So you’ve got your small business set up and have a small team of employees to support your operations and goals. However, now the question that lingers is, how do I keep them on this team? Larger companies have many perks and incentives such as retirement plans that encourage people to consider jumping ship.
Setting up a retirement plan for you small business encourages employees to stay with you for the long haul, as well as build your own nest egg for your own retirement. Additionally, business deductions and other credits can be claimed for setting up and maintaining savings plans for your employees.
Here are a couple of common types of savings and retirement plans small businesses use:
Simplified Employee Pension (SEP) – A savings plan that is very easy to set up. Usually used by sole proprietors and very small businesses. The SEP comes in the form of an IRA account. Participants must contribute to the SEP-IRA in the form of money (e.g., check, money order, cash). The annual contribution limit is up to 25% of the employee’s compensation or $53,000. A tax credit can be claimed for starting an SEP and deductions can be claimed for contributions to it.
Savings Incentive Matching Plans for Employees (SIMPLE) IRA and 401k Plans – Savings plan that is available to small companies of 100 or fewer employees who received $5,000 or more in compensation in a year. Employees elect a certain salary deduction to contribute and the employer matches the amount up to 3% percent. Annual contribution limit for an employee in 2017 is $18,000 (401k Plans). Contributions to SIMPLE plans can also be claimed as deductions on an individual’s income tax filing.
Qualified Plans – Savings plans available to small businesses and corporations. Generally divided into two types of plans, defined benefit and defined contribution plans. In very simplified terms, defined benefit plans are retirement plans that lay out what retirement benefits and amounts will be paid out (e.g. State employee pension programs) while defined
contribution plans define how much money will need to be contributed to a plan (e.g. private employer 401k profit-sharing plans). The rules surrounding setting up and maintaining qualified plans are much more complex and often small businesses will adopt pre-made plans from large brokerage firms like Charles Schwab.
This is general overview of common plans available to small businesses for savings and retirement. There are many more bylaws and rules surrounding setting up and maintaining these kinds of plans, as well as the number of employees you have and the contribution limits.
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Ever thought about being your own boss? Want your work to attest to your own skill, rather than have middle managers to deal with? Or maybe bring people together and work for a common dream? Consider starting your own business. Establishing a business in the United States is not relatively complicated. To start off, figure out what kind of business you want to participate in. Next, you need to decide on what kind of type of business structure you want (sole proprietor, partnership, corporation, etc.), and then develop a reliable and robust recordkeeping system.
Which business structure should I go with?
These are some of the most common business types that are established:
Sole proprietorship – Very simple type of business. Unincorporated and owned by a single individual. All profit, liabilities, and taxes are connected to the individual owner, and therefore are simply reported on an person’s 1040 form.
Partnership – Owned and operated by 2 or more people who are in a business relationship. Partners contribute capital and are involved in the operations of the company. Partnerships are known as “pass through entities”, which means the
partnership’s taxes are passed along to the partners of the firm and onto their individual tax forms. However, they still must file informal returns of the company’s operations.
Corporation – Shareholders exchange capital and other assets in exchange for stock ownership of a corporation. More complicated type of business with many rules and regulations surrounding it. Corporations are regarded as separate legal entities and are taxed like individuals. This means a corporation’s shareholders are double taxed (individually, and for their partial ownership of a corporation).
The nature of your business will likely determine what type of business you want to become. It probably wouldn’t make sense for a mom & pop donuts shop to be established as a corporation, but instead as a partnership, due to the simpler nature of establishing one. On that same note, an engineering firm would probably find a corporation more beneficial because of liability concerns and the ability to raise capital from shareholders.
Employer Identification Number, Tax year, and Accounting Methods
After deciding what type of business you want to be, obtain a Federal Employer Identification Number, similar to an individual’s social security number. Unsure if you need an IRS EIN, check out our previous article on this topic.
Next, designate your tax year. You can chose to follow the calendar year or go by a tax year of 12 months, such as designating a date in the middle of the year as your company start date. For example, you can decide your company’s start date as August 18, which would mean your annual filings would be centered around that time going forward.
You also must choose an accounting method between a cash basis or accrual basis. You may have come across these terms in an accounting class. Basically, being on a cash basis means you record cash income as it is received, while the accrual method means you record income as it is earned but may not necessarily be received at the time, such as money earned from a long-term contract. Most small businesses go with a cash basis for simplicity.
Recordkeeping
All businesses should strive to accurately maintain records. This will be needed when filing your annual returns and can help you in case the IRS audits your tax filings. Most small businesses use accounting software like QuickBooks to keep track of their transactions and maintain a physical filing bin for their business files, such as a business charter or other founding documents. Are you curious to find out how long you need to keep your business records?
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Paying your student loans can help with your taxes! More specifically, paying off the student loan interest can potentially lower your tax bill.
Paying off the interest accrued on your loan can be claimed as a deduction towards your adjusted gross income (AGI). Your AGI determines how much of your income will be considered taxable. As a result, it ultimately affects your tax bill to the IRS. You can claim up to $2,500 in student loan interest that you paid in a year as a deduction towards your AGI. Of course, there are some considerations before claiming the student loan interest deduction on your individual income tax.
