Management Advisory Services & Business Consulting Archives - Page 6 of 46

Do you qualify for the QBI deduction?

Management Advisory Services & Business Consulting|January 5, 2023

If you own a business, you may wonder if you’re eligible to take the qualified business income (QBI) deduction. Sometimes this is referred to as the pass-through deduction or the Section 199A deduction.

The QBI deduction is:

Available to owners of sole proprietorships, single member limited liability companies (LLCs), partnerships, and S corporations, as well as trusts and estates.
Intended to reduce the tax rate on QBI to a rate that’s closer to the corporate tax rate.
Taken “below the line.” In other words, it reduces your taxable income but not your adjusted gross income.
Available regardless of whether you itemize deductions or take the standard deduction.

Taxpayers other than corporations may be entitled to a deduction of up to 20% of their QBI. For 2022, if taxable income exceeds $170,050 for single taxpayers, or $340,100 for a married couple filing jointly, the QBI deduction may be limited based on different scenarios. For 2023, these amounts are $182,100 and $364,200, respectively.

The situations in which the QBI deduction may be limited include whether the taxpayer is engaged in a service-type of trade or business (such as law, accounting, health or consulting), the amount of W-2 wages paid by the trade or business, and/or the unadjusted basis of qualified property (such as machinery and equipment) held by the trade or business. The limitations are phased in.

Get in touch with us to learn more.

Timing is everything when it comes to accounting software upgrades

Management Advisory Services & Business Consulting|December 29, 2022

“Well, it still works, and everyone knows how to use it, but….”

Do these words sound familiar? Many businesses stick with their accounting software far too long for these very reasons. What’s important to find out and consider is everything that comes after the word “but.”

Managers and employees often struggle with systems that don’t provide all the functionality they need, such as being able to generate certain types of reports that could help the company better analyze its financials. Older software might constantly freeze up or crash. In some cases, the product may even be so old that support is no longer provided.

When it comes to accounting software upgrades, timing is everything. You don’t want to spend money unnecessarily if your system is fully functional and secure. But you also don’t want to wait too long and risk losing a competitive edge, suffering data loss or corruption, or incurring a security breach.

Building a knowledge base

The first question to ask yourself is: When was the last time we meaningfully upgraded our accounting software?

Many more products may have hit the market since you bought yours — including some that were developed specifically for your industry. Although most accounting software has the same essential features, it’s these specialized functions that hold the most potential value for certain types of companies.

To make an educated choice, business owners and their leadership teams need to gain a detailed understanding of their specific needs and the technological savvy of their employees. You can go about this knowledge-building effort in various ways, including conducting a user survey and putting together a comprehensive, detailed comparison of three or four accounting software products that appear best-suited to your business.

If it appears highly likely that a new accounting system would markedly improve your financial tracking and reporting, you’ll be able to make a confident and well-advised purchasing decision.

Preparing for the transition

Bear in mind that buying the software will be the easy part. Transitioning to the new system will probably be much more challenging. When changing or significantly upgrading their accounting software, companies have to walk a fine line between:

Rushing the timeline, potentially mishandling setup issues and not providing sufficient training, and
Dragging their feet, potentially falling behind on financial reporting.

You might need to engage an IT consultant to help oversee the data transfer from the old system to the new, catch and clean up errors, and ensure strong cybersecurity measures are in place.

It’s a big decision

Moving onward and upward from a long-used accounting system is a big decision. Let us help you determine what software features would be most beneficial to your business, identify which current products would best fulfill your needs, and develop a sensible budget for the purchase.

Is your business closing? Here are your final tax responsibilities

Management Advisory Services & Business Consulting|December 20, 2022

Businesses shut down for many reasons. Some of the reasons that businesses shutter their doors:

An owner retirement,
A lease expiration,
Staffing shortages,
Partner conflicts, and
Increased supply costs.

If you’ve decided to close your business, we’re here to assist you in any way we can, including taking care of the various tax obligations that must be met.

For example, a business must file a final income tax return and some other related forms for the year it closes. The type of return to be filed depends on the type of business you have. Here’s a rundown of the basic requirements.

Sole Proprietorships. You’ll need to file the usual Schedule C, “Profit or Loss from Business,” with your individual return for the year you close the business. You may also need to report self-employment tax.

