Are you a business owner working from home as a sole proprietor or an entrepreneur with a home-based side gig? You may qualify for sizeable home office deductions if you meet specific requirements, including write-offs attributable to everyday household expenses.

When Tax Opportunity Knocks

To qualify for a home office deduction, you must use at least part of your home regularly and exclusively as either:

• Your principal place of business, or
• A place to meet or deal with customers, clients, or patients in the normal course of business.

In addition, you may be able to claim deductions for maintaining a separate structure, such as a barn or shed, where you store products or tools used solely for business purposes.

Notably, “regular and exclusive” use means you must consistently use a specific identifiable area in your home for business, although incidental or occasional personal use won’t necessarily disqualify you.

When evaluating whether your home office is your “principal place of business,” the IRS could challenge deductions if you work at multiple locations. However, your home office will qualify as your principal place of business if it’s used regularly and exclusively for administrative or management activities. You don’t have any other fixed location for these activities. This may affect taxpayers in various professions and industries, including physicians, architects, interior designers, and plumbers.

How the TCJA Changed Home Office Deductions

Suppose you’ve been working remotely from home during the pandemic as an employee for a company. Previously, people who itemized could have claimed home office deductions as a miscellaneous expense, subject to the 2%-of-AGI rule, if the arrangement was for their employer’s convenience.

But the Tax Cuts and Jobs Act (TCJA) suspends miscellaneous expense deductions for 2018 through 2025. So, employees currently get no personal tax benefit from working from home. On the other hand, self-employed individuals still may qualify if they meet the tax law requirements.

Direct and Indirect Expenses

If you qualify for home office deductions, you can write off the full amount of your direct expenses and a proportionate amount of your indirect expenses based on the percentage of business use of your home.

Indirect expenses include:

• Mortgage interest,
• Property taxes,
• Utilities (such as electric, gas, and water),
• Insurance,
• Repairs and maintenance,
• Home security system fees, and
• Depreciation under IRS tables.

Important: If you itemize deductions, mortgage interest and property taxes may already be deductible. If you claim a portion of these expenses as indirect home office expenses, the remainder will count as a personal itemized deduction.

Calculating Your Deduction

Typically, the percentage of business use is determined by the square footage of your home office. For instance, if you have a 3,000-square-foot home and use a room with 300 square feet as your home office, the applicable percentage is 10%.

For example, say you use a room comprising 10% of your home as an office for your business. You spend $5,000 to have the home office painted and carpeted (direct expenses), and you incur another $10,000 in indirect expenses for the entire home. In this case, you can deduct $6,000 [$5,000 plus (10% of $10,000)].

How to Apply the Simplified Method

Keeping track of indirect expenses is time-consuming and tedious. Some taxpayers prefer to take advantage of a simplified method of deducting home office expenses. Instead of deducting actual expenses, you can claim a deduction equal to $5 per square foot for the area used as a home office, up to a maximum of $1,500 for the year. Although the simplified method takes less time to apply than tracking your actual expenses, it generally results in a significantly lower deduction than writing off actual direct and indirect expenses.

Going back to the previous example of an office comprising 10% of the home, the simplified method would give you a home office deduction of only $1,500. That’s much less than the $6,000 home office deduction you would have received by tracking actual expenses.

Deciding What’s Right for Your Home-Based Business

Do you qualify for a home office deduction? If so, what’s the optimal method for computing your deduction? Contact a Reynolds + Rowella tax advisor to address these and other questions about deducting home office expenses and other self-employed write-offs.

Reynolds + Rowella is a regional accounting and consulting firm known for a team approach to financial problem solving. As Certified Public Accountants, our partners foster a personal touch with our clients. As members of DFK International/USA, an association of accountants and advisors, our professional network is international, yet many of our clients have known us for years through the local communities we serve.

Our mission is to operate as a financial services firm of outstanding quality. Our efforts are directed at serving our clients in the most efficient and responsive manner possible, delivering services that exceed the expectations of those we serve. The firm has offices at 90 Grove St., Ridgefield, Conn., and 51 Locust Ave., New Canaan, Conn. For more information, please contact Elizabeth Bresnan at 203.438.0161 or email.

With business travel picking up again and summer fast approaching, many business owners may be considering trips that combine work with vacation or other personal activities. A quick refresher on the IRS rules related to deducting business vs. personal travel costs can help you reduce your tax bill next year.

General Requirements

Business expenses must be “ordinary and necessary” to be deductible for federal income tax purposes. When it comes to business travel, you can deduct the ordinary and necessary expenses of traveling away from your home for business for more than one day.

“Home” refers to the city or general area where you work, regardless of where you live. If you have more than one place of business, your tax home is your principal place of business.

Domestic Travel

When traveling within the United States, you can generally deduct 100% of your travel expenses to get to and from the destination (airplane tickets and cab fares) depending on if the trip is primarily for business. Whether travel is mainly for business turns on how much time you spend on business purposes vs. personal purposes. For example, if you travel for ten days and spend seven days visiting clients and three sightseeing, the trip is primarily for business. If you spend more of the trip on personal than business purposes, you can’t deduct any travel expenses to and from the destination. You can, however, deduct expenses you incur while at your destination that would otherwise qualify as business expenses.

When your trip is primarily for business, you can deduct the cost of your lodging, and under temporary rules, you can deduct 100% of meal costs for 2022. (This deduction is scheduled to revert to 50% of meal costs in 2023.) You may also deduct other qualified business expenses incurred on the days you spend on the business. But you generally can’t deduct expenses incurred by a companion unless that person is an employee.

