Tax and Financial News
The Most Wonderful Time of the Year – Tax Planning Season
Now is the time to focus on year-end tax planning. Careful and strategic planning can help minimize your tax bill and maximize what you keep. Given the uncertainty and sweeping scope of proposed tax law changes, planning is both more complex and more important than ever this year. Below, we discuss five year-end tax planning strategies you can use to maximize how much of your own money you keep.
Play the Timing Game
Why pay taxes now if you can delay it until next year? Income deferral is difficult for W-2 employees, but the self-employed and freelancers have a lot more room to plan. Businesses and the self-employed who operate on cash basis accounting (as opposed to accrual basis) can delay invoicing customers and clients until late December. For cash basis taxpayers, your income is taxable only if you receive it before year end, so delaying invoicing means you won’t get paid until early January.
Remember that you want only to defer income if your tax bracket next year will be the same or lower. If you know you will be in a higher tax bracket next year, then you might want to do the opposite and move as much income into 2017 as possible. Unfortunately, with the proposed tax bracket changes, this might be a difficult planning decision as both the current and new rules, if any, will likely impact your decision.
Speed Up Deductions
Similar to deferring income, you might want to accelerate deductions.
Any deductions where you impact the timing – such as charitable deductions – are good choices. Remember to keep proper records to document the contributions regardless of the amount. Also, consider donating stocks or property that has appreciated in value in lieu of cash to receive a higher tax benefit.
Other deductions that are good options to pull into 2017 include estimated state income taxes due January 15 and property taxes due early next year.
There are two important points to keep in mind. First, pulling deductions into 2017 can be a big mistake if you are impacted by the alternative minimum tax. Second, if a new tax bill passes and eliminates some or all of the itemized deductions, then this might be your last chance to benefit by accelerating them into 2017.
Harvesting Isn’t Just For Farmers
The stock markets are up big so far this year, so a lot of people have gains instead of losses. However, certain sectors, such as commodities, haven’t done so well. If a portion of your investment portfolio is down from where you purchased, you might want to harvest those losses to offset gains from other investments and reduce your taxable income.
The general rule is that you can deduct losses up to the amount of your capital gains, plus an additional $3,000 – and then roll over any excess losses to be used in future years. Just make sure your tax strategy aligns with your overall investment goals.
Take Your Retirement to the Max
Maxing out your 401(k) contributions can help you avoid significant taxes. If you have the financial means, see if you can contribute extra before year end. Self-employed individual 401(k) owners can make their “employer” contributions up until April 17, 2018. Another option is to contribute to an IRA; however, this isn’t as time sensitive. You can contribute to an IRA all the way up to the initial tax filing deadline still deduct the amount against 2017 income.
Make Tax Planning Less Taxing
The cost of hiring a tax professional to assist you in navigating the complexities and challenges of tax planning is also something you can write off if you itemize your deductions. Again, like many other itemized deductions, this one could disappear under the proposed tax plans – so now’s the time to invest in consulting an expert.
General Business News
Is it the Right Time to Franchise a Business?
When a business owner wants to expand his business concept across a region or the country, franchising can be an attractive option. According to the International Trade Association’s 2016 Franchising Top Markets Report, franchising was projected to generate $944 billion in financial growth for the nation’s economy, expanding more than 3 percent in 2016. The same report also expected the franchise business model to create an additional 278,000 jobs in 2016. With the potential for franchising to create greater value for business owners, is franchising right for your company?
Determining a Business’ Ability to be Franchised
Before a business model can be franchised, it’s worth looking at different types of franchise models. One model is creating a standardized business system that can take the form of a hotel or motel, a restaurant/dining establishment or a graphic design/printing business. Other types of franchises include selling either pre-made products or manufacturing a product onsite (be it a food item or tangible marketing materials) under the corporate headquarters’ direction and brand or trademark. From these different models, business owners should look at the type of product or service they are selling and how their experience compares to the rest of the industry.
When it comes to evaluating a business’ ability to be franchised, along with reviewing the profits and sales records, one important factor is the organization’s concept and how easy it can be replicated regionally or nationally. Franchises that have a greater chance of being successful give consumers something they are accustomed to in their daily lives. However, a franchise must also put a unique spin on a familiar product to help distinguish it and help it take off beyond its initial location.
Taking the food service industry for example, a quick-serve chain that sells hamburgers or pretzels that uses organic, sustainable raised ingredients and is served to customers via a conveyor belt is an example of delivering a familiar product through a unique approach. This is just one example – looking at how the product is differentiated from the rest of its competitors is what is important to scalability and consumer interest.
By highlighting that raw ingredients are grown 100 percent organically, consumers may be attracted to the brand’s product health and environmental commitments. Potential franchisees create value by producing a predictable and easily executable system for standardized employee training, both initially and for ongoing needs.
What Role is Desired by the Business Owner?