Partnerships. A partnership must file Form 1065, “U.S. Return of Partnership Income,” for the year it closes. You also must report capital gains and losses on Schedule D. Indicate that this is the final return and do the same on Schedules K-1, “Partner’s Share of Income, Deductions, Credits, Etc.”

All Corporations. Form 966, “Corporate Dissolution or Liquidation,” must be filed if you adopt a resolution or plan to dissolve a corporation or liquidate any of its stock.

C Corporations. File Form 1120, “U.S. Corporate Income Tax Return,” for the year you close. Report capital gains and losses on Schedule D. Indicate this is the final return.

S Corporations. File Form 1120-S, “U.S. Income Tax Return for an S Corporation” for the year of closing. Report capital gains and losses on Schedule D. The “final return” box must be checked on Schedule K-1.

All Businesses. Other forms may need to be filed to report sales of business property and asset acquisitions if you sell your business.

Duties involving workers

If you have employees, you must pay them final wages and compensation owed, make final federal tax deposits and report employment taxes. Failure to withhold or deposit employee income, Social Security and Medicare taxes can result in full personal liability for what’s known as the Trust Fund Recovery Penalty.

If you’ve paid any contractors at least $600 during the calendar year in which you close your business, you must report those payments on Form 1099-NEC, “Nonemployee Compensation.”

More tax issues to consider

If your business has a retirement plan for employees, you’ll want to terminate the plan and distribute benefits to participants. There are detailed notice, funding, timing and filing requirements that must be met by a terminating plan. There are also complex requirements related to flexible spending accounts, Health Savings Accounts, and other programs for your employees.

We can assist you with many other complicated tax issues related to closing your business, including debt cancellation, use of net operating losses, freeing up any remaining passive activity losses, depreciation recapture and possible bankruptcy issues.

We can advise you on the length of time you need to keep business records. You also must cancel your Employer Identification Number (EIN) and close your IRS business account.

If your business is unable to pay all the taxes it owes, we can explain the available payment options to you. Contact us to discuss these issues and get answers to any questions.

Choosing a retirement plan for your small business

Management Advisory Services & Business Consulting|December 6, 2022

Most growing small businesses reach a point where the owner looks around at the leadership team and says, “It’s time. We need to offer employees a retirement plan.”

Often, this happens when the company is financially stable enough to administer a retirement plan and make substantive contributions. Other times it occurs when the business grows weary of losing good job candidates because of a less-than-impressive benefits package.

Whatever the reason, if you don’t have a retirement plan and see one in your immediate future, you’ll want to carefully select the one that will work best for your company and its employees. Here are some basics about three of the most tried-and-true plans.

1. 401(k) plans offer flexibility

Available to any employer with one or more employees, a 401(k) plan allows employees to contribute to individual accounts. Contributions to a traditional 401(k) are made pretax, reducing taxable income, but distributions are taxable.

Both employees and employers can contribute. For 2023, employees can contribute up to $22,500 (up from $20,500 in 2022). Participants who are age 50 or older by the end of the year can make an additional “catch-up” contribution of $7,500 (up from $6,500 in 2022). Within limits, employers can deduct contributions made on behalf of eligible employees.

Plans may offer employees a Roth 401(k) option, which, on some level, is the opposite of a traditional 401(k). This is because contributions don’t reduce taxable income currently but distributions are tax-free.

Establishing a 401(k) plan typically requires, among other steps, adopting a written plan and arranging a trust fund for plan assets. Annually, employers must file Form 5500 and perform discrimination testing to ensure the plan doesn’t favor highly compensated employees. With a “safe harbor” 401(k), however, the plan isn’t subject to discrimination testing.

2. Employers fully fund SEP plans

Simplified Employee Pension (SEP) plans are available to businesses of any size. Establishing one requires completing Form 5305-SEP, “Simplified Employee Pension—Individual Retirement Accounts Contribution Agreement,” but there’s no annual filing requirement.

SEP plans are funded entirely by employer contributions, but you can decide each year whether to contribute. Contributions immediately vest with employees. In 2023, contribution limits will be 25% of an employee’s compensation or $66,000 (up from $61,000 in 2022).