Qualified student loan – The loan that you will claim the interest deduction on must be a qualified student loan. It has to be a loan taken out by you, a spouse, or your dependent towards educational purposes paid within a reasonable period after you took the loan. Loans taken from relatives or employer plans do not qualify.
Qualified Educational Expense – The expenses used by the loan have to be qualified education expenses. Registration fees, books, and lab materials are generally considered qualified expenses. Transportation costs such as parking fees also qualify. Even room and board expenses MAY qualify if the residence is a property owned and operated by the educational institution, such as an on-campus dormitory.
Eligible Education Institution – Generally any accredited university or vocational school that is able to receive federal student aid money.
To help calculate your student loan interest deduction, organizations that maintain student loans like banks or
quasi-government entities, such as MOHELA, send out IRS Form 1098-E within the early part of the year if they receive student loan payments of at least $600 from the previous year. The 1098-E notes the amount of interest accrued, which determines the deduction amount. The deduction begins to phase out if your AGI is at least $50,000 up to $80,000 if filing single. For those married filing jointly, the phaseout begins at $130,000 up to $160,000.
Want to know more about what educational credits and tax advantages are out there? Follow us on our social media for future tax tip articles and share it with your friends and relatives!Have a more specific question? Please do not hesitate to schedule a call with us. MiklosCPA is a California-based accounting firm that has helped businesses plan out accounting and tax strategies.
Generally, US taxpayers living abroad as Expats have access to the same exemptions, deductions, and credits like citizens living in the United States. Expats also have access to the Foreign Income Exclusion that we discussed in a previous article. However there are some additional considerations for expats planning to file their taxes while living abroad.
Any income or expenses you claim for the foreign income exclusion cannot be used or claimed on any other related credits or deductions that can be claimed. Example: you cannot use the housing expenses you claimed on the foreign housing exclusion as a deduction.
Exemptions can be claimed for your children born abroad, so long as you are a US citizen at the time your child was born, even if your spouse may not be a non-citizen.
Charitable contributions made to foreign charities are generally nondeductible. There are some exceptions for some Canadian, Mexican, and Israeli charities due to certain tax treaties.
Moving expenses may be deductible if the expenses incurred are related to your work at a new location.
If you pay taxes to a foreign country, you may be eligible for an income tax credit based on the amount you pay to a foreign country.Use IRS Form 1116 “Foreign Tax Credit” to figure the amount of foreign tax paid to determine the credit.
If you chose to not claim the credit, foreign income taxes can also be taken as a deduction instead. Report it as a deduction on your schedule A for your 1040 Form.
The United States has negotiated many tax treaties with other countries. Under these treaties, US expats are entitled to certain credits, deductions, exemptions, and other options to assist their tax liabilities. For more specific details, the IRS website provides details on these treaties and what can be claimed.
Hopefully you found this info for expat taxes informative. As complex as the tax code can get here in the states, just imagine how complex each person’s taxes can get if they live abroad! We here at MiklosCPA, a SoCal CPA firm, have knowledge and experience in helping expats and foreign nationals plan and properly prepare their taxes for compliance with the IRS. If these articles have piqued your interest, please do touch base with us.
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The first part in this series covered the general advantages and rules surrounding the American Opportunity Credit. Now we will be taking a look at its related credit, the Lifetime Learning Credit. Many of the qualifications and rules are similar to the American Opportunity Credit, such as what are considered qualified educational expenses, who qualified as an eligible student, parents being able to claim dependent students, and other rules. See our other article on qualified educational expenses for more details.
Unlike the American Opportunity Credit, the Lifetime Learning Credit may be claimed on your individual tax return for an unlimited amount of years. You do not even need to be pursuing a degree or be a part-time student to qualify.
Up to $2,000 of the credit may be claimed perreturn for the first $10,000 of qualified educational expenses. Just like the American Opportunity Credit, there is also a modified adjusted gross income (MAGI) limit, but the number is set a bit lower at $67,000 if filing single and $134,000 if married, filing jointly. The credit begins to get phased out at $57,000 if filing single and $114,000 married, filing jointly.
However, unlike the other credit, the Lifetime Learning Credit is nonrefundable. So, even if your final tax bill that you owe is a negative number, it may not be refundable. For example:
Dominic signed up in 2018 at Cypress College for the fall semester for one class in automotive repair. He paid $230 in registration fees, $35 for a parking permit, and $500 in lab materials and books. At the start of 2019, Dominic prepares his tax return and claims the Lifetime Learning Credit.
He later learns from his tax preparer that he cannot claim the parking amount on the credit. So, his total credit he can claim goes down to $730 for 2018. He also learns that even after his deductions and other adjustments are calculated, his total tax liability he has to pay is $500. He will not be getting a refund, but the Lifetime Learning credit cancels out ($500-$730= -$230) the tax he has to pay.
Even if the credit may not be refundable, it is stilladvantageous to use the Lifetime Learning Credit because it can potentially turn the amount you may owe to the IRS into nothing, which translates into savings for you. It is also less strict in its eligible student requirements by not demanding part-time status, so even just taking one class at a community college can allow you to use this credit.
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