Business Strategies Archives - Think Outside the Tax Box

Business Strategies

By Dan Chodan, CPA

Your Inventory’s Inflation Can Be Your Tax Savings

The pandemic forced businesses to adapt in many ways. The economic recovery has highlighted supply chain issues exacerbated by strong demand and leading to overall inflation. Businesses are now continuing to adapt to higher prices. If you have inventory, you perhaps can realize tax benefits to help with this inflationary effect through the Last-In, First-Out inventory method (LIFO). LIFO inventory methods are hardly a new tax concept, but taxpayers often may have ignored them due to complexity or periods of marginal inflation. This strategy deserves a second look during a year of high inflation. Read on to learn more about this tax savings strategy and the simplified calculation methods available.


Just Good Business: Partners in a Real Estate Deal? Think Twice Before Forming That LLC

The limited liability corporation or LLC is one of the most popular entity choices for small business owners. And for good reason. An LLC is relatively simple to form and, as the name suggests, it provides a limited amount of liability protection for business owners. Nevertheless, some business owners are often unaware that an LLC has no inherent tax advantages (because, as our readers know, the Feds disregard it for tax purposes) over other types of entities (or even no entity at all). You should always be encouraged to make your entity choice based on a variety of factors, including both potential tax treatment and the administrative burden associated with it. How do you use an LLC to save tax, and better yet ensure it isn’t costing you more than it needs to? Keep reading to find out.

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Finally – SALT Cap Workarounds to Bypass Schedule A Limits

Ever since TCJA passed, taxpayers in high income tax states have been wincing each time they see the $10,000 limitation appearing on Schedule A. But while the law included this $10,000 state tax deduction limit for individuals , it did not include a limit for partnerships, S, or C corporations. To clarify the deduction’s limitation, the IRS issued a notice blessing an entity-level tax and accordingly, many states have implemented such a tax. This allows you the ability to bypass the $10,000 limit on Schedule A and deduct the state taxes paid as a business expense. As of this writing, 19 states have passed what are known as “pass-through entity taxes,” but there are pros and cons to using this loophole. If you are the owner of a pass-through entity and pay more than $10,000 each year in state taxes, this workaround may increase the state tax deduction beyond the limit. Keep reading to learn how.

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COVID Relief Money Is Still Hiding in Plain Sight: The Employee Retention Credit

Business COVID relief funds have been plentiful. We have seen it all from state and local grant programs to the Restaurant Revitalization Fund and Paycheck Protection Program (PPP). The dollars have flowed freely during the past two years although some programs were certainly simpler than others. The Employee Retention Credit (ERC), unfortunately, has been the most complex and misunderstood relief program. It deserves serious consideration along with a second and third look. ERC has suffered from a branding problem, from repeated changes, and because the PPP overshadowed it. The CARES Act brought both programs to life in March 2020 , but small businesses quickly ignored the ERC in favor of the forgivable PPP loans. A taxpayer could only choose one of these programs until the December 2020 COVID relief law retroactively allowed them to coexist in the same business. But once again a second round of PPP loans overshadowed the ERC. Perhaps now with the grants awarded and PPP funds issued, the ERC can finally get the attention it deserves. The benefits are tremendous at up to $5,000 per employee in 2020 and $28,000 per employee in 2021. Opportunities abound for businesses and advisers to be on the hunt for ERC eligibility both obvious and obscure. Today, let’s review the program and cover some of the unusual ways to qualify.

