Tax season can be a stressful time for many, but with the right preparation and guidance, it doesn’t have to be. Whether you’re an individual filer, a small business owner, or managing a more complex financial situation; understanding how to get ready for tax season is crucial. We will explore the different options for filing your tax return, including the pros and cons of using a Certified Public Accountant (“CPA”) and a Tax Preparer, so you can confidently choose who to trust with your financial information. Additionally, to ensure a smooth and efficient process, we have compiled a detailed checklist of the information and documents you’ll need to provide. By gathering these items, you will help your CPA/Tax Return Preparer provide an accurate and complete tax return for you. Remember, whether you are married, filing a joint return, or own business/real estate, this checklist will outline the most common required documentation to complete your tax return.

Who should file your tax return

There are many things to consider when deciding who will file your tax return. Do you choose a Certified Public Accounting Firm or a Tax Preparer? Does the firm or tax preparer prioritize data security? What characteristics should I look for in a CPA/Tax Preparer? Are they licensed? Do they offer IRS Representation, should you need it in the future? If you have asked any of these questions during tax season, we are here to help you answer them.

When deciding between a CPA firm and a tax preparer for your tax return, it’s essential to consider the unique advantages and disadvantages of each option.

CPA Firm

Pros:

1. Expertise and Qualifications:
   • CPAs have rigorous training and certification requirements. They possess a deep understanding of tax laws and accounting principles. In addition to a Certified Public Accounting License, a CPA/CPA firm will typically have a PTIN (Preparer Tax Identification Number), which can be obtained from the IRS Directory of Federal Tax Return Preparers with Credentials and Select Qualifications.
2. Comprehensive Services:
   • CPA firms offer a broad range of services beyond tax preparation, including financial planning, accounting services, and business consulting. They can provide year-round advice on financial matters. CPA firms also typically offer mid-year tax planning meetings to their clients, allowing the discussion around new deductions and credits to happen earlier in the year so business owners can make decisions that can positively impact their upcoming tax liability.
3. Representation:
   • CPAs can represent you in dealings with the IRS, including audits and appeals.
4. Credibility and Reliability:
   • CPA firms typically have established reputations and a history of reliable service. All CPAs are required to have an undergraduate degree in accounting / tax from an accredited university. They are also required to pass the rigorous state CPA exam to obtain their CPA license/certification.  They follow strict ethical guidelines and professional standards. CPA firms hold state certifications and are required to take over 40hrs of continuing education each year to stay up to date on the latest tax law changes. Any complaints or disciplinary actions against a CPA/CPA firm are public record and can be obtained from the Arizona State Board of Accountancy CPA Directory.
5. Data Security Measures:

1. • CPA firms are bound by strict regulations and professional standards that govern data security and client confidentiality. CPA firms typically invest in firewalls, encryption, and secure servers. They often have dedicated IT staff responsible for maintaining and upgrading their security systems. Firms often have detailed policies and procedures to handle data breaches and cybersecurity threats, as well as the firm’s staff usually receives regular training on data security best practices. Many use advanced tax preparation software with built-in security features, and secure online portals for clients to upload their documents and access their tax returns. CPAs have a professional obligation to maintain client confidentiality and can face significant penalties for a breach, therefore this often results in a high level of vigilance when handling sensitive data.

Cons:

1. Cost:
   • Hiring a CPA firm can be more expensive than using a tax preparer, especially with a more complex tax return.
2. Availability:
   • During peak tax season, it may be harder to get an appointment with a CPA firm. CPA firms have clients that they work with on a regular basis, it is best to schedule your meetings with CPA firms in advance of any tax deadline.

Tax Preparer

Pros:

1. Cost-Effective:
   • Tax preparers usually charge lower fees than CPA firms, making them an attractive option for simple returns.
2. Accessibility:
   • Easy to find and schedule appointments, especially during tax season. Most paid tax preparers, especially when working at a local office or chain company, will have availability in the evenings and weekends allowing for more flexibility in scheduling.
3. Efficiency:
   • Experienced tax preparers can handle straightforward returns quickly, and typically are familiar with the common deductions and credits. Tax Preparers tend to only allow between 1-1½ hours for each tax return making the process very quick, however that can come with some disadvantages as well.

