Start Off on the Right Foot for the 2023 Tax Year

If your 2022 refund or balance due turns out not to be the desired amount, you may want to consider adjusting your withholding based on your projected tax for 2023. If you need assistance, please call this office.

W-9 Collection – If you are operating a business, then you are required to issue a Form 1099-NEC to each service provider to which you have paid at least $600 during a given year. It is a good practice to collect a completed W-9 form from every service provider (even if you are paying less than $600), as you may use that provider again later in the year and may have difficulty getting a W-9 after the fact—especially from providers that do not plan to report all of their income for the year.

Estimated Tax Payments – If you are self-employed, then you prepay each year’s taxes in quarterly estimated payments by sending 1040-ES payment vouchers or making electronic payments. For the 2023 tax year, the first three payments are due on April 18, June 15, and September 15, 2023, and the final payment is due on January 16, 2024. Generally, these payments are based on the prior year’s taxable income; if you expect any significant changes in either income or deductions relative to the previous year, please contact this office for help in adjusting your payments accordingly.

Charitable Contributions – If you marginally itemize your deductions, then you can employ the bunching strategy, which involves taking the standard deduction one year but itemizing your deductions in the next. However, you must make this decision early in the year so that you can make two years’ worth of charitable contributions in the bunching year.

Required Minimum Distributions – Each year, if you are 73 (a recent law change increased it from 72 in 2022) or older, you must take a required minimum distribution from each of your retirement accounts or face a substantial penalty. By taking this distribution early in the year, you can ensure that you do not forget and accidentally subject yourself to penalties.

Gifting – If you are looking to reduce your estate-tax exposure or if you just want to give some money to family members, know that each year, you can gift up to an inflation-adjusted amount, which for 2023 is $17,000, to each of an unlimited number of beneficiaries without affecting your lifetime estate-tax exclusion amount or paying a gift tax.

Retirement-Plan Contributions – Review your retirement-plan contributions to determine whether you can afford to increase your contribution amounts and to make sure that you are taking full advantage of your employer’s contributions to the plan.

Beneficiaries – Marriages, divorces, births, deaths, and even family clashes all affect whom you include as a beneficiary. It is good practice to periodically review not just your will or trust but also your retirement plans, insurance policies, property holdings, and other investments to be sure that your beneficiary designations are up to date.

Reasonable Compensation – With the advent a few years ago of the 20% pass-through deduction, which is available to most businesses other than C-corporations, the issue of reasonable compensation took on new importance, particularly for shareholders of S corporations. This has been a contentious issue in the past, as it has allowed shareholders who are not just investors but who are actually working in the business to take a minimum salary (or no salary at all) so that all their income passed through the K-1 as investment income. This strategy allows such shareholders and the S corporation to avoid payroll taxes on income that should be treated as W-2 compensation. A number of issues factor into a discussion of reasonable compensation, including comparisons to others working in similar businesses and to employees within the same business, as well as the cost of living in the business’s locale. This is a subjective amount, and it generally must be determined by a firm that specializes in making such determinations.

Business-Vehicle Mileage – Generally, vehicles with business use also have some amount of nondeductible personal use in a given year. It is always a good practice to record a vehicle’s mileage at the beginning and at the end of each year so as to determine its total mileage for that year. The total mileage figure is then used when prorating the personal- and business-use expenses related to that vehicle.

College-Tuition Plans – Contribute to your child’s Section 529 plan as soon as possible; the funds begin accumulating earnings as soon as they are in the account, which is important because the student will likely begin using that money at age 18 or 19.

Only a few of the tax-related actions that you take during a year will benefit yourself or others. The most important of these actions is keeping timely and accurate tax records; for businesses in particular, this is of the utmost importance. Those who have well-documented income and expense records generally come out on top when the IRS challenges them.

If you have any questions related to your taxes or if would like an appointment for tax projections or tax planning, please contact our office.

What Is Business Cash Flow?

As the name suggests, cash flow is a term used to describe the money coming into and out of a business. Cash received – like money being paid to the business from its customers – would be inflow. Cash spent – like the funds being paid to vendor partners and other operational costs – would be outflow.

Obviously, it’s always important to have more money coming into your business than going out in most situations. But whether this is true is not the only factor you should be accounting for. Instead, it should be seen for what it really is – a metric that tells just one small part of a much larger story.

