Three tax breaks for small businesses

Sometimes, bigger isn’t better: Your small- or medium-sized business may be eligible for some tax breaks that aren’t available to larger businesses. Here are some examples.

1. QBI deduction

For 2018 through 2025, the qualified business income (QBI) deduction is available to eligible individuals, trusts and estates. But it’s not available to C corporations or their shareholders.

The QBI deduction can be up to 20% of:

  • QBI earned from a sole proprietorship or single-member limited liability company (LLC) that’s treated as a sole proprietorship for federal income tax purposes, plus
  • QBI passed through from a pass-through business entity, meaning a partnership, LLC classified as a partnership for federal income tax purposes or S corporation.

Pass-through business entities report tax items to their owners, who then take them into account on their owner-level returns. The QBI deduction rules are complicated, and the deduction can be phased out at higher income levels.

2. Eligibility for cash-method accounting

Businesses that are eligible to use the cash method of accounting for tax purposes have the ability to fine-tune annual taxable income. This is accomplished by timing the year in which you recognize taxable income and claim deductions.

Under the cash method, you generally don’t have to recognize taxable income until you’re paid in cash. And you can generally write off deductible expenses when you pay them in cash or with a credit card.

Only “small” businesses are potentially eligible for the cash method. For this purpose under current law, a small business includes one that has no more than $25 million of average annual gross receipts, based on the preceding three tax years. This limit is adjusted annually for inflation. For tax years beginning in 2022, the limit is $27 million.

3. Section 179 deduction

The Sec. 179 first-year depreciation deduction potentially allows you to write off some (or all) of your qualified asset additions in the first year they’re placed in service. It's available for both new and used property.

For qualified property placed in service in tax years 2018 and beyond, the deduction rules are much more favorable than under prior law. Enhancements include:

Higher deduction. The Sec. 179 deduction has been permanently increased to $1 million with annual inflation adjustments. For qualified assets placed in service in 2022, the maximum is $1.08 million.

Liberalized phase-out. The threshold above which the maximum Sec. 179 deduction begins to be phased out is $2.5 million with annual inflation adjustments. For qualified assets placed in service in 2022, the phase-out begins at $2.7 million.

The phase-out rule kicks in only if your additions of assets that are eligible for the deduction for the year exceed the threshold for that year. If they exceed the threshold, your maximum deduction is reduced dollar-for-dollar by the excess. Sec. 179 deductions are also subject to other limitations.

Bonus depreciation

While Sec. 179 deductions may be limited, those limitations don’t apply to first-year bonus depreciation deductions. For qualified assets placed in service in 2022, 100% first-year bonus depreciation is available. After this year, the first-year bonus depreciation percentages are scheduled to start going down to 80% for qualified assets placed in service in 2023. They will continue to be reduced until they reach 0% for 2028 and later years.

Contact us to determine if you’re taking advantage of all available tax breaks, including those that are available to small and large businesses alike.

© 2022


Businesses will soon be able to deduct more under the standard mileage rate

Business owners are aware that the price of gas is historically high, which has made their vehicle costs soar. The average nationwide price of a gallon of unleaded regular gas on June 17 was $5, compared with $3.08 a year earlier, according to the AAA Gas Prices website. A gallon of diesel averaged $5.78 a gallon, compared with $3.21 a year earlier.

Fortunately, the IRS is providing some relief. The tax agency announced an increase in the optional standard mileage rate for the last six months of 2022. Taxpayers may use the optional cents-per-mile rate to calculate the deductible costs of operating a vehicle for business.

For the second half of 2022 (July 1–December 31), the standard mileage rate for business travel will be 62.5 cents per mile, up from 58.5 cents per mile for the first half of the year (January 1–June 30). There are different standard mileage rates for charitable and medical driving.

Special situation

Raising the standard mileage rate in the middle of the year is unusual. Normally, the IRS updates the mileage rates once a year at the end of the year for the next calendar year. However, the tax agency explained that “in recognition of recent gasoline price increases, the IRS made this special adjustment for the final months of 2022.” But while the move is uncommon, it’s not without precedent. The standard mileage rate was increased for the last six months of 2011 and 2008 after gas prices rose significantly.

While fuel costs are a significant factor in the mileage figure, the IRS notes that “other items enter into the calculation of mileage rates, such as depreciation and insurance and other fixed and variable costs.”