5. Data Security:

1. • Large tax preparer chains often have corporate- level security policies and IT departments dedicated to data protection. These chains typically implement standardized security measures across all locations. Many use advanced tax preparation software with built-in security features, and secure online portals for clients to upload their documents and access their tax returns. Large chains typically have the capital to invest in high-tech security technology and resources and may conduct regular audits of their security practices.

Cons:

1. Qualifications and Expertise:
   • Tax preparers do not have the same level of training or certification as CPAs, many do not have undergraduate degrees in accounting / tax.  Many have not taken the CPA exam to obtain their CPA license/certification. Tax preparers are not required to take continuing education on an annual basis to stay up to date on the latest tax law changes.  Tax Preparers typically only have a limited amount of time to spend on your return before their next client meeting begins.  As a result, you could potentially be missing tax credits or deductions that could have lowered your tax liability.  If you need assistance in determining the type of credentials or qualifications that are held by a specific tax professional, use the IRS Directory of Federal Tax Return Preparers with Credentials and Select Qualifications.
2. Limited Services:
   • Tax preparers typically focus solely on individual income tax returns and may not offer other services, such as tax planning, long-term financial planning or business consulting.
3. Representation:
   • Not all tax preparers can represent you in front of the IRS. If your return is audited, you may need additional assistance.
4. Data Security Inconsistencies:
   • The level of security can vary between different locations and individual preparers, depending on how well the corporate policies are enforced locally. High turnover rates can lead to gaps in training and awareness of security protocols. Tax Preparers may handle high volumes of clients, which can result in less personalized attention to data security. Tax Preparer firms typically have large databases of client information that can be particularly attractive to cybercriminals.

Detailed Checklist of Information and Documents

Gathering these items listed below will help your CPA or Tax Return Preparer provide a complete and accurate tax return for you.

Business Information 

• • Business information (name, legal type, accounting basis)
  • Ownership Structure
  • Operating agreement, articles of incorporation
  • Financial statements (income statement, balance sheet, cash flows statement)
  • Revenue details and copies of 1099-NEC received
  • Business expenses (automobile, office supplies, phone, interest, equipment, legal, advertising, meals, travel, etc.)
  • Payroll reports
  • Research and development expenses
  • Fixed asset list
  • Asset purchases/sales
  • Partner/ Shareholder Contributions / Distributions
  • Business debt schedules
  • Tax notices
  • Prior year tax return

Personal Information

For new clients, we require the following personal details:

• Full Name of the taxpayer(s)
• Date of Birth
• Social Security Number(s)
• Address
• Contact Information (Phone number and email)
• Driver’s License
• Bank Information for direct deposit
• Prior Year Tax Return

Dependent Information (if applicable)

If you have dependents, please provide:

• Name of dependent(s)
• Date of Birth
• Social Security Number(s)
• Relationship to the taxpayer(s)
• Custody Information (full custody or split custody)

Income Information

Collect and provide the following income-related documents for all taxpayers on the return:

• Wages: W-2 forms
• Investment Income:
  • Interest Income (1099-INT)
  • Dividend Income (1099-DIV)
  • Capital Gains (1099-B)
  • Reports of any cryptocurrency transactions
• Rental Income:
  • Address of rental property(s)
  • Type of rental property (Residential or Commercial)
  • Number of days the property was rented
  • Rental Income and related expenses (property taxes, repairs, maintenance, insurance, etc.)