The Ins and Outs of Business Cash Flow: Breaking Things Down

One of the reasons why keeping an eye on cash flow is so important is because it helps paint a vivid picture of a business’s liquidity. The more liquid a company is, the more flexible it is

A significant amount of positive cash flow relative to outflow indicates that a company’s liquid assets are increasing. This is something that should happen naturally over time as a business continues to grow and scale. This doesn’t just mean that they’re comfortable when it comes to handling their financial obligations. They can take some of that money and strategically invest it back into the business itself where it can make the biggest impact.

This type of positive cash flow also acts as a viable buffer against any uncertainty or even challenges that may develop. Case in point: everything that has been going on over the last few years with the still-ongoing COVID-19 pandemic. When the pandemic first hit in March 2020, businesses of all types found their doors suddenly closed. The ones that were able to survive to the point where they could re-open again – or at least remain afloat for as long as possible – were those that had liquidity through positive cash flow.

In a larger sense, there are a few different types of cash flow to concern yourself with. Operating cash flow refers to the amount of money that a company is generating via everyday activities. Investment cash flow, as the name suggests, is income generated from investment actions like purchasing securities.

Financing cash flow goes into more detail about how money is moving between a business and a number of other entities like investors, owners, and even creditors.

Again, tracking business cash flow is all about the insight it generates. Not only does it allow you to keep the doors open because you know you have enough money to handle your obligations, but it also helps to meet your short and long-term goals for expansion as well. In essence, it helps those business leaders come up with the best possible plan for the future – which is also why this is something you need to be taking a look at on a regular basis.

Tracking Cash Flow: An Overview

All told, tracking cash flow over the long term is something that will be accomplished through a few different financial statements. The first of these is the balance sheet, which simply puts together an outline of a company’s current assets and liabilities.

Next, we have the income statement. This is a document that helps highlight a company’s profitability at a particular moment in time.

Finally, you have the actual cash flow statement. Think of this as something like a checkbook in nature – the cash flow statement confirms that all the other data on the statements mentioned above is as accurate as possible.

The cash flow statement provides a detailed overview of a company’s cash-based transactions, both going in and coming out of the business. It can also help indicate how many unpaid invoices may be out there. Collecting them can help reconcile the books and improve cash flow as much as possible.

In the end, business cash flow is always an essential part of any organization. You need visibility into where money is coming from and where it’s going in order to make the most informed decisions possible at all times. That’s why it’s always recommended that you enlist the help of a professional to handle this critical matter on your behalf – that way you can leverage their expertise to your advantage, all so that you can focus more on your business, the way it should be.

So if you’d like to get additional insight into business cash flow, or if you just have any additional questions that you’d like to go over with someone in a bit more detail, please don’t delay – contact us today.

Best Practices for Avoiding Cash Flow Problems With Your Business: A Guide

If you had to make a list of some of the biggest issues that plague small business owners regularly, cashflow problems would undoubtedly be right at the top.

Cash flow is about more than just the money coming into and going out of your business. It represents your ability to capitalize on opportunities as an entrepreneur as opposed to watching them pass you by because you lack the necessary cash on hand. It’s about making sure that you have the cash inflow you need to pay your employees on time. It’s about understanding how you’re going to pay vendors and other suppliers to get your products and services into the hands of the people who need them on time. The list goes on and on.

Based on this, it should not come as a surprise that an estimated 82% of all small businesses that close do so because of a significant cash flow problem. When you also consider the fact that the number of small businesses that fail to make it beyond their fifth anniversary is estimated to be 48%, it’s easy to see why this is one critical aspect of being an entrepreneur that you do not want to overlook.

To be clear, none of this is to say that if you manage to avoid significant cash flow problems you’re guaranteed to run a successful business for years to come. Unfortunately, the situation is a lot more malleable than that – there are still a lot of other variables that need to be accounted for. It’s simply that proper cash flow forecasting is imperative to avoid a lot of the major mistakes that new entrepreneurs in particular commonly make. It will also help avoid disruption and can be a key contributing factor in your business’s ability to scale and grow larger over time.

Thankfully, getting a handle on cash flow problems as a small business owner isn’t necessarily as difficult as one might assume. It does, however, require you to keep a number of crucial things in mind along the way.

The Ins and Outs of Cash Flow: Breaking Things Down

First, it’s important to get a handle on just what is meant by the term cash flow in the first place. Generally speaking, it can be separated into two categories: cash inflow and cash outflow.

Cash inflow refers to the amount of money that is coming into your business at any given time. This is typically represented by the money being generated when you sell your products or services. Note that not every dollar that comes into the organization is revenue, mind you – you still have expenses and things of that nature to account for.