Foreign Travel

You’ll need to allocate your travel expenses daily between business and personal days for foreign travel, deducting only the portion allocable to business days. Business days include:

• Transportation days,
• Days your presence is required (even if you spend most of the day on personal activities),
• Days you spend on business, and
• Weekends and holidays that fall between business days.

The IRS recognizes four exceptions to this general rule. You don’t have to allocate any of your travel expenses to and from a foreign destination if:

1. You’re out of the country for seven consecutive days or less (counting the day you return to the country but not the day you leave). For example, traveling to London for a four-day meeting and spending two more days on personal activities is considered seven days out of the country.

2. You’re out of the country for more than one week but spend less than 25% of that time on personal activities (counting both the day you leave and return). For example, you fly to Japan and spend 14 days on business and five on individual actions, with one day traveling each way. That’s 21 days, but you’ve spent less than 25% (5/21) of the time on personal activities.

3. You don’t have substantial control over your travel arrangements. This exception generally doesn’t apply to business owners, executives, or the self-employed.

4. Vacation isn’t a significant consideration for the trip.

In each of these cases, your travel is considered “entirely for business.” You can deduct 100% of your travel expenses to and from the destination, plus your lodging and meal expenses (subject to the applicable limit) for the business days. Of course, any expenses explicitly related to personal travel would be nondeductible.

Build a Record

The rules for deducting business travel can be complicated, but the tax savings can be significant. Contact a Reynolds + Rowella tax advisor with any questions about which costs are deductible and how to ensure you have proper documentation.

Reynolds + Rowella is a regional accounting and consulting firm known for a team approach to financial problem solving. As Certified Public Accountants, our partners foster a personal touch with our clients. As members of DFK International/USA, an association of accountants and advisors, our professional network is international, yet many of our clients have known us for years through the local communities we serve.

Our mission is to operate as a financial services firm of outstanding quality. Our efforts are directed at serving our clients in the most efficient and responsive manner possible, delivering services that exceed the expectations of those we serve. The firm has offices at 90 Grove St., Ridgefield, Conn., and 51 Locust Ave., New Canaan, Conn. For more information, please contact Elizabeth Bresnan at 203.438.0161 or email.

Outsourcing is not strictly about cost-savings; it is also about enhancing your organization’s flexibility.

Flexibility is a primary, but oftentimes less talked about, benefit of outsourced accounting. Imagine for a moment handing off some of the organization’s accounting tasks or the entirety of its accounting function to outside specialists. Now think about what you and your internal team could focus on with that in the hands of an experienced managed accounting team. Could you increase market share and community outreach? Would you focus more on training and leadership development? Perhaps improving customer services or cross-selling to long-term customers are two of your short-term business goals. Outsourcing some or all of your accounting function gives you the flexibility needed to focus on your organization’s top level growth strategies.

Business owners who outsource their accounting and finance can flex, pivot, and strategically plan.

Accounting services can be outsourced at any stage of growth. As a small to mid-size business, you need access to the right level of talent at the right time to get the current work done and scale with your business. Having this degree of flexibility will help your business meet your current—and future—needs and achieve its greatest potential.

Outsourcing also improves flexibility by scaling support up or down as needed. Your accounting services partner can contribute more during busy seasons, support existing staff with day-to-day tasks and reporting, or even fill a role until your organization can find the right candidate for the long haul. It can also open easy access to an interim or part-time controller or CFO, who can develop a solid financial foundation for the company and oversee the finance team or a particular finance and accounting project as needed.

Tax laws change, accounting standards are dynamic and unique problems are bound to arise. When partnering with an outsourcing team of CPAs, you have significant flexibility in determining which functions you want to outsource. You can continuously outsource one or multiple traditional accounting functions entirely or only contract out a portion of the task to fit your needs. 

Reynolds + Rowella has a range of experience helping clients improve flexibility in the accounting function. Our Managed Accounting Services team, managed by CPAs, can help your organization map current processes, assess your needs, develop a plan, and provide ongoing service so that you can focus on adapting to change and growing your business.

Gregory J. Pepin, CPA,  Partner
gregoryp@reynoldsrowella.com

Greg has over 22 years of accounting experience, with over 19 years in the public sector. He specializes in tax consultation, planning and compliance for closely-held businesses and individuals. Greg prides himself on being a trusted advisor to his clients for all of their financial related matters.

Greg is one of Reynold + Rowella’s Tax Partners and leads the firm’s Managed Accounting and Family Office Solutions Group.

Reynolds + Rowella is a regional accounting and consulting firm known for a team approach to financial problem solving. As Certified Public Accountants, our partners foster a personal touch with our clients. As members of DFK International/USA, an association of accountants and advisors, our professional network is international, yet many of our clients have known us for years through the local communities we serve.

Our mission is to operate as a financial services firm of outstanding quality. Our efforts are directed at serving our clients in the most efficient and responsive manner possible, delivering services that exceed the expectations of those we serve. The firm has offices at 90 Grove St., Ridgefield, Conn., and 51 Locust Ave., New Canaan, Conn. For more information, please contact Elizabeth Bresnan at 203.438.0161 or email.

In business, timely and accurate financial information is crucial. Too often business owners find themselves attempting to handle their books and records on their own or by hiring third-party “bookkeeping” providers with little to no accounting, taxation or business knowledge. The usual perceived alternative to this – finding the right person to hire, even just part-time – is usually a costly one. It also carries with it the risk of taking that leap and missing the mark on fit and synergy which just puts owners further behind than they already were.

HERE ARE FOUR REASONS WHY OUTSOURCING YOUR COMPANY’S ACCOUNTING OPERATIONS MAKES SENSE.

