Tax Planning for the Self-Employed

April 12, 2022March 15, 2022 by Christie

Self-employment is the opportunity to be your own boss, to come and go as you please, and oh yes, to establish a lifelong bond with your accountant. If you’re self-employed, you’ll need to pay your own FICA taxes and take charge of your own retirement plan, among other things. Here are some planning tips.

Understand self-employment tax and how it’s calculated

As a starting point, make sure that you understand (and comply with) your federal tax responsibilities. The federal government uses self-employment tax to fund Social Security and Medicare benefits. You must pay this tax if you have more than a minimal amount of self-employment income. If you file a Schedule C as a sole proprietor, independent contractor, or statutory employee, the net profit listed on your Schedule C (or Schedule C-EZ) is self-employment income and must be included on Schedule SE, which is filed with your federal Form 1040. Schedule SE is used both to calculate self-employment tax and to report the amount of tax owed.

Make your estimated tax payments on time to avoid penalties

Employees generally have income tax, Social Security tax, and Medicare tax withheld from their paychecks. But if you’re self-employed, it’s likely that no one is withholding federal and state taxes from your income. As a result, you’ll need to make quarterly estimated tax payments on your own (using IRS Form 1040-ES) to cover your federal income tax and self-employment tax liability. You may have to make state estimated tax payments, as well. If you don’t make estimated tax payments, you may be subject to penalties, interest, and a big tax bill at the end of the year. For more information about estimated tax, see IRS Publication 505.

If you have employees, you’ll have additional periodic tax responsibilities. You’ll have to pay federal employment taxes and report certain information. Stay on top of your responsibilities and see IRS Publication 15 for details.

Employ family members to save taxes

Hiring a family member to work for your business can create tax savings for you; in effect, you shift business income to your relative. Your business can take a deduction for reasonable compensation paid to an employee, which in turn reduces the amount of taxable business income that flows through to you. Be aware, though, that the IRS can question compensation paid to a family member if the amount doesn’t seem reasonable, considering the services actually performed. Also, when hiring a family member who’s a minor, be sure that your business complies with child labor laws.

As a business owner, you’re responsible for paying FICA (Social Security and Medicare) taxes on wages paid to your employees. The payment of these taxes will be a deductible business expense for tax purposes. However, if your business is a sole proprietorship and you hire your child who is under age 18, the wages that you pay your child won’t be subject to FICA taxes.

As is the case with wages paid to all employees, wages paid to family members are subject to withholding of federal income and employment taxes, as well as certain taxes in some states.

Establish an employer-sponsored retirement plan for tax (and nontax) reasons

Because you’re self-employed, you’ll need to take care of your own retirement needs. You can do this by establishing an employer-sponsored retirement plan, which can provide you with a number of tax and nontax benefits. With such a plan, your business may be allowed an immediate federal income tax deduction for funding the plan, and you can generally contribute pretax dollars into a retirement account. Contributed funds, and any earnings, aren’t subject to federal income tax until withdrawn (as a tradeoff, tax-deferred funds withdrawn from these plans prior to age 59½ are generally subject to a 10 percent premature distribution penalty tax — as well as ordinary income tax — unless an exception applies). You can also choose to establish a 401(k) plan that allows Roth contributions; with Roth contributions, there’s no immediate tax benefit (after-tax dollars are contributed), but future qualified distributions will be free from federal income tax. You may want to start by considering the following types of retirement plans:

Keogh plan
Simplified employee pension (SEP)
SIMPLE IRA
SIMPLE 401(k)
Individual (or “solo”) 401(k)

The type of retirement plan that your business should establish depends on your specific circumstances. Explore all of your options and consider the complexity of each plan. And bear in mind that if your business has employees, you may have to provide coverage for them as well (note that you may qualify for a tax credit of up to $5,000 for the costs associated with establishing and administering such a plan). For more information about your retirement plan options, consult a tax professional or see IRS Publication 560.

Take full advantage of all business deductions to lower taxable income

Because deductions lower your taxable income, you should make sure that your business is taking advantage of any business deductions to which it is entitled. You may be able to deduct a variety of business expenses, including rent or home office expenses, and the costs of office equipment, furniture, supplies, and utilities. To be deductible, business expenses must be both ordinary (common and accepted in your trade or business) and necessary (appropriate and helpful for your trade or business). If your expenses are incurred partly for business purposes and partly for personal purposes, you can deduct only the business-related portion.

If you’re concerned about lowering your taxable income this year, consider the following possibilities:

Deduct the business expenses associated with your motor vehicle, using either the standard mileage allowance or your actual business-related vehicle expenses to calculate your deduction
Buy supplies for your business late this year that you would normally order early next year
Purchase depreciable business equipment, furnishings, and vehicles this year
Deduct the appropriate portion of business meals and travel expenses
Write off any bad business debts

Self-employed taxpayers who use the cash method of accounting have the most flexibility to maneuver at year-end. See a tax specialist for more information.

Deduct health-care related expenses

If you qualify, you may be able to benefit from the self-employed health insurance deduction, which would enable you to deduct up to 100 percent of the cost of health insurance that you provide for yourself, your spouse, and your dependents. This deduction is taken on the front of your federal Form 1040 (i.e., “above-the-line”) when computing your adjusted gross income, so it’s available whether you itemize or not.

