Business Strategies

The best tax planning will often be found where both the form and substance of a transaction align in the client’s interest. One such planning activity focuses on reducing self-employment tax, and while the attempt is admirable, the substance of the transaction might be stronger than its form. Generally, if you’re a partner in a partnership, your distributive share of income is subject to Self Employment Contributions Act (SECA) tax, also known as self-employment tax. This can be up to an additional 15.3 percent on your earnings, unless an exception applies. Many tax pros attempt to mitigate this tax by simply making the spouse of the main business partner a limited partner in the entity. The thought is that an exclusion applies for SECA tax when there is a “limited partner’s” share of partnership income. But be careful! When the underlying substance overrides the form of a transaction, the taxpayer generally will lose. The IRS recently highlighted such a problem with form in its draft partnership tax instructions by saying “For purposes of self-employment tax, however, status as a limited partner is determined under Section 1402(a)(13); whether a partner is a limited partner under state limited partnership law is not determinative.” Simply calling a partner “limited” is not enough. The limited partner exception from self-employment tax creates a significant benefit when applied, but rulings focused on the substance of the partner’s interest have narrowed this exception. Let’s review how to properly qualify as a limited partner in light of the IRS’s recent emphasis in this area. In the process, we will also look at the specifics of how particular forms should still win the day by avoiding SE tax. Keep reading for more.

Most businesses require the purchase of equipment or other property to help generate income. How you deduct the costs of these business assets depends on what it is and how long it will be useful (what are called asset classes and the Business Use Percentages (BUP)). In some situations, you can deduct the full cost of the asset the year you buy it, rather than depreciating it over time, but many times you are deducting a portion of what you paid for the property each year you have it. Fixed assets are assets that have a useful life of more than one year and/or are not expected to be converted to cash within a year (those types of assets are current assets). Land, buildings, furniture, and equipment (including vehicles) are the most common types of fixed assets for businesses. Fixed asset listings are records of the costs of business property and what tax deductions or improvements have been made over time. Unfortunately, these lists can get quite messy and confusing over time, especially the longer a business is in operation, and the more frequently you have changed tax professionals. What most business owners (and even their tax advisers) don’t know is that there are often thousands in tax savings contained on these lists, especially when they are messy or confusing. There are four savings opportunities buried in these records and what you do with them can result in less cash to the IRS. Continue reading to learn more.

Every year, tax courts hear more than 600 federal tax cases, mostly by the U.S. Tax Court. The vast majority are trial court decisions, again, mostly from the U.S. Tax Court, but also district courts throughout the U.S. Independent of the IRS, the court hears cases relating to income, estate, and gift tax and its rulings can be used as precedent for better interpreting the laws. It practically can provide a roadmap as to what the judges are looking for in defense of a taxpayer’s claim or position. Among the Tax Court decisions, most are memorandum and summary opinions focused on figuring out facts so practitioners can apply the proper law. Annually, we might see fewer than 50 regular Tax Court decisions involving a new interpretation of the tax law. But this still leaves a lot of potentially significant cases in attempting to identify the top 10federal tax cases dating back to the start of our modern income tax in 1913. Which are the most significant? That all depends on you and what you are trying to learn from each case. When it comes to tax planning, read on to learn about the top 10 cases of all time.

It seems so simple, right? You open an account and as you complete the paperwork, you enter something on the line labeled “Beneficiary,” and that’s that. But how many accounts are there? What about other assets? What about, well, life? Because life happens, it can have odd effects on the distribution of assets. This is a cautionary tale of unintended consequences and a reminder to review your beneficiary designations, if not annually, at least every time you experience a major life event. Consider a retired couple one of whom has a large 401(k) (or similar) account. Both have Social Security and true pensions, as well. Typically, the Social Security and pension benefits will end with the death of the individual. The 401(k), however, remains and the listed beneficiary is the spouse. The beneficiary spouse dies before the spouse with the 401(k). Upon the death of her spouse, the account holder creates a will using a popular online tool, which does not advise her to review beneficiary designations on her bank, brokerage, and retirement accounts. Keep reading to learn what to check, when, and how to avoid what goes wrong.

The Employee Retention Credit is worth big bucks. Qualifying companies can get significant relief money – sometimes millions of dollars. So, it was no surprise to me when I heard some outlandish eligibility statements such as “the national emergency declaration counts” or even some “every business gets it” claims. There is a lot of desire to qualify out there and plenty of credit consultants looking to make money. But recently I have heard a different argument from multiple sources which has intrigued me. The argument is dressed up much better and almost looks legitimate. Here is a summary of how the line of thinking goes: OSHA rules mandate compliance with CDC guidelines creating partial suspension eligibility for ERC. I call it the “OSHA argument.” That thinking has not set well with some – particularly as the argument results in qualification for every business for all of 2020 and 2021. Red states have had little or no restrictions in 2021 and even deep blue states generally lifted their restrictions in the spring of 2021. But conveniently, the OSHA argument would mean state and local orders do not need to be reviewed at all as a national order is in place. For a consultant charging a percentage of the ERC, they can sell this service now to everyone and avoid the headache of eligibility discussions. Let’s take a closer look at this argument and reasons why it does not work.

Companies that specialize in the Credit for Increasing Research Activities (also known as the R&D tax credit) sell hard to our clients. During tax season they are online looking for businesses who may qualify for this credit—especially startups. They cast an extremely wide net that has the potential for a lot of bycatch. While it’s true that the R&D credit is often overlooked by small businesses and their return preparers, it’s not as easy to qualify for the credit as some of these companies want small business owners to believe. Savvy tax professionals can help to ensure that their qualifying business clients receive the benefit of this credit while avoiding situations that would make them ineligible for it.

There are some significant lessons in the recent decision in the case of Estate of Michael Connelly. Sorry to spoil the surprise, but what I think the big one is is that co-owners of S corporations (and other sorts of entities) should consider a cross-purchase rather than redemption when they have a buy/sell agreement. That is particularly true if life insurance funds the arrangement. Keep reading to find out why.

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.