‘Failing to Plan is Planning to Fail’ ~ Benjamin Franklin
Franklin also wrote that “nothing is certain but death and taxes.” He was right about death and taxes but he had them in the wrong order. Taxes come before and after death! Tax Planning is the process of using the tax code to your advantage and taking the necessary steps to reduce your income tax burden.We provide tax planning services year-round, but the end of the year often provides the last chance to reduce upcoming tax bills.
This year, there were several changes and additions to the tax law and tax planning for 2020 offers individuals and businesses a myriad of new (as well as time tested strategies) that should be considered to lower your tax burden or even allow you to obtain an expedited refund for prior year tax payments, if you qualify.
Moskowitz Tax Planning offers you a 3-step process at a flat fee rate.
- Schedule your initial tax planning appointment with Steve or Cliff;
- Gather and Provide information we ask of you;
- Plan to implement strategies recommended by year-end.
Tax Planning Tips to Consider
PPP Loans for $50,000 or less can Be Forgiven With Fewer Administrative Headaches
Millions of small businesses who took out a Paycheck Protection Program (PPP) loan for $50,000 or less are now eligible to apply for loan forgiveness using a simplified application form according to the Small Business Administration (SBA).
Just over 3.57 million, or 68.5%, of the 5.21 million PPP loans granted this year were for $50,000 or less, according to the SBA. These loans can now use a less stringent application process for determining if they can be forgiven.
Here’s how to take advantage of the simplified forgiveness application.
- Download the simplified form. Click here to download the simplified form (Form 3508S). Click here to download instructions for the simplified form.
- Don’t confuse it with the EZ application form. There is another loan forgiveness form for small businesses called the EZ Application Form (Form 3508EZ). Click here to download the EZ form. Click here to download instructions for the EZ form.
- Stay in touch with your lender about submitting your application. Remember that only your lender can submit your forgiveness application to the SBA. Stay in contact with your lending institution about when and how to complete the loan forgiveness application.
Donating Stock to Charities Can Yield Bigger Tax Savings
Scrolling through your inbox, you come across an email from your favorite charity asking for a donation. You’ve been meaning to make a contribution for a while now, but just never got around to sending them a payment.
But you’re ready to do it now, and you’re cyber smart, so you avoid the email and go directly to the charity’s website.
Regardless of how you make your payment – credit card, debit card, EFT, or mailing a physical check – your donation is considered a cash contribution. Instead of making a cash contribution to a charity, you could instead make a stock contribution and see a potentially larger tax deduction.
To illustrate, assume you purchased stock in 2015 for $10,000 and donated the stock in 2020 when the fair market value was $15,000. Here are three different scenarios and their tax implications assuming your marginal income tax rate is 37% and your long-term capital gain rate is 20%.
- Donate cash instead of selling stock. Donating $15,000 of straight-up cash to the charity decreases federal taxes by $5,550 if you itemize deductions. You get a charitable contribution tax deduction equal to the fair market value of the stock when it is donated, which in this example is $15,000. Your federal income tax savings is 37% of $15,000, or $5,550.
- Sell stock and donate the proceeds. Selling the stock and then donating the cash proceeds reduces your tax liability by $4,550. Here’s why:
- Federal Income tax savings = $5,550 (37% of $15,000)
- Capital gains taxes paid = $1,000. Selling the stock first means that you have to pay taxes on the gain. Your tax liability is 20% of $5,000.
- Donate the stock directly to the charity. Donating your stock directly to the charity cuts your tax bill by $6,550! Here’s how it works:
- Federal Income tax savings = $5,550 (37% of $15,000)
- Capital gains tax savings = $1,000. By donating the stock, you do not owe long-term capital gain taxes. This saves 20% of the $5,000.
As you can see, directly donating stock to a charity can potentially save you $6,550 in taxes, compared to $5,550 if donating straight-up cash and $4,550 if selling the stock then donating the proceeds.