Cash outflow, as the name suggests, is the money going out of your business. This includes not just payments to people like your employees but also payments to vendors and other suppliers. Regular expenses and debt payments would also fall under the cash outflow umbrella.

These two concepts are closely related and a cash flow problem in one area will almost immediately start to impact the other. If you start making late payment after payment to your suppliers, for example, your relationship will be harmed, and you may find it difficult to find people to work with in the future. Making a late credit card or other debt payment could hurt your ability to borrow (and negatively impact your credit rating). It can even harm your reputation not just with your customers, but with your employees as well.

All of this is why there are no such things as “small” cash flow problems.” What seems like a minor issue at first will soon snowball into something far bigger if left unchecked, which is why you need a stable foundation in place to avoid these types of situations altogether.

Pay Attention to How (and Why) You’re Borrowing

By far, one of the most important ways to make sure you have a handle on your cash flow situation is to gain as much insight as possible into the money that you’re borrowing – and why.

An entrepreneur rarely has the money on hand to build an entire enterprise on their own without taking out additional debt like small business loans. Many even use business credit cards and similar borrowing techniques to get up and running and to make sure that things are running as efficiently as possible.

Having said that, you need to pay careful attention to borrowing too much or borrowing from sources that are too expensive. If you have too many loans with a high-interest rate, you may be paying more each month than that money is bringing into your business. If you start to miss a payment or two, those interest rates could increase even further – causing you to take on additional debt just to stay afloat.

If possible, refinance any high-interest-rate credit cards and similar loans to take advantage of more favorable terms and conditions. Likewise, don’t borrow additional money if you’re already strapped or if it just doesn’t make long-term financial sense to do so.

Maintain Those Cash Reserves

One of the biggest lessons that many small business owners learned given everything going on in the world over the last few years has to do with the importance of cash reserves.

One day, everything is going smoothly and exactly as expected. The next day, something unprecedented happens – like a sudden global pandemic begins, forcing most businesses to indefinitely close their doors without any indication of when or even how they’d re-open again.

According to one recent study, 17% of small business owners said that they’d have to shut down permanently if they were faced with just a two-month-long revenue loss. This is why cash reserves are critical – they help you prepare for whatever life happens to throw at you, regardless of how unexpected it may be.

In other words, don’t immediately spend every extra dollar coming into your business after expenses and other payments are accounted for. Try to build up as large of a reserve as possible so that if something does happen, you’ll at least be able to weather the storm for a while until you come up with a more permanent solution or until conditions return to normal.

Monitor Your Receivables

To circle back around to the concept of how devastating a late payment can be, another one of the biggest sources of cash flow problems touches on the same idea, albeit from a different perspective: your accounts receivable status.

Simply put, accounts receivable refers to the money that you are being paid by your customers (either standard consumers who purchase a product or service or other businesses) in exchange for something of value. If you’re a B2B organization that sells a product to other businesses, for example, you likely send out invoices to those customers regularly. That represents money you are owed, certainly – but the longer those invoices go unpaid, the more likely you are to wind up in a decidedly negative cash flow position.

Not only is this a common problem that a lot of businesses face, but it’s also one that is, unfortunately, getting worse. One survey conducted in 2020 showed that over the course of the previous two years, small business owners reported that their rate of outstanding receivables increased a massive 81%. Keep in mind that this survey was also taken prior to the onset of the pandemic, meaning that this number probably only got higher over the following two years.

In an effort to help prevent this from becoming a major cash flow issue for your own small business, there are a few important steps you can take. First, make sure that you’re closely following all outstanding invoices in the first place. You can’t collect on invoices that you’re not sure were sent in the first place. You need a system in place that clearly outlines who owes what amount of money, when those invoices are due, and who has paid and who hasn’t.

Likewise, to entice certain people who may make regular late payments, you could offer some type of pricing discount or other incentives. You could offer a discount of a certain percentage if the invoice is paid immediately, for example. Or a similar reduction in prices if the invoice is paid in cash. Yes, you’ll lose out on a bit of money from offering a discount, but you’ll avoid having to wait for indefinite amounts of time to gain access to the money that you are owed. Never neglect payment terms like this as far as cash flow is concerned.

Work With a Financial Professional

Another one of the most common cash flow problems that new entrepreneurs deal with in particular involves attempting to handle all aspects of this part of their business on their own.