Contributions you make to a health savings account (HSA) are also deductible “above-the-line.” An HSA is a tax-exempt trust or custodial account you can establish in conjunction with a high-deductible health plan to set aside funds for health-care expenses. If you withdraw funds to pay for the qualified medical expenses of you, your spouse, or your dependents, the funds are not included in your adjusted gross income. Distributions from an HSA that are not used to pay for qualified medical expenses are included in your adjusted gross income, and are subject to an additional 20 percent penalty tax unless an exception applies.

IMPORTANT DISCLOSURES The opinions expressed herein are those of Ballast Tax & Business Services, LLC and are subject to change without notice. The third-party material presented is derived from sources Ballast Tax & Business Services consider to be reliable, but the accuracy and completeness cannot be guaranteed. Past performance is not indicative of future results. Nothing contained herein is an offer to purchase or sell any product. This material is for informational purposes only and should not be considered investment advice. Ballast Tax & Business Services reserve the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

Consolidated Appropriations Act Provides Relief to Individuals and Businesses

January 19, 2021December 30, 2020 by Christie

The $900 billion emergency relief package represents a bipartisan effort to assist individuals and businesses during the ongoing coronavirus pandemic and accompanying economic crisis.

On Sunday, December 27, 2020, the Consolidated Appropriations Act, 2021 (CAA 2021) was signed into law. A $900 billion emergency relief package is included as part of this omnibus spending bill. It is intended to assist individuals and businesses during the ongoing coronavirus pandemic and accompanying economic crisis. Major relief provisions are summarized here, as well as some additional tax provisions.

Unemployment provisions

The legislation provides an extension to expanded unemployment benefit assistance (although at a lower amount):

An additional $300 weekly benefit to those collecting unemployment benefits, through March 14, 2021
An additional 11-week extension of federally funded unemployment benefits for individuals who exhaust their state unemployment benefits
Targeted federal reimbursement of state unemployment compensation designed to eliminate state one-week delays in providing benefits (allowing individuals to receive a maximum 50 weeks of benefits)
Unemployment benefits through March 14, 2021, for many who would not otherwise qualify, including independent contractors and part-time workers

Recovery rebates

Most individuals will receive another direct payment from the federal government. Technically a 2020 refundable income tax credit, the rebate amount will be calculated based on 2019 tax returns filed and sent automatically via check or direct deposit to qualifying individuals. To qualify for a payment, individuals generally must have a Social Security number and must not qualify as the dependent of another individual.

The amount of the recovery rebate is $600 ($1,200 if married filing a joint return) plus $600 for each qualifying child under age 17. Recovery rebates are phased out for those with an adjusted gross income (AGI) exceeding $75,000 ($150,000 if married filing a joint return, $112,500 for those filing as head of household). For those with AGIs exceeding the threshold amount, the allowable rebate is reduced by $5 for every $100 in income over the threshold.

Rebate Amounts and Phaseout Ranges

Filing Status	Payment Amount	Phaseout Threshold	Phaseout Completed
Married Filing Jointly	$1,200	$150,000	$174,000
+ 1 Child	$1,800	$150,000	$186,000
+ 2 Children	$2,400	$150,000	$198,000
Head of Household	$600	$112,500	$124,500
+ 1 Child	$1,200	$112,500	$136,500
+ 2 Children	$1,800	$112,500	$148,500
All Others	$600	$75,000	$87,000

Business relief

The employee retention tax credit has been extended through June 30, 2021. It is available to employers that were significantly impacted by the crisis and is applied to offset Social Security payroll taxes. As extended, the credit is increased to 70% of qualified wages, up to a certain maximum per quarter.
Paycheck protection program (PPP) loans have been extended and the allowable uses (eligible expenses) of the loan expanded. A PPP loan amount can be forgiven for paying certain expenses, and such amount is not included in income. It is clarified that no deduction will be denied, no tax attribute reduced, and no basis increase denied by reason of the exclusion from gross income.
Repayment of employee payroll taxes deferred in 2020 was originally scheduled for the period January 1, 2021, through April 30, 2021. The period for repayment has been expanded to January 1, 2021, through December 31, 2021.
The employer tax credit for providing emergency sick and family leave has been extended through March 31, 2021.
A full deduction is now allowed for business meals provided by a restaurant for expenses paid or incurred in 2021 and 2022.

Rent relief

The legislation allocates funds to state and local governments to provide emergency rental assistance through December 31, 2021.
The legislation extends an eviction moratorium originally issued by the Centers for Disease Control and Prevention, but only through January 31, 2021.

Charitable giving

Enhancements to the normal charitable gifts deduction rules in 2020 have been extended through 2021.

For those who itemize deductions, the limit on the charitable gifts deduction has been increased to 100% of AGI for direct cash gifts to public charities.
For nonitemizers, a $300 (increased to $600 in 2021 for joint returns) charitable deduction for direct cash gifts to public charities is available (in addition to the standard deduction).

Other tax provisions

The floor for deducting medical expenses has been permanently lowered to 7.5% of AGI (it was scheduled to increase to 10% in 2021).