3. SIMPLEs target small businesses

A Savings Incentive Match Plan for Employees (SIMPLE) IRA is a type of plan available only to businesses with no more than 100 employees. It’s up to employees whether to contribute. Although employer contributions are required, you can choose whether to:

Match employee contributions up to 3% of compensation, which can be reduced to as low as 1% in two of five years, or
Make a 2% nonelective contribution, including to employees who don’t contribute.

Employees are immediately 100% vested in contributions, whether from themselves or their employers. The contribution limit in 2023 will be $15,500 (up from $14,000 in 2022).

A big step forward

Obviously, choosing a retirement plan to offer your employees is just the first step in the implementation process. But it’s a big step forward for any business. Let us help you assess the costs and tax impact of any plan type that you’re considering.

Reinforce your cybersecurity defenses regularly

Management Advisory Services & Business Consulting|December 1, 2022

If you’ve been in business for any amount of time, you probably don’t need anyone to tell you about the importance of cybersecurity. However, unlike the lock to a physical door, which generally lasts a good long time, measures you take to protect your company from hackers and malware need to be updated and reinforced much more regularly.

Two common categories

Most of today’s business cyberattacks fall into two main categories: ransomware and social engineering.

In a ransomware attack, hackers infiltrate a company’s computer network, encrypt or freeze critical data, and hold that data hostage until their ransom demands are met. It’s become a highly common form of cybercrime. Just one example, which occurred in October 2022, involved a major health care system that had recently executed a major M&A deal.

On the other hand, social engineering attacks use manipulation and pressure to trick employees into granting cybercriminals access to internal systems or bank accounts. The two most common forms of social engineering are phishing and business email compromise (BEC).

In a typical phishing scam, cyberthieves send fake, but often real-looking, emails to employees to entice them into downloading attachments that contain malware. Or they try to get employees to click on links that automatically download the malware.

In either case, once installed on an employee’s computer, the malware can give hackers remote access to a company’s computer network — including customer data and bank accounts. (Also beware of “smishing,” which is when fraudsters use text messages for the same purpose.)

BEC attacks are similar. Here, cyberthieves send fake emails mainly to accounting employees saying the company’s bank accounts have been frozen because of fraud. The emails instruct employees to reply with account usernames and passwords to supposedly resolve the problem. With this information, thieves can wreak financial havoc — including initiating unauthorized wire transfers — which can be difficult, if not impossible, to reverse.

Preventative measures

Here are a few things you can do to guard against cyberattacks:

Continually train employees. Conduct mandatory training sessions at regular intervals to ensure your employees are familiar with your cybersecurity policies and can recognize the many possible forms of a cyberattack.

Maintain IT infrastructure. Instruct and remind employees to download software updates when they’re available. Enforce a strict policy of regular password changes. If two-factor authentication is feasible, set it up. This is particularly important with remote employees.

Encrypt and back up data. All company data should be encrypted and regularly backed up on a separate off-site server. In the event of a ransomware attack, you’ll still be able to access that data without paying the ransom.

Restrict access to your Wi-Fi network. First and foremost, it should be password-protected. Also, move your router to a secure location and install multiple firewalls. If you offer free Wi-Fi to customers, use a separate network for that purpose.

Consider insurance coverage. Insurers now sell policies that will help pay costs associated with data breaches while also covering some legal fees associated with cyberattacks. However, you’ll need to shop carefully, set a reasonable budget and read the fine print.

Defend your data

None of the measures mentioned above are one-time activities. On a regular basis, businesses need to determine what new training employees need and whether there are better ways to secure IT infrastructure and sensitive data. Let us help you assess, measure and track the costs associated with preserving your company’s cybersecurity.

Employers: In 2023, the Social Security wage base is going up

Management Advisory Services & Business Consulting|November 23, 2022

The Social Security Administration recently announced that the wage base for computing Social Security tax will increase to $160,200 for 2023 (up from $147,000 for 2022). Wages and self-employment income above this threshold aren’t subject to Social Security tax.

Basics about Social Security

The Federal Insurance Contributions Act (FICA) imposes two taxes on employers, employees and self-employed workers. One is for the Old Age, Survivors and Disability Insurance program, which is commonly known as Social Security. The other is for the Hospital Insurance program, which is commonly known as Medicare.

