Learning Center for Tax and Financial Insights

September 17 - S Corporations File a 2017 calendar year income tax return (Form 1120S) and pay any tax due. This due date applies only if you requested an automatic 6-month extension. Provide each shareholder with a copy of K-1 (Form 1120S) or a substitute Schedule K-1.September 17 - Corporations Deposit the third installment of estimated income tax for 2018 for calendar year September 17 - Social Security, Medicare and withheld income tax If the monthly deposit rule applies, deposit the tax for payments in August. September 17 - Nonpayroll Withholding

The Tax Cuts and Jobs Act has left many of today’s businesses with big questions. Incorporation remains a hot topic, but this law is shaking things up. It’s quick to assume your company should be one or the other, but without careful consideration of the facts, your organization may end up facing financial loss, hefty tax penalties or missed tax savings. The goal of this type of incorporation is to minimize tax burdens, but the wrong decision can be costly. In a C Corp, the company pays corporate taxes to the Internal Revenue Service. But, in an S Corp, there’s no entity tax. Rather, taxes are paid through an individual return. The New Law Changes The new law, which went into effect for the 2018 tax year, brought changes to both S Corp and C Corp businesses. In fact, both types of corporations benefited here. For C Corps, the tax rate was dropped from 35 percent down to just 21 percent. For an S Corp the new law provides a deduction equal to 20% of the pass-through income from the corp subject to limitations for higher-income taxpayers. At best, this reduces the effective tax rate to 29.6 percent from 37 percent. In both cases, there are specific restrictions here to know. One thing to remember about these tax changes is that there are many components to determining which method is right for your business. Don’t make a quick judgment here. Rather, invest in some one-on-one time with your tax professional to determine the best possible scenario for your individual company. To help, consider these key areas. S Corp and C Corp Ownership A key component in deciding how to incorporate your business relates to ownership. In the S Corp, there is a limit of 100 shareholders within the company. These must be domestic organizations operated in the United States where all of the company’s shareholders are also living in the United States. Additionally, this structure allows for a single stock classification. As a business, you cannot offer common stocks as well as preferred shares, for example. Comparatively, C Corps allow for fewer restrictions. There is no limit on ownership at all. There is no limit on the number of shareholders the company can have. Any small- to a medium-sized company planning an IPO or simply obtain investors outside of the traditional domestic structure will find C Corps offer far more flexibility. Another key factor about C Corps relates to the differences within your shareholders. These corporations can issue several types of stock. As a result, it is not uncommon for some shareholder votes to be more important than others. This, too, can influence the decision you make in choosing one or the other model. Corporation Taxation – Choosing the Best Taxation Structure Most companies will focus most of their decision on S Corp or C Corp options based on ownership as a starting point. However, every company also wants to keep costs low. Taxation is one of the most expensive hurdles any organization must manage. And, each type of structure offers a different look. For example, consider how a C Corp is taxed. It is commonly referred to as a “double taxation structure.” This is because the company (the entity itself) will pay a corporate tax. Then, the stockholders pay taxes on their income from the business. While this has long been a concern for any business owner using the C Corp structure (paying taxes twice on income is very costly), the new tax law changes this a bit. As noted previously, the tax rate for C Corp has changed from 35 percent to just 21 percent. However, the dividends will still be faced with double taxation. The slashing to 21 percent means every company is paying the same rate, neither the size of the company nor the type of organization matters. That’s an important consideration when choosing which type of structure is right for your company. With the help of a tax professional, it is also important to consider other tax strategies available. For example, an S Corp shareholder pays taxes every year on the money the company earns during that year. This is a simpler, straightforward scenario. But, in a C Corp, the taxes are only paid when the company decides to distribute dividends. It can also occur if a shareholder realizes capital gains (such as when selling ownership). This provides the C Corp with an ability to minimize taxes just by timing dividends properly. Making the Right Decision for Your Needs This is only the very top edge of considerations for which is best for your company. However, there are a few things that can influence your decision. Stable Small Businesses If you own a smaller company, you’ll benefit from an S Corporation for various reasons. First, the income passes through and is taxable to the stockholders on their 1040s, thereby eliminating double taxation. Plus the lower tax rate and the 20% pass-through deduction are very beneficial to an S-Corporation structure. Growing Small Businesses If your company is growing – or you plan to go public and take on new ownership, the C Corporation offers the opportunity to do so. It allows for a larger number of investors, and international investments are possible. Additionally, as a smaller business, you may not be likely to issue dividends any time soon. As a result, this can reduce the amount of income reported to the IRS on an annual basis. Larger Companies For larger organizations, the C Corp tends to offer the best structure overall. Other options limit investor access and may create scenarios where the company cannot grow. The effective tax rate is significantly lower – competitive to any company no matter the size. The new tax reform provides the most advantages to this buyer in particular. Making the Decision for Your Needs Many organizations today have jumped on the new tax reform as an opportunity to incorporate more tax savings. However, a clear picture is important. It’s important to slow down before making any type of drastic decisions like this. They have far-reaching implications and can create a financial burden or limitations on an organization if the wrong decision occurs. However, with the help of a tax professional or attorney, it is possible to make better decisions based specifically on the type of business structure you have, the business’s short-term and long-term goals, as well as new laws and taxation rates. Before you make a change as an entrepreneur, know what you are really getting.