Starting in 2021, the deduction for qualified tuition and related expenses has been repealed. To make up for it, the modified adjusted gross income (MAGI) phaseout range for the Lifetime Learning Credit has been increased to be the same as the phaseout range for the American Opportunity Tax Credit.

A number of provisions that are periodically extended (often a year at a time) have been extended through 2025, including:

The exclusion from gross income of discharge of qualified principal residence indebtedness
The employer credit for paid family and medical leave
The exclusion from income for certain employer payments of student loans

A number of other provisions have been extended (generally through 2021), including:

The treatment of mortgage insurance premiums as qualified residence interest for purposes of the interest deduction
The energy efficient home credit

IMPORTANT DISCLOSURES: ORIGINALLY POSTED AT BALLAST ADVISORS. The opinions expressed herein are those of Ballast Advisors, LLC and are subject to change without notice. The third-party material presented is derived from sources Ballast Advisors consider to be reliable, but the accuracy and completeness cannot be guaranteed. Past performance is not indicative of future results. Nothing contained herein is an offer to purchase or sell any product. This material is for informational purposes only and should not be considered investment advice. Ballast Advisors reserve the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice. Ballast Advisors, LLC is a registered investment advisor under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about the firm, including its services, strategies, and fees can be found in our ADV Part 2, which is available without charge upon request.

Thursday, Sept. 3 IRS webinar focuses on Opportunity Zones

August 31, 2020 by Christie

IR-2020-198, August 31, 2020

WASHINGTON — The Internal Revenue Service is holding a free webinar designed to give an overview of Opportunity Zones and to discuss related tax benefits for investors. Opportunity Zones are an economic development tool that allows people to invest in distressed areas in the United States.

webinar-IRS This free 75-minute webinar will take place on Thursday, September 3 at 2 p.m. Eastern Time. It is open to investors, tax professionals, government agencies and anyone else interested in the tax rules that affect Opportunity Zones.

In addition to the overview, topics to be covered include:

Investor reporting elections
Annual investor reporting requirements
Impact of disaster relief on Opportunity Zones

The webinar will feature a live question and answer session and will be closed captioned for viewers who are deaf or hearing impaired. Anyone interested in attending can register online.

For more information on Opportunity Zones, visit the general Opportunity Zones page and the Opportunity Zones Frequently Asked Questions.

Archived versions of past IRS webinars are available at www.irsvideos.gov.

Originally Published: https://www.irs.gov/newsroom/thursday-sept-3-irs-webinar-focuses-on-opportunity-zones

Financial safety is an important part of disaster preparedness

August 31, 2020August 10, 2020 by Christie

checklist for financial safety in a disaster

IRS Tax Tip 2020-99, August 10, 2020

Before a natural disaster strikes, taxpayers are encouraged to prepare, if possible. This includes developing evacuation plans, putting together kits of essential supplies and putting financial safety measures in place.

To help protect their financial safety in a disaster situation, taxpayers should:

Update emergency plans. A disaster can strike at any time. Personal and business situations are constantly evolving, so taxpayers should review their emergency plans annually.
Create electronic copies of documents. Taxpayers should keep documents in a safe place. This includes bank statements, tax returns and insurance policies. This is especially easy now since many financial institutions provide statements and documents electronically. If original documents are available only on paper, taxpayers can use a scanner and save them on a USB flash drive, CD or in the cloud.
Document valuables. Documenting valuables by photographing or videotaping them before a disaster strikes makes it easier to claim insurance and tax benefits, if necessary. IRS.gov has a disaster loss workbook that can help taxpayers compile a room-by-room list of belongings.
Know what tax relief is available in disaster situations. Information on Disaster Assistance and Emergency Relief for Individuals and Businesses is available at IRS.gov. Taxpayers should also review the itemized deduction for casualty and theft losses. Net personal casualty and theft losses are deductible only to the extent they’re attributable to a federally declared disaster. Claims must include the FEMA code assigned to the disaster.
Remember the IRS is ready to help. In the case of a federally declared disaster, people can visit Around the Nation on IRS.gov and click on their state to review the available disaster tax relief. Taxpayers who live in counties qualifying for disaster relief receive automatic filing and payment extensions for many currently due tax forms and don’t need to contact the agency to get relief. People with disaster-related questions can call the IRS at 866-562-5227 to speak with an IRS specialist trained to handle disaster issues. They can request copies of previously filed tax returns and attachments by filing Form 4506, order transcripts showing most line items through Get Transcript on IRS.gov or call 800-908-9946 for transcripts.

More information:

Originally published: https://www.irs.gov/newsroom/financial-safety-is-an-important-part-of-disaster-preparedness

Tax credits help business owners recover the cost of providing Coronavirus-related leave

May 26, 2020May 26, 2020 by Christie

If you’re a small and medium size business owner, this one’s for you. The IRS announced important refundable payroll tax credits that are much less talked about in the shuffle of COVID-19 relief efforts. These credits will continue to be important to businesses especially after states fully reopen, and employees may continue to find themselves to be sick with COVID-19, need to care for family members who are sick with Covid-19, and/or cannot come to work due to lack of childcare due to Covid-19.

Chris Strand, managing accountant at Ballast Tax and Business Services breaks down what small business owners need to know about this plan which has the goal to swiftly recover the cost of providing Coronavirus-related leave.