1. Outsourcing will allow you to tap into the expertise of several different levels of accounting professional without having to hire each of them individually. It gives you access to an experienced accounting team, that will mind your company’s back office and provide you with valuable feedback and information. An outsourced accounting team can give you peace of mind and the confidence needed to make informed business decisions.
2. When outsourcing all or part of your companies accounting functions, you are partnering with professionals that have streamlined the processes and the have newest accounting software and techniques available to benefit your business.
3. As the business owner, you can re-focus your time to managing and growing the business and day to day operations. In turn your operational efficiency will improve. Your business is built on your expertise as an entrepreneur, and your time should be spent on growth and strategic goals. A good, outsourced accounting service will support your company’s goals and leverage their expertise to tailor information and reports to create and monitor benchmarks and baseline financial performance, analyze cash flow and provide insight on other key performance indicators (KPIs).
4. There is typically a significant cost savings when choosing to partner with an outsource accounting service vs. doing the same job in-house. Compensation  and benefits, along with the expense of training and office space are some key costs savings you can invest in initiatives that will grow your business.

Partnering with a team of trained professionals allows you to step back from the day-to-day accounting function and focus on the overall growth and vision of the company itself.

From advanced bookkeeping and accounting to customized management reporting and controller services, Reynolds + Rowella’s Managed Accounting Services are designed to transform your accounting and finance function. It’s not just about maintaining your books and records, but also providing a platform to drive profits, improve cash flow, and help you grow your business.

Reynolds + Rowella Managed Accounting Services help privately-held businesses and nonprofit organizations gain the confidence, efficiency, and actionable financial intelligence they need to succeed.

Gregory J. Pepin, CPA,  Partner
gregoryp@reynoldsrowella.com

Greg has over 22 years of accounting experience, with over 19 years in the public sector. He specializes in tax consultation, planning and compliance for closely-held businesses and individuals. Greg prides himself on being a trusted advisor to his clients for all of their financial related matters. Greg is one of Reynold + Rowella’s Tax Partners and leads the firm’s Managed Accounting and Family Office Solutions Group.

Reynolds + Rowella is a regional accounting and consulting firm known for a team approach to financial problem solving. As Certified Public Accountants, our partners foster a personal touch with our clients. As members of DFK International/USA, an association of accountants and advisors, our professional network is international, yet many of our clients have known us for years through the local communities we serve.

Our mission is to operate as a financial services firm of outstanding quality. Our efforts are directed at serving our clients in the most efficient and responsive manner possible, delivering services that exceed the expectations of those we serve. The firm has offices at 90 Grove St., Ridgefield, Conn., and 51 Locust Ave., New Canaan, Conn. For more information, please contact Elizabeth Bresnan at 203.438.0161 or email.

Not all businesses are structured to integrate various departments, like sales, accounting, marketing, HR, IT, etc., to run the day-to-day operations and ensure goals are met. Many closely-held businesses simply do not have the need or the resources to build out full departments and opt to outsource certain parts of the business.

Accounting is an area that many businesses choose to outsource due to the cost of hiring and retaining an experienced accountant and the importance and complexity of the work. Salaries, overhead, benefits, IT, PTO, and overtime costs can easily add up. Building an entire finance and accounting department of 3-5 employees, each with a different role, can cost your business more than $300,000! So, how does that compare to the cost of outsourcing?

According to Salary.com, the average annual salaries across the U.S are:

Full Charge Bookkeeper: $45,000 ^[1]
Staff Accountant: $57,000 ^[2]
Controller: $105,000 ^[3]

According to the Bureau of Labor Statistics, the average cost of benefits per employee is $13k per year (including health insurance, PTO, payroll tax + worker’s comp, and retirement benefits). ^[4]

Now, let’s look at the cost of outsourcing. The average range of outsourced accounting services, which includes a bookkeeper, staff accountant, and a manager (controller equivalent) is $45,000-65,000 a year! This is a significant savings for small- and mid-sized businesses.

Outsourced accounting services not only provides accurate, timely information to help with vital decision making and clarity to analyze and solve financial issues, but also the peace of mind that having expert resources can provide. As a business owner, it’s essential to have good financial and accounting systems in place so that you can focus on achieving business growth.

Outsourcing accounting and finance functions is an investment in your business, not a cost. In fact, a major benefit of outsourcing is the reduction of expenses by offering cost-effective services. Surrounding yourself with a team of experts is how businesses succeed.

Thinking about your business is a big part of ours. Reynolds + Rowella’s Managed Accounting Services Group possesses the experience and expertise needed to keep you informed and in the best possible position to make the strategic decisions necessary to keep your business growing.

The Reynolds + Rowella Managed Accounting Services Group provides budget development and monitoring, cash flow projection and management, tax and management reporting. Our managed accounting services can solve the issue of finding the right people to handle your accounting and finance needs and help you reduce significant costs of maintaining the accuracy and confidentiality of your data. Keeping you informed and making data-driven decisions is our goal. We are ready to begin.

Gregory J. Pepin, CPA,  Partner
gregoryp@reynoldsrowella.com

Greg has over 22 years of accounting experience, with over 19 years in the public sector. He specializes in tax consultation, planning and compliance for closely-held businesses and individuals. Greg prides himself on being a trusted advisor to his clients for all of their financial related matters. Greg is one of Reynold + Rowella’s Tax Partners and leads the firm’s Managed Accounting and Family Office Solutions Group.

[1] https://www.glassdoor.com/Salaries/bookkeeper-salary-SRCH_KO0,10.htm
[2] https://www.glassdoor.com/Salaries/staff-accountant-salary-SRCH_KO0,16.htm
[3] https://www.glassdoor.com/Salaries/controller-salary-SRCH_KO0,10.htm
[4] https://www.bls.gov/news.release/pdf/ecec.pdf 

Reynolds + Rowella is a regional accounting and consulting firm known for a team approach to financial problem solving. As Certified Public Accountants, our partners foster a personal touch with our clients. As members of DFK International/USA, an association of accountants and advisors, our professional network is international, yet many of our clients have known us for years through the local communities we serve.