There’s a maximum amount of compensation subject to the Social Security tax, but no maximum for Medicare tax. For 2023, the FICA tax rate for employers is 7.65% — 6.2% for Social Security and 1.45% for Medicare (the same as in 2022).

2023 updates

For 2023, an employee will pay:

6.2% Social Security tax on the first $160,200 of wages (6.2% of $160,200 makes the maximum tax $9,932.40), plus
1.45% Medicare tax on the first $200,000 of wages ($250,000 for joint returns; $125,000 for married taxpayers filing a separate return), plus
2.35% Medicare tax (regular 1.45% Medicare tax plus 0.9% additional Medicare tax) on all wages in excess of $200,000 ($250,000 for joint returns; $125,000 for married taxpayers filing a separate return).

For 2023, the self-employment tax imposed on self-employed people is:

12.4% Social Security tax on the first $160,200 of self-employment income, for a maximum tax of $19,864.80 (12.4% of $160,200), plus
2.9% Medicare tax on the first $200,000 of self-employment income ($250,000 of combined self-employment income on a joint return, $125,000 on a return of a married individual filing separately), plus
3.8% (2.9% regular Medicare tax plus 0.9% additional Medicare tax) on all self-employment income in excess of $200,000 ($250,000 of combined self-employment income on a joint return, $125,000 for married taxpayers filing a separate return).

Employees with more than one employer

What happens if one of your employees works for your business and has a second job? That employee would have taxes withheld from two different employers. Can the employee ask you to stop withholding Social Security tax once he or she reaches the wage base threshold? Unfortunately, no. Each employer must withhold Social Security taxes from the individual’s wages, even if the combined withholding exceeds the maximum amount that can be imposed for the year. Fortunately, the employee will get a credit on his or her tax return for any excess withheld.

Looking forward

Inflation means you and your employees can save more for retirement in 2023

Management Advisory Services & Business Consulting|November 21, 2022

How much can you and your employees contribute to your 401(k)s next year — or other retirement plans? In Notice 2022-55, the IRS recently announced cost-of-living adjustments that apply to the dollar limitations for pensions, as well as other qualified retirement plans for 2023. The amounts increased more than they have in recent years due to inflation.

401(k) plans

The 2023 contribution limit for employees who participate in 401(k) plans will increase to $22,500 (up from $20,500 in 2022). This contribution amount also applies to 403(b) plans, most 457 plans and the federal government’s Thrift Savings Plan.

The catch-up contribution limit for employees age 50 and over who participate in 401(k) plans and the other plans mentioned above will increase to $7,500 (up from $6,500 in 2022). Therefore, participants in 401(k) plans (and the others listed above) who are 50 and older can contribute up to $30,000 in 2023.

SEP plans and defined contribution plans

The limitation for defined contribution plans, including a Simplified Employee Pension (SEP) plan, will increase from $61,000 to $66,000. To participate in a SEP, an eligible employee must receive at least a certain amount of compensation for the year. That amount will increase in 2023 to $750 (from $650 for 2022).

SIMPLE plans

Deferrals to a SIMPLE plan will increase to $15,500 in 2023 (up from $14,000 in 2022). The catch-up contribution limit for employees age 50 and over who participate in SIMPLE plans will increase to $3,500 in 2023, up from $3,000.

Other plan limits

The IRS also announced that in 2023:

The limitation on the annual benefit under a defined benefit plan will increase from $245,000 to $265,000. For a participant who separated from service before January 1, 2023, the participant’s limitation under a defined benefit plan is computed by multiplying the participant’s compensation limitation, as adjusted through 2022, by 1.0833.
The dollar limitation concerning the definition of “key employee” in a top-heavy plan will increase from $200,000 to $215,000.
The dollar amount for determining the maximum account balance in an employee stock ownership plan subject to a five-year distribution period will increase from $1,230,000 to $1,330,000, while the dollar amount used to determine the lengthening of the five-year distribution period will increase from $245,000 to $265,000.
The limitation used in the definition of “highly compensated employee” will increase from $135,000 to $150,000.

IRA contributions

The 2023 limit on annual contributions to an individual IRA will increase to $6,500 (up from $6,000 for 2022). The IRA catch-up contribution limit for individuals age 50 and older isn’t subject to an annual cost-of-living adjustment and will remain $1,000.

