News & Information

12 April 2024 IRC §162 allows for the deduction of ordinary and necessary business expenses, which can significantly lower your tax bill.

Understanding IRC §162

IRC §162 is the go-to tax provision for small business owners looking to maximize deductions. It states that "there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business". What does this mean for a small business owner? Essentially, if an expense is common and accepted in your business realm, and it's appropriate and helpful for your business, it may qualify as deductible. Treasury Regulations Section 1.162-1(a) further clarify that these expenses must be "directly connected with or pertain to the taxpayer's trade or business."

What Qualifies as Ordinary and Necessary?

To dive deeper, it's crucial to understand what 'ordinary' and 'necessary' entails. 'Ordinary' expenses are those that are typical in your industry. 'Necessary' expenses are those that are helpful and appropriate for your business, as outlined in the *Internal Revenue Manual (IRM)* 4.10.7.2.3.1 (05-19-1998). Although, the term 'necessary' doesn't mean that the expense must be indispensable; rather, it should be appropriate for your business circumstances.

Common Deductible Expenses for Small Businesses

• Rent – If you rent an office space or retail location, those payments are deductible (IRC §162(a)(3)).
• Salaries and Wages – What you pay your employees is deductible, providing the pay is reasonable and services are actually rendered (IRC §162(a)(1)).
• Supplies and Materials – The cost of items necessary to run your business is deductible.
• Utilities – Electricity, water, and other utilities essential for your business operation are deductible.
• Insurance – Premiums paid for business insurance are typically deductible (IRC §162(a)(10)).
• Repairs and Maintenance – Costs for routine repairs and maintenance that do not add value to property but maintain its existing value are deductible (Reg. Section 1.162-4).
• Advertising – Promotional costs to advertise your business are generally deductible as a currently incurred business expense (Reg. Section 1.162-20).

Frequently Overlooked Deductions

Even experienced small business owners (and their accountants) can miss out on less obvious deductions, such as:

• Education Expenses – Costs to improve or maintain skills required in your current business may be deductible (Reg. Section 1.162-5).
• Home Office Deduction – If you use part of your home regularly and exclusively for business, you may be able to deduct expenses like mortgage interest, insurance, utilities, repairs, and depreciation (IRC §280A).
• Travel and Meals – Business travel costs are deductible, and while meals during travel or with clients are only partially deductible, they still contribute to savings.

By taking advantage of IRC §162, you can transform a portion of your necessary business expenses into savings on your tax bill. It doesn't just stop at the obvious outlays; diving into the nuances of tax regulations can unearth more opportunities to reduce taxable income and thus preserve more earnings for growth and investment in your venture.

Warning: Stay Compliant. The IRS requires meticulous record-keeping to substantiate your deductions. Save receipts and keep clear records because if you are audited, you’ll need to prove that your expenses were legitimate.

A Conservative Approach May Be Wise (but not too conservative)

While deductions can save money, it's crucial to tread carefully—you want to claim everything you're entitled to without creating more problems than you cure. Appropriate caution, paired with detailed documentation, is the key to confidently claiming your deductions and minimizing the chances of an unsuccessful audit. 

But no accounting shall be asked from them for the money that is delivered into their hand, for they deal honestly”.

11 April 2024 Officially, the Department of Labor “protects workers” by enforcing laws around fair pay and safe working conditions. To this end, a DOL audit scrutinizes your business to confirm adherence to our difficult labor laws. Auditors examine payroll details and may even interview staff to assess your workplace's compliance. In fine, your business must follow labor laws, not just to safeguard employees, but to prevent hefty fines or more serious legal consequences from the government.

Warning: Non-compliance could mean financial penalties, criminal charges, and potential business closure. *DOL audits are broad and burdensome, often going beyond what an IRS audit would cover, potentially inspecting classifications for overtime eligibility, etc. 

What To Expect During a DOL Audit

The DOL asks you to produce documents, including:

• Payrolls
• Timesheets
• Policy manuals
• Employee role descriptions
• Employee benefit records

After reviewing these documents, the DOL may interview employees to get their perspective on workplace conditions, specifically regarding policies like overtime and break times.

Reasons Why You Might Be Audited by the DOL

Audits can happen at random, but trigger points can include employee complaints, previous violations, high staff turnover, mistakes on annual Form 5500 reports, delinquent payments to service providers, or prohibited transactions.

Consequences of Failing to Comply

If the audit finds non-compliance, consequences may include, fines, imprisonment, or losing your business license, and employees could suffer from not receiving adequate wages or working in unsafe conditions.