By now, you’re an expert in running your business – that doesn’t make you an expert on the financial side of the equation. Simply keeping up with something like accounts receivable information or expenses can quickly become a full-time job, which is a problem since you already have one of those you’re supposed to be devoting the majority of your attention to.

Thankfully, the solution is clear: find a financial professional that you trust who has experience in the specific industry that you’re operating in. Not only will they be able to help you come up with an effective cash flow management strategy, but they can put together essential documents like a cash flow statement and cash flow forecast data as well. The former paints a vivid picture of where you stand today, while the latter helps you see what you will achieve if you stay on the current trajectory.

A cash flow forecast is particularly important as, if you’re on a trajectory for poor cash flow or even negative cash flow, you’ll know about it as soon as possible so that you can hopefully do something about it. Even if everything is going smoothly, they’ll still ensure you have the most accurate and actionable information to make the best decisions for your business.

Keep Control Over Your Expenses

Finally, one of the most common cash flow problems that a lot of businesses face has to do with ballooning expenses. Yes, certain things are beyond your control that are “costs of doing business” – like the amount you’re paying for utilities to run a physical location, for example.

But especially if you’re experiencing dwindling cash flow, there are several steps you should take immediately. Take a look at all the business services you’re paying for and stop the ones that aren’t absolutely necessary, at least temporarily. If the issue is that your suppliers are increasing their prices, try to find ones that offer similar items at lower costs without compromising quality.

In general, look for opportunities to reduce your operating costs as much as you can, at least for a little while. It can certainly help ward off any impending disaster and allow you to get back on your feet through a series of strategic financial moves in the days and weeks to come.

In the end, especially in the early days of any small business, you need to come to terms with the fact that cash flow will matter more than profit. You’re not going to break even overnight, but negative cash flow and related issues could bring your organization to its proverbial knees before you know it.

Not only does something like a cash flow forecast help give you advanced notice of any problems that you may encounter in the future, but it also makes sure that you have the cash on-hand needed to fend off unexpected situations. It puts you in a better position to capitalize on opportunities and helps your business continue to scale and evolve over time. When you also consider the fact that it will also help lower your stress levels as an entrepreneur because you can spend less time worrying about money and more time putting it to good use, you’re looking at a perfect storm in the best possible way.

If your business is experiencing cash flow problems or you want to talk over budgeting or other cash flow tips, reach out to our office for a consultation. We are here to help.

Brady Martz is a proud member of RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.

Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise, and technical resources.

For more information on how the Brady Martz can assist you, please contact us.

Home Energy Improvement Credit Is Enhanced

Going all the way back to 2006, except for 2008, the federal tax code has offered a tax credit for making energy-saving improvements to a taxpayer’s home. This credit had expired after 2021 but has been given renewed life and substantially enhanced by the Inflation Reduction Act of 2022.

Under the old law, the credit had a lifetime cap of $500, which many taxpayers had taken advantage of in the previous 16 years, while others could not remember if they had used the entire lifetime credit during those years. As a result, with a lifetime cap of only $500, and a small credit rate of only 10%, the credit had become less of an incentive for taxpayers to make energy-saving improvements to their homes and was frequently disregarded.

Now with the passage of the Inflation Reduction Act of 2022, this credit once again becomes a meaningful incentive for taxpayers to make energy-saving improvements to their homes. The new legislation not only did away with the minimal $500-lifetime limit by replacing it with a $1,200 annual limit, but it also increased the credit rate from 10% to 30%.

The legislation also made the changes retroactive to include home energy-saving improvements for 2022 and extending the credit through 2032.

As before, under prior law, certain credit limits apply to the various types of energy-saving improvements. Although not a complete list, the following are credit limits that apply to various energy-efficient improvements under the new law:

  • $600 for credits concerning residential energy property expenditures, windows, and skylights.
  • $250 for any exterior door ($500 total for all exterior doors).
  • $300 for residential qualified energy property expenses
  • Notwithstanding these limitations, a $2,000 annual limit applies to amounts paid or incurred for specified heat pumps, heat pump water heaters, and biomass stoves and boilers.
  • The $1,200 credit amount is increased by up to $150 for the cost of a home energy audit.
  • The new law adds Air Sealing Insulation as a creditable expense.
  • However, the new law eliminates treatments of roofs as creditable after 2022.

Under the new law, the one making the improvements and claiming the credit need only be a resident of the home and not necessarily the owner.