Plan ahead

Current high inflation rates will make it easier for you and your employees to save much more in your retirement plans in 2023. The contribution amounts will be a great deal higher next year than they’ve been in recent years. Contact us if you have questions about your tax-advantaged retirement plan or if you want to explore other retirement plan options.

Year-end tax planning ideas for your small business

Management Advisory Services & Business Consulting|October 20, 2022

Now that Labor Day has passed, it’s a good time to think about making moves that may help lower your small business taxes for this year and next. The standard year-end approach of deferring income and accelerating deductions to minimize taxes will likely produce the best results for most businesses, as will bunching deductible expenses into this year or next to maximize their tax value.

If you expect to be in a higher tax bracket next year, opposite strategies may produce better results. For example, you could pull income into 2022 to be taxed at lower rates, and defer deductible expenses until 2023, when they can be claimed to offset higher-taxed income.

Here are some other ideas that may help you save tax dollars if you act before year-end.

QBI deduction

Taxpayers other than corporations may be entitled to a deduction of up to 20% of their qualified business income (QBI). For 2022, if taxable income exceeds $340,100 for married couples filing jointly (half that amount for others), the deduction may be limited based on: whether the taxpayer is engaged in a service-type business (such as law, health or consulting), the amount of W-2 wages paid by the business, and/or the unadjusted basis of qualified property (such as machinery and equipment) held by the business. The limitations are phased in.

Taxpayers may be able to salvage some or all of the QBI deduction by deferring income or accelerating deductions to keep income under the dollar thresholds (or be subject to a smaller deduction phaseout). You also may be able increase the deduction by increasing W-2 wages before year-end. The rules are complex, so consult us before acting.

Cash vs. accrual accounting

More small businesses are able to use the cash (rather than the accrual) method of accounting for federal tax purposes than were allowed to do so in previous years. To qualify as a small business under current law, a taxpayer must (among other requirements) satisfy a gross receipts test. For 2022, it’s satisfied if, during a three-year testing period, average annual gross receipts don’t exceed $27 million. Not that long ago, it was only $5 million. Cash method taxpayers may find it easier to defer income by holding off billings until next year, paying bills early or making certain prepayments.

Section 179 deduction

Consider making expenditures that qualify for the Section 179 expensing option. For 2022, the expensing limit is $1.08 million, and the investment ceiling limit is $2.7 million. Expensing is generally available for most depreciable property (other than buildings) including equipment, off-the-shelf computer software, interior improvements to a building, HVAC and security systems.

The high dollar ceilings mean that many small- and medium-sized businesses will be able to currently deduct most or all of their outlays for machinery and equipment. What’s more, the deduction isn’t prorated for the time an asset is in service during the year. Just place eligible property in service by the last days of 2022 and you can claim a full deduction for the year.

Bonus depreciation

Businesses also can generally claim a 100% bonus first year depreciation deduction for qualified improvement property and machinery and equipment bought new or used, if purchased and placed in service this year. Again, the full write-off is available even if qualifying assets are in service for only a few days in 2022.

Consult with us for more ideas

These are just some year-end strategies that may help you save taxes. Contact us to tailor a plan that works for you.

Separating your business from its real estate

Management Advisory Services & Business Consulting|October 18, 2022

Does your business need real estate to conduct operations? Or does it otherwise hold property and put the title in the name of the business? You may want to rethink this approach. Any short-term benefits may be outweighed by the tax, liability and estate planning advantages of separating real estate ownership from the business.

Tax implications

Businesses that are formed as C corporations treat real estate assets as they do equipment, inventory and other business assets. Any expenses related to owning the assets appear as ordinary expenses on their income statements and are generally tax deductible in the year they’re incurred.

However, when the business sells the real estate, the profits are taxed twice — at the corporate level and at the owner’s individual level when a distribution is made. Double taxation is avoidable, though. If ownership of the real estate were transferred to a pass-through entity instead, the profit upon sale would be taxed only at the individual level.

Protecting assets

Separating your business ownership from its real estate also provides an effective way to protect it from creditors and other claimants. For example, if your business is sued and found liable, a plaintiff may go after all of its assets, including real estate held in its name. But plaintiffs can’t touch property owned by another entity.

The strategy also can pay off if your business is forced to file for bankruptcy. Creditors generally can’t recover real estate owned separately unless it’s been pledged as collateral for credit taken out by the business.