“There are two pieces to this tax credit which is available only to small and medium size business owners,” says Strand. “The paid sick leave credit and the paid family leave credit reimburses employers who provide up to 80 hours of sick leave for employees who are sick with Covid 19 or who must care for a family member with Covid 19. Secondly, it also reimburses employers who pay employees up to 10 weeks who must miss work due to the lack of available child care due to COVID-19.”

According to the IRS, not only does this cover wages, but It also covers health care costs for the employee, and employers are not required to pay FICA taxes on those wages.

“This is also available to self employed individuals,” says Strand. “The credit is refundable and the funds can be obtained quickly.”

In order to take advantage of the credit, the IRS states, employers simply deduct the credit amount from their payroll tax deposits for the current period. If there are more credits than payroll tax deposits, they can file to receive a check right away, not wait until the end of the year by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19.

“To be clear, this only applies to wages paid to employees who come down with, or care family members who come down with, Covid 19. Or to wages paid to employees who lose their child care due to Covid 19,” Strand adds. “This pandemic has brought about challenges never before seen and rarely even foreseen in our business community. This tax credit can potentially provide a significant aid to those business owners striving to meet these challenges.”

For details about these credits and other relief, contact Ballast Tax and Business Services.

The Economic Injury Disaster Loan (EIDL) program

April 17, 2020April 7, 2020 by Christie

SBA disaster loan application form on the wooden surface.

The SBA’s Economic Injury Disaster Loan (EIDL) program provides vital economic support to small businesses to help overcome the temporary loss of revenue they are experiencing as a result of the COVID-19 pandemic. Federal Disaster Loans are available for Businesses, Private Nonprofits, Homeowners, and Renters. This isn’t new – it’s a similar program to other loans available to declared victims of disasters such as hurricanes, tornados, earthquakes, fires, etc. However, for COVID-19, the program has been expanded and provides emergency grants of up to $10,000 – theoretically within three days – and low-interest loans up to $2 million.

Who qualifies?

This program is for any small business with less than 500 employees (including sole proprietorships, independent contractors and self-employed persons), private non-profit organization or 501(c)(19) veterans organizations affected by COVID-19.

Businesses in certain industries may have more than 500 employees if they meet the SBA’s size standards for those industries.

What are the Loan terms?

According to the SBA, no matter the amount you apply for, the Economic Injury Disaster Loan advances funds (up to $10,000) and will be made available within days of a successful application. This loan advance will not have to be repaid, so in other words, the first $10k of the loan is effectively a grant.

The amount of your grant (up to $10,000), which you request when you fill out your EIDL application, is determined by the number of employees you have at $1,000 per employee with a maximum grant of $10,000. For example: If you have three employees, you will receive $3,000. That amount will be deducted from the loan forgiveness amount of any PPP loan you receive and should arrive within days of your EIDL loan application, according to the SBA.

You can apply for an EIDL of up to $2 million to provide working capital for expenses such as fixed debt and payroll costs. The interest rate is 3.75% and the loan term can be as long as 30 years. The COVID-19 EIDL includes an automatic one-year deferral on repayment, though interest begins to accrue when the loan is disbursed.

How to Apply

Unlike the Paycheck Protection Program, which requires you apply with a local lender, for an EIDL loan, you don’t have to go through a bank. You can apply through the SBA on their website.

The application process has been streamlined and the SBA says it should take you two hours and ten minutes or less to complete.

The application can be found on the SBA Disaster Assistance web page. You must apply no later than Dec. 16, 2020 in most states. A few have extended the deadline to Dec. 21.

You Can Apply for a PPP Loan Too

SBA guidance allows you to apply for a PPP loan in addition to an EIDL, so long as you don’t use the funds from each loan for the same expenses.

For example, if you decide to apply for a PPP loan and use those funds strictly for payroll, you cannot subsequently use funds from an EIDL for payroll, as well. If your EIDL loan was used for payroll costs, your PPP loan must be used to refinance your EIDL loan. Proceeds from any advance up to $10,000 on the EIDL loan will be deducted from the loan forgiveness amount on the PPP loan.

Sources: https://www.sba.gov/funding-programs/loans/coronavirus-relief-options/economic-injury-disaster-loan-emergency-advance, https://www.congress.gov/bill/116th-congress/house-bill/748/text

Please Note:Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized tax advice from Ballast Tax Services. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Ballast Tax Services is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice.

Ballast Tax and Business Services does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Ballast Tax’s website or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.

PPP (Paycheck Protection Program) Loans Summary

April 17, 2020April 7, 2020 by Christie

Paycheck Protection Program PPP Loan. Wooden cubes on the desk.

Paycheck Protection Program (PPP) is part of the $349 billion Federal stimulus package designed to provide access to cash so that businesses can keep paying their employees and other expenses such as health insurance premiums, rent or mortgage payments and utilities.

Who qualifies?

If you own a business, 501(c)(3) non-profit organization, 501(c)(19) veterans organization, or Tribal business concern with under 500 employees and have been affected by Coronavirus (COVID-19) you may be eligible. Also, if you’re a sole proprietor, independent contractor, or self-employed you also may be eligible for these loans. You also had to be in business as of February 15, 2020.

How do you apply?