Staying Prepared

The best way to ace a DOL audit is to ensure your business complies with labor laws. Keep precise payroll records, up-to-date employee handbooks, and be ready to discuss your company's policies. Here are tips for staying prepared:

• Organize all necessary documents
• Understand your rights during an audit
• Cooperate fully and transparently with the auditor

Staying FLSA Compliant

• Thorough recordkeeping
• Correctly classifying employees regarding overtime eligibility
• Accurately compensating overtime where it's due
• Conducting internal audits to catch and correct issues early

Recordkeeping Requirements Under the FLSA

Businesses must keep certain information for non-exempt workers:

• Employee's name and Social Security number
• Address and birthdate (if under 19)
• Gender and job role
• Workweek start time, daily and weekly hours worked
• Compensation details and deductions
• Total pay per period and pay dates

After the DOL Audit

Post-audit, the DOL provides a report. If you're found non-compliant, they'll list necessary corrections, usually with a 60-day window for resolution. Failure to comply could lead to the DOL action, resulting in fines, back payments, or legal consequences for the business owners.

“They show that the work of the law is written on their hearts, while their conscience also bears witness, and their conflicting thoughts accuse or even excuse them”. 

9 April 2024 Creating a Limited Liability Company (LLC) is a straightforward and cost-effective strategy to structure your business. Not only does it offer protection from personal legal liability but can also serve to boost your business’s credibility and financial autonomy, viz. business credit. 

Part (I)  By default, an LLC is treated as a “pass-through” entity for tax purposes—meaning it doesn't pay taxes as a separate entity. Instead, profits and losses flow through to each member, who then reports them on their personal income tax returns. Members may also be subject to federal self-employment taxes.

For single-member LLCs, the process is straightforward: profits and losses are reported directly on the individual's tax return. For multi-member LLCs, they default to being taxed like a partnership, where each member files a schedule that accompanies their individual return, stating their share of the profits and losses.

An LLC can also opt for S-Corp tax status, allowing it to maintain pass-through treatment while potentially lowering the self-employment taxes members are liable for. In this arrangement, the LLC itself is not taxed directly, but members might reduce their overall tax liability.

Part (II)  LLCs themselves do not fall into tax brackets as they're not considered separate tax entities under a sole proprietorship, partnership, or S-Corp status. However, the 2017 Tax Cuts and Jobs Act introduced a possible 20% deduction on net business income for qualifying pass-through entity owners, which could impact the individual tax rates of LLC members. Navigating this deduction can be complex, and it’s advisable for LLC members to seek guidance from tax professionals.

While organizing as an LLC tends to be less complex than a corporation (C-Corp) structure—requiring fewer formalities and offering a preferable tax status for many businesses—there are scenarios where electing a C-Corp status could be more beneficial. This is particularly true since C-Corps are subject to "double taxation" where earnings are taxed at both the corporate and individual levels when dividends are distributed.

Conversely, LLCs can avoid this by having earnings taxed only once as they pass through to members directly. However, a C-Corp has additional tax strategies at its disposal. Members can be classified as employees with their wages deductible from the LLC's profits, which might lower the overall company tax liability while benefiting the members.

An LLC might choose to be taxed as a C-Corp, provided they adhere to specific IRS requirements. This election complicates the LLC's operations, but under certain circumstances, it can lead to enhanced profitability.

Warning:  The choice between being taxed as a pass-through entity or electing C-Corp taxation carries different implications for the complexity of your operations and your tax liability. For this reason, consulting with a knowledgeable tax advisor is invaluable as you determine the best path for your business.

8 April 2024 Part (I) Life insurance policies offer a wide range of tax benefits that can be strategically advantageous in financial planning. When you maintain a life insurance policy, the premiums you pay are typically made with after-tax dollars, which means you’ve already paid taxes on the money you’re using to pay the premiums. One of the most significant advantages of life insurance from a tax perspective is the death benefits your beneficiaries receive are generally income tax-free. This means they won't have to pay income tax on the money they receive as the death benefit of the policy when you pass away.

The cash value growth within permanent life insurance policies, such as whole life or universal life insurance, is another area where you can experience tax benefits. The policy's cash value grows tax-deferred, meaning you don't pay taxes on the interest, dividends, or capital gains within the policy as they accrue. 

Policy loans can be taken out against the cash value of a permanent life insurance policy without being taxed. While these loans carry interest, they are not considered income and thus are tax-free. It is important to note, however, that if the policy lapses or is surrendered before the loan is repaid, the outstanding loan amount can be subjected to taxes.

