to be paid by December 31, 2022.