Since the program opened, April 3, there have been a flood of applications, the SBA recommends that you first consult with a local lender with whom you already have an existing lending relationship, as to whether it is participating in the program.

However, you can apply through any existing SBA 7(a) lender or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating.

You only can apply once, so if you try and apply with multiple banks, ask for a guarantee that the lenders will contact you before submitting your file, so you are not triggered for fraud.

If you wish to begin preparing your application, you can download a copy of the PPP borrower application form to see the information that will be requested from you when you apply with a lender. The program is available now through June 30, 2020.

Loan Details and Forgiveness

According to the SBA, Individual businesses may be eligible for up to $10 million in forgivable loans if employees are kept on the payroll for eight weeks and the money is used for payroll, rent, mortgage interest, or utilities.

The loan will be fully forgiven if the funds are used for payroll costs, interest on mortgages, rent, and utilities (due to likely high subscription, at least 75% of the forgiven amount must have been used for payroll). Loan payments will also be deferred for six months. No collateral or personal guarantees are required. Neither the government nor lenders will charge small businesses any fees.

Loan forgiveness is based on the employer maintaining or quickly rehiring employees and maintaining salary levels. Forgiveness will be reduced if full-time headcount declines, or if salaries and wages decrease. When calculating your loan, salaries will be capped at $100,000.

Otherwise this loan has a maturity of 2 years and an interest rate of 1%.

Tracking 8-Week payroll

According to guidance issued by the Department of Treasury on April 2, 2020, the eight-week period begins on the first day lenders disperse funds to businesses. This regulation also noted lenders should issue funds no later than 10 calendar days from the date of loan approval.

Beware of Scams

It’s as important as ever to be vigilant about consumer protection.

Make sure you never provide private information – social security numbers, credit card details, or banking information – to anyone calling, emailing or some other way claiming to be from the Treasury Department or the SBA offering you grants or stimulus payments. Scammers could use this information to apply for a loan on your behalf.

Be wary of any false promises for quicker loans and faster processing. It is best to go through a federally backed credit union or traditional SBA lender, as they’ll be the most familiar with the program and as such get up to speed on new processes sooner.

Source: These summaries are based on interpretations of the CARES Act; U.S. Treasury guidance released March 31, 2020; U.S. Treasury guidance released April 2, 2020; and FAQs released April 7, 2020.

COVID-19 Update

August 31, 2020March 17, 2020 by Christie

We want you to know that Ballast Tax and Business Services is taking all the necessary precautions to keep business running as usual while our communities deal with the spread of the Coronavirus (COVID 19). We’ve issued a protocol to all our Ballast Tax staff for keeping the workplace clean and safe and for the best interest of employee and client health.

Our accountants will be replacing all in-person meetings for the foreseeable future with either a web meeting (via Join.me) or conference call. We would be happy to provide further instructions for this type of meeting.
While we traditionally still receive some tax forms via hardcopy in the mail, we are asking that all clients who are able, please scan your return and electronically submit paperwork through our secure portal.
If you are unable to scan your documents, please note that we will delay processing any hand-mailed paperwork we receive for at least a week, to avoid potential virus transmission on surfaces.
We will be suspending our receipt of cash payments, but will continue to accept payment by check, money order, and all major credit cards.
We will be automatically filing extensions for all individual returns as we away a formal tax deadline extension from the IRS.
In the event that our offices were to close, Ballast Tax and Business Services can meet your service needs under many different circumstances. Our accountants have the ability to work remotely using our secure access technology to continue to serve you.
We have technology that shifts our main phone service line to cellphones, so you should continue to call Ballast Tax and Business as usual.
We will keep you informed of any changes and potential extensions the IRS may make as things develop.

If you need any additional information on some best practices to reduce the spread, please read best practices issued by the CDC.

Thank you for your cooperation.

Tax Calculation

October 17, 2019October 15, 2019 by Christie

What is tax calculation?

Tax calculation is the process by which you figure out how much you owe in income tax. If you file federal income tax Form 1040, you must compute your adjusted gross income (AGI) and your taxable income before you can calculate your tax. Essentially, your AGI is your total income minus certain adjustments. Your taxable income is your AGI minus your itemized deductions (or your standard deduction) and your exemptions. (Personal exemptions have been suspended for 2018 to 2025.)

After finding your taxable income, you need to determine your income tax liability from the tax table or the tax rate schedules. This tax amount is then reduced by certain credits you may be entitled to and increased by any other taxes you may owe. In terms of tax calculation and tax planning, certain taxes deserve particular note: the alternative minimum tax, the capital gains tax, and the self-employment tax.

How do you determine your adjusted gross income (AGI)?

AGI is your total income minus any adjustments, including the following:

Educator expenses (up to $250 in qualified expenses for eligible educators)
IRA deduction for you and for your spouse
Deduction for moving expenses (generally suspended for 2018 to 2025)
Deduction for employer portion of your self-employment tax
Self-employed health insurance deduction
Deduction for Keogh, SEP, and SIMPLE retirement plan contributions
Penalty on early withdrawal of savings
Alimony paid (pre-2019 divorce, unless divorce agreement provides otherwise)
Student loan interest deduction
Health savings account (HSA) deduction
Tuition and fees (qualified tuition deduction)*

Other less common adjustments are also available, including:

Archer MSA deduction
Certain expenses of qualified performing artists
Jury duty pay given to your employer
Reforestation amortization and expenses
Certain required repayments of supplemental unemployment benefits
Contributions to a Section 501(c)(18)(D) pension plan
Certain expenses from the rental of personal property
Contributions by certain chaplains to Section 403(b) plans
Attorney fees and court costs for actions involving certain unlawful discrimination claims

*Not available after 2017 unless extended by Congress.