Our mission is to operate as a financial services firm of outstanding quality. Our efforts are directed at serving our clients in the most efficient and responsive manner possible, delivering services that exceed the expectations of those we serve. The firm has offices at 90 Grove St., Ridgefield, Conn., and 51 Locust Ave., New Canaan, Conn. For more information, please contact Elizabeth Bresnan at 203.438.0161 or email.

With year-end rapidly approaching, it’s time to consider making some moves that will lower your 2021 federal income tax bill — and potentially position you for future tax savings. Unfortunately, tax planning is particularly challenging this year because the tax rules for 2022 aren’t yet certain. In fact, they may not even be certain for 2021.

Here are nine planning tips for you to consider making before year end. But you also may want to be ready to take last-minute corrective actions if Congress works out a deal on the proposed Build Back Better Act and the Bipartisan Infrastructure Bill before year end.

1. Game the Standard Deduction

The 2017 Tax Cuts and Jobs Act (TCJA) almost doubled the standard deduction amounts. For 2021, the standard deduction allowances are:

• $12,550 for single people and married individuals who file separate returns,
• $18,800 for people who use head-of-household filing status, and
• $25,100 for married couples who file jointly.

If your total itemizable deductions will be close to your standard deduction allowance, consider making enough additional expenditures for itemized deduction items before year end to exceed the standard deduction. Those additional expenditures will lower this year’s tax bill. Next year, your standard deduction will be bigger thanks to an inflation adjustment, and you can claim it then if you’re unable to itemize next year.  

The easiest deductible expense to prepay is included in the mortgage payment due on January 1. Accelerating that payment into this year will give you 13 months’ worth of itemized home mortgage interest deductions in 2021. Speak to an R+R tax advisor to determine whether you’re affected by limits on mortgage interest deductions under current law.

Other ways to increase your itemized deductions for 2021 include:

• Making bigger charitable donations this year and smaller donations next year to compensate, and
• Accelerating elective medical procedures, dental work and expenditures for vision care if you think you can qualify for a medical expense deduction.

You can claim an itemized deduction for medical expenses to the extent they exceed 7.5% of your adjusted gross income (AGI) for 2021.

2. Manage Gains and Losses in Taxable Investment Accounts 

If you hold investments in taxable brokerage firm accounts, consider the tax advantage of selling appreciated securities that have been held for over 12 months. The federal income tax rate on long-term capital gains can be as high as 20%, plus the 3.8% net investment income tax (NIIT) can also apply at higher income levels.

To the extent you have capital losses from earlier this year or capital loss carryovers from prior years, selling appreciated investments this year won’t result in a tax hit. In particular, sheltering net short-term capital gains with capital losses is a tax-smart move because net short-terms gains would otherwise be taxed at higher ordinary income rates of up to 37%. 

3. Donate to Charity

You can also make gifts to your favorite charities in conjunction with an overall revamping of your investments in taxable brokerage firm accounts. But there are two tax-smart principles to keep in mind.

First, don’t give away investments that are currently worth less than what you paid for them. Instead, sell the shares and book the resulting tax-saving capital loss. Then you can give the cash sales proceeds to favored charities — plus, if you itemize, you can claim the resulting tax-saving charitable write-offs.

The second principle applies to investments in appreciated securities. These winning investments should be donated directly to a preferred charity. Why? Because, if you itemize, donations of publicly traded shares that you’ve owned for over a year result in charitable deductions equal to the full current market value of the shares at the time of the gift. Plus, when you donate appreciated shares, you escape any capital gains taxes on those shares. Meanwhile, the tax-exempt charitable organization can sell the donated shares without owing any federal income tax.

4. Gift Assets to Loved Ones

The principles for tax-smart gifts to charities also apply to gifts to relatives. That is, you should sell losing investments and collect the resulting tax-saving capital losses. Then give the cash sales proceeds to loved ones.

Likewise, you should give appreciated shares directly to relatives. When they sell the shares, they’ll probably pay a lower tax rate than you would.

5. Donate to Charity from Your IRA

IRA owners and beneficiaries who have reached age 70½ are permitted to make cash donations totaling up to $100,000 annually to IRS-approved public charities directly out of their IRAs. You don’t owe income tax on these qualified charitable distributions (QCDs), but you also don’t receive an itemized charitable contribution deduction.

The upside is that the tax-free treatment of QCDs equates to an immediate 100% federal income tax deduction without having to worry about restrictions that can delay itemized charitable write-offs. Contact your tax advisor if you want to hear about the benefits of QCDs. If you’re interested in taking advantage of this strategy for 2021, you’ll need to arrange with your IRA trustee or custodian for money to be paid out to one or more qualifying charities before year end.

6. Prepay College Tuition Bills

If paid for you, your spouse or a dependent to attend college, you may be eligible for one of the following tax credits for higher education costs:

American Opportunity credit. This credit equals 100% of the first $2,000 of qualified postsecondary education expenses, plus 25% of the next $2,000 (assuming the phaseout rule explained later doesn’t affect you). So, the maximum annual credit is $2,500.

Lifetime Learning credit. This credit equals 20% of up to $10,000 of qualified education expenses. The maximum credit is $2,000.

For 2021, both higher education credits are phased out if your modified adjusted gross income (MAGI) is between:

• $80,000 and $90,000 for single people, or
• $160,000 and $180,000 for married couples filing jointly.