Retirement Income

Ensure you have documents related to:

• Pension Income
• IRA distributions
• Social Security Income

Other Income

Additional income sources may include:

• State tax refunds received
• Unemployment compensation (1099-G)
• Income from pass-through entities (K-1 from partnerships and S-corps)
• Dividend income from C-corporations

Adjustments to Income

Provide information on:

• Health insurance paid for self-employed individuals
• Student loan interest
• Educator expenses for teachers

Deductions

Gather documents related to:

• Medical expenses
• State or sales taxes paid
• Property taxes paid
• Mortgage interest
• Investment interest paid
• Donations (cash and non-cash, with receipts if over $500, and 1098-C for vehicle donations)

Credits

For applicable credits, provide:

• Invoices for solar panels
• Purchase agreements for electric vehicles
• Education expenses (1098-T)
• Foreign taxes paid (1099-DIV)

Estimated Tax Payments

If you have made estimated tax payments, please include:

• A list and dates of all payments made
• Copies of any notices received from tax authorities

Additional Information (if applicable)

Lastly, if applicable, provide your Personal Identity Theft Prevention Number from the IRS.

Conclusion

As tax season approaches, being well-prepared and making informed decisions about who will handle your tax return can significantly reduce stress and ensure accuracy. Taking the time to choose the right tax partner to prepare your tax return is critical!  It will ensure your tax information and return is complete, accurate, and secure.  It will also ensure your tax liability is minimized.  Working with a partner that you can trust to look out for your best interests and represent you in dealings with the IRS, including audits and appeals is key.

By following the comprehensive checklist above, you will ensure a smooth and efficient tax filing process. We are here to make the tax preparation process as seamless as possible. If you have any questions or need assistance with collecting these documents, do not hesitate to reach out. Stay organized, keep track of your documents, and remember, we are here to help every step of the way!

If you have any questions or would like to schedule a tax planning or tax preparation meeting, do not hesitate to reach out to us at (480) 980-3977.

Mid-year business income tax planning is an essential practice for businesses of all sizes. This process involves evaluating a company’s financial performance and tax situation partway through the fiscal year to make informed decisions and adjustments. Proactive tax planning can lead to significant financial benefits and ensure a smoother year-end tax filing process. Here are the top ten reasons why mid-year business income tax planning is crucial for any organization:

1. Cash Flow Management:
   • By evaluating your financial position mid-year, you can better predict your tax liability and set aside the necessary funds. This helps in avoiding cash flow shortages when taxes are due.
2. Tax Savings Opportunities:
   • Mid-year tax planning allows businesses to identify and implement tax-saving strategies before the year ends. This includes taking advantage of deductions, credits, and other tax benefits that may not be available if identified too late.
3. Avoiding Penalties and Interest:
   • Timely tax planning helps ensure that estimated tax payments are accurate and on time. This reduces the risk of underpayment penalties and interest charges from the IRS.
4. Strategic Business Decisions:
   • Reviewing your financials mid-year can provide insights into your business’s performance. This information is crucial for making informed decisions about investments, hiring, and other strategic moves that can impact your tax situation.
5. Compliance and Documentation:
   • Mid-year planning ensures that your business is on track with record-keeping and compliance requirements. This can simplify the year-end tax filing process and reduce the risk of audits and other compliance and legal issues.
6. Adapt to Changing Tax Laws:
   • Tax laws frequently change, and mid-year tax planning allows businesses to stay updated and adapt to new regulations, ensuring compliance and optimizing tax positions.
7. Maximize Retirement Contributions:
   • Planning ahead allows business owners and employees to make the most of retirement plan contributions, which can provide significant tax advantages and help secure long-term financial stability.
8. Plan for Capital Expenditures:
   • Mid-year planning helps businesses strategize their capital investments, ensuring they take advantage of available deductions and credits, and plan for depreciation expenses.
9. Prepare for Growth and Expansion:
   • Reviewing financials mid-year can highlight opportunities for growth and expansion. Proper tax planning can ensure that these initiatives are financially viable and tax-efficient.
10. Improved Financial Forecasting:
    • Mid-year tax planning provides a clearer picture of the company’s financial health, enabling more accurate financial forecasting and budgeting for the remainder of the year.

Together, these reasons underscore the importance of regular, proactive tax planning as a critical component of effective business management.

