Tax Planning

Tax planning suggestions

I have been advising clients on tax advice for 15 years. There are many ways of tax planning; However, the best approach has been to find ways to put tax-free money in the hands of my clients. Here are some tips to help you do the same for your customers.

Should I use tax planning software?

When I started doing tax planning, there were no software programs that did this ancillary service. Today there are several programs that perform tax planning. However, not all of these programs meet my requirements. Most only offer mathematical feedback without accompanying advice, similar to tax software. Because of this, I don’t use tax planning software.

When should tax planning be carried out?

First, tax planning should be done quarterly. If your specialty is taxation, you should advise your client. For example, if you are just doing bookkeeping for a customer and sending them financial statements, the customer is likely not to understand what you are sending them. Less than one percent of customers even look at what you send them because they don’t know what it means.

Some people wait until the end of the year to do tax planning. However, the reality is that every business has cash flow problems. November and December especially are terrible for most businesses unless they are retail businesses. As a result, your customer may not have the money to implement what you tell them to do.

A misunderstanding in tax planning

There is a theory of tax planning that is wrong. Most people know that you can use the Section 179 deduction on any equipment purchased in any year as long as it does not exceed taxable profit. In addition, you can take advantage of bonus depreciation, provided that the equipment starts with the taxpayer.

Some schools of thought recommend buying equipment that you may or may not need and pulling those prints. However, this is short-sighted advice. Tax planning should take into account both the future and the present.

While these prints can be valuable, they will spend cash just to get a print unless the customer needs the equipment. As you think about tomorrow, keep in mind that if the equipment is sold or scrapped and the Section 179 deduction has been used, you will have to carry back that depreciation now and your customer may now be in a higher tax bracket.

How the TCJA affects tax planning

My mantra in tax planning has always been that the more tax-free money a customer puts in their pockets, the better. According to the Tax Cuts and Jobs Act (TCJA) of 2018, tax choices are extremely important. For example, starting a business as an S-Corporation to avoid the self-employment tax on some of the profits was the best advice 99 percent of the time. However, this can no longer be the case.

Under TCJA there is the qualified company income allowance (QBI). However, there are several reservations about this deduction. Authorized traders, for example, who are usually subject to a higher tax bracket, are exempt from this deduction. In addition, there are restrictions on adjusted gross income (AGI). Conversely, a C corporation pays a flat tax of 21 percent.

I realize that there can be double taxation; in a conversion from an S corporation to a C corporation, Rev. Proc. 2019-1 allows the customer to zero all profit accumulated on the Accumulated Adjustments Account (AAA) as it is previously taxed income. Additionally, in a C corporation, the owner can now take advantage of non-taxable fringe benefits, avoiding the need to take a dividend.

The next situation that arises is adequate compensation. Adequate compensation is important in an S corporation because self-employment tax avoidance is just Social Security and Medicare. In a C corporation, excessive compensation could be interpreted as tax avoidance.

Appropriate remuneration is also important because retirement provision is based on it. For example, you have defined compensation plans like SEPs, SIMPLEs, 401 (k) plans, and KEOUGHs, and then you have defined benefit plans too. All of these plans are based on earned income. In short, the more a customer pays themselves, the more they can bring into these plans.

For example, a business owner, with or without an employee, can start either a Safe Harbor 401 (k) plan or a Solo 401 (k) plan. Both plans, between pay deferral and employer matches, can be up to $ 58,000 for those under 49 or $ 64,500 for those over 50.

What an employer does for himself, he has to do for his employees. However, with a Safe Harbor 401 (k), they only need to offset three percent of the employee’s salary deferral. Typically, most employees do not participate in the plan. Safe Haven 401 (k) and Solo 401 (k) must open before the fourth quarter of the year. For high net worth clients, a performance plan may be the way to go.

Depending on the age of the owner, the owner can deposit up to $ 250,000 into the plan. You need to include the longest-serving employee in the plan; however at a much lower price than the owner. With a defined benefit plan, you can also have a Safe Harbor 401 (k) plan; however, the owner can only increase his salary deferrals by three percent.

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