An Irrevocable Beneficiary is someone who has been named as a beneficiary on a life insurance policy and whose status as a beneficiary cannot be changed without his or her consent. Naming an irrevocable beneficiary provides a guarantee to that beneficiary that they will receive the policy's proceeds. This can be particularly important in situations such as providing for a spouse after divorce (as mandated by the divorce agreement) or ensuring financial support for a child with special needs.

When a policyholder names an irrevocable beneficiary, that decision can have estate planning benefits as well. Policies with irrevocable beneficiaries can be structured so the death benefit is not considered part of the policyholder's estate for tax purposes, potentially avoiding, or reducing state or federal estate taxes. The key here is that the policyholder gives up ownership rights to the policy by making the beneficiary irrevocable, effectively removing the death benefit from their taxable estate.

In terms of trusts, life insurance proceeds can be paid directly to a properly established trust, such as an irrevocable life insurance trust (ILIT). The ILIT is a common tool used to exclude life insurance proceeds from the insured's estate for estate tax purposes. Since the ILIT is the owner and the beneficiary of the life insurance policy, and the grantor does not maintain any control over the policy, the proceeds are not included in the grantor's estate and are free from both income and estate taxes.

Part (II) Selecting the Right Type of Life Insurance Policy. When everything is said and done, you really only have five choices, that is to say, term life, universal life, whole life, variable life, and finally, second-to-die (survivorship) insurance. Below is a brief explanation or each one. 

1. Term Life Insurance: Provides coverage for a limited period of time. If the insured dies during the term, the benefit will be paid to the beneficiary. Term life insurance is the most straightforward and initially, the least expensive type of life insurance available, making it a popular choice for cash-strapped, short-sighted individuals (and the happy few who legitimately need temporary coverage). 

2. Universal Life Insurance: Is a type of permanent life insurance with a cash value component that earns interest. One of its key features is flexibility, inasmuch as policyholders have the option to adjust their premiums and death benefits over time. A portion of the premium goes towards life coverage, while the rest is added to the cash value. The cash value can also be used to pay premiums, and interest accrues based on the current market or minimum guaranteed interest rate. 

3. Whole Life Insurance: Is the oldest form of permanent life insurance. It has a death benefit along and a cash value component. Unlike universal life, whole life insurance has a fixed premium that does not change over time and offers a guaranteed cash value accumulation. Specifically, the insurance company invests a portion of your premiums, and the policy accumulates cash value on a tax-deferred basis; this can be borrowed against or used in other ways during the policyholder's lifetime. Whole life offers more predictability than universal life due to its fixed nature in terms of costs and benefits.

4. Variable Life Insurance: Permanent life insurance policy with an investment component. Specifically, the cash value can be invested in a variety of options, often referred to as sub-accounts. These sub-accounts can include stocks, bonds, money market funds, and other investment instruments and are similar in nature to mutual funds. Caution: The policy's cash value and death benefit can vary based on the performance of these investments. 

5. Second-to-Die (Survivorship) Insurance: This policy insures two lives, usually a married couple, and pays a death benefit after the second person dies. This type of policy is most often used in estate planning to pay for estate taxes, estate settlement costs, or to provide for heirs. The premiums are lower than they would be for two separate permanent policies, and the death benefit can be used to preserve the value of the estate for the beneficiaries. Caution: survivorship life insurance does not provide immediate funds to the surviving spouse. 

“But if any provide not for his own, and specially for those of his own house, he hath denied the faith, and is worse than an infidel”.

1 April 2024 Parenthood isn’t easy, especially for people requiring in vitro fertilization (IVF). Since I have personal experience with this topic, the purpose of this article is to make your journey more affordable. So, let’s get into it: 

Qualifying Medical Expenses (Permissible Deductions). IRC Section 213(d)(1), holds that medical expenses incurred to alleviate or prevent a physical or mental defect or illness are considered deductible. This is clarified further in the Treasury Regulations at §1.213-1(e)(1)(ii). Due to IVF’s direct role in treating infertility, the IRS recognizes it as a deductible medical expense.

To qualify for the deduction, your total unreimbursed qualifying medical expenses must exceed 7.5% of your adjusted gross income (AGI). That means if your AGI is $100,000, your IVF expenses must surpass $7,500. IRC Section 213(a).

