2015 Tax Planning Tips
Natalya Itu - Colorado Business CPA, LLC
November 30, 2015
As we are saying good bye to 2015 year, it is important to remember that tax year is not over yet and there is still time to apply some of the below tax strategies to minimize your tax liability. Please go over them and feel free to call us at 1-800-5040-CPA if you have any questions or would like us to help you to apply some of these tax strategies.
In this blog we will discuss late S-election, Payroll compliance issues, HSAs and IRAs and income/ expense shifting strategies.
If you operate your business as an LLC, and make over $30,000 in net income, you should consider converting your business into an S-corporation. Being an S-corporation entity is a good way to operate your business not only because it reduces audit risk (your chances of being audited are about 10 times less versus you operating your business as a schedule C), but also you can save a few thousand dollars on self-employment taxes. S-corporation income is not subject to self-employment taxes (15.3%); however, you still need to have a reasonable salary and subject that portion of your income to self-employment tax. The good news is that you can still save a few thousand dollars (depending on your income) on payroll taxes. Again, it costs more to operate your S-corporation, therefore, you need to see what your tax savings will be and whether they outweigh the cost of becoming an S-corporation. This is one of the best strategies and for one more good reason. If you have your LLC with net income of over $30,000 in 2015 you can still elect your business to run as an S-corporation and therefore, save money this year. This is like an instant tax savings. Timely S-corporation election would need to be filed by March 15th 2016 for 2015 tax year. However, the IRS allows you to file a late S-election provided you use the IRS Revenue Ruling 2013-30 and have a reasonable cause for your late S-election.
Different states have different rules on S-corporations, therefore consulting with a business attorney from your state would be a very good idea. Besides, I am not an attorney, I am a CPA that can only give you advice regarding your tax savings.
Payroll compliance issues:
If you run your business as an S-corporation, you have to have payroll. By payroll, I don’t mean the money you take from your business - it would be called shareholders distributions or owner’s draws if you operate your business as a single member LLC. By payroll, I mean a real W-2 at the end of the year. Basically you treat yourself as an employee of your own corporation. That means your salary will be subject to payroll taxes. You can establish a retirement plan for yourself and the company can match your contributions. You can also reimburse yourself or pay directly from your business account for health insurance premiums. It is very important to note that health insurance premiums for shareholders and their dependents (family plan) can be subtracted as a dollar for dollar tax deduction, meaning on page 1 of your Form 1040 and not on your Schedule A subject to 10% threshold. However, it is important to note that in order to take this deduction, your health insurance premiums must be reported on your W-2 form in Box 1 (income subject to Federal and State income tax) and Box 14. Your health insurance premiums are not subject to FICA (Medicare and Social Security tax). Keep in mind though, your deduction will be limited to your FICA wages. For example, if your medical insurance premium is $6,000 and your FICA wages are $5,000, only $5,000 will be deducted on page 1 of Form 1040 and the other $1,000 will be transferred to Schedule A and will, most likely, have no effect on your tax return.
If you apply for a late S-election for 2015, it is very important to have a payroll in December, so all payroll forms can be issued for 2015.
Another good reason to have an official payroll in December would be as a way to make estimated tax payments. If you knew that you owed money on taxes and did not make any estimated tax payments, you can be subject to a penalty - failure to make estimated tax payments. However, you can avoid this by making tax payments (Federal Income Tax withholding and Social Security, Medicare taxes) with your December payroll check. IRS will treat your tax payment made in December as if it was made throughout the entire year. Make sure you have at least 90% to cover your prior tax liability to avoid penalties.
You can also establish a retirement account in December and even contribute to it in the next year (SEP) and make payments to it either through payroll or use payroll amounts to determine eligibility amounts. Meaning SEP contribution is limited to 25% of your W-2 (FICA wages).
If your spouse did not earn any money but helped you in your business, you can have payroll for him or her and they can contribute to their Social Security fund or use their payroll for making retirement contributions.
This is why it is important to have good accounting records by the end of November so you can determine if it is a good idea to convert your business into an S-corporation as well as plan your income, expenses and estimated tax payments accordingly.
Now let’s talk about income, expenses and what can be done in 2015 to minimize your tax liability. By utilizing Section 179 tax deduction, you can generate tax savings by deducting the cost of fixed assets versus depreciating it over 5-15 years. The limit so far is $25,000. Therefore, it is time to buy the furniture and equipment you need in order to grow your business. Please keep in mind that your business should show income in order for Sec. 179 to be deductible.
You can also purchase or pre-pay your expenses with your credit card. However, keep in mind if you expect higher income next year, pre-paying your expenses might not be a good idea. Again, keeping good accounting records will help you to plan accordingly.
You can also plan your Schedule A, itemized tax deductions the same way. For example, if you don’t have a house mortgage you might use standard tax deduction year after year because the combination of charitable contributions, real estate taxes, and other itemized tax items is not enough to exceed standard tax deduction. Planning for medical expenses can be done the same way. By pre-paying on real estate taxes, making charitable contributions once for two years or plan your medical procedures, you might be able to use itemized deduction versus tax once every two years.