If you dread every minute of the time you spend on accounting, you should know how QuickBooks Online can change your outlook. How long would it take you to determine: What your total expenses for this quarter are? Whether or not your business is profitable as of today? How much you’ve sold every month this year? Which invoices are overdue? If you’re using QuickBooks Online, you can get answers to all those questions—and more—in the time it takes you to sign on to the website. That’s not an exaggeration. The first thing QuickBooks Online displays is what’s called its Dashboard. This is the site’s home page, which contains an array of charts and account balances that provide a quick overview of your finances. Click on an element here—say, a checking account balance—and you’ll be able to drill down and see the details behind it (in this case, an online account register). Click on the Expense graph, and a transaction report opens. Your First Hours with QBO QuickBooks Online is not one-size-fits-all. Its setup tools help you customize it to meet your own company’s needs. QuickBooks Online works like other online productivity applications you may have used. It uses toolbars and buttons for navigation, drop-down lists and blank fields for data entry, and clickable links to open new related screens to trigger actions. Which is to say, the site is easy to use once you understand its structure. We can walk you through the early steps that are required, which involves tasks like: Using the provided setup tools to customize the site. Connecting QuickBooks Online to your bank and credit card company websites so you can work with transactions. Creating records for your customers, vendors, and the products and services you sell (you’ll be able to add new ones as your business grows). Learning about QuickBooks Online’s pre-built reports. Familiarizing yourself with the site’s workflow. Making the transition from your current accounting system. How You’ll Benefit Once you’re comfortable using QuickBooks Online, you’ll discover what millions of small businesses have already learned, that the site helps you: Get paid faster. You can sign up with a payment processor to accept credit cards and direct bank withdrawals, which can speed up your customers’ responses to invoices. You’ll also be able to accept payments when you’re out of the office on your mobile devices. Minimize errors. Once you enter data, QuickBooks Online remembers it. No more duplicate data entry that can cause costly mistakes.

Article Highlights: Selecting a Type of IRA Missing out on the Saver’s Credit Taking Distributions before Retirement Age Failure to Keep Designated Beneficiaries Current Overlooking the Spousal IRA Failing to Recognize Low Tax Distribution Opportunities Social Security Income and Traditional IRA Distributions Rollover Errors Failing to Take a Required Minimum Distribution Knowing the Beneficiary Options Understanding the Special Spousal Beneficiary Options Disclaiming an Inherited IRA Failing to Realize Your Child Can Have an IRA Not Taking Advantage of IRA-to-Charity Distributions If you have an IRA account or are considering one, there are a number of potential missteps you will want to avoid. Some of them can lead to unwanted taxes and penalties, and of course, we are talking about your retirement funding, so it is an important issue. Here are a number of issues to keep in mind: Selecting a Type of IRA Account – The first decision you will have to make is whether to choose a traditional IRA or a Roth IRA. A traditional IRA provides a tax deduction for the contribution and tax-deferred growth, but any withdrawal from the account is fully taxable. On the other hand, Roth IRA contributions are not deductible, but distributions after retirement are tax-free. A Roth IRA offers tax-free accumulation, meaning the earnings build up over the life of the IRA tax-free. Making the decision involves a number of factors, some of which will be discussed later in this article. For those currently with low income and on a limited budget with little extra income to spare for IRA contributions, the traditional IRA offers a tax deduction, which will allow them to make a larger contribution and is better than having no retirement funds at all. In addition, lower-income individuals may qualify for the Saver’s Credit, discussed later, which provides a tax credit that might help them to afford a contribution. For younger individuals, a Roth IRA provides tax-free accumulation, meaning the earnings will be tax-free when distributed at retirement. Thus, the longer one has a Roth IRA, the more tax-free income it can provide. Missing out on the Saver’s Credit – As mentioned previously, the Saver’s Credit helps lower-income individuals to save for retirement by providing a credit to help cover the cost of their IRA contribution. The credit can be as much as 50% of the first $2,000 contributed to an IRA (either traditional or Roth), depending upon your income for the year. It is not allowed for individuals under the age of 18, individuals claimed as dependents of another or full-time students. The credit is non-refundable, meaning it can only be used to offset one’s tax liability, so lower-income taxpayers may not have enough tax to benefit. Taking Distributions before Retirement Age – If a distribution is taken from a traditional IRA before reaching the age of 59½, that distribution will not only be taxable but will also be subject to a 10% early withdrawal penalty. So, consider it carefully before taking an early distribution. Assuming you are in the 22% tax bracket, every $100 of an early distribution will result in you owing $32 of tax, including the penalty. Only take an early distribution if you are desperate. There are exceptions to the 10% early withdrawal penalty, but not for the tax on the early distributions. The common penalty exceptions include limited withdrawals for a home purchase, medical expenses, disability and higher education expenses. Failure to Keep Designated Beneficiaries Current – A number of life events can change who you want to be the beneficiary of your IRA account when you pass. Divorce and the death of a beneficiary are probably the most common, but regardless of the reason, it is important to keep your IRA trustee or custodian apprised about the current names of your beneficiaries, or else the account could end up in the hands of someone you didn’t want it to be. Overlooking the Spousal IRA – You may not be aware, but a non-working spouse can also make an IRA contribution based upon the working spouse’s income. The amount that can be contributed is the smaller of the annual IRA contribution limit or the working spouse’s compensation less any IRA contribution made by the working spouse. Contributions to spousal IRAs do not need to be divided equally between spouses, but neither spouse may make a contribution of more than the annual limit. The deduction for contributions to both spouses’ IRAs may be further limited if either spouse is covered by an employer’s retirement plan. Failing to Recognize Low Tax Distribution Opportunities – Occasionally, a taxpayer will have an abnormally low-income year, or the individual’s deductions will be abnormally high, resulting in a negative or very low taxable income. When this occurs, traditional IRA distributions by those age 59½ or older can be taken with little or a minor tax liability. Because the distribution must be taken before the end of the year, the key is to recognize this possibility, determine how much of a withdrawal will provide the best result and then take the distribution before year’s end. Also low-income taxable years can provide an opportunity to convert some portion of a traditional IRA to a Roth IRA with minimal or no tax liability. Social Security Income and Traditional IRA Distributions – If you are retired and drawing Social Security, remember that Social Security income does not become taxable until one-half of the Social Security income plus your other income exceeds $32,000 for a married couple, or $25,000 for most other filing statuses. Even if you don’t need the funds from an IRA distribution, it may be appropriate for you to withdraw enough from your IRA (or other qualified plans) so that your overall income closely matches the taxable Social Security threshold. Then, you can put those withdrawals away for a future major expense item or unexpected financial liability and avoid a large distribution in one year that would cause the SS to be taxed.