Two options

The optional standard mileage rate is one of two methods a business can use to compute the deductible costs of operating an automobile for business puroses. Taxpayers also have the option of calculating the actual costs of using their vehicles rather than using the standard mileage rate. This may include expenses such as gas, oil, tires, insurance, repairs, licenses, vehicle registration fees and a depreciation allowance for the vehicle.

From a tax standpoint, you may get a larger deduction by tracking the actual expense method than you would with the standard mileage rate. But many taxpayers don’t want to spend time tracking actual costs. Be aware that there are rules that may prevent you from using one method or the other. For example, if a business wants to use the standard mileage rate for a car it leases, the business must use this rate for the entire lease period. Consult with us about your particular circumstances to determine the best course of action.

© 2022


How to keep remote sales on point

The pandemic has dramatically affected the way people interact and do business. Your company likely undertook various changes to adapt to the initial lockdowns and the ongoing public health guidance over the past two years.

An interesting byproduct of the crisis is that it created a somewhat involuntary experiment in remote work. Many businesses that were previously reluctant to allow telework — and remote sales, in particular — have learned that they can be highly effective.

If your company continues to deploy a remote sales staff, don’t assume it will “run itself” or that this tech-based approach is finished evolving. Here are some tips on keeping remote sales on point.

Devise sound strategies

No matter what the method, sales efforts should be targeted. Remote sales teams can lose their focus when they’re able to literally reach out to the world via the Internet. Don’t let sound sales and marketing strategies fall by the wayside.

For example, it’s far easier to sell to thoroughly researched prospects or, best of all, existing customers — who are already familiar with your products or services and those with whom you have an established relationship.

Continuously leverage technology

This might sound like a silly point given that remote sales are wholly dependent on technology to occur, but tech solutions are constantly evolving. Stay on the lookout for video chat and virtual meeting solutions that might work better for your business.

In addition to video-based products, other types of technology can enhance or support the sales process. For instance, software platforms that enable you to create customized, interactive and visually appealing presentations can help overcome some of the challenges of remote sales. And salespeople can use brandable “microsites” to:

  • Share documentation and other information with customers and prospects,
  • Monitor customers’ activities on these sites, and
  • Tailor follow-ups appropriately.

Also, because different customers have different preferences, it’s a good idea to offer a variety of approaches to communication — including email, texts, instant messaging, videoconferencing and live chat. Good old-fashioned phone calls should, of course, be an option as well.

Provide an outstanding experience

The ultimate goal of any remote sales team is to close deals and bring in revenue. But, rather than getting too caught up in the numbers, your salespeople should always be cognizant of the experience they’re helping provide customers.

Today’s buyers, whether consumer or business-to-business, largely prefer the convenience and comfort of self-service and digital interactions. That’s half the battle. However, your remote sales staff must still ensure that customers’ experiences with both your technology and people are overwhelmingly positive. This might entail occasionally taking off their sales hats and donning a customer service or tech support hat to solve a problem.

Stay competitive

The lasting impact of the pandemic isn’t yet completely clear, but the manner in which it has accelerated the use of remote technology is readily apparent. To stay competitive, businesses need to continue incorporating and enhancing remote sales techniques and IT solutions. Let us assist you in weighing the costs, risks and advantages of your investments in this area.

© 2022


Five tax implications of divorce

Are you in the early stages of divorce? In addition to the tough personal issues that you’re dealing with, several tax concerns need to be addressed to ensure that taxes are kept to a minimum and that important tax-related decisions are properly made. Here are five issues to consider if you’re in the process of getting a divorce.

  1. Alimony or support payments. For alimony under divorce or separation agreements that are executed after 2018, there’s no deduction for alimony and separation support payments for the spouse making them. And the alimony payments aren’t included in the gross income of the spouse receiving them. (The rules are different for divorce or separation agreements executed before 2019.)
  2. Child support. No matter when the divorce or separation instrument is executed, child support payments aren’t deductible by the paying spouse (or taxable to the recipient).
  3. Personal residence. In general, if a married couple sells their home in connection with a divorce or legal separation, they should be able to avoid tax on up to $500,000 of gain (as long as they’ve owned and used the residence as their principal residence for two of the previous five years). If one spouse continues to live in the home and the other moves out (but they both remain owners of the home), they may still be able to avoid gain on the future sale of the home (up to $250,000 each), but special language may have to be included in the divorce decree or separation agreement to protect this tax exclusion for the spouse who moves out.
    If the couple doesn’t meet the two-year ownership and use tests, any gain from the sale may qualify for a reduced exclusion due to unforeseen circumstances.
  4. Pension benefits. A spouse’s pension benefits are often part of a divorce property settlement. In these cases, the commonly preferred method to handle the benefits is to get a “qualified domestic relations order” (QDRO). This gives one spouse the right to share in the pension benefits of the other and taxes the spouse who receives the benefits. Without a QDRO the spouse who earned the benefits will still be taxed on them even though they’re paid out to the other spouse.
  5. Business interests. If certain types of business interests are transferred in connection with divorce, care should be taken to make sure “tax attributes” aren’t forfeited. For example, interests in S corporations may result in “suspended” losses (losses that are carried into future years instead of being deducted in the year they’re incurred). When these interests change hands in a divorce, the suspended losses may be forfeited. If a partnership interest is transferred, a variety of more complex issues may arise involving partners’ shares of partnership debt, capital accounts, built-in gains on contributed property, and other complex issues.