Mid-year business income tax planning is not just a financial exercise but a strategic imperative for businesses aiming to thrive in a competitive landscape. By addressing tax liabilities and opportunities proactively, companies can ensure optimal financial health, minimize risks, and position themselves for growth. From managing cash flow and avoiding penalties to capitalizing on tax savings and staying compliant with evolving tax laws, the benefits of mid-year tax planning are substantial. Incorporating this practice into your business routine will not only simplify year-end processes but also empower you with the insights and flexibility needed to make strategic decisions confidently. Ultimately, effective tax planning paves the way for sustained business success and long-term financial stability.

Call us today to setup your Mid-Year Business Income Tax Planning meeting, we can be reached at (480) 980-3977!

Many business owners work tirelessly to develop excellent product and service offerings and/or high-quality manufacturing and distribution capabilities. However, when it comes to putting that same energy and focus into a financial plan for their business, they come up short. However, it is the financial plan that helps them manage their growth and ensure they are getting the right return on their investment of time and resources.  The financial plan also enables a business owner more effectively communicate its long-term plan with its banks, investors and co-travelers.

Business Goals and Objectives

The first step in this planning process is to identify objectives and goals associated with the new or expanding business. By establishing performance goals, the entrepreneur sets achievement levels to work toward, as well as a method of measurement to evaluate actual performance relative to these goals. A business owner can now track its performance monthly/weekly compared to these goals and identify where it is on-track and off-track.   Those areas where it is on-track continue to execute the plan, those areas where it is off-track make slight changes to get back on-track as soon as possible.  Without goals, it is impossible to know if actual performance is good enough to meet the company’s financial obligations: payroll, accounts payable, loan payments, return to shareholders.

A wise business owner once said, “If you do not choose a destination, any path you take will get you there!” You can be sure that your bank or investors have specific expectations. Failure to meet these minimum levels of production may result in your financiers asking you to take your business elsewhere. Not a pleasant thought, yet it happens regularly when management does not pay attention to the numbers.

Components of Financial Plan

A good financial plan begins with a good understanding of the business. How has the business performed in the past, and what is it expected to do in the future? What operational plans does the management team have to be successful in the future? What are the business goals for the next year, and what are the resulting action items the company plans to execute in order to achieve these goals? These goals and action items can include items such as: new product or service offerings, increased sales in a particular market, increased marketing efforts, increased manufacturing capability or operational efficiency.

Once the organization has defined its operational plans for the future, the next step is to translate these operational plans into the financial plans. The financial plan should consist of a set of monthly or quarterly financial statements including an income statement, balance sheet and cash flow statement.  These financial statements help you to understand how your company will perform in the future, for example does your business generate enough cash flow to cover its payroll, insurance, advertising expense or debt service. If not, the company has the opportunity to revise its plans to achieve its goals.  These financial statements along with other financial metrics and goals can then be used as benchmarks to measure the company’s actual performance throughout the year.  You can also use this financial plan to evaluate other business opportunities that you may encounter throughout the year. For example, you may use your plan to help you evaluate whether or not you should acquire a competitor in your industry or divest of a particular segment of your business.

Financial goals could include the following:

• Total sales/revenue – ideally, it should reflect a reasonable increase each year
• Gross margin – stable with industry or improving each year
• Expenses – as low as possible, increasing only as needed
• Capital expenditures – as low as possible, increasing only as needed
• Profitability – stable with industry or improving each year
• Cash flow – ideally, it should reflect a reasonable increase each year
• Return on investment – ideally, this should be better than your industry average

These are just a few ideas that may or may not be appropriate to your particular business. The point is that management should continually set realistic performance goals and monitor the results. The bottom line: do you know where your company is going, and are you leading or following?

Time-Frames in Financial Plans

Financial plans can cover a variety of time-frames; some look out 10 years into the future, while others look out 2 quarters into the future. Most companies do a combination of long term financial planning, which looks at the next three to five years, in combination with more detailed short term financial planning that looks at the next 6 to 12 months.

Most companies begin preparation of their financial plans for the following year and beyond in the third and fourth quarter of the current year. The larger the company the longer the process can take and the earlier in the year these companies begin. The key is to give yourself adequate time to do your research and get your financial plan in place before beginning the new year.

Based on our experience working with clients over the past 21 years, here are some of the items we have noted with clients that utilize financial plans and those that do not.  Which category do you want to be in?