Article Highlights: Parents Attempting to Shift Income to Children Kiddie Tax Tax Reform Changes Tax on Child’s Unearned Income Tax on Child’s Earned Income Some years back, it was not uncommon for parents to put their investments in their dependent children’s names to take advantage of their children’s lower tax rates. Although the Uniform Gift to Minors Act legally made a child the owner of money put into his or her name, this didn’t stop parents from routinely putting their child’s name and social security number on the accounts so that the tax would be determined at the child’s lower marginal rate. The IRS had no easy way to combat parents taking advantage of their children’s lower tax rates, so Congress came up with a unique way of taxing children’s investment income (unearned income) such as interest, dividends and capital gains. When this law was originally passed over 30 years ago, it only applied to children under age 14, but Congress expanded it over time to include children with unearned income under the age of 19 and full-time students under the age of 24 who aren’t self-supporting. The way it worked prior to the 2017 tax reform, the first $1,050 of a child's income was tax-free, the next $1,050 was taxed at just 10% and any unearned income above $2,100 was taxed at his or her parents' higher tax rate. A child’s earned income (generally income from wages) was taxed at the single rate, and the child could use the regular standard deduction for single individuals ($6,350 in 2017) to reduce his or her taxable earned income. The computation got more complicated when the child’s siblings also had unearned income. With tax reform, for years 2018 through 2025, the first $2,100 of the child’s unearned income is being taxed as before, with the first $1,050 being tax-free and the next $1,050 being taxed at 10%. However, instead of the balance being taxed at the parents’ tax rate, the balance is taxed at the income tax rates for estates and trusts, which for 2018 hits 37% when the balance of the unearned income reaches $12,500. The income tax rates for trusts and estates are illustrated below.

Article Highlights: Tax Reform 2.0 House Ways and Means Committee Talking Points Prognosis The dust has not yet settled from the Tax Cuts and Jobs Act (TCJA), passed into law in December 2017, and the House Ways and Means Committee is already considering another round of tax changes. The committee chair, Kevin Brady, Republican from Texas, wants to include input from stakeholders such as business groups, think tanks and other relevant organizations. Historically, major tax reforms have been decades apart, so the committee chair is looking for another approach to the way Washington deals with tax policy. As with all tax legislation, it begins with talking points. From what we can gather, it appears the focus of Tax Reform 2.0 will include: Making the first round of individual and pass-through business deductions permanent. Focusing on retirement savings and creating a flexible universal savings account so individuals are accustomed to saving for retirement earlier in life. Making it easier for small businesses to participate in multi-employer retirement plans. Looking for ways to help the Treasury implement the TCJA. Providing new business start-ups with greater expensing options for start-up costs. Identifying technical corrections needed for the TCJA.