Tax Archives - Janus, Curran, Finkelson-Reece, PLLC

15Dec2023

Unveiling the Tax Savings Potential of S Corporations

In the realm of business structures, S Corporations stand out as a popular choice for entrepreneurs and small business owners, offering a unique blend of liability protection, operational flexibility, and significant tax-saving opportunities. Understanding the intricacies of how S Corporations can provide tax advantages is crucial for entrepreneurs seeking to maximize their financial efficiency. In this blog post, we’ll explore the tax-saving potential of S Corporations and how they can benefit businesses.

What is an S Corporation?

An S Corporation is a pass-through entity that elects to pass corporate income, losses, deductions, and credits through to its shareholders for federal tax purposes. This structure allows the business to avoid double taxation on corporate income while still providing limited liability protection to its owners.

Tax Savings of S Corporations:

Pass-Through Taxation: One of the most significant advantages of an S Corporation is its pass-through taxation feature. Unlike C Corporations, which face double taxation (taxation at both the corporate and individual levels), S Corporations pass profits and losses directly to shareholders’ personal tax returns. This structure generally results in lower overall taxes since income is only taxed once at the individual level.
Avoidance of Self-Employment Taxes: Shareholders who actively participate in the business but also receive a reasonable salary may enjoy tax savings. Unlike sole proprietorships and partnerships, where all business income is subject to self-employment taxes, S Corporation shareholders can receive a portion of their income as distributions, not subject to self-employment taxes. However, shareholder-employees must receive a reasonable salary for the services they provide to the company.
Tax Deductions and Retirement Plans: S Corporations can offer various tax deductions that can reduce taxable income. They can deduct salaries, employee benefits, healthcare premiums, retirement contributions, and other legitimate business expenses, thereby lowering the overall tax burden.
Flexibility in Profit Distribution: S Corporations offer flexibility in profit distribution among shareholders. This flexibility allows for strategic income distribution, enabling shareholders to allocate profits in a way that minimizes overall tax liability.
Loss Deductions: S Corporation shareholders can deduct their share of the company’s losses on their personal tax returns, subject to certain limitations. These losses can offset other sources of income, reducing the shareholder’s overall tax liability.

Considerations and Compliance:

It’s important to note that while S Corporations offer substantial tax benefits, they come with specific compliance requirements. Shareholders must adhere to corporate formalities, maintain accurate records, and file required tax returns and forms to retain S Corporation status and enjoy the associated tax advantages.

Conclusion: S Corporations present a powerful tax-saving opportunity for businesses, enabling entrepreneurs and small business owners to mitigate tax liabilities and optimize their financial positions. However, the decision to elect S Corporation status should be made after careful consideration of individual business circumstances and in consultation with tax professionals or financial advisors. By leveraging the tax benefits of S Corporations while fulfilling compliance obligations, businesses can pave the way for enhanced financial efficiency and growth,

26Jul2023

Understanding Gift Tax: What you Need to Know

Gift tax is a tax imposed on the transfer of assets from one person to another without any monetary consideration or with consideration below the fair market value. While gift-giving is a common practice, it can have potential tax implications, and it’s essential to understand how gift tax works to avoid any surprises when it comes to filing your taxes. In this post, we’ll delve into the basics of gift tax and what you should be aware of as a giver or recipient of gifts.

1. Gift Tax Exclusion: The good news is that not all gifts are subject to tax. The United States, for example, allows for a gift tax exclusion, which means you can give a certain amount to each person each year without triggering any gift tax. For 2023, the annual gift tax exclusion is $17,000 per recipient. It means you could gift up to $17,000 to as many individuals as you want, and it wouldn’t be counted towards your lifetime gift tax exemption or be subject to gift tax.

2. Lifetime Gift Tax Exemption: In addition to the annual exclusion, there is a lifetime gift tax exemption. This exemption represents the total amount you can give away over your lifetime without owing any gift tax. However, it’s important to note that this exemption also applies to the estate tax. The gift tax and the estate tax share a unified lifetime exemption, which is $12.92 million per individual as of 2023. This means you can gift up to this amount during your lifetime without paying any gift tax. However, anything above this limit will be subject to gift tax.