When business owners transition from owning a single location to becoming a franchisor, their role changes. Business owners often transition from repairing shop fixtures and selling their namesake product to becoming the No. 1 salesperson, explaining how the franchise works and how it can benefit franchisee owners. Other considerations for business owners include how open are they to outside partners, or having to secure debt financing for future expansion.
Some individual states have regulations for selling franchises and the Federal Trade Commission requires a Franchise Disclosure Document to be filed with the agency. This document includes a manual of operations for franchisees, information on the management team’s business background, audited financial statements, etc. Along with the regulatory requirements, franchisors also need to think about what fees and royalties franchisees must pay; the detail and length of training each franchisee receives; and what products or equipment the franchisee buys from you, the franchisor.
Making the move from an established business owner to a franchisor is a complex process that may not be a good fit for every business. However, for the right type of business and those running it, becoming a franchisor can take a unique concept nationwide.
Tip of the Month
Tax Bill Winners and Losers
Congress’ recent tax reform bill, the TaxCut and Jobs Act, aims to lower taxes on corporations and companies. The GOP believes that lower taxes will help American companies to be more competitive and, in turn, will generate more jobs and more dividends for shareholders. Not all economists are sold on this argument. They note that many corporations are already cash-rich, and there are no guarantees that lessening their tax burden will result in employment gains or more generous dividends for their shareholders.
Senate Republicans agree with their Congressional colleagues on corporate tax reform, but they have additional proposals. These have been reviewed by the nonpartisan Congressional Budget Office, which has reported that the Senate’s reform package will leave lower-income and middle-class families worse off, and that proposed health insurance changes will further burden America’s poorest families. The bill overall would add some $1.4 trillion to the deficit over the next decade. Here’s an overview of the how the currently proposed reforms might affect business owners and households.
- Big Business Scores Big
The top corporate tax rate would be cut from 35 percent to 20 percent (Senate version does not go into effect until 2019) – the largest one-time decrease in corporate taxes ever. Also, corporations would see additional tax breaks, including a lower rate of percent on money expatriated from low-tax countries, and a new system that, for the most part, would tax the profits created in the United States rather than worldwide income. The amended House version taxes cash repatriation at 14 percent and non-cash assets at 7 percent, while the Senate version taxes cash at 10 percent and non-cash assets at 5 percent.
- Some Joy for Small Businesses via “Pass-Through” Taxation Reform
More than 90 percent of small businesses are organized for tax purposes as “pass-through” companies – either sole proprietorships, partnerships or Limited Liability Corporations. This means that income is only taxed once. If the business receives income, the money boosts the owner’s coffers, and the owner makes the appropriate tax payments based on his/her individual tax rate. The new House proposals call for cutting the top pass-through rate from 39.6 percent to 25 percent, but excludes service companies like consultants and lawyers. It also proposes a complicated formula so that the lowered rate may apply to only about 30 percent of total income. Business owners who make $150,000 or less would be allowed to pay a reduced rate of 9 percent on the first $75,000 of their earnings. This tax break would be phased in – the lowest rate would not be available until 2022. The Senate takes a different approach to lowering business owner income by proposing allowing pass-through entity members to deduct up to 17.4 percent of their ordinary business income. It also denies this deduction to anyone in operating a service businesses with a taxable income of more than $500,000 or $250,000, married filing jointly versus single.
- A Simpler Tax Code
Filing taxes will be simpler. The House bill reduces the current seven tax brackets to just four – 12 percent, 25 percent, 35 percent and 39.6 percent. The top rate applies to income of $1 million or more per year for couples and $500,000 or more for individuals. The Senate bill keeps seven brackets but alters the rates and bracket ranges instead. The bill also eliminates many credits and deductions; but it does provide a larger standard deduction ($12,000 for single taxpayers and $24,000 for couples), a larger deduction for a child – $1,600 per child as opposed to the current $1,000 per child – and a new Family Flexibility Credit of $300 per year for individuals and $600 for couples. Both versions of the bill call of the elimination of personal exemptions as well.
- Less Deductions for Most of Us
It may be great to have less tax brackets to consider, but along with this streamlining comes a big reduction in itemized deductions. What remains under the House version are deductions for charitable donations, property taxes (up to $10,000 per year), and mortgage interest deductions. The Senate version of the bill completely eliminates the SALT (State and Local Tax) deduction.
- The Wealth Passes On
Changes to estate taxation will help wealthy families keep more of their inheritances, until 2024 when estate taxation is eliminated entirely. Current estimates suggest that about half the benefits included in the reform proposals will accrue to the wealthiest top 2 percent. These individuals will no longer have to pay the alternative minimum tax (AMT), a measure first introduced in 1969 to inhibit tax-dodging strategies. The extremely wealthy segment of society will also be able to file charitable deductions to lower their tax bills.
What eventually becomes law remains up for debate. However, almost everyone can agree that the final passage of the Republican’s tax reform proposals faces a rough road ahead.