Also, I wanted to point out is when you gift someone something, the limit of the gift cannot exceed $25, however, if you give something to the business (to accounting firm for example) $25 limit is not applicable. Obviously the gift amounts still has to be reasonable.
Now I want to devote some time for a single member LLC tax situation. In my opinion, the best tax write-off is payments you make to your children who help you in your business and are under 18 years of age. Paying your children who are under 18 years of age especially if you operate your business as a single member LLC can be a really good tax strategy because they will pay no taxes on the first $6,300 - meaning you can save on payroll taxes and your income tax. For example, if you have a 15% income tax rate plus 5% state plus 15.3% self-employment tax, that’s 35.3%. 35.3% of $6,300=$2,224 in tax savings. It can get even better, because now your child has earned income, meaning you can contribute to his or her Roth IRA!
Before you apply this strategy, make sure your children did work for you. You will need to keep track of their hours worked as well as job responsibilities and show fund transfers to their account. Also, you (or your accountant) need to file payroll tax reports with $0.00 tax liability.
If you operate your business as an S-corporation, your children will have to pay payroll taxes. By creating your own family LLC and applying your children through this business entity will save you money on payroll taxes. I also believe it is a good strategy to employ your children for their education, teach them how the family business operates and make them feel that they contribute to the success of your family business.
Let’s address HSAs. If you have a high deductible medical insurance plan, you can still contribute to your HSA before April 15th, 2016 provided you had your plan the entire 2015 year. The maximum tax deduction or amount of contribution is $3,350 for single and $6,650 for the family plan. If you are over 55 years of age, you can make an additional $1,000 contribution. The good news is you don't need to use it if you are not sick, and can use the money to purchase investments, however, you would pay 20% penalty and it will become taxable even if you use funds for something other than paying medical expenses.
Health Reimbursement Arrangement Accounts are one of the best ways to reimburse your spouse who is an employee in your LLC (Single member LLC, not an S-corporation) and take your medical deductions and treat is as a business expense. This is a very good strategy if you operate your business as a Schedule C and not as an S-corporation. You can establish a plan with the companies who specialize in establishing HRAs and pay an annual fee of $150 or so.
If you use your vehicle for business, make sure you keep track of your business mileage. If you don't have an office outside your home, your business miles are everywhere you travel for business purposes outside your home. Please keep in mind that in order to claim your home office you need to use one of the rooms in your house exclusively and regularly for business.
Health insurance premium deductions for self-employed individuals operating their business as a Schedule C is deducted on page 1 of your Form 1040. The deduction does not reduce your self-employment tax but does reduce your income tax. Also, health insurance tax deductions will be limited to your net income reported in Schedule C.
When you operate your business as an S-corporation, you have to have an official W-2 and report health insurance premiums in Box 1 ( in addition to your salary) and Box 14 with the description - shareholder’s health insurance. It is important to properly disclose your medical insurance premiums and to have payroll to avoid further issues, such as audit issues with the IRS.
If your income is low, you can qualify for health insurance premium credit as part of the Obama Health Care Reform. You would need to purchase your health insurance through Health Insurance Marketplace to qualify. If you are not sure what your income is going to be next year, I would suggest not to ask the government to subsidize your insurance premiums, because if you get a subsidy but later found out that your income is too high, you would have to return it back on your tax return and it can be painful. Also, you will be receiving new forms this year, such as 1095-A (if you received your health insurance via Health Insurance Marketplace), 1095-B or 1095-C. Make sure you do give these forms to your accountant. Also, be aware that the tax penalties double for not having a health insurance. It is 2% of your taxable income or $325 per person (whichever is greater).
If you are healthy, I would suggest to get a high deductible plan (catastrophic) plan so you can avoid penalties for not having health insurance, protect yourself if something happened to you and also use your HSA contributions as one of the investment vehicles.
The last topic I would like to address is investing money by contributing to retirement accounts. If you are a business owner it is still not too late to establish and contribute money into a 401K or solo 401K, if you have no employees. Contributions have to be made by 12/31/2015. You can also establish an SEP IRA and contribute up to 25% of your W-2 income. If you have employees, 401Ks would be a good plan for 2015.
If your income is low this year, due to loss of the job or just starting your business, it would be a good time to convert your IRA (Traditional) to Roth. Conversion will create a taxable even, therefore it is a good strategy for people with low income. You can do conversions before 12/31/2015 and if you change your mind, you have until April 15th to roll it back into traditional IRA if you choose to do so.
If you have any questions or would like to hire a CPA for your tax planning and tax compliance work, please don't hesitate to contact our firm - Colorado Business CPA, LLC - by calling to make an appointment at 1-800-5040-272 (CPA). You can also contact us via our website. Feel free to share this blog with your friends that are business owners and might benefit from this information.
Thank you for your time and I look forward to seeing or hearing from you soon!
Natalya and Colorado Business CPA, LLC