Numerous rules and restrictions apply to these higher education credits. If you’re eligible for either credit, consider prepaying college tuition bills that aren’t due until early 2022 if it would result in a bigger credit this year. Specifically, you can claim a 2021 credit based on prepaying tuition for academic periods that begin in January through March of next year.

7. Defer Income into Next Year

It may pay to defer some taxable income from this year into next year if you optimistically believe you’ll be in the same or lower tax bracket in 2022 than in 2021. For example, if you operate a small business that uses the cash method of accounting, you can postpone taxable income by waiting until late in the year to send out some invoices. That way, you won’t receive payment for them until early 2021. Small business owners can also defer taxable income by accelerating some deductible business expenditures into this year.

Both moves will postpone taxable income from this year until next year when it might be taxed at lower rates. Deferring income can also be helpful if you’re affected by unfavorable phase-out rules that reduce or eliminate various tax breaks, such as the child tax credit and the higher-education tax credits.

Note: Congress is currently discussing possible tax increases for some higher-income individuals to help fund various spending initiatives.

8. Convert a Traditional IRA to a Roth IRA

The best scenario for converting a traditional IRA into a Roth account is when you expect to be in the same or higher tax bracket during retirement as you are in today. If you think you might be in a higher tax bracket in the future due to proposals being discussed by Congress, now might be a good time to consider a conversion.

However, there’s a current tax cost for converting. A conversion is treated as a taxable liquidation of your traditional IRA followed by a nondeductible contribution to the new Roth account. If you wait to convert your account until 2022 or later, the tax cost could be higher, depending on future tax rates.

After the conversion, all the income and gains that accumulate in the Roth account, and all qualified withdrawals, will be federal income-tax-free. In general, qualified withdrawals are those taken after:

• You’ve had at least one Roth account open for more than five years, and
• You’ve reached age 59½, become disabled or died.

With qualified withdrawals, you (or your heirs if you die) won’t be required to pay higher tax rates that might otherwise apply in future years. While the current tax hit from a Roth conversion is unwelcome, it could be a relatively small price to pay for future tax savings.

9. Schedule a Tax Planning Meeting

Given the uncertainties about future federal income taxes, year-end tax planning for 2021 is a tricky business. Schedule a meeting with an R+R tax advisor as soon as possible to stay atop the latest developments and to discuss any last-minute moves that may be needed before December 31

Reynolds + Rowella is a regional accounting and consulting firm known for a team approach to financial problem solving. As Certified Public Accountants, our partners foster a personal touch with our clients. As members of DFK International/USA, an association of accountants and advisors, our professional network is international, yet many of our clients have known us for years through the local communities we serve.

Our mission is to operate as a financial services firm of outstanding quality. Our efforts are directed at serving our clients in the most efficient and responsive manner possible, delivering services that exceed the expectations of those we serve. The firm has offices at 90 Grove St., Ridgefield, Conn., and 51 Locust Ave., New Canaan, Conn. For more information, please contact Elizabeth Bresnan at 203.438.0161 or email.

By Ryan Wisniewski

For many, social security retirement benefits are a significant source of income in retirement, although it is not typically the only source. How much of your social security income is subject to income tax, depends on how much total income you have during the year. Anywhere from 0% to 85% of your social security income can be subject to tax. It is important to know when social security retirement benefits are taxable so that you can plan accordingly for income tax withholding and/or quarterly estimated tax payments. The taxability of this income can also play an important role in your overall retirement planning.

If your “provisional income” exceeds certain levels, a portion of your social security retirement benefits will be taxable.  Provisional income is calculated by adding the following:

• Modified Adjusted Gross Income (in most instances this equals your Adjusted Gross Income),
• plus: 50% of your total social security benefits,
• plus: 100% of tax-exempt interest income

If your provisional income exceeds specified threshold amounts, anywhere from 50% – 85% of your annual social security benefits can be taxable. 

The specified threshold amounts for various filings statuses are:

• Married Filing Joint – 50% of social security income taxable when provisional income exceeds $32,000; 85% taxable when provisional income exceeds $44,000.
• Single, Head of Household, Qualifying Widower, or Married Filing Separate – 50% of social security income taxable when provisional income exceeds $25,000; 85% taxable when provisional income exceeds $34,000.

There are several solutions to limiting the taxability of your social security retirement benefits. These include, but are not limited to:

• Keeping some retirement assets in Roth accounts. Since distributions from Roth accounts are tax-free, assuming they are withdrawn after age 59.5, the amounts do not add to your provisional income.
• Grouping income-producing events into one-year. If, for example, you have an income event in January 2021 which will inevitably push your provisional income over the threshold that would cause your social security income to be 85% taxable, and you know you will have a similar event in January 2022, perhaps you can accelerate that event into December 2021. This will leave the potential that your 2022 social security income might not reach that 85%, or even that 50%, level of taxability.
• Withdraw taxable retirement funds prior to applying for social security benefits. Not only will this help with funding your living expenses prior to applying for social security benefits, but your monthly benefits will increase the further you push out taking social security benefits, at least until age 70. 
• Reduce debt prior to retirement. If you can reduce or eliminate debt, your cash flow needs will be less, and the amount of income necessary will decrease. Absent of required minimum distribution rules, this could help to reduce or eliminate the taxability of your social security income.

While social security retirement benefits will remain an integral part of retirement income for many, the importance of managing the taxability of such income is very important.  In collaboration with your personal financial advisor and investment advisor, your trusted CPA can help to evaluate your options, so that you are not caught off-guard with taxes you did not anticipate paying.

Please consult your R+R tax advisor for more information.