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California’s AB-5 And Its Impact On Small Businesses That Work with Independent Contractors

Question: I run a virtual business with no employees, but independent contractors perform all the work. I heard about that case in California. Should I be doing something different in my business? Do I owe any penalties for how I’ve done it in the past? Answer: Effective January 1, 2020, AB 5, later AB 2257, radically changed the rules and criteria for determining whether a worker’s classification is independent contractor or employee. The so-called “gig law” was effective based on a California Supreme Court case from 2018. The significance of the ruling is that it changed the criteria of worker classification and held that workers are presumptively employees and the burden is on the hiring entity to establish that a worker is an independent contractor not subject to wage order protections in California. Although this is a change impacting California employers, the rest of the country has eagerly watched and hoped to cash in on the changes that would generate billions in employment taxes. Businesses that prefer to work with independent contractors such as Uber and Lyft were quick to propose a ballot initiative in 2020 that the voters passed and now drivers are exempt from the new criteria (insert eyeroll here). Want to know how to get your own exemption from AB-5? Continue reading.

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Build Back Better Legislation Could Present Complications for QSBS

Tax advisors are seeing more clients looking to claim an exclusion for Qualified Small Business Stock and expecting the gain to be 100 percent tax free. Can this be? Believe it or not, it very well could be, but nuanced criteria, not to mention the recently proposed amendment to IRC Section 1202 through the Build Back Better Act, make it a complex incentive to evaluate and monitor over time. In fact, QSBS gains haven’t always been 100 percent tax free. When introduced in 1993, QSBS started out as a 50 percent capital gain exclusion. The exclusion was increased to 75 percent in 2009, and increased to 100 percent in September 2010. Currently, the exclusion percentage is solely based on the date the owners acquired QSBS stock, but the proposed BBB amendment would additionally subject the exclusion percentage to the taxpayer’s Adjusted Gross Income (AGI), depending on a $400,000 threshold. The proposed language has accountants scratching their heads over the seemingly circular reference in determining what level of exclusion their clients would receive. As written, you need to know the QSBS exclusion percentage to calculate AGI, and you need AGI to know the exclusion percentage! Keep reading to learn how.

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Just Good Business: When It’s Time to Hire a Pro

Often, clients and potential clients grumble when their tax professionals recommend hiring a bookkeeping and/or accounting professional. Why? Because many people (including some tax practitioners) simply do not understand the miraculous complexity that is double-entry accounting. As some are probably aware, proper bookkeeping and accounting are much more than simply entering income and expenses into a software program. Nevertheless, it is sometimes difficult to explain the nuances of and the necessity for double-entry accounting to clients. Following are the specific circumstances under which clients should hire a professional bookkeeper and/or accountant. And remember, what works for clients also works for busy tax and accounting professionals. You may, after reading this article, decide that it’s in your own best interests to outsource your business’s tax and accounting work both for peace of mind and for time and money saved. So, when is it just good business to gently insist that your client hire an accounting professional? Keep reading to find out.

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Just Good Business: What to Consider When Choosing an Entity

It’s every tax professional’s favorite answer to the question “How is your business organized?” “I have an LLC.” It’s the non-answer answer. Unfortunately for many clients and practitioners, clients often decide to form an LLC for no reason other than “they said I should” and more often cannot provide a good answer when the practitioner asks, “Who is ‘they?” Ideally, small business clients should consult both an attorney and a tax professional when deciding to form a business entity under state law. Because while state law governs entity formation and many aspects of entity administrative compliance, federal and state tax law determines which tax returns you need to file and which tax laws apply to the entity. It is just good business to make a mindful, proactive choice when choosing a type of business entity. Making a conscientious choice means asking the right questions. And when choosing a business entity, asking the right questions means asking questions about matters other than simply tax considerations.

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Qualified Small Business Stock and Your LLC or S Corporation

Your optimal choice of entity depends on many factors, including which tax breaks and loopholes are available for that entity type. The C corporation leaps to the top of entity choices if your C corporation stock will qualify as small business stock (QSBS). The tax law gives two huge tax breaks to QSBS: 1. Up to $10 million of gain exclusion upon sale or the stock’s liquidation; or 2. Tax-deferred rollover of gains if the taxpayer purchases additional QSBS. But beware: There are two issues that are ambiguous under the law that could cause you to not qualify for either of these tax benefits. Read on to learn more!

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