This has been a year of transition for Grider + Co. We have moved to new software internally which led us to a new portal system for our clients. If you haven’t received info to set up your portal account, contact us at 316-636-9450 and we will get you set up.
C Corporations now enjoy a flat tax at 21%. That sounds great given personal rates up to 37%. Let's have a closer look.
For entities that tend to have profit under $50,000 per year, this represents a tax increase from 15% under prior law.
For entities that tend to pay out all profits as salaries, as many physician groups often do, this is a non-event other than the cost of not paying out quite enough is reduced.
For other profitable businesses where the owners expect to distribute profits rather than hold in the company, one needs to consider the double taxation of those dividends.
If the individual is in the top 37% federal bracket, compare that to 21% corporate tax and 20% of the remaining 79%, or 14%, for a total of 35%. Thus, there is potentially a 2% Federal benefit. In many cases state double taxation will more the offset the federal C corporation savings. But savings result for some. At the least, it makes C corps more viable where they are the only real option or where they are chosen for employee benefits advantages or other reasons.
Beware that the top 37% personal rate applies to married, joint returns with taxable income in excess of $600,000, and only to income above that amount. So for most, the Federal rate is lower, as is the rate on qualified dividends. One in a 24% bracket would compare to 21% corporate tax plus 15% of the remaining 79%, or 11.85%, for a total of 32.85%. So that C corp would increase taxes compared to other alternatives.
This analysis ignores important points including self-employment tax and the Affordable Care Act surcharges on earned income and investment income over the applicable thresholds, as well as state and local taxes. Consult your tax advisor.
Still, C corporations deserve consideration in more situations than at any time since at least 1982.
Under the Tax Cuts and Jobs Act (TCJA), your Section 529 (college savings) accounts can be used to pay private school tuition up to $10,000 per year per student. Previously, only college costs qualified.
From a Federal standpoint, if the money goes in and comes right back for the tuition, there is no tax saving. But if you have existing gains in the 529 account, an allocable portion of the distribution is earnings which escape taxation. And if you pre-fund future years, any appreciation will produce additional savings in excluded earnings.
Plus, some states, including Kansas, provide incentives for funding 529 accounts. In the Kansas example, contributions up to $3,000 per year per student (double that if married, filing jointly) are deducted from Kansas income. Of course, if you already contribute that much for college, no further state savings would occur, beyond the exclusion of earnings where state law usually follows the federal treatment discussed above.
Qualified Charitable Distributions (QCD) allow anyone over 70 1/2 to make their charitable donations directly from their IRA, permitting a tax benefit without itemizing deductions.
The Tax Cuts and Jobs Act of 2017 (TCJA) greatly expanded the standard deduction while limiting tax deductions and eliminating miscellaneous deductions. Together, these changes leave most people unable to itemize deductions, and many of those who still itemize will lose the benefit of some of the amount given to charity. Many charities are feeling the effect of reduced giving as a result of this reduction in the tax benefit of giving. That is why techniques like QCD are vital to maintain not only one's tax saving, but also the vitality of our favorite charities.
The maximum QCD is $100,000 per year per person.
QCD's are reported on Form 1099-R as if they are taxable, but are excluded from taxable income on Form 1040. Since there is no income, the donor does not need a deduction to achieve the benefit of the gift.
QCD is a preferred method of funding charity for those who cannot itemize deductions and have reached the required age (or will soon). Those under 70 1/2, those lacking IRA funds, and those looking to optimize charitable tax benefits of appreciated non-retirement assets must use other techniques referenced below and addressed in other posts.
QCD's CANNOT be paid to a donor-advised fund or to a Section 509(a)(3) supporting organization. These restrictions are unfortunate since separate checks must be made by the custodian to each public charity, which is more cumbersome than using a donor-advised fund. But it is designed to prevent tax benefit from an IRA without completing the donation process.
Checks from the IRA must be made payable to the charity, not the IRA owner/beneficiary. Some custodians mail these checks to the IRA owner for delivery to the charities. Others mail the checks directly to the charity. The latter approach may require a medallion signature guarantee or similar steps to protect the IRA owner.
QCD's often have some benefit even for those who can itemize, though less so under the TCJA. Those having significant mortgage interest, investment interest, medical, casualty, gambling deductions (or other less common deductions) are more likely to continue itemizing each year, and the QCD technique may be unnecessary, or of limited benefit. QCD should never cause higher tax and usually provides savings.
We are happy to discuss QCD benefits with you.
The new standard deductions are addressed in this post (to do).
Alternate techniques in other posts for tax-advantaged charitable giving include:
Combining multiple years donations into one year via
Donor-advised fund, or
Using pledges to delay giving until a later year.
QuickBooks Online (QBO) contains a powerful bank download feature. With a few easy steps, bank accounts and credit cards can be linked to the QBO account. The downloaded info can significantly reduce data entry but it is important to understand how to use it.
The downloaded transactions show up in the Banking Menu, which can be found on the left menu and on the bank section on the dashboard page. (Note, before the accounts are connected to your bank, the dashboard will take you to the account register). The banking page shows the connected accounts across the top and you can jump from one account to another very easily. Each account defaults to a list under the tab titled "For Review". This list represents transactions that have made it to your bank account but they are not recorded in your QuickBooks bank account register until you accept them or match them on the review page of the bank download.
Think of the bank download page as a bucket that holds the transactions until you decide what to do with them. You have several choices:
ADD - This will add the entry to the QuickBooks bank account register. Before accepting, you can select the account and the class and make adjustments to the memo. QBO gets smarter as you use this feature. It bases guesses on previous entries you have accepted. Each time you change an account for an entry, it will change all other like entries that haven't been accepted. Therefore, if you have two transactions to Amazon and one should be recorded to supplies and the other should be recorded to repairs & maintenance, you will need to add them one at a time (rather than as a batch action) to avoid them both going to one account.
MATCH - This option recognizes that you have already entered the transaction in your register and is matching the downloaded item to it, effectively clearing it for you on the next bank reconciliation you prepare. It does not add the entry as that would duplicate it. (Note: the download cannot match to transactions that have already been included in an account reconciliation).
FIND MATCH - Within the options when a transaction is selected (opening the line to show more details), you have the option to find matches. This is especially helpful if the downloaded amount matches to two or more previously entered transactions. For example, if you entered daily credit card deposits but the credit card processor clears the Saturday and Sunday deposits as a single deposit, you can use Find Matches to select the two deposits that match to the one download.
TRANSFER - The transfer option occurs when the download "guesses" the transaction is a transfer between another asset or liability account. Generally, this will apply to credit card payments and bank account transfers from other connected accounts. I find this one trips people up more than the other options. If an transfer is accepted and later needs to be corrected, you can only change it to another asset or liability account. If the transaction is really income, it can't be moved to an income account. If you suspect the system is not guessing correctly, change the option to ADD so you can choose an income or expense account.
Finally, you can deal with groups of transactions at one time through the Batch Actions option. By clicking the boxes on the left of the selected lines, you can perform the following actions:
ACCEPT SELECTED - This accepts the transactions as they are listed. So you can accept Adds, Matches and Transfers all at once.
EXCLUDE SELECTED - This removes the items from the review list but doesn't record them in the register. They are moved to the Excluded tab on the download page. This option is most useful when first starting with the bank download. Generally, the download will bring in about 90 days of history but you may have only 30 days that haven't been previously reconciled. Therefore, the older transactions need to be excluded to avoid duplicate entries.
MODIFY SELECTED - This will allow you to select multiple items and modify the payee, account and class to be the same for all selected transactions.
With an understanding of the download process, it can be a great time saving tool!