Home Energy Audit – A home energy audit is an inspection and written report for a dwelling unit located in the United States and owned or used by the taxpayer as the taxpayer’s principal residence which:

  • Identifies the most significant and cost-effective energy efficiency improvements for the dwelling unit, including an estimate of the energy and cost savings for each such improvement, and
  • Is conducted and prepared by a home energy auditor that meets the certification or other requirements specified by IRS. The amount of the credit allowed with respect to a home energy audit can’t exceed $150.

Identification Number Requirement – The Act added a new provision that bars the credit unless the energy-saving item is produced by a qualified manufacturer, and the taxpayer includes the qualified product identification number of the item on their tax return for the tax year the credit is claimed. However, that requirement does not take effect until after December 31, 2024, giving qualified manufacturers time to comply.

Other Credit Issues:

  • It is a nonrefundable personal tax credit and is allowed against the alternative minimum tax (AMT) if the taxpayer is subject to the AMT.
  • There are no credit carryover provisions if the credit is not fully utilized in the year of the home energy improvements.
  • Unlike the solar credit, this credit doesn’t have any specific prohibitions against swimming pools or hot tubs.

If you have questions related to how you might benefit from the enhanced and extended tax credit for making energy-saving improvements to your home, please give our office a call.

Electric Vehicle Credit Undergoes Major Overhaul

With the recent passage of the Inflation Reduction Act of 2022, the electric vehicle credit has undergone some major changes. Although most of the changes take effect in 2023, to qualify for the current credit, vehicles purchased after August 15, 2022, are required to meet the final assembly requirement of the new law.

That requirement necessitates that vehicles sold after August 15, 2022, undergo final assembly in North America.

“Final assembly” means the manufacturer must produce new clean vehicles at a plant, factory, or other place located in North America from which the vehicle is delivered to a dealer with all component parts necessary for the mechanical operation of the vehicle included with the vehicle.

The U.S. Department of Energy has prepared a preliminary list of Model Year 2022 and early Model Year 2023 vehicles that may meet the final assembly in North America requirement.

Although the current law phasing out the credit once a manufacturer has produced 200,000 vehicles has been eliminated beginning in 2023, it still applies for vehicles sold in 2022. Even though those vehicles meet the final assembly requirement, because of the 200,000 limit they may not qualify for credit or reduced credit in 2022 but will again qualify in 2023 under the new rules. The U.S. Department of Energy list tags those that have reached the 200,000 limit. Visit the IRS site for a list of qualifying vehicles to see if a vehicle might still qualify for a reduced credit.

 Transition Rule – The legislation also provides a transition rule where a taxpayer who, from January 1, 2022, and before August 16, 2022, purchased, or entered a written binding contract to purchase, a new plug-in electric drive motor vehicle and placed that vehicle in service on or after August 16, 2022, may elect to use the credit rules in effect before the Inflation Reduction Act changes, thus avoiding the final assembly and other requirements of the new law.

The New Law – The new law, generally effective beginning January 1, 2023, includes some new stringent requirements including that the critical minerals and other battery components used in the manufacture of a qualifying vehicle be from North America. Because of the current limited availability of these critical minerals this requirement is being phased in through 2029, giving manufacturers time to develop North American sources for these materials.

Also beginning in 2023, the law imposes income limits on who qualifies for the credit, as well as limiting the cost of the vehicles eligible for the credit as follows:

 Income limit – No credit is allowed for any tax year if the lesser of the modified adjusted gross income (MAGI) of the taxpayer for the:

  • Current tax year, or
  • The preceding tax year

Exceeds the threshold amount as indicated in the table below. Thus there is no phaseout; just one dollar over the limit and no credit will be allowed.



Filing Status MAGI
Married Filing Joint & SS $300,000
Head of Household $225,000
Others $150,000

MAGI means adjusted gross income increased by any foreign earned income and housing exclusions and excluded income from Guam, American Samoa, the Northern Mariana Islands, and Puerto Rico.

Manufacturer’s Suggested Retail Price Limitation – No credit is allowed for a vehicle with a manufacturer’s suggested retail price of more than the following:

 Vans, sport utility vehicles, and pickups $80,000
Other vehicles $55,000

New Vehicle Definition – Where under prior law a qualifying vehicle was required to have a battery with a minimum of 4 kilowatts-hours, after 2022 a qualifying vehicle’s battery must be a minimum of 7 kilowatts-hours.