Fortunately, eligible IVF expenses can be interpreted broadly, viz., medical care expenses encompass payments for the diagnosis, cure, mitigation, treatment, or prevention of disease, or payments for treatments affecting any structure or function of the body (IRM 21.6.1.4.4). Deductible expenses include:

• Initial consultation and lab work
• Procedures like egg retrieval and embryo implantation
• Costs of sperm or egg donation
• Related medications and hormone therapies
• Storage fees for sperm, eggs, or embryos
• Any necessary legal and administrative fees

To claim IVF-related deductions, taxpayers must itemize deductions on their tax return, as indicated in the instructions for Schedule A (Form 1040

Keep a diary: Proper documentation is vital. IRM 21.6.1.48 stipulates taxpayers must be able to substantiate their medical expenses by maintaining receipts and detailed records. In fine, keep good records, just in case the IRS decides to audit your expenses.

Not everything that glitters is gold. While IVF costs can be deducted, not all associated expenses qualify. For example, non-prescription drugs and voluntary cosmetic procedures are not covered. Moreover, any expenses compensated (reimbursed) by insurance or another source can't be claimed.

If you (or your accountant) have any questions about deducting in vitro fertilization costs on your tax return, contact David Selig at (212) 974-3435

"Behold, children are a heritage from the Lord, the fruit of the womb a reward".

29 March 2024 The Offer in Compromise (OIC) Program, as provided for in Section 7122 of the Internal Revenue Code [is] like navigating a financial labyrinth – where the grand prize is the slenderest of chances to settle your tax debt for less than you actually owe. Unfortunately, the road to acceptance is narrow (Narrow is the Gate). That is to say, there's an extremely low rate of approved OIC applications – largely due to ridiculously low offers, and unreasonableness on the part of the IRS. 

Moving on, after you’ve submitted your paperwork (and it’s been accepted for review) an IRS Examiner will evaluate your income, expenses, and asset equity, as provided on Forms 656, 433-A OIC, etc. 

Ostensibly, the IRS's decision to accept or reject an OIC is predicated on your "Reasonable Collection Potential" (RCP). RCP is a deep fantastical dive into your finances, assets, and forecasting your future income in order to calculate the maximum amount likely to be recouped within the statutory period. These guidelines are published in Policy Statement P-5-100 and can be found in IRM 1.2.14.1.17.

If your OIC is rejected, or if an OIC is not a reasonable option, you may want to pursue a Partial Payment Installment Agreement (PPIA), as provided for in IRC Section 6159. A PPIA is extremely powerful because it allows taxpayers to pay a lesser amount over the remaining statutory period of collections. See: IRM 5.14.2, i.e., Partial Payment Installment Agreements and the Collection Statute Expiration Date (CSED).

In closing, every taxpayer's situation is his own. Accordingly, you may want to steer clear of “out-of-state tax resolution companies” who peddle debt resolution for "pennies on the dollar" (Broad is the Way) and in the alternative, retain a local attorney and/or accountant who knows what they’re doing.

For additional information, contact David Selig at (212) 974-3435

“Enter by the narrow gate; for wide is the gate and broad is the way that leads to destruction, and there are many who go in by it. Because narrow is the gate and difficult is the way which leads to life, and there are few who find it”.

28 March 2024 Depreciation for rental property spreads the cost of the property across a predetermined length of time, as identified in the Internal Revenue Code (IRC). For residential rental properties, this duration is 27.5 years, per IRC Section 168(c), while commercial properties are depreciated over 39 years. 

The above approach is known as the straight-line method, which divides the property’s cost equally across each year of the applicable depreciation period. However, this uniform method may not be the most advantageous from a tax perspective. 

A more sophisticated tax strategy is available through cost segregation. Recognized by the Internal Revenue Service (IRS), cost segregation serves to accelerate depreciation deductions by separating property components by their respective class lives. 

Cost segregation involves an in-depth analysis that categorizes building elements apart from the building structure. These elements include tangible personal property like electrical systems and fixtures, non-structural elements such as carpeting, and land improvements like landscaping. 

According to IRC Sections 1245 and 1250, these components can be reclassified to a much shorter depreciable life — typically 5, 7, or 15 years — rather than adhering to the longer 27.5- or 39-year life of the entire building. 

By accelerating the depreciation schedule for these specific elements, the property owner can take larger upfront depreciation deductions. Such acceleration is permitted under the MACRS (Modified Accelerated Cost Recovery System) as outlined in IRC Section 168. 

This tactic can lead to substantial immediate tax savings, enhance cash flow, and optimize the financial performance of the investment property. 

For additional information, contact David Selig at (212) 974-3435

“Ye shall do no unrighteousness in judgment, in meteyard, in weight, or in measure”.