Grossbach Zaino & Associates, CPA's, PC


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Deducting Meal and Entertainment Expenses

A lot of business gets done outside of the office — over lunch, on the golf course, etc. The tax law allows deductions for business meal and entertainment expenses only if specific requirements are met. Even then, deductions are generally limited to 50% of the cost.

General Rules

Meal and entertainment expenses can qualify for the 50% tax deduction if they are directly related to business. Example: You have a dinner meeting with your customer to discuss the schedule for a new project. Because the purpose of the meeting is to talk about the project — a revenue generating activity for your firm — the meal is directly related to your business.

What if you don’t “talk business” while you are entertaining a customer, client, or prospect? The expense may still qualify for a deduction if a substantial, bona fide business discussion takes place before or after (on the same day as) the meal or entertainment activity. Example: You and your client meet at your office to discuss a business matter. Afterward, you treat the client to lunch and a ball game. In this case, 50% of your expenses are potentially deductible because they are associated with the active conduct of your business.

To support your deduction, you should have records of the time, place, and business purpose of the activity; who attended and their business relationship; and the amount spent.

When the 50% Limit Does Not Apply

In some cases, meal and entertainment expenses are fully deductible. Expenses that may qualify for a 100% deduction include:

  • The cost of occasional recreational and social activities primarily for the benefit of non-highly compensated employees, such as an annual summer picnic
  • Amounts treated as employee compensation (for example, the cost of an all-expenses-paid vacation for your company’s top-grossing salesperson)
  • Amounts paid for tickets to charitable sporting events, such as a golf fundraiser

Taxpayers must meet various requirements to qualify for these deductions.


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A Plan for Retiring Your Savings

Tax planning is important during your earning years. It’s equally important during your golden years. Having a plan for withdrawing the assets you’ve saved for retirement can help minimize taxes and maximize your financial resources.

Stretch Those Benefits

The general rule is to protect tax benefits for as long as possible by using up assets in taxable accounts before assets in tax-advantaged accounts. The savings you have in traditional individual retirement accounts (IRAs) and qualified retirement plans grow tax deferred. The longer you wait to withdraw from these accounts, the longer they have to benefit from tax-deferred compounding.

Lower Rates Can Help

Selling an appreciated investment in a taxable account will generate a capital gain. To the extent it is practical, plan to liquidate high-basis, long-term (holding period of longer than one year) investments first. The tax rates on long-term capital gains are lower than the rates on short-term gains, which are taxed as ordinary income.

Required Distributions

Once you reach age 70½, you’ll generally have to start taking annual required minimum distributions (RMDs) from your retirement plan accounts and traditional IRAs, even if you don’t need the money. The RMD rules don’t apply to Roth IRA owners, however, so save your Roth assets for last. Roth IRA beneficiaries must take RMDs, but the distributions are generally income-tax free and can be spread out over life expectancy if desired.


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Compensation or Dividend in Disguise?

When your C corporation has a profitable year, do you take more salary or pay yourself a year-end bonus? Since you are pivotal to your company’s success, paying yourself more in the good years only makes sense. Increasing or decreasing your compensation from year to year based on company performance can also help manage your company’s cash flow — and the amount of income taxes it has to pay.

Tax Impact

A corporation may deduct compensation as a business expense if it is reasonable in amount. Distributing profits as salaries and bonuses can help minimize taxable corporate income, although you and other recipients will be taxed individually on the compensation you receive.

You may decide that paying additional compensation is preferable to paying out profits as dividends. Unlike compensation, dividends are not deductible. Result: Corporate profits are taxed twice — once at the corporate level and again to the shareholders who receive the dividends.

A Word of Caution

If the amount of compensation paid to you and other shareholder-employees is deemed to be unreasonable, the IRS could challenge your company’s deduction for the expense, reclassifying the “excessive” amounts as nondeductible dividends.

To reduce the chances of problems with the IRS, consider these strategies:

  • Divide the profits and pay out a portion as bonuses. Leave enough money in the company to generate a small amount of taxable income.
  • When setting bonuses, avoid using ownership percentages to determine the amounts shareholders will receive since that method suggests the payment of dividends.
  • Adopt and follow a formal compensation plan for executives that includes bonus payments based on meeting specified financial goals.

Earmark a portion of company profits for dividends. Individual shareholders will generally pay federal income tax on qualified dividends received in 2015 at a maximum rate of 20%, which is significantly lower than the maximum rate on compensation and other ordinary income


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Revisiting Rates

Investors get a tax break on their net capital gain, defined as the excess of net long-term capital gain over net short-term capital loss.*

Generally, the tax rate on most net capital gain is no higher than 15%, although a 20% rate can apply to some or all net capital gain if an investor is in the highest ordinary income-tax bracket. And investors in the 10% or 15% ordinary income-tax bracket may enjoy a 0% rate (i.e., no tax) on some or all of their net capital gain.

Aside from the 20% and 0% rates just mentioned, there are a few other exceptions to the 15% rate:

> Net capital gain from selling collectibles is taxed at a maximum 28% rate

> Real property gain attributable to depreciation is taxed at a maximum 25% rate

> A percentage of qualified small business stock gain is excluded, and the remainder is taxed at a maximum 28% rate

* The long-term holding period is more than one year.


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Anything You Need

You got it! Or at least you do if you’ve been conscientious about gathering your income-tax records throughout the year and storing them in one place. But it never hurts to double-check. Before tax time arrives, make sure you have the information you’ll need to prepare your return. Here’s a sampling.

Work income. Your income might include your salary, bonuses, commissions, and payments for freelance or part-time work. Having a list of all your income sources allows you to check off each Form W-2 or 1099 as you receive it.

Investment income. Collect documents showing interest, dividends, and investment trades.

 

Expenses. You should have all your receipts for property taxes, mortgage and home equity loan interest, childcare expenses, medical bills, tuition, and other potentially deductible or credit-eligible expenses. You’ll also need records of any 2015 estimated tax payments.

Charitable contributions. Gather receipts from your donations to tax-exempt charities.


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A Year-end Checkup for Small Businesses

In addition to providing for you and your family, your small business is a part of this country’s job creation engine. Small businesses make up 99.7% of U.S. employer firms and account for 63% of net new private sector jobs.* Conducting an annual review of your business finances can help keep your business healthy and growing.

Management

No doubt you are pivotal to your company’s success. But at some point, it’s important to focus on bringing up the next level of management, especially if you would like to sell your business or pass it to family members in the future. While mentoring the key individuals who can effectively run the business, don’t forget about key person insurance for them. It’s designed to protect your business if you, a partner or another key employee were to die prematurely.

Plan ahead

What would happen to your business if you or one of your key employees could no longer work? Unless you’ve planned ahead, the company’s continued success, continuity of management and the future of all the families your business supports could be jeopardized. Would the absent worker’s family — which could be yours — be fairly compensated for their interest in the business if that interest needed to be sold?

A buy-sell agreement combined with key person insurance can help relieve concerns you may have. Work with your financial professional and attorney to make sure the agreement is drafted properly to address your and your business’s needs.

Risks

Do you have appropriate processes and procedures in place to handle human resources and compliance issues, such as the new health care coverage rules under the federal health reform law? When was the last time you reviewed your business’s insurance coverage with your financial professional? You may discover that your business does not have all the coverage it needs in this litigious climate. Ask about umbrella and general liability insurance.

* Frequently Asked Questions about Small Businesses, SBA Office of Advocacy, March 2014