1. Consider establishing an employee stock ownership plan (ESOP). If you own a business and need to diversify your investment portfolio, consider establishing an ESOP. A properly funded ESOP provides you with a mechanism for selling your shares with no current tax liability. Consult a specialist in this area to learn about additional benefits.
2. Make a succession plan. Have you provided for a succession plan for both management and ownership of your business in the event of your death or incapacity? Many business owners wait too long to recognize all the benefits from making a succession plan. These benefits include ensuring an orderly transition and ensuring the lowest possible tax cost. Waiting too long can be expensive from a financial perspective (covering gift and income taxes, life insurance premiums, appraiser fees, and legal and accounting fees) and a non-financial perspective (intra-family and intra-company squabbles).
3. Consider the limited liability company (LLC) and limited liability partnership (LLP) forms of ownership. These entity forms should be considered for both tax and non-tax reasons.
4. Avoid nondeductible compensation. Compensation can only be deducted if it is reasonable. Recent court-decisions have allowed business owners to deduct compensation when (1) the corporation’s success was due to the shareholder–employee, (2) the bonus policy was consistent, and (3) the corporation did not provide unusual corporate prerequisites and fringe benefits.
5. Purchase Corporate Owned Life Insurance (COLI). COLI can be a tax-effective tool for funding deferred executive compensation, funding company redemption of stock as part of a succession plan, and providing many employees with life insurance in a highly leveraged program. Consult your insurance and tax advisers when considering this technique.
6. Consider establishing a SIMPLE retirement plan. If you have no more than 100 employees and no other qualified plan, you may set up a Savings Incentive Match Plan for Employees (SIMPLE) into which an employee may contribute up to $10,000 per year if you're under 50 years old and $12,500 a year if you're over 50. You, as employer, are required to make matching contributions. Talk with a benefits specialist to fully understand the rules and advantages and disadvantages of these accounts.
7. Establish a Keogh retirement plan before December 31st. If you are self-employed and want to deduct contributions to a new Keogh retirement plan for this tax year, you must establish the plan by December 31st. You don’t actually have to put the money into your Keogh(s) until the due date of your tax return. Consult with a specialist in this area to ensure that you establish the Keogh or Keoghs that maximize your flexibility and your annual contributions.
8. Take advantage of section 179 expensing. If you meet certain requirements, you may be able to expense up to $108,000 in purchases of qualifying property placed in service during the filing year, instead of depreciating the expenditures over a longer time period.
9. Don’t forget deductions for health insurance premiums. If you are self-employed (or are a partner or a 2-percent S corporation shareholder–employee), you may deduct 100% of your medical insurance premiums for yourself and your family as an adjustment to gross income. The adjustment does not reduce net earnings subject to self-employment taxes, and it cannot exceed the earned income from the business under which the plan was established. You may not deduct premiums paid during a calendar month in which you or your spouse is eligible for employer-paid health benefits.
10. Review whether compensation may be subject to self-employment taxes. If you are a sole proprietor, an active partner in a partnership, or a manager in a limited liability company, the net earned income you receive from the entity may be subject to self-employment taxes.
11. Don’t overlook minimum distributions at age 70½ and rack up a 50 percent penalty. Minimum distributions from qualified retirement plans and IRAs must begin by April 1 of the year after the year in which you reach age 70½. The amount of the minimum distribution is calculated based on your life expectancy or the joint and last survivor life expectancy of you and your designated beneficiary. If the amount distributed is less than the minimum required amount, an excise tax equal to 50 percent of the amount of the shortfall is imposed.
12. Don’t double up your first minimum distributions and pay unnecessary income and excise taxes. Minimum distributions are generally required at age seventy and one-half, but you are allowed to delay the first distribution until April 1 of the year following the year you reach age seventy and one-half. In subsequent years, the required distribution must be made by the end of the calendar year. This creates the potential to double up in distributions in the year after you reach age 70½. This double-up may push you into higher tax rates than normal. In many cases, this pitfall can be avoided by simply taking the first distribution in the year in which you reach age 70½.
13. Don’t forget filing requirements for household employees. Employers of household employees must withhold and pay social security taxes annually if they paid a domestic employee more than $1,400 a year. Federal employment taxes for household employees are reported on your individual income tax return (Form 1040, Schedule H). To avoid underpayment of estimated tax penalties, employers will be required to pay these taxes for domestic employees by increasing their own wage withholding or quarterly estimated tax payments. Although the federal filing is now required annually, many states still have quarterly filing requirements.
14. Consider funding a nondeductible regular or Roth IRA. Although nondeductible IRAs are not as advantageous as deductible IRAs, you still receive the benefits of tax-deferred income. Note, the income thresholds to qualify for making deductible IRA contributions, even if you or your spouse is an active participant in a employer plan, are increasing.
15. Calculate your tax liability as if filing jointly and separately. In certain situations, filing separately may save money for a married couple. If you or your spouse is in a lower tax bracket or if one of you has large itemized deductions, filing separately may lower your total taxes. Filing separately may also lower the phaseout of itemized deductions and personal exemptions, which are based on adjusted gross income. When choosing your filing status, you should also factor in the state tax implications.
16. Avoid the hobby loss rules. If you choose self-employment over a second job to earn additional income, avoid the hobby loss rules if you incur a loss. The IRS looks at a number of tests, not just the elements of personal pleasure or recreation involved in the activity.
17. Review post-death planning opportunities. A number of tax planning strategies can be implemented soon after death. Some of these, such as disclaimers, must be implemented within a certain period of time after death. A number of special elections are also available on a decedent’s final individual income tax return.
18. Check to see if you qualify for the Child Tax Credit. A $1,000 tax credit is available for each dependent child (including stepchildren and eligible foster children) under the age of 17 at the end of the taxable year. The child credit generally is available only to the extent of a taxpayer’s regular income tax liability. However, for a taxpayer with three or more children, this limitation is increased by the excess of Social Security taxes paid over the sum of other nonrefundable credits and any earned income tax credit allowed to the taxpayer.
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