A variety of other issues

These are just some of the issues you may have to deal with if you’re getting a divorce. In addition, you must decide how to file your tax return (single, married filing jointly, married filing separately or head of household). You may need to adjust your income tax withholding and you should notify the IRS of any new address or name change. There are also estate planning considerations. We can help you work through all of the financial issues involved in divorce.

© 2022


The kiddie tax: Does it affect your family?

Many people wonder how they can save taxes by transferring assets into their children’s names. This tax strategy is called income shifting. It seeks to take income out of your higher tax bracket and place it in the lower tax brackets of your children.

While some tax savings are available through this approach, the “kiddie tax” rules impose substantial limitations if:

  1. The child hasn’t reached age 18 before the close of the tax year, or
  2. The child’s earned income doesn’t exceed half of his or her support and the child is age 18 or is a full-time student age 19 to 23.

The kiddie tax rules apply to your children who are under the cutoff age(s) described above, and who have more than a certain amount of unearned (investment) income for the tax year — $2,300 for 2022. While some tax savings on up to this amount can still be achieved by shifting income to children under the cutoff age, the savings aren’t substantial.

If the kiddie tax rules apply to your children and they have over the prescribed amount of unearned income for the tax year ($2,300 for 2022), they’ll be taxed on that excess amount at your (the parents’) tax rates if your rates are higher than the children’s tax rates. This kiddie tax is calculated by computing the “allocable parental tax” and special allocation rules apply if the parents have more than one child subject to the kiddie tax.

Note: Different rules applied for the 2018 and 2019 tax years, when the kiddie tax was computed based on the estates’ and trusts’ ordinary and capital gain rates, instead of the parents’ tax rates.

Be aware that, to transfer income to a child, you must transfer ownership of the asset producing the income. You can’t merely transfer the income itself. Property can be transferred to minor children using custodial accounts under state law.

Possible saving vehicles

The portion of investment income of a child that’s taxed under the kiddie tax rules may be reduced or eliminated if the child invests in vehicles that produce little or no current taxable income. These include:

  • Securities and mutual funds oriented toward capital growth;
  • Vacant land expected to appreciate in value;
  • Stock in a closely held family business, expected to become more valuable as the business expands, but pays little or no cash dividends;
  • Tax-exempt municipal bonds and bond funds;
  • U.S. Series EE bonds, for which recognition of income can be deferred until the bonds mature, the bonds are cashed in or an election to recognize income annually is made.

Investments that produce no taxable income — and which therefore aren’t subject to the kiddie tax — also include tax-advantaged savings vehicles such as:

  • Traditional and Roth IRAs, which can be established or contributed to if the child has earned income;
  • Qualified tuition programs (also known as “529 plans”); and
  • Coverdell education savings accounts.

A child’s earned income (as opposed to investment income) is taxed at the child’s regular tax rates, regardless of the amount. Therefore, to save taxes within the family, consider employing the child at your own business and paying reasonable compensation.

If the kiddie tax applies, it’s computed and reported on Form 8615, which is attached to the child’s tax return.

Two reporting options

Parents can elect to include the child’s income on their own return if certain requirements are satisfied. This is done on Form 8814 and avoids the need for a separate return for the child. Contact us if you have questions about the kiddie tax.

© 2022


Important considerations when engaging in a like-kind exchange

A business or individual might be able to dispose of appreciated real property without being taxed on the gain by exchanging it rather than selling it. You can defer tax on your gain through a “like-kind” or Section 1031 exchange.

A like-kind exchange is a swap of real property held for investment or for productive use in your trade or business for like-kind investment real property or business real property. For these purposes, “like-kind” is very broadly defined, and most real property is considered to be like-kind with other real property. However, neither the relinquished property nor the replacement property can be real property held primarily for sale. If you’re unsure whether the property involved in your exchange is eligible for a like-kind exchange, contact us to discuss the matter.

