Tax Tips- Businesses

Easton Tax

Roth IRAs for Minors - Gift of a Lifetime

Opening Roth IRAs for minor children is one of the more popular tax-saving practices in families who own businesses. The family business can employ the child who has reached the age of 16, and deposit part of the salary into the child's Roth IRA account. Although the child needs to pay payroll tax or self-employment tax, there are two benefits: 1) the family pays less in taxes overall as the child essentially doesn't pay personal income tax; 2) investment returns in a Roth IRA are not taxable if withdrawn after retirement. At a compound interest rate of 5%, you could expect a 10X return in 50 years; that is 116X at a 10% rate. The Roth IRA makes a generous gift to the child for his/her lifetime.

The maximum amount you can place in your child's Roth IRA is $6,500 for 2023. If you pay via 1099, you could set at $7,500 to include the 15.3% self-employment payroll tax. Lastly you need to consider child labor laws in your state, however minors at 16+ are allowed to work outside of the school hours in many states.

File Operating Loss for Startup Companies

Losses incurred by C Corporation entrepreneurs when selling shares or closing the company are generally counted as capital losses and are recognized in Schedule D of the individual tax return. Net capital loss is subject to a maximum deduction of $3,000 per year. It can be disadvantageous for larger losses. Although the amount that remains to be deducted can be deducted indefinitely in future years, it may take a painful long time to be fully deducted.

However, the tax codes allow more deductions for small businesses to help ease the pain. For small corporations with less than $1 million in capital, the IRS allows each investor to recognize a loss of up to $50,000 at once. If both husband and wife are investors, a lump sum loss of $100,000 can be recognized in a year. This is far better than recognizing $3,000 loss in a year. This tax provision is called Section 1244 Stock. In addition to meeting the definition of a small corporation, there are two more conditions: 1) you need to be the original shareholder, and 2) you need to hold the shares for over one year.

How to Pay Taxes to the IRS via Bank Wire Transfer?

How to pay taxes to the IRS by bank wire transfer? You may know corporate tax or federal payroll tax are generally paid to the IRS through the federal payment system EFTPS, but the EFTPS requires prior application and a password to be sent via email.

In addition to EFTPS, the IRS also allows wire transfer payments. To make a wire transfer payment, you need to download a form called Same-Day Taxpayer Worksheet from the IRS website, fill out the form, and bring it to the bank. However, bank staff often don't know how to handle such wire transfer. If that is the case for you, you can help your bank staff. Ask them to put the IRS Routing Number as 091036164, and the IRS bank account number as your company's 9-digit tax identification number (EIN) without the hyphen"-". Beneficiary information should be filled in as such: your company's 9-digit tax ID: the first 4 letters of your company name: company name: 5-digit tax type: the last 2 digits of the year: the 2 digits of the month in which the tax was paid. Information for the beneficiary can be found on the first page of the form.

Use Operating Loss to Offset Taxes on Future Profit

Clients often ask whether the Net Operating Loss of a US corporation can be used to offset the company's future profits.

The answer is yes. Starting in 2021, the federal government allows losses to be deferred indefinitely to future years. However, losses incurred prior to 2021 are only allowed to roll forward 20 years, and the losses expire at year 21. In addition, starting from 2018, only 80% of the net profit for the new year are allowed to be deducted every year. In terms of state taxes, with the exception of the four states that do not have corporate tax (Ohio, Nevada, Texas & Washington), there are 19 states with the same policies as federal, all with an 80% deduction limit, including Florida and Georgia. There are 25 states that have no deduction limit, that is, the previous company's losses can be fully deducted in the following year, such as California, New York, Connecticut, New Jersey. In addition, two states (Pennsylvania & New Hampshire) have a deduction limit lower than the federal 80%. For example, PA only allows 40% of the net profit for the new year to be deducted each year.

Executive Compensation vs. Stock Dividend - Tax Considerations

Business owners are aware of the tax advantages of executive compensations vs. dividends. Corporations can deduct the salaries and bonuses of their executives, not dividend payments. Money paid out as compensation is taxed once, to the recipient employees while dividends are taxed twice.