Transfer of Credit to the Dealer – After 2022, the new law adds an interesting twist that allows a taxpayer to utilize the credit to reduce the vehicle’s cost. This is accomplished by the taxpayer, who, on or before the purchase date, can elect to transfer the clean vehicle credit to the dealer from whom the taxpayer is purchasing the vehicle in return for a reduction in purchase price equal to the credit amount.

Making the election cannot limit the use or value of any other dealer or manufacturer incentive to buy the vehicle, nor can the availability or use of the incentive limit the ability of the taxpayer to make the election.

A buyer who has elected to transfer the credit for a new clean vehicle to the dealer and has received credit from the dealer but whose MAGI exceeds the applicable limit is required to recapture the amount of the credit on their tax return for the year the vehicle was placed in service.

Credit For Used Vehicles – The new law includes a credit for used clean vehicles that cost $25,000 or less that are purchased from a dealer. This credit is limited to the first time the vehicle is resold and available only to taxpayers whose MAGI is no more than half that of the MAGI limit for the new clean vehicle credit. The credit amount is the lesser of $4,000 or 30% of the purchase price. However, other details of this credit need further guidance from the IRS. Watch for additional information in the future.

If you have questions about these new rules on the clean vehicle credit, please give our office a call.

Autumn 2022 Headlights Newsletter

The latest issue of Headlights, a publication of the AutoCPAGroup, is now available.

Take Tax Advantage of a Low-Income Year

People generally assume that tax planning only applies to individuals with the big bucks. But think again, as some tax moves benefit lower-income taxpayers and those who are having a lower-than-normal income year. So, if 2022 is not producing a lot of income for you, or your income will be substantially lower this year than it usually is, you may be surprised to know that you actually might be able to take advantage of some tax-planning opportunities. Implementing some of these ideas will require action on your part before the close of the year. Here are some possibilities to consider.

Exercise Stock Options – If you are an employee of a corporation, the company may offer you the option to purchase shares of it at a fixed price at some future date, so that you can benefit from your commitment to the company’s success by sharing in the company’s growth through the increase in stock value. If those options are non-qualified, then you must report the difference between your preferential option price and the stock’s value when you exercise the option as income. This income will be included in your wages on your year-end W-2 form. In a low-income year, this may give you the chance to exercise some or all of your options without any or with minimal income tax liability.

Convert a Traditional IRA to a Roth IRA – Roth IRA accounts provide the benefits of tax-free accumulation and, once you reach retirement age, tax-free distributions. This is why many taxpayers convert their traditional IRA account to a Roth IRA. However, to do so, you must generally pay tax on the converted amount. Many taxpayers overlook some great opportunities to make conversions, such as in years when their income is unusually low or a year when their income might even be negative due to abnormal deductions or business losses. The current standard deduction is higher than ever before, which may offer a taxpayer the opportunity to convert some or all their traditional IRA to a Roth IRA without any conversion tax. If you are in any of these circumstances this year, you should consider converting some or all of your traditional IRA to a Roth IRA before the end of the year.

Maximize IRA Distributions – If you are retired and taking IRA distributions, make sure that you are maximizing your withdrawals with respect to your tax bracket. With the robust standard deduction and a lower-than-normal income, it may be tax-effective to actually withdraw more than the minimum required by law. In fact, you may even be able to take a distribution from your IRA with no tax liability. Presented with this situation, you would certainly want to take advantage of it before year’s end, even if you do not need the funds, which you could bank for the future.

Sell Appreciated Stock – Income tax rates increase as a taxpayer’s taxable income increases. The regular tax rates start at 10% and then increase in step amounts as one’s taxable income increases, reaching a maximum rate of 37%. However, long-term capital gains are given special treatment and only have three tax rates: 0%, 15%, and 20%. The 0% tax rate applies for taxpayers with taxable incomes up to the following amounts for 2022:

Filing Status Single Head of Household Married Filing Joint Married Filing Separate
Taxable Income $0–$41,675 $0–$55,800 $0–$83,350 $0–$41,675

This provides a unique opportunity to sell investments that will produce long-term capital gains (investments held for at least a year and a day) and benefit from the 0% long-term capital gain rates. Thus, if you have stocks that have appreciated in value, you may be able to sell them before the end of the year and pay no tax on the gain. The tops of the 0% ranges are adjusted each year for inflation.

Delay Business Expenditures – If you are self-employed, you may find it beneficial to delay business-related purchases until next year to avoid reducing your current yearly income any further and save the deduction until next year, when the items are purchased.