Here’s how the tax rules work

If it’s a straight asset-for-asset exchange, you won’t have to recognize any gain from the exchange. You’ll take the same “basis” (your cost for tax purposes) in the replacement property that you had in the relinquished property. Even if you don’t have to recognize any gain on the exchange, you still have to report the exchange on a form that is attached to your tax return.

However, the properties often aren’t equal in value, so some cash or other (non-like-kind) property is thrown into the deal. This cash or other property is known as “boot.” If boot is involved, you’ll have to recognize your gain, but only up to the amount of boot you receive in the exchange. In these situations, the basis you get in the like-kind replacement property you receive is equal to the basis you had in the relinquished property you gave up reduced by the amount of boot you received but increased by the amount of any gain recognized.

Here’s an example

Let’s say you exchange land (investment property) with a basis of $100,000 for a building (investment property) valued at $120,000 plus $15,000 in cash. Your realized gain on the exchange is $35,000: You received $135,000 in value for an asset with a basis of $100,000. However, since it’s a like-kind exchange, you only have to recognize $15,000 of your gain: the amount of cash (boot) you received. Your basis in the new building (the replacement property) will be $100,000, which is your original basis in the relinquished property you gave up ($100,000) plus the $15,000 gain recognized, minus the $15,000 boot received.

Note: No matter how much boot is received, you’ll never recognize more than your actual (“realized”) gain on the exchange.

If the property you’re exchanging is subject to debt from which you’re being relieved, the amount of the debt is treated as boot. The theory is that if someone takes over your debt, it’s equivalent to him or her giving you cash. Of course, if the replacement property is also subject to debt, then you’re only treated as receiving boot to the extent of your “net debt relief” (the amount by which the debt you become free of exceeds the debt you pick up).

Like-kind exchanges can be complex but they’re a good tax-deferred way to dispose of investment or trade or business assets. We can answer any additional questions you have or assist with the transaction.

© 2022


Weathering the storm of rising inflation

Like a slowly gathering storm, inflation has gone from dark clouds on the horizon to a noticeable downpour on both the U.S. and global economies. Is it time for business owners to panic?

Not at all. As of this writing, a full-blown recession is possible but not an absolute certainty. And the impact of inflation itself will vary depending on your industry and the financial strength of your company. Here are some important points to keep in mind during this difficult time.

Government response

For starters, don’t expect any dramatic moves by the federal government. Some smaller steps, however, have been taken.

For instance, the Federal Reserve has raised interest rates to “pump the brakes” on the U.S. economy. And the IRS recently announced an increase in the optional standard mileage rate tax deduction for the last six months of 2022 (July 1 through December 31). The rate for business travel is now 62.5 cents per mile — up from 58.5 cents per mile for the first half of 2022.

This is notable because the IRS usually adjusts mileage rates only once annually at year-end. The tax agency explained: “in recognition of recent gasoline price increases, [we’ve] made this special adjustment for the final months of 2022.”

Otherwise, major tax relief this year is highly unlikely. Some tax breaks are inflation-adjusted — for example, the Section 179 depreciation deduction. However, these amounts were calculated at the end of 2021, so they probably won’t keep up with 2022 inflation. What’s more, many other parts of the tax code aren’t indexed for inflation.

Strategic moves

So, what can you do? First, approach price increases thoughtfully. When inflation strikes, raising your prices might seem unavoidable. After all, if suppliers are charging you more, your profit margin narrows — and the risk of a cash flow crisis goes way up. Just be sure to adjust prices carefully with a close eye on the competition.

Second, take a hard look at your budget and see whether you can reduce or eliminate nonessential expenses. Inflationary times lead many business owners to try to run their companies as leanly as possible. In fact, if you can cut enough costs, you might not need to raise prices much, if at all — a competitive advantage in today’s environment.

Last, consider the bold strategy of taking a growth-oriented approach in response to inflation. That’s right; if you’re in a strong enough cash position, your business could increase its investments in marketing and production to generate more revenue and outpace price escalations. This is a “high risk, high reward” move, however.

Optimal moves

Again, the optimal moves for your company will depend on a multitude of factors related to your industry, size, mission and market. One thing’s for sure: Inflation to some degree is inevitable. Let’s hope it doesn’t get out of control. We can help you generate, organize and analyze the financial information you need to make sound business decisions.

© 2022