How do you determine your taxable income?

To figure the amount of your taxable income, you must first subtract either your itemized deductions or your standard deduction from your adjusted gross income (AGI). Next, you subtract your exemptions. (Personal exemptions have been suspended for 2018 to 2025.) Whether or not you itemize deductions, you may also subtract a qualified business income deduction from your AGI.

Deductions

You can choose to itemize your deductions on Schedule A (Form 1040) or take the standard deduction.

Itemized deductions: You can itemize your deductions (such as medical expenses, taxes, mortgage interest, and casualty losses) on Schedule A (Form 1040). You can benefit from itemizing your deductions on Schedule A if you have total itemized deductions that are more than the highest standard deduction amount to which you otherwise are entitled. Note, however, that in years 2013 to 2017, itemized deductions may be limited for taxpayers with high AGIs.
Standard deduction: The standard deduction is based on your filing status and whether you are 65 or older or blind. If you were 65 or older or blind during this tax year, you’re entitled to a higher standard deduction than taxpayers under 65 and/or not blind. There are special rules that may eliminate or reduce your standard deduction, such as when your filing status is married filing separate and your spouse itemizes deductions.

Exemptions

Whether you itemize your deductions or use the standard deduction, currently, you can generally deduct $4,050 (for 2016 and 2017) for each exemption you are allowed to claim. However, if your AGI exceeds a specified dollar amount for your filing status, the amount of your deductions and exemptions may be limited or phased out (the phaseout did not apply in 2012). Personal exemptions have been suspended for 2018 to 2025.

How do you determine your tax?

After finding your taxable income, the next step is to figure your income tax liability. This tax amount is then reduced by certain credits to which you may be entitled and increased by any other taxes you owe. Finally, you apply any payments or other credits against your liability to determine whether you owe additional tax or whether you are entitled to a refund.

Tax tables and tax rate schedules are used to ascertain tax. The tax table must be used for taxable income of less than $100,000 (unless Form 8615 or Schedule D is used to calculate tax). The tax rate schedule, however, must be used for taxable income of $100,000 or more (unless Form 8615 or Schedule D is used to calculate tax). Form 8615 is used to calculate the tax for a child’s unearned income that is subject to the kiddie tax rules. Regardless of whether you use the tax table or the tax rate schedule, the amount of tax you pay depends on your tax bracket.

A tax bracket is, generally, the income tax rate at which you are taxed for a certain range of income. Brackets are expressed by their marginal tax rate. Currently, there are seven marginal tax rates: 10, 12, 22, 24, 32, 35, and 37 percent. The income levels at which each rate applies vary depending upon your filing status: married filing separately, married filing jointly, head of household, or single.

What are the current tax rates?

The tax rate schedules for 2019 are as follows:

Single:

If Taxable Income Is:	Your Tax Is:
Not over $9,700	10% of taxable income
Over $9,700 to $39,475	$970 + 12% of the excess over $9,700
Over $39,475 to $84,200	$4,543 + 22% of the excess over $39,475
Over $84,200 to $160,725	$14,382.50 + 24% of the excess over $84,200
Over $160,725 to $204,100	$32,748.50 + 32% of the excess over $160,725
Over $204,100 to $510,300	$46,628.50 + 35% of the excess over $204,100
Over $510,300	$155,798.50 + 37% of the excess over $510,300

Married filing jointly and surviving spouses:

If Taxable Income Is:	Your Tax Is:
Not over $19,400	10% of taxable income
Over $19,400 to $78,950	$1,940 + 12% of the excess over $19,400
Over $78,950 to $168,400	$9,086 + 22% of the excess over $78,950
Over $168,400 to $321,450	$28,765 + 24% of the excess over $168,400
Over $321,450 to $408,200	$65,497 + 32% of the excess over $321,450
Over $408,200 to $612,350	$93,257 + 35% of the excess over $408,200
Over $612,350	$164,709.50 + 37.6% of the excess over $612,350

Married individuals filing separately:

If Taxable Income Is:	Your Tax Is:
Not over $9,700	10% of taxable income
Over $9,700 to $39,475	$970 + 12% of the excess over $9,700
Over $39,475 to $84,200	$4,543 + 22% of the excess over $39,475
Over $84,200 to $160,725	$14,382.50 + 24% of the excess over $84,200
Over $160,725 to $204,100	$32,748.50 + 32% of the excess over $160,725
Over $204,100 to $306,175	$46,628.50 + 35% of the excess over $204,100
Over $306,175	$82,354.75 + 37% of the excess over $306,175

Heads of household:

If Taxable Income Is:	Your Tax Is:
Not over $13,850	10% of taxable income
Over $13,850 to $52,850	$1,385 + 12% of the excess over $13,850
Over $52,850 to $84,200	$6,065 + 22% of the excess over $52,850
Over $84,200 to $160,700	$12,962 + 24% of the excess over $84,200
Over $160,700 to $204,100	$31,322 + 32% of the excess over $160,700
Over $204,100 to $510,300	$45,210 + 35% of the excess over $204,100
Over $510,300	$152,380 + 37% of the excess over $510,300

Trusts and estates:

If Taxable Income Is:	Your Tax Is:
Not over $2,600	10% of taxable income
Over $2,600 to $9,300	$260 + 24% of the excess over $2,600
Over $9,300 to $12,750	$1,868 + 35% of the excess over $9,300
Over $12,750	$3,075.50 + 37% of the excess over $12,750

How do the long-term capital gains tax rates come into play?