Release Dependency – If you are the custodial parent of a child and receive no benefit from the nonrefundable child tax credit, you may want to consider releasing the dependency of the child to the non-custodial parent for the current year, allowing the non-custodial parent to claim the $2,000 child tax credit. Doing so will not affect your ability to claim the child care credit or the refundable earned income tax credit. However, if the child is attending college, then any tuition credit will go to the one claiming the child. The dependency is released on IRS Form 8332, but care should be taken when completing the form to avoid unintentionally releasing the dependency for more than one year.

Delay Personal Deductible Expenditures – If you itemize your deductions and the deductions will provide no or minimal tax benefit this year, you might consider delaying paying that medical expense, real property tax bill, or state estimated tax payment, or making a charitable contribution, until after the first of the year. Many taxpayers find it beneficial to “bunch” deductions in one year and then claim the standard deduction in the alternate year. For example, by paying two years of church tithing or pledges to a charitable organization all in one year, deducting the total in that year, and then contributing nothing and taking the standard deduction the next year, the combined tax for the two years may be less than if a contribution was made in each year. However, before postponing payments until next year, make sure that no penalties will be associated with delaying your tax-obligation payments.

If you have questions about employing any of these strategies or wish to make a tax-planning appointment, please give our office a call.

Not All Interest Is Deductible For Taxes

A frequent question that arises when borrowing money is whether or not the interest will be tax deductible. That can be a complicated question, and unfortunately not all interest an individual pays is deductible. The rules for deducting interest vary, depending on whether the loan proceeds are used for personal, investment, or business activities. Interest expense can fall into any of the following categories:

  • Personal interest – is not deductible. Typically this includes interest from personal credit card debt, personal car loan interest, home appliance purchases, etc.
  • Investment interest – this is interest paid on debt incurred to purchase investments such as land, stocks, mutual funds, etc. However, interest on debt to acquire or carry tax-free investments is not deductible at all. The annual investment interest deduction is limited to “net investment income,” which is the total taxable investment income reduced by investment expenses (other than expenses related to investments that produce non-taxable income). The investment interest deduction is only allowed to taxpayers who itemize their deductions.
  • Home mortgage interest – includes the interest on debt to purchase, construct or substantially improve a taxpayer’s principal home or second home. This type of loan is referred to as acquisition debt. For the interest to be deductible the debt must be secured by the home purchased, constructed, or substantially improved. A secured debt is one in which the taxpayer signs a mortgage, deed of trust, or land contract that makes their ownership in a qualified home security for payment of the debt; provides, in case of default, that the home could satisfy the debt; and is recorded under any state or local law that applies. In other words, if the taxpayer can’t pay the debt, their home can then serve as payment to the lender to satisfy the debt.

    o For Debt Incurred Before 12/16/2017 – the debt for which the interest is deductible is limited to $1,000,000 ($500,000 for married separate).

    o For Debt Incurred After 12/15/2017 – the debt for which the interest is deductible is limited to $750,000 ($375,000 for married separate).

  • Passive activity interest – includes interest on debt that’s for business or income-producing activities in which the taxpayer doesn’t “materially participate” and is generally deductible only if income from passive activities exceeds expenses from those activities. The most common passive activities are probably real estate rentals. For rental real estate activities, there is a special passive loss allowance of up to $25,000 for taxpayers who are active but not necessarily material participants in the rental. The $25,000 phases out for taxpayers with adjusted gross income between $100,000 and $150,000.
  • Trade or business interest – includes interest on debts that are for activities in which a taxpayer materially participates. This type of interest can generally be deducted in full as a business expense.

Because of the variety of limits imposed on interest deductions, the IRS provides special rules to allocate interest expense among the categories. These “tracing rules,” as they are called, are generally based on the use of the loan proceeds. Thus interest expense on a debt is allocated in the same manner as the allocation of the debt to which the interest expense relates. Debt is allocated by tracing disbursements of the debt proceeds to specific expenditures, i.e., “follow the money.”

These tracing rules, combined with the restrictions associated with the various categories of interest, can create some unexpected results. Here are some examples:

Example 1: A taxpayer takes out a loan secured by his rental property and uses the proceeds to refinance the rental loan and buy a car for personal use. The taxpayer must allocate interest expense on the loan between rental interest and personal interest for the purchase of the car, and even though the loan is secured by the business property, the personal loan interest portion is not deductible.