Reynolds + Rowella is a regional accounting and consulting firm known for a team approach to financial problem solving. As Certified Public Accountants, our partners foster a personal touch with our clients. As members of DFK International/USA, an association of accountants and advisors, our professional network is international, yet many of our clients have known us for years through the local communities we serve.

Our mission is to operate as a financial services firm of outstanding quality. Our efforts are directed at serving our clients in the most efficient and responsive manner possible, delivering services that exceed the expectations of those we serve. The firm has offices at 90 Grove St., Ridgefield, Conn., and 51 Locust Ave., New Canaan, Conn. For more information, please contact Elizabeth Bresnan at 203.438.0161 or email.

You may still have time to significantly reduce this year’s business federal income tax bill even with all the uncertainty about proposed tax law changes. Here are five possible moves to consider — but stay tuned for developments. Congress is currently considering some tax changes.   

1. Claim 100% First-Year Bonus Depreciation for Last-Minute Asset Additions

Thanks to the Tax Cuts and Jobs Act (TCJA), 100% first-year bonus depreciation is available for qualified new and used property that’s acquired and placed in service in calendar year 2021. That means your business might be able to write off the entire cost of some or all of your 2021 asset additions on this year’s federal income tax return and maybe on your state return, too.

Consider making additional acquisitions between now and December 31. Contact your tax advisor for details on the 100% bonus depreciation break and exactly what types of assets qualify.

However, if significant tax-rate increases are enacted for 2022 and beyond, you could be better off forgoing 100% first-year bonus depreciation and, instead, depreciating newly acquired assets over a number of years. If tax rates go up, those future depreciation write-offs could be worth more than a current-year 100% write-off.

Fortunately, you have until the deadline for filing your current-year federal income tax return — including any extension — to decide which course to take. If your business uses the calendar year for tax purposes, the extended filing deadline will be October 17, 2022, for sole proprietorships and C corporations. The extended deadline will be September 15, 2022, for partnerships, limited liability companies (LLCs) and S corporations. Extending your return may give you more flexibility to react to future tax developments.      

2. Write Off New or Used Heavy SUV, Pickup or Van

The 100% bonus depreciation deal can have a major tax-saving impact on first-year depreciation deductions for new or used heavy vehicles used over 50% for business. That’s because heavy SUVs, pickups and vans are treated for federal income tax purposes as transportation equipment. In turn, that means they qualify for 100% bonus depreciation.

Specifically, 100% bonus depreciation is available when the SUV, pickup, or van has a manufacturer’s gross vehicle weight rating (GVWR) above 6,000 pounds. You can verify a vehicle’s GVWR by looking at the manufacturer’s label, which is usually found on the inside edge of the driver’s side door where the door hinges meet the frame. If you’re considering buying an eligible vehicle, placing one in service before year end could deliver a significant write-off on this year’s return.

However, if significant tax-rate increases are enacted for 2022 and beyond, you could be better off forgoing 100% first-year bonus depreciation and, instead, depreciating newly acquired assets over a number of years. You have until the deadline for filing your current-year federal income tax return, including any extension, to decide whether claiming 100% first-year bonus depreciation is a good idea.   

3. Manage Current-Year Business Income and Deductions

If your business operates as a pass-through entity — such as a sole proprietorship, S corporation, partnership or LLC taxed as a partnership — your shares of various tax items are accounted for on your personal return and net income is taxed at your personal federal income tax rates.

As year-end approaches, if you expect to be in the same or lower federal income tax bracket in 2022 than you are in 2021, the traditional strategy of deferring taxable income into next year while accelerating deductible expenditures into this year makes sense. Deferring income and accelerating deductions will, at a minimum, postpone part of your tax bill from 2021 until 2022.

On the other hand, if you expect to be in a higher tax bracket in 2022 than you are in 2021, accelerate income into this year (if possible) and postpone deductible expenditures until 2022. That way, more income will be taxed at this year’s lower rate instead of next year’s higher rate.

4. Maximize the Deduction for Pass-Through Business Income 

The deduction based on an individual’s qualified business income (QBI) from pass-through entities is a key element of the TCJA. The deduction can be up to 20% of a pass-through entity owner’s QBI, subject to restrictions that can apply at higher income levels and another restriction based on the owner’s taxable income.

For QBI deduction purposes, pass-through entities include:

• Sole proprietorships,
• Single-member LLCs that are treated as sole proprietorships for tax purposes,
• Partnerships,
• LLCs that are treated as partnerships for tax purposes, and
• S corporations.

You can also claim the QBI deduction for up to 20% of qualified REIT dividends and up to 20% of qualified income from publicly traded partnerships. 

Because of the limitations on the QBI deduction, year-end tax planning moves (or lack thereof) can increase or decrease your allowable QBI deduction. For instance, year-end moves that reduce this year’s taxable income can have the unanticipated negative side effect of reducing this year’s QBI deduction. Work with your tax pro to optimize your results.       

5. Establish a Tax-Favored Retirement Plan

If your business doesn’t already have a retirement plan, now might be the time to take the plunge. Current retirement plan rules allow for significant deductible contributions.

For example, if you’re self-employed and set up a SEP-IRA, you can contribute up to 20% of your self-employment earnings, with a maximum contribution of $58,000 for 2021. If you’re employed by your own corporation, up to 25% of your salary can be contributed to your account, with a maximum contribution of $58,000. If you’re in the 32% federal income tax bracket, making a maximum contribution could cut what you owe Uncle Sam for 2021 by a whopping $18,560 (32% times $58,000).

Other small business retirement plan options include:

• 401(k) plans, which can even be set up for just one person (also called solo 401(k)s),
• Defined benefit pension plans, and
• SIMPLE-IRAs.