Currently, the highest marginal tax rate applicable to ordinary income and short-term capital gains of individuals is 37 percent, whereas the top long-term capital gains rate for individuals is 20 percent for most long-term capital gains. Because of this difference, you need to complete a special capital gains tax worksheet to calculate your capital gains tax.

Long-term capital gains and qualified dividends are generally taxed at special capital gains tax rates of 0 percent, 15 percent, and 20 percent depending on your taxable income. The actual process of calculating tax on long-term capital gains and qualified dividends is extremely complicated and depends on the amount of your net capital gains and qualified dividends and your taxable income. These rates also generally apply to qualified dividends paid to individuals from domestic corporations and qualified foreign corporations.

What about the alternative minimum tax (AMT)?

The purpose of the alternative minimum tax (AMT) is to ensure that taxpayers with substantial income will not escape taxation entirely by employing certain exclusions, deductions, and credits. The tax law gives special treatment to some kinds of income and allows special deductions and credits for some kinds of expenses. Taxpayers who benefit from the law in these ways may have to pay at least a minimum amount of tax through an additional tax: the AMT.

What about the self-employment tax?

If you are self-employed, you must pay Social Security and Medicare taxes for yourself as part of your income tax. The self-employment tax is based on net earnings from self-employment, not on taxable income. The rate on net earnings is 15.3 percent; 12.4 percent is for Social Security and 2.9 percent is for Medicare. The maximum amount subject to the Social Security part is currently $132,900 (up from $128,400 in 2018). All of your net earnings of at least $400 are subject to the Medicare tax.

You generally must report and pay self-employment tax (Schedule SE of Form 1040) if either of the following applies to you (or to your spouse, if you file a joint return):

You were self-employed and your net earnings from self-employment were $400 or more
You had church employee income of $108.28 or more

For tax years after 2012, a 0.9 percent Medicare surtax also applies to wages and self-employment income in excess of $200,000 for single taxpayers and over $250,000 for married couples filing joint returns ($125,000 for married couples filing separate returns).

What are some other taxes that might affect you?

Social Security and Medicare tax on tips not reported to employer: If you received tips of $20 or more in any month while working for one employer but didn’t report all of them to your employer, you must figure your Social Security and Medicare tax on the tips not reported. Use Form 4137 and attach it to Form 1040.
Household employment taxes: If you have a household employee, you may need to pay state and federal household employment taxes. You generally must add your federal employment taxes to the income tax that you report on your federal income tax return. Household work is work done in or around your home by baby-sitters, nannies, health aides, private nurses, maids, caretakers, yard workers, and similar domestic workers. A household worker is your employee if you can control not only what work is done but also how it is done. If you have a household worker, you may need to withhold and pay Social Security and Medicare taxes, or you may need to pay federal unemployment tax, or you may need to do both. For more information, see IRS Publication 926, or Schedule H and its instructions.
Premature distribution tax: If you take a distribution from your qualified plan before you reach age 59½, you may have to pay a 10 percent premature distribution tax on that part of the distribution that is taxable (unless you meet an exception). This penalty tax can amount to a substantial sum if your distribution is large.
A 20 percent tax on excess (golden parachute) payments: If you received an excess parachute payment (EPP), you may have to pay a tax equal to 20 percent of this excess payment.
For tax years after 2012, an additional hospital insurance (Medicare) tax of 0.9 percent: This additional tax will be assessed on wages (as well as self-employment income) that exceed $200,000 ($250,000 for married couples filing joint returns, $125,000 for married couples filing separate returns). Employees will be liable for this amount to the extent that the additional tax has not been withheld from wages.
For tax years after 2012, a new unearned income Medicare contribution tax on the investment income of high earners: The 3.8 percent tax will apply to the lesser of (1) net investment income or (2) the amount by which adjusted gross income (AGI) exceeds the $200,000 or $250,000 for married couples filing jointly ($125,000 for married couples filing separate returns) threshold amounts. Net investment income generally includes interest, dividends, capital gains, annuity income, royalties, and rents. Tax-exempt interest won’t be included, nor will income or distributions from qualified retirement accounts.
Starting in 2014, a new tax on individuals who don’t have adequate health care coverage (this is often referred to as the individual insurance mandate): This tax will be phased in over three years, starting at the greater of $95, or 1 percent of gross income in 2014 (up to a family maximum of $285); increasing to the greater of $325, or 2 percent of gross income in 2015 (up to a family maximum of $975); and rising to the greater of $695, or 2.5 percent of gross income in 2016 and 2017 (up to a family maximum of $2,085). The individual insurance mandate has been eliminated for months beginning after December 31, 2018.