Example 2: The taxpayer borrows $50,000 secured by his home to be used in his consulting business. He deposits the $50,000 into a checking account he only uses for his business. Since he can trace the use of the funds to his business, he can deduct the interest as a business expense.

Example 3: The taxpayer owns a rental property free and clear and wants to purchase a home to use as his personal residence. He obtains a loan on the rental to purchase the home. Under the tracing rules, the taxpayer must trace the use of the funds to their use, and as the debt was not used to acquire the rental, the interest on the loan cannot be deducted as rental interest. The funds can be traced to the purchase of the taxpayer’s home. However, for interest to be deductible as home mortgage interest, the debt must be secured by the home, which it is not. Result: the interest is not deductible anywhere.

As you can see, it is very important to plan your financing moves carefully, especially when equity in one asset is being used to acquire another. Please call our office for assistance in applying the various interest limitations and tracing rules to ensure you don’t inadvertently get some unexpected results.

What an Economic Slowdown Means for Your Small Business

If you pay attention to the financial news, you’ve likely heard that we may — or may not — be in the midst of a recession. While experts argue over whether or not two consecutive periods of falling gross domestic period necessarily confirm an overall decline in economic activity, small business owners have more pressing questions, like, “How is a recession going to affect my business?” and “What can I do to make sure my business survives?”

What is a recession and how will it impact my business?

Economies swing from periods of expansion to periods of contraction. A recession is a period when consumers stop spending, and this leads to an overall negative impact on some — but not all — businesses. Those that survive and thrive in a recession share certain traits: They generally have adequate cash reserves and access to capital, and they are often private companies that can quickly shift their business strategies without fear of rebellion from shareholders.

What you most need to know about a recession is that it tends to make customers cut their spending, so you need to be prepared to respond in a way that keeps your business available to them, keeps you top of mind, and keeps your quality as high as possible despite reduced profits. It’s a challenge, but it’s not impossible.

Can I make my business recession-proof?

Protecting your business against the worst impacts of recession requires some planning and a commitment to resisting panic. The planning part may feel like it’s too late if we’re already in a recession, but that’s not necessarily true. It certainly helps to have deep cash reserves or access to credit, but even businesses without those advantages can find ways to cut back and make adjustments without changing their commitment to quality and customer service.

  • Cut back on unnecessary spending – You may feel like your expenses aren’t out of line, but taking the time to review the last few months’ worths of credit card and bank statements tend to reveal areas where fat can be trimmed. Are you spending money on subscriptions or memberships that you don’t really need? Are you paying fees for equipment that you aren’t using anymore, or for support services that you arranged for early in your business’ life that you no longer need? Sometimes expenses are actually habits rather than necessities, and businesses — and individuals too — can usually realize some savings when they conduct a quick self-audit.
  • Maximize your business expenditures – If your business places regular orders with the same suppliers over and over again, there’s a good chance that you can negotiate an additional discount or start buying in bigger bulk to reduce your costs. A lot of businesses are concerned about cash flow and are more open to bartering or arranging some kind of deal in order to keep a good customer in business.
  • Reduce your inventory – You don’t want your clients to get a sense that the cupboards are bare, but if you’re in the habit of ordering several months’ worth of supplies, you can quickly cut your expenses by shifting to a three-month strategy. Alternatively, if your suppliers are hesitant about your ordering cutback, try arranging for reduced prices for long-term orders, or locking in your prices to avoid increases.

Avoid making common mistakes

One thing that all small businesses can do when anticipating a recession is to learn from mistakes made by others. Conserving cash may be key, but you don’t want to do so in a way that is going to cost you money or customers in the long run. Eliminating employees is one of the biggest examples of a cost-cutting strategy that can backfire. Not only will your operation run less efficiently if you eliminate key staff, but when the recession inevitably ends you’ll need to replace them – and hiring and training aren’t cheap. If you absolutely cannot keep employees onboard, consider furloughs rather than firings in order to keep the door open to bringing valued personnel back.

Cutting back on marketing expenses is another thing that small businesses often make in the face of economic downturns. History has shown that this is a mistake and that the businesses that survived previous recessions and went on to achieve bigger and better sales numbers were the ones that continued reaching out to customers and driving interest in products or services.

Budgeting is hard in uncertain times, but still vital

Business finances fluctuate all the time, and unless your business has already weathered a recession it is hard to forecast how it will impact your operations. Budgeting and saving are absolutely crucial in the face of a downturn. If you need assistance in weathering an economic storm, contact our office to set up a time to create a working strategy.