Notable Considerations for Businessess

TAXABLE FRINGE BENEFITS

Generally, 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 and company services at cost. They also include modest holiday gifts, minimal personal use of office equipment and even occasional company parties. The value of more substantial benefits, such as personal use of a company car or country club membership, also must be included in taxable income.

FAMILY MEMBERS ON PAYROLL

Consider adding your spouse or children to your payroll to help maximize business tax deductions. A spouse who is an employee may be entitled to make IRA contributions or participate in your company’s retirement plan. The family business can also provide all employees, including a spouse, with other benefits such as health insurance, whose premiums would become a business deduction. If you’re self-employed, wages paid to 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. There are two ways to take a deduction:

• Deduct a portion of your mortgage interest, property taxes and insurance, and utilities equal to the percentage of your home’s square footage dedicated to business use.


• Use the simplified method, which allows a maximum $1,500 deduction depending on square footage used.

Make sure you receive adequate documents and receipts when reimbursing employees for business expenses.

EXIT PLANNING

The sale of a small business can have a major impact on the transaction’s profit due to potential taxes. One way to reduce the tax impact is to conduct an installment sale, especially if the buyer lacks sufficient cash or will pay a contingent amount that’s based on the company’s performance.

Installment sales spread the gain over the length of the contract, which may help avoid triggering the Net Investment Income Tax or short-term capital gains tax. 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. The IRS has extended the transition period through January 10, 2024 during which taxpayers get 45 days to perfect a research credit claim for refund prior to IRS’s final determination on the claim.

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

As part of federal COVID relief provided during 2020, employers and self-employed people could choose to put off paying the employer's share of their eligible Social Security tax liability, normally 6.2% of wages. Half of that deferral was due January 3, 2022, and the other half was due January 3, 2023.