Case Study #1 – No Financial Plan 

• Client does not see value in financial planning and does not prepare a good plan
• Client does not perform competitive financial analysis of business
• Client does not monitor key financial metrics – profit, liquidity, solvency ratios
• Client is not aware of bank loan covenants
• Market conditions change and client is faced with a business recession
• Lack of diversification in client base results in significant decline in revenue
• Client is caught by surprise when it begins incurring monthly net losses and negative cash flow
• Client defaults on bank loans covenants and bank calls loan forcing workout
• Client forced to lay-off staff
• Client losses its commercial building to its bank
• Client forced to sell business at fire sale prices

Case Study #2 – Detailed Financial Plan

• Client prepares a detailed 5 year financial plan and updates it on an annual basis
• Client measures its financial performance relative to its plan on a monthly basis
• Client identifies financial challenges while they are small and makes minor course corrections to stay on track and hit its goals
• Client completes competitive financial analysis on an annual basis to understand its performance relative to its industry averages
• Client improves revenue growth over 30% per year
• Client improves profitability over 25% per year
• Client able to make long term commitments to new employees
• Client shares financial plan and performance with its bank on a monthly basis
• Bank approves client for working line of credit, building loan and equipment loan
• Client maintains strong balance sheet to allow it to acquire competition in downturn
• Client maintains profitability and positive cash flow through recession
• Client able to perform mid year tax planning to lower tax liabilities
• Client sleeps peacefully at night knowing that it is on-track to meet its goals

Uses of a Financial Plan

Once you have completed your financial plan, you now have a road map you can use to guide your progress and actions throughout the year. It will help you to quickly identify where you may not be on-track with your plan, so that you can quickly course-correct to get your business back on-track. You can also use this financial plan to evaluate other business opportunities that you may encounter throughout the year. For example, you may use your plan to help you evaluate whether or not you should acquire a competitor in your industry or divest of a particular segment of your business. Your financial plan can also be shared with outside investors, employees, or business partners to educate them on your business and show them where your business is headed. You can also use your financial plan to identify your future financing needs and secure the financing you need.

Studies have shown time and time again that the more a business measures its performance against established goals, the more likely it is to improve its performance. A good financial plan is one of the key tools you can use to measure your company’s performance. A good financial plan can help your company exceed its goals, and can help ensure the company’s financial performance is good enough to meet its financial obligations.  Don’t wait any longer, give us a call today, let us help you: prepare your business financial plan, eliminate surprises and sleep at night!

Please let us know if you have questions concerning financial plans or any related topics, we can be reached at (480) 980-3977!

As we approach tax season, it’s crucial for businesses to optimize their tax planning strategies to maximize savings and ensure compliance. Here are five key strategies to consider:

1) Take Advantage of Deductions:

One of the most effective ways to reduce taxable income is by leveraging deductions. This includes expenses such as salaries, rent, utilities, and business-related supplies. Keep meticulous records of all deductible expenses throughout the year to ensure you’re not missing out on potential savings. Strategically timing the recognition of income and expenses can also have a substantial impact on taxable income. Consider deferring income to the following year or accelerating deductible expenses into the current year to optimize tax savings.

2) Contribute to Retirement and Health Plans:

Contributing to retirement plans, such as a 401(k) or SEP IRA, not only helps secure your financial future but also provides immediate tax benefits. Contributions to these plans are typically tax-deductible, reducing your taxable income for the year. Offering health insurance benefits to employees not only helps attract and retain top talent but can also provide tax advantages for businesses. Employer contributions to employee health insurance premiums are typically tax-deductible as business expenses, reducing taxable income.

3) Utilize Tax Credits:

Tax credits are powerful tools for reducing tax liability as they directly offset the amount of tax owed. Research and take advantage of available tax credits for businesses, such as the Research and Development Tax Credit, Work Opportunity Tax Credit, and Small Employer Health Insurance Tax Credit. The Research and Development Tax Credit, in particular, incentivizes innovation by providing a credit for qualified research expenses, including wages, supplies, and contract research costs.

