Divorcing business owners should pay attention to the tax consequences

Uncategorized Aug 28, 2023

If you’re getting a divorce, you know the process is generally filled with stress. But if you’re a business owner, tax issues can complicate matters even more. Your business ownership interest is one of your biggest personal assets and in many cases, your marital property will include all or part of it.

Transferring property tax-free

In general, you can divide most assets, including cash and business ownership interests, between you and your soon-to-be ex-spouse without any federal income or gift tax consequences. When an asset falls under this tax-free transfer rule, the spouse who receives the asset takes over its existing tax basis (for tax gain or loss purposes) and its existing holding period (for short-term or long-term holding period purposes).

For example, let’s say that under the terms of your divorce agreement, you give your house to your spouse in exchange for keeping 100% of the stock in your business. That asset swap would be tax-free. And the existing...

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The advantages of using an LLC for your small business

Uncategorized Jul 31, 2023

The advantages of using an LLC for your small business

If you operate your small business as a sole proprietorship, you may have thought about forming a limited liability company (LLC) to protect your assets. Or maybe you’re launching a new business and want to know your options for setting it up. Here are the basics of operating as an LLC and why it might be a good choice for your business.

An LLC is a bit of a hybrid entity because it can be structured to resemble a corporation for owner liability purposes and a partnership for federal tax purposes. This duality may provide the owners with the best of both worlds.

Protecting your personal assets

Like the shareholders of a corporation, the owners of an LLC (called “members” rather than shareholders or partners) generally aren’t liable for the debts of the business except to the extent of their investment. Thus, the owners can operate the business with the security of knowing that their personal assets are...

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A tax-smart way to develop and sell appreciated land

Uncategorized Jul 24, 2023

A tax-smart way to develop and sell appreciated land

Let’s say you own highly appreciated land that’s now ripe for development. If you subdivide it, develop the resulting parcels and sell them off for a hefty profit, it could trigger a large tax bill.

In this scenario, the tax rules generally treat you as a real estate dealer. That means your entire profit — including the portion from pre-development appreciation in the value of the land — will be treated as high-taxed ordinary income subject to a federal rate of up to 37%. You may also owe the 3.8% net investment income tax (NIIT) for a combined federal rate of up to 40.8%. And you may owe state income tax too.

It would be better if you could arrange to pay lower long-term capital gain (LTCG) tax rates on at least part of the profit. The current maximum federal income tax rate on LTCGs is 20% or 23.8% if you owe the NIIT.

Potential tax-saving solution

Thankfully, there’s a strategy that...

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How an S Corp Can Save You on Self-Employment Taxes

Uncategorized Jul 10, 2023

If you're running an unincorporated small business, you probably don't like the size of your self-employment (SE) taxes. No wonder!

In 2023, the SE tax hits hard at a whopping 15.3% rate on the first $160,200 of your net SE income. That includes 12.4% for Social Security tax and 2.9% for Medicare tax. The Social Security tax ceiling has increased to $160,200 from $147,000 in 2022, and it's only going to get worse in the future due to inflation. Beyond the Social Security tax ceiling, the Medicare tax keeps going at a 2.9% rate before jumping to 3.8% for higher levels of net SE income, thanks to the additional 0.9% Medicare tax on all income.

The S Corp Advantage

For the wages you pay yourself as an employee of an S corporation in 2023, the FICA tax withholding rate is 7.65% on the first $160,200 of wages. This breaks down to 6.2% for Social Security tax and 1.45% for Medicare tax. Once you exceed $160,200, the FICA tax withholding rate drops to 1.45% because the Social...

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Starting a business? How expenses will be treated on your tax return

Uncategorized Jul 03, 2023

Starting a business? How expenses will be treated on your tax return

Government officials noticed a big boom in new businesses during the COVID-19 pandemic. And the U.S. Census Bureau says business applications are still increasing slightly (0.4% increase from April 2023 to May 2023). They keep track of this by counting the number of businesses applying for Employer Identification Numbers.

If you're one of those entrepreneurs, here's something you might not know: a lot of the expenses you rack up while starting your business can't be deducted right away on your tax return. It's important to understand that how you handle your initial expenses can make a big difference in the amount you owe in federal taxes.

Here's the lowdown on expenses:

  1. Start-up costs: These are the expenses you incur while getting your business up and running or when you're exploring the idea of starting or buying a business.

  2. Deducting start-up and organizational costs: The tax code lets you deduct...

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