However, tax law only allows compensations deemed “reasonable” to be deducted. Therefore business owners need to be able to defect themselves when challenged by the IRS. IRS can examine the “reasonableness” from many different aspects, such as compensation amounts that comparable companies would pay the executives, similar services paid under similar circumstances, the employee’s role and the amount of time spent on the job, the employee’s skills and compensation history, the size and incomes of the business.

So how you can protect yourself as a business owner against those close examinations by the IRS. The following best practices can help.

Avoid payments made to anyone related to your company. The IRS frowns upon those payments made to anyone “related” to a corporation such as a shareholder’s family.
Refrain from setting up compensations in direct proportion to the stocks owned by the corporation’s shareholders. IRS can choose to view these as disguised dividends especially when no or little dividends are given for company stocks.
Keep executive salaries in line with counterparts in similar businesses or industries. Document supporting data such as executive compensation studies in your industry, especially when changes occur such as compensation increases to reward good performance. Be sure to document while these decisions are made and retain the documentation (paper trail).
Pay some dividends if the business is profitable to avoid the perception the company is trying to pay out all of its profits as compensation.

How to File Bad Debts in a Tax Return?

It depends on the type of loan: business loan or investment loan. Business loans are debts incurred in the course of business, such as bad debts that cannot be recovered from sales. This type of bad debt can be partially or fully recognized as a loss (write off) on the corporate tax return, or as an expense recognized in Schedule C for the self-employed.

Investment loans include borrowing from private individuals, companies or investment institutions, as well as borrowing from self-founded C Corporations. Investment loans generally require written loan contracts and specified interest rates. In the case of private loans, if the loan is not expected to be recovered at the get-go, or the loan is intended to be forgiven such as relatives and friends, the debt forgiveness is considered a gift, not a deductible investment loss. Losses on investment borrowings can only be recognized in one lump sum and not progressively as business/commercial borrowings.

This type of loss counts as capital loss subject to a limit of $3,000 net capital loss per year. When borrowing to a self-employed company, and you are also a salaried employee of the company and the borrowing is not higher than your annual salary, the IRS may recognize that the borrowing is for the purpose of protecting your own salary vs. investment loan. Then you may make itemized deductions in Schedule A in your tax return.

New! Effective Jan 2024 - Corporate Transparency Act

The new Corporate Transparency Act (CTA) will become effective on Jan.1, 2024, and companies that fail to file on time will be fined for $10,000. Business owners need to take the CTA seriously.

The CTA is a new regulation similar to the FBAR (Report of Foreign Bank and Financial Account), which simply put, is that the federal government wants to know "who is the boss behind a small US company". The purpose of the regulations is to further control financial crimes such as money laundering, tax evasion, terrorists and illegal proceeds.

The CTA requires companies registered to operate in the US (including Corporations, LLCs and other organizations including domestic and foreign companies) to report annually to the Treasury Department’s Financial Crimes Enforcement Network (FinCEN): 1) the company's name, address, tax ID, and state of incorporation; 2) the names, dates of birth, current addresses, tax identification numbers, driver's license numbers, or passport numbers of all shareholders who have significant decision-making capacity or own 25%+ company stocks.

Institutions that are not required to declare include: 1) listed companies；2) financial and investment institutions registered with the SEC； 3) charities； 4) larger entity-operated companies, including corporations with 20+ full-time employees in the US, or annual revenues of $5 million+ that have met the tax filing obligations.

Filing timeline: newly registered companies in 2024 need to file within 30 days. Companies registered prior to 2024 need to complete the declaration by 1/1/2025. Note that in addition to individual shareholders who directly or indirectly own 25% of the company shares, those who are not shareholders but have significant decision-making capacity in the company are required to be declared. Typically, those individuals include: 1) company executives, such as CEO, CFO, COO, etc.；2) persons who can appoint and dismiss the company's officers；3) persons who have the capacity to make major decisions in the company；4) all other persons with decision-making authority, including indirect holdings, etc.