Estate planning options

Separating real estate from a business may give you some estate planning options, too. For example, if the company is a family business but some members of the next generation aren’t interested in actively participating, separating property gives you an extra asset to distribute. You could bequest the business to one heir and the real estate to another family member who doesn’t work in the business.

Handling the transaction

The business simply transfers ownership of the real estate and the transferee leases it back to the company. Who should own the real estate? One option: The business owner could purchase the real estate from the business and hold title in his or her name. One concern is that it’s not only the property that’ll transfer to the owner, but also any liabilities related to it.

Moreover, any liability related to the property itself could inadvertently put the business at risk. If, for example, a client suffers an injury on the property and a lawsuit ensues, the property owner’s other assets (including the interest in the business) could be in jeopardy.

An alternative is to transfer the property to a separate legal entity formed to hold the title, typically a limited liability company (LLC) or limited liability partnership (LLP). With a pass-through structure, any expenses related to the real estate will flow through to your individual tax return and offset the rental income.

An LLC is more commonly used to transfer real estate. It’s simple to set up and requires only one member. LLPs require at least two partners and aren’t permitted in every state. Some states restrict them to certain types of businesses and impose other restrictions.

Proceed cautiously

Separating the ownership of a business’s real estate isn’t always advisable. If it’s worthwhile, the right approach will depend on your individual circumstances. Contact us to help determine the best approach to minimize your transfer costs and capital gains taxes while maximizing other potential benefits.

Sometimes businesses need to show customers tough love

Management Advisory Services & Business Consulting|October 6, 2022

“We love our customers!” Many businesses proclaim this at the bottom of their invoices, in their marketing materials and even on the very walls of their physical locations.

Obviously, every company needs a solid customer or client base to survive. But, to truly thrive, you need to evaluate which customers are reliably contributing to the bottom line and which ones are thinning it out. For those that fall into the latter group, it might be time to show them some tough love.

Tracking the data

Your first step in evaluating customers is calculating, as precisely as possible, how much each one contributes to profitability.

This process will be simple if your sales system tracks individual customer purchases, and your accounting system has good cost accounting or decision support capabilities. Perhaps you have cost data for individual products, but not at the customer level. In this case, you might be able to manually “marry” product-specific purchase history with cost data to determine individual customer value.

Even if you don’t maintain cost data, you can sort the good from the bad by reviewing customer purchase volume and average sale price. Often, such data can be supplemented by general knowledge of the relative profitability of various products. Be sure that sales are net of any returns.

Companies that don’t track individual customers can still analyze customer segments or products. For instance, if the same distributor serves one group of customers, estimate the resources used to support that channel and their associated costs. Or ask individual departments to track employees’ time by customer or product for a specific period.

Be sure to include indirect costs. High marketing, handling, service or billing costs for individual customers or segments of customers can significantly affect their profitability even when they buy high-margin products or services. If you use activity-based costing, your company should already have this information.

Sorting them out

After you’ve assigned profitability levels to each customer or segment of customers, sort them into three groups:

An A group that consists of highly profitable customers whose business you’d like to expand,
A B group made up of customers who aren’t extremely profitable but still positively contribute to the bottom line, and
A C group of customers who are undercutting your profitability.

Members of the C group are customers you likely can’t afford to keep. They’re often overly demanding or even abusive to employees. Some expect special treatment that costs you labor hours or actual dollars. Still others are consistently late paying invoices, which slows your cash flow. Whatever the case may be, they’re firmly in the “no longer profitable” category.

Freeing yourself

It might seem counterintuitive to intentionally let go of customers. However, by showing “C-listers” some tough love — and the door — you’ll free up staff time and resources to better serve groups A and B, as well as to win over promising prospects. Contact us for help evaluating your customers from a cost vs. benefit perspective.

Do you qualify for the QBI deduction?

Timing is everything when it comes to accounting software upgrades

Is your business closing? Here are your final tax responsibilities

Choosing a retirement plan for your small business

Reinforce your cybersecurity defenses regularly

Employers: In 2023, the Social Security wage base is going up

Inflation means you and your employees can save more for retirement in 2023

Year-end tax planning ideas for your small business

Separating your business from its real estate

Sometimes businesses need to show customers tough love

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