Depending on your circumstances, these other types of plans may allow bigger deductible contributions.

Thanks to a change made by the 2019 SECURE Act, tax-favored qualified employee retirement plans, except for SIMPLE-IRA plans, can now be adopted by the due date (including any extension) of the employer’s federal income tax return for the adoption year. The plan can then receive deductible employer contributions that are made by the due date (including any extension), and the employer can deduct those contributions on the return for the adoption year.

Stay Tuned

In May, the U.S. Department of Treasury released its “Green Book,” which contains Biden administration proposals. More recently, the House Ways and Means Committee released proposed legislation that includes some of President Biden’s proposals, while adding, tweaking and eliminating other changes proposed in the Green Book. It’s currently uncertain which proposed changes, if any, will become reality.

Depending on what happens in the coming months, your business should be ready to make last-minute tax planning moves right up until December 31.

Contact an R+R tax advisor to discuss tax planning options that are right for your small business. Be sure to subscribe to the R+R’s Business Buzz newsletter to stay up to date on tax law changes, important tax reminders and financial tips.

Reynolds + Rowella is a regional accounting and consulting firm known for a team approach to financial problem solving. As Certified Public Accountants, our partners foster a personal touch with our clients. As members of DFK International/USA, an association of accountants and advisors, our professional network is international, yet many of our clients have known us for years through the local communities we serve.

Our mission is to operate as a financial services firm of outstanding quality. Our efforts are directed at serving our clients in the most efficient and responsive manner possible, delivering services that exceed the expectations of those we serve. The firm has offices at 90 Grove St., Ridgefield, Conn., and 51 Locust Ave., New Canaan, Conn. For more information, please contact Elizabeth Bresnan at 203.438.0161 or email.

Are you feeling generous? Qualified charitable contributions can be rewarded with sizeable tax breaks during the second calendar year of the COVID-19 pandemic. Recent legislation includes the following four temporary tax law changes that are designed to help individuals and businesses that donate to charities through the end of 2021.

1. Deductions for Non-Itemizers

In the past, you could claim significant itemized deductions on your federal income tax return for contributing money or property (or both) to qualified charitable organizations during the tax year. But there was no corresponding tax break for non-itemizers. In other words, if you claimed the standard deduction, you realized no tax benefit for charitable donations.

However, the CARES Act authorized a deduction of up to $300 for monetary donations made by non-itemizers during 2020. (See “What Is a Cash Contribution?” at right.) Then the Consolidated Appropriations Act (CAA) extended this tax break to 2021 and doubled the limit to $600 for joint filers. If a married couple files separately, each spouse may deduct up to $300.

2. Annual AGI Limit

The IRS imposes certain annual limits on deductions for charitable contributions made by individuals. For instance, previously you could deduct an amount for monetary contributions equal to no more than 60% of your annual gross income (AGI). Any amount above the 60%-of-AGI limit was carried over for up to five years. For these purposes, monetary contributions include cash and cash-equivalent contributions.

However, the CARES Act increased this limit to 100% of AGI for 2020. Now the American Rescue Plan Act (ARPA) has extended this tax break through 2021. That means you can effectively wipe out the full amount of your personal tax liability by donating money to qualified charities.

Important: The 100% limit isn’t automatic. A taxpayer must choose to use this new limit for any qualified cash contributions. Otherwise, the usual limit applies. The taxpayer’s other charitable contribution deductions reduce the maximum amount allowed under this election.

3. Corporate Deduction Limit

Similar to individuals, the tax law limits the amount that a C corporation can deduct on its corporate tax return for monetary contributions made to charity. Normally, the deduction limit is 10% of the company’s taxable income. For example, if a corporation has $1 million in taxable income, its deduction for donations of cash is limited to $100,000.

The CARES Act raised this threshold for corporations. It allowed a deduction in 2020 for monetary contributions to charity of up to 25% of taxable income. The ARPA has extended this limit for the 2021 tax year. But the increased limit isn’t automatic. C corporations must choose to use the increased corporate deduction limit on a contribution-by-contribution basis.

4. Donations of Food Inventory

Generally, a corporation that donates business property to charity can deduct an amount limited to the property’s cost. However, there’s a special tax break for donations of food inventory (for example, meals for families victimized by the pandemic). This tax break has expired and been reinstated several times in the past.

How much can your business deduct? A C corporation may deduct an amount equal to the property’s basis plus one-half the unrealized appreciation (but not more than twice the basis). The deduction also can’t exceed 10% of the corporation’s taxable income for the year.

First, the CARES Act increased the deduction limit to 25% of taxable income for 2020. The CAA extended this higher limit through 2021.

For other businesses — including sole proprietorships, partnerships, and S corporations — the limit is based on the taxpayer’s total net income for the year. A special method for computing the enhanced deduction continues to apply, as do food quality standards and other requirements.

Still Time to Donate

As the year winds down, both individual taxpayers and small businesses may look to boost their charitable donations to meet their philanthropic goals — and improve their overall tax picture. A donation that’s made to a qualified organization in 2021 is deductible for 2021 — even if it’s charged by credit card for an amount you actually pay in 2022.

Consider all relevant factors in your charitable-giving decisions and coordinate this with other parts of your year-end tax plan. Contact an R+R tax advisor for additional guidance.

Reynolds + Rowella is a regional accounting and consulting firm known for a team approach to financial problem solving. As Certified Public Accountants, our partners foster a personal touch with our clients. As members of DFK International/USA, an association of accountants and advisors, our professional network is international, yet many of our clients have known us for years through the local communities we serve.