Donating stock directly to a charity is slightly more complicated than donating cash and requires you do it correctly. If you’re considering making a donation of stock to a charity, please call us to discuss.
Please also see our blog posts on The Tax Benefit Of Charitable Donations.
Retirement Savings Tips for Small Business Owners
As an owner of a small business, you’ve proven that you’re a self-starter by operating a successful private enterprise. Of equal importance is applying your skills towards saving for your future. Here are some of the most popular tax-advantaged retirement vehicles for small business owners in 2020 and some tips on saving for retirement.
Options if you’re not currently enrolled in a plan
For small business owners not currently enrolled in a retirement plan, here are three of the most popular retirement account options:
Simplified Employee Pension (SEP) IRA Account.Contribute as much as 25% of your business’s net profit up to $57,000 for 2020. 401(k) Plan.Contribute up to $57,000 of your salary and/or your business’s net profit. Savings Incentive Match Plan for Employees (SIMPLE) IRA Account.You can put all your business’s net profit in the plan, up to $13,500 plus an additional $3,000 if you’re 50 or older.
Which plan should you choose? SEP and SIMPLE IRAs are ideal for either sole proprietors or really small businesses (no more than one or two dozen employees). Due to higher administrative costs, 401(k) plans are usually more suited for larger small businesses (more than one or two dozen employees).Or consider a Cash Balance Plan.
More than 20 different types of pension plans exist, such as the Cash Balance Plan. The more sophisticated plans provide qualifying businesses and individuals to contribute and deduct from their taxes far greater amounts than the simpler plans above allowing the qualified business owners to yearly contribute hundreds of thousands to millions of dollars for themselves.
Major benefits of pension plans include:
- Tax savings-reduce your federal and state income taxes by providing for your future;
- Cash flow advantages. Other tax deductions require payment by 12/31/20 to deduct for 2020; but not qualified pension plans that allow for a 2020 income tax deduction for contributions up to the filing of the tax return, including extension. Which means that you have about ¾ of 2021 to make a contribution that you can deduct from your 2020 tax return;
- Pensions are an “exempt asset”, meaning that if you lose a lawsuit the winner cannot take any of your pension. Even if you file a bankruptcy the Court cannot take a penny of your pension.
Tips to maximize your retirement contributions
For small business owners who are currently enrolled in a retirement plan, here are some suggestions for maximizing your annual contributions into your retirement accounts:
Pay yourself first. Instead of funding your retirement account with whatever is left over after paying your monthly bills, decide at the beginning of each month how much you want to set aside to fund your retirement. Make funding your retirement each month as important as your other bills. Then assume that you pay your retirement bill first. If you run out of money before paying all your bills, decide if there are any expenses that can be pared back for subsequent months so you can meet your monthly retirement savings goal.
List your retirement contributions on your income statement. It is easy to forget about retirement planning when running the day-to-day operations of your business. To keep retirement contributions top-of-mind, record these as a separate line item on your business’s income statement.
Review your tax situation throughout the year. Tax planning is now more important than ever with the uncertainty caused by the recent pandemic. So, allow us to review your tax situation to see how to maximize each year’s retirement contributions.
Moskowitz Announcement: Tax Accounting & Advisory Services
At Moskowitz LLP, we recognize that our clients look to us for more than defending tax audits, tax law disputes, and cleaning up old tax and accounting problems. We also blend tax and accounting services with strategic planning and consultation. As such, Moskowitz LLP is pleased to announce that it has invested in its tax accounting department to better provide you with ongoing business tax accounting needs and offer advisory services. In addition to reducing your taxes, our tax accounting teams support our tax attorneys for use in your legal cases but also to provide you with financial information that tells you what happened in your business, why it happened, and better yet, how to benefit from the information and insights to provide predictive analytics to tell you what is likely to happen to your business finances so that you can realize your business goals.
For more information, please contact our office and ask to discuss profit optimization planning services.
As always, should you have any business or tax questions, please feel free to call.