Question: I’ve heard other planners talk about using an accountable plan to reduce tax, but how exactly does this save a taxpayer money?

Answer: An accountable plan is a type of reimbursement arrangement between an employer and employee that meets certain IRS criteria. It often covers business expenses that an employee incurs while performing their job, such as travel costs, home office expenses, or supplies. The way this plan helps save money on taxes is through the appropriate treatment of reimbursements or allowances under the tax law.

Did you know that reimbursements for out-of-pocket expenses are taxable income? Normally, reimbursements for expenses are income, and the employee needs to pay income tax on them. However, if the expenses meet the criteria of an accountable plan, they’re excludable from the employee’s income. This means the employee does not have to pay income tax, Social Security, Medicare, or unemployment taxes on these funds.

What about the case of partners in partnerships and shareholders in S-corporations? These individuals often face out-of-pocket expenses that the respective partnership or S-corporation doesn’t reimburse. Is there a way for these individuals to reap tax benefits for these expenditures too?

There used to be. Under pre-TCJA rules, employees and owners of partnerships and S-corporations could deduct ordinary and necessary expenses, which were unreimbursed from the business as a Miscellaneous Itemized Deduction subject to the 2 percent floor.

To learn how to make sure your S-corporation and partnership out-of-pocket expenses are deductible, and reimbursements are not taxable to the owners, click here to read on.

Question: My client is just now paying the PTET for California with a timely filed election. Can they deduct the tax payment if they are an accrual basis taxpayer?

Answer: Based on face value, unfortunately, the answer is no.

Both cash and accrual basis passthrough entities would need to pay the tax by 12/31/21 (assuming calendar year-end) to get the deduction on the 2021 tax return.

This answer is based on IRS Notice 2020-75, stating that an entity could take a deduction in the year paid. While the guidance did not specify cash or accrual in the definition, unless the IRS comes out with any other guidance stating otherwise, it is a federal deduction so it works the same as accrued state taxes, which the taxpayer must pay by the end of the tax year to deduct the amount following the economic performance rules.

However, what if your client is an accrual basis taxpayer? While Notice 2020-75 does not specifically distinguish or reference method of accounting, there may be a way to fix your 2021 state tax deductions if you missed the 12/31 deadline.

Click here to keep reading.

Question: I understand the concept of paying just 21 percent tax through a C corporation. This makes sense if my tax rate is higher than, say 25 percent or 35 percent. But isn’t this money taxable to me as a dividend as soon as I withdraw it from the corporation? I don’t understand; won’t that actually cost me more tax?

Answer: You have identified the exact reason C corporations can be what we call “high maintenance.” You’re right. Done in the wrong way, using a C corporation can actually cost more in tax than using a pass-through entity and paying tax at your individual rate, even if that rate is, say, 35 percent. By the time you pay qualified dividends tax on any withdrawals, you can wind up paying 45 percent or even 50 percent, depending on your individual tax rate.

The key is to use smart planning. Rather than simply withdrawing the funds from your C corporation as a taxable dividend, use one six ways to withdraw tax-free instead. Doing this will help you lock in the low 21 percent flat rate and permanently save you from your high individual tax brackets.

Keep reading to learn more.

Question: You talk a lot about reducing federal taxes, but what about other taxes? It seems like we get taxed on everything multiple times! Is this even legal?

Answer: Isn’t it the truth! You may feel that your income, purchases, and belongings get taxed double, triple, and even more times. The saying goes, “nothing is certain except death and taxes.” And even when you die the same property and earnings may be taxed again. The Supreme Court even answered the question in 2015 about whether taxing the same income more than once is constitutional. In the case of Maryland v. Wynne, the 5-4 decision indicates that two states do not have the right to tax the same income.

While many of the strategies discussed in Think Outside the Tax Box reduce federal taxes, most of them will reduce your state income taxes as well, depending on whether or not the state in which you pay taxes conforms to federal tax law. In addition, there are many state tax reduction strategies worth learning and implementing.

However, did you know there are also tax reduction strategies for other types of taxes like property taxes?

One of the oldest taxes and primary sources of revenue for states, counties, cities, schools, and fire departments comes from taxing the value of property owned within a jurisdiction. In some locations, this can include personal property as well as real estate.

Like most good tax laws, property tax laws include loopholes you can use to pay less. To learn more, continue reading here.

After two years of “The Tax Season That Never Ends,” tax pros everywhere are looking for ways to leverage their services and improve profit margins in their firms. But many are missing out on their biggest opportunity to dramatically increase profits: selling tax planning to existing clients.

As technology has advanced and firms have adopted more automation, tax pros can do much more work in less time. This is a problem when you are in the business of selling billable hours.

Additionally, as the Tax Code has grown in complexity, we often find that taxpayers don’t fully understand the value of our expertise and knowledge – they simply see the same prepared form year after year. This makes it difficult to continue increasing prices beyond the market rate for tax prep.

As a result, many tax preparers have embraced value pricing for tax planning services. The market demand for strategic planning has increased and as small business owners embrace do-it-yourself accounting software, it is easy to offer this missing expert advice needed to assist the business owner in reducing tax expense. Accountants have found success in breaking through pricing barriers and reducing the risk of scope creep in their experiments with value pricing.

Yet most are fearful of bringing this offer to existing clients and start offering higher priced planning only to new customers. Many judge that existing clients will be upset the pros haven’t offered this work in the past, assuming taxpayers will be unhappy missing out on value they could have created long ago. Still others worry merely raising rates will mean losing customers.

Despite discovering that new customers really like price certainty and value the strategic work, tax pros are still reluctant to upsell existing relationships, thereby, offering different processes to lists of “new” and “old.” Yet considering it costs five times more to gain a new client than to approach an existing client, many accountants are leaving profits on the table.

According to research by Bain and Company, increasing your client retention rate increases profits by 25 percent to 95 percent. And statistics show that keeping and selling more services to a current client is less expensive compared to securing a new client. Still, fear blocks many from making this transition, creating more loyal, profitable, and happy clients.

Here are the four biggest mistakes I see tax professionals make by not offering advisory services to clients.

Question: What are my ethical responsibilities when I use software to produce a tax plan?

Answer: In the world of taxes, there are many ethical issues that can come into play. One area that involves judgment and expertise is when it comes to interpreting tax codes for various purposes such as taking deductions or understanding how ambiguous language might apply in certain situations – all while trying not to make any mistakes.

To learn more about your ethical obligations, continue reading.

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.