Our mission is to operate as a financial services firm of outstanding quality. Our efforts are directed at serving our clients in the most efficient and responsive manner possible, delivering services that exceed the expectations of those we serve. The firm has offices at 90 Grove St., Ridgefield, Conn., and 51 Locust Ave., New Canaan, Conn. For more information, please contact Elizabeth Bresnan at 203.438.0161 or email.

When you take withdrawals from your traditional IRA, you probably understand they’re taxable. But what does that really mean?

Important: Once you reach a certain age, you must start taking required minimum distributions from your traditional IRAs to avoid an expensive tax penalty. Previously, the required beginning date (RBD) was April 1 of the year after the year in which you turn 70½. However, the SECURE Act pushed back the RBD to 72 for individuals who reach 70½ after 2019.

Critical Starting Point

To determine the federal income tax consequences of a withdrawal, first figure out how many traditional IRAs you have. Remember to include:

• Any rollover IRAs set up to receive distributions from former employers’ retirement plans, and
• Any SEP-IRAs or SIMPLE-IRAs set up in your name.

If you have several traditional IRAs, you must add them together and treat them as one account to determine the tax consequences of taking withdrawals from any of them. However, if your spouse owns an IRA, it doesn’t affect how withdrawals from your IRAs are taxed.

Important: If you take any IRA withdrawals this year, you’ll receive a Form 1099-R from your IRA trustee or custodian in early 2022. If you don’t report the withdrawal(s), you’ll hear from the IRS, because a copy of any Form 1099-R gets sent to the tax agency, too.

Taxpayers with Only One Traditional IRA

When calculating how much of your withdrawal will be subject to federal income tax, there are two scenarios if you have only one IRA:

1. No nondeductible contributions. If you haven’t made any nondeductible contributions, all withdrawals are 100% taxable, and you must include them in your taxable income for the year you take them. If you take any withdrawals before age 59½, they’ll be hit with a 10% penalty tax unless an exception applies. (See “How to Avoid the Early Withdrawal Tax Penalty” at right.)           

2. Some nondeductible contributions. If you’ve made some nondeductible contributions over the years, those amounts will create tax basis in your account, and each withdrawal from your traditional IRA will include some amount of basis. That amount is tax-free; the remainder is taxable. Taxable amounts are handled in the manner previously explained.

To calculate tax-free basis amounts and taxable amounts, you create a fraction. The numerator equals your cumulative nondeductible contributions as of the end of the year. The denominator equals your IRA balance on that date plus all withdrawals taken during the year.

Next, you must multiply your withdrawals by that fraction. The result is the amount of tax-free withdrawals of basis. The rest of your withdrawals are taxable.

For example, as of December 31, 2021, you’ve made $12,000 in nondeductible contributions to your traditional IRA. During 2021, you withdraw $20,000. On December 31, 2021, the account is worth $60,000.

The numerator of your fraction is $12,000. The denominator is $80,000 ($60,000 + $20,000). So, the tax-free basis portion of your 2021 distribution is $3,000 [($12,000 / $80,000) times $20,000]. The remaining $17,000 ($20,000 minus $3,000) is taxable in 2021. If you’re under 59½, you may also owe the 10% early withdrawal penalty tax.

Taxpayers with Several Traditional IRAs

The calculations become a little more complicated if you have more than one IRA. Again, there are two possible tax scenarios:

1. No nondeductible contributions. If you haven’t made any nondeductible contributions, all withdrawals are 100% taxable, regardless of how many IRAs you have. And you must include the withdrawals in your taxable income for the year you take them. If you take any withdrawals before age 59½, they’ll be hit with a 10% early withdrawal penalty tax unless an exception applies. Your tax advisor can tell you if you are eligible for any of the exceptions.

2. Some nondeductible contributions. In this situation, you must create a fraction to calculate tax-free basis amounts and taxable amounts. The numerator equals your cumulative nondeductible contributions to all your IRAs as of the end of the year. The denominator equals the combined balances of all your IRAs on that date plus all withdrawals taken during the year.

Next, you must multiply your withdrawals by that fraction. The result is the amount of tax-free withdrawals of basis. The rest of your withdrawals are taxable.

For example, as of December 31, 2021, you’ve made $18,000 in nondeductible contributions to your two traditional IRAs. You also have a rollover IRA that was funded with a distribution from your former employer’s 401(k). During 2021, you withdraw $28,000. It doesn’t matter which account (or accounts) the money came from. On December 31, 2021, the three accounts are worth $272,000 combined.

The numerator of your fraction is $18,000. The denominator is $300,000 ($272,000 + $28,000). So, the tax-free basis portion of your 2021 distribution is $1,680 [($18,000 / $300,000) times $28,000]. The remaining $26,320 ($28,000 minus $1,680) is taxable in 2021. If you’re under 59½, you may also owe the 10% early withdrawal penalty tax.

For More Information

As you can see, the tax rules get complicated if you’ve made nondeductible contributions. Fortunately, you don’t have to file the required tax forms by yourself. Contact a R+R tax advisor to help you understand how withdrawals from your traditional IRA will affect your tax situation and complete the necessary red tape. 

Reynolds + Rowella is a regional accounting and consulting firm known for a team approach to financial problem solving. As Certified Public Accountants, our partners foster a personal touch with our clients. As members of DFK International/USA, an association of accountants and advisors, our professional network is international, yet many of our clients have known us for years through the local communities we serve.

Our mission is to operate as a financial services firm of outstanding quality. Our efforts are directed at serving our clients in the most efficient and responsive manner possible, delivering services that exceed the expectations of those we serve. The firm has offices at 90 Grove St., Ridgefield, Conn., and 51 Locust Ave., New Canaan, Conn. For more information, please contact Elizabeth Bresnan at 203.438.0161 or email.