Avoiding Personal Holding Company Tax

October 17, 2019September 18, 2019 by Christie

What is a personal holding company?

A personal holding company (PHC) is a C corporation in which more than 50 percent of the value of its outstanding stock is owned (directly or indirectly) by five or fewer individuals and which receives at least 60 percent of its adjusted ordinary gross income from passive sources. Because the top corporate tax rates have historically been lower than the top individual tax brackets, some shareholders of closely held corporations have sought to retain earnings within the corporation as a strategy to avoid the higher individual tax rates. To prevent this, Congress enacted a penalty tax on certain C corporations–the personal holding company (PHC) tax.

The personal holding company tax is imposed on the undistributed income of those C corporations that serve as vehicles to shelter passive income. The rationale is that a corporation should be primarily an active business operation. The law targets those closely held corporations that derive substantial income from investments, such as royalties, interest, dividends, and rents. Avoiding PHC status is important because failure to do so could result in additional taxation. A PHC must pay a corporate tax equal to 20 percent. (From 2003 to 2012, the tax rate was 15 percent. The rate increased as of 2013 with passage of the American Taxpayer Relief Act of 2012). The tax is levied on undistributed PHC income.

To summarize, a personal holding company (PHC) is a C corporation in which:

At least 60 percent of the corporation’s adjusted ordinary gross income consists of PHC income
At any time during the last half of the tax year, more than 50 percent of the value of the corporation’s outstanding stock is owned, directly or indirectly, by (or for) five or fewer individuals

What is PHC income?

PHC income generally consists of the following sources of (primarily) passive income:

Dividends
Interest minus certain amounts excluded under Internal Revenue Code 543(a)(1) and Internal Revenue Code 543(b)(2)(C)
Royalties minus certain expenses allowed under Internal Revenue Code 543(b)(2)(B)
Annuities
Rents subject to specific income requirements
Compensation received for the use of corporate property from shareholders who own at least 25 percent of the value of the stock of the corporation, subject to limits
Amounts received under a personal service contract if someone other than the corporation designates the individual performing the services, and the person designated owns (directly or indirectly) at least 25 percent of the value of the corporation’s stock at least some time during the taxable year
Income from estates and trusts
Mineral, oil, gas, and copyright royalties subject to specific income requirements

What is PHC’s adjusted ordinary gross income?

In general, a PHC’s adjusted ordinary gross income is the corporation’s gross income, minus:

Gains from the sale or disposition of capital assets
Gains under Internal Revenue Code 1231(b)
Certain foreign income
Certain expenses allowed against rental income
Certain expenses allowed against royalty income
Certain interest income

See Internal Revenue Code 543(b) for more details.

Are there any exceptions to the definition of a personal holding company?

Some businesses that meet the general income and ownership tests for personal holding companies are statutorily excluded from PHC classification and taxation. These exceptions include the following:

Tax-exempt corporations
Banks
Domestic building and loan associations
Life insurance companies
Surety companies
Certain lending or finance companies
Certain foreign companies
Certain small business investment companies operating under the Small Business Investment Act of 1958
Corporations under the jurisdiction of the court in a Title 11 or similar bankruptcy case

What strategies can be used to avoid PHC taxation?

Throughout the year, corporations should monitor their accumulated earnings and the types of income they receive to detect potential exposure to the PHC tax. Certain strategies can be employed to avoid the tax.

Increase number of business owners

Since the PHC tax applies only to C corporations in which more than 50 percent of the value of stock is owned by five or fewer individuals during the last half of the tax year, you can avoid PHC status by ensuring that the top five owners in your closely held corporation own less than 50 percent of the value of the outstanding stock. Gifts of stock to relatives or friends can avoid potential problems in this area.

Bear in mind, though, the concept of “constructive ownership.” Stock owned directly or indirectly by your family members and certain other related individuals or entities could be treated as owned by you. Your family members include your brothers and sisters, your spouse, ancestors, and lineal descendants. You can, for instance, gift stock to the spouse of your brother or sister.

Increase adjusted ordinary income or decrease PHC income

Since you are only subject to the PHC tax if at least 60 percent of the corporation’s adjusted ordinary gross income consists of PHC income, you should change the relationship between your operating income and your passive investment income. More specifically, you can take steps to increase your adjusted ordinary income or to decrease PHC income.

To increase adjusted ordinary income:

Accelerate sales and bill at year-end
Decrease cost of goods sold by deferral of purchases or other expenses at year-end
Invest in other business activities that result in additional gross receipts that are not PHC income

To decrease accumulated PHC income:

Cash in some securities and reinvest the funds in stocks that have growth potential but do not regularly pay dividends
Pay dividends to stockholders (dividends can even be paid 2½ months after year-end if you make a special election)
Limit your passive investments

Can converting from a C corporation to an S corporation help?

While the PHC tax is only imposed on C corporations, election of S status may not be an effective solution. An S corporation that has prior C corporation earnings and profits (E&P) and more than 25 percent of its gross receipts from PHC income sources is also exposed to a tax. A corporate level tax of 35 percent is levied on the excess net passive income.