3. Reporting Requirements: Even if your gifts fall within the annual exclusion and don’t require you to pay gift tax, you might still need to file a gift tax return (IRS Form 709). This form is necessary to keep track of the gifts you’ve made over the annual exclusion amount and to keep a running total of your lifetime gift tax exemption usage. Filing a gift tax return doesn’t necessarily mean you’ll owe any tax; it’s mainly an informational report for the IRS.

4. Gift Splitting: If you are married and file a joint tax return, you and your spouse can effectively double the annual exclusion amount. This concept is known as gift splitting. So, for the tax year 2023, a married couple could gift up to $34,000 to an individual without triggering any gift tax.

5. Education and Medical Exclusions: Gifts made for qualified education expenses and medical expenses are generally exempt from gift tax, regardless of the amount. However, to qualify, you must make the payment directly to the educational institution or medical service provider.

6. Gift Tax Rates: If you exceed both the annual exclusion and the lifetime gift tax exemption, you will be subject to gift tax. The gift tax rates vary depending on the year and may be subject to change by the government. In 2023, the top gift tax rate is 40%.

7. Consult a Tax Professional: Navigating the complexities of gift tax can be daunting, especially if you plan to make substantial gifts. It’s always a good idea to consult with a qualified tax professional or estate planning attorney to ensure compliance with the tax laws and make informed decisions about your gift-giving strategy. Remember, tax laws can change, and this post may not reflect the most current regulations. Always check with the latest IRS guidelines or consult a tax professional for up-to-date information on gift tax. Reach out to Mathew Finkelson-Reece, CPA MBA ABV (mreece@janus-curran.com) at Janus, Curran, Finkelson-Reece PLLC with any questions.

19Feb2023

Tyreek Hill and State Income Taxes

Recently, star Miami Dolphins Wide-Receiver Tyreek Hill was asked why he signed a 4-year contract with the Dolphins over the New York Jets. Hill honestly and shortly answered, “Just those state taxes man. I had to make a grown-up decision.” Hill was referring to the state income taxes of New Jersey, which has a marginal income tax rate of 10.75% for those earning over $5 million a year. Hill’s contract is for a reported $30 million a year, thus he could be paying New Jersey State income tax of roughly $3 million had he selected the Jets. The State of Florida does not impose an income tax and upon establishing residency, he will not pay any income tax on what he earns in the state.

*Note that Hill will still be required to pay income tax on his salary to the state where his away games are located.*

State income tax is imposed by a state on income earned from the state or in it. Like federal income tax, state income tax is self-assessed, meaning taxpayers must file state tax returns. There are currently eight states that have not imposed a tax on income: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. Although New Hampshire doesn’t tax earned income, the NH government still taxes unearned income such as dividends and interest. Though by 2027, the NH government plans on abolishing all individual income tax.

While some states impose zero income tax, California imposes the highest marginal tax rate at 13.3% of taxable income over $1,000,000. Because of these high marginal tax rates, sport franchises located in California and New York/New Jersey can find themselves at a steep disadvantage compared to those located in Texas and Florida when it comes to compensating athletes.

A pertinent example being that of Tyreek Hill’s experience.

Other than the sunny, beautiful beaches and the eclectic population, it can be insinuated that Hill is not the only person who has assessed their options for residency and evaluated the choices contingent upon tax-related measures; perhaps why many of the United States’ wealthiest individuals choose to reside in Florida.

In many states, if you are a resident, it means all income earned in any capacity will be tax subject to that state’s income tax. However, you can take a credit for the income tax paid on income from out of state. Also as previously stated, even if you are a resident of a state that does not impose income tax, you will still be subject to tax if the income is earned in another state where income tax is imposed.

Tyreek Hill will be subject to income tax for the salary he earns when he scores a touchdown in the Meadowlands when the Dolphins travel to New Jersey once a year. However, the state income tax savings of him being a Florida Resident and playing for the Dolphins are going to be astronomical. For reasons like this, the taxation of individuals working and earning income in multiple states can get complicated. It is recommended to talk to a professional consultant when facing State Income Tax Issues. Feel free to reach out to Janus, Curran, Finkelson-Reece, PLLC Certified Public Accountants if you would like to discuss.

-Mathew Finkelson-Reece is a licensed Certified Public Accountant in the States of Florida and Pennsylvania, he also holds an Accreditation in Business Valuation from the American Institute of Certified Public Accountants. He can be reached at mreece@janus-curran.com/

Category Archives: Tax