4) Maximize Section 179 Deduction and Bonus Depreciation:

Section 179 and Bonus Deprecations of the IRS tax code allows businesses to deduct the full purchase price of qualifying equipment and software purchased or financed during the tax year. This deduction can provide significant tax savings by allowing businesses to immediately deduct the cost of eligible assets rather than depreciating them over time. Be sure to take advantage of this deduction before the annual limit is reached.

5) Employ Income Splitting Strategies:

For businesses with multiple owners or family members involved, consider income splitting strategies to distribute income among individuals in lower tax brackets. This can be achieved through salary adjustments, dividends, or utilizing family members in the business. Hiring your children to work for your business and paying them a reasonable salary for work they perform, can shift income from your higher tax bracket to their lower tax bracket. Additionally, their earnings may be exempt from certain payroll taxes, such as Social Security and Medicare taxes.

By implementing these tax-saving strategies, businesses can minimize their tax burden while maximizing cash flow for growth and development. Remember, proper tax planning is not only about reducing taxes but also about positioning your business for long-term success and financial stability. Please let us know if you have any questions regarding these strategies or any other tax compliance or planning issues, we can be reached at (480) 980-3977!

Is The Research and Development Tax Credit Right for Your Business?

With the start of the year, businesses continue thinking about potential tax saving strategies. With these discussions comes considering the possibility of any tax credits that could be useful for the business to participate in. This could range from Energy efficiencies, to increasing charitable contributions, to Research and Development. Today we will talk about the Research and Development Tax Credit; what is it, who qualifies for it, the benefits, any changes that have occurred in the last year surrounding the credit, and how is the research and development tax credit calculated.

Research And Development Tax Credit: What Is It?

The Research and Development Tax Credit allows businesses to take a dollar-for-dollar reduction in the company’s income tax liability based on the research and development activities of that company. The company can elect to apply a portion of the research credit as a payroll tax credit against the employer’s share of social security tax. For taxable years beginning after December 31, 2015 and before January 1, 2023, the maximum research credit that can be applied toward payroll taxes was $250,000. Eligible businesses to take a portion of the credit against payroll taxes must have under $5 million in gross receipts in the current year and no more than five years of generating gross receipts including the current year.

An activity qualifies as research and development if is aimed at discovering new knowledge that benefits the development of a new product or service, new process or technique, or the improvement of an existing product. Costs that can be identified with research and development activities are: Materials, equipment, and facilities; personnel; intangible assets; contract services; and indirect costs.

1. Materials, equipment, and facilities that are acquired or constructed for the purpose of research and development activities but have a potential future alternative use would still be capitalized as a tangible asset. However, if the materials, equipment, and facilities were consumed or have no alternative future use then these would be considered research and development costs and expensed at the time incurred.
2. For personnel, salaries or wages for the employees who actively participated in research and development activities are expensed as a research and development cost.
3. Intangible assets that are purchased from third parties for the purpose of use in research and development and have an alternative future use are amortized over the useful life. The amortization of these intangibles that were used in the research and development activities are expensed. However, the intangibles that are purchased for use in research and development and have no alternative future use are expensed in the time incurred.
4. Contract services in connection with the research and development and work performed by a third party on behalf of the company would all be included in research and development costs.
5. Indirect costs should be reasonably allocated as a research and development cost. However, if there are any indirect costs where it is not clearly identified to be connected to the research and development then it should not be included in those costs.

Research And Development Tax Credit: Who Qualifies to Take the Credit?

Eligible businesses that qualify to take the research and development tax credit are small businesses structured as a partnership, sole proprietorship, or a corporation that has no publicly traded stock. The average annual gross receipts for the three proceeding tax years need to be less than $50 million to take advantage of this tax credit. In order to take advantage of the credit the research must be conducted inside the United States, Puerto Rico, or a U.S. possession. The business must engage in activities considered “qualified research”, which involves work that creates new products, processes, or technology advancements. Accurate record keeping of the research and development activities are required for taking advantage of the credit.

Research And Development Tax Credit: What Are the Benefits?

There are many benefits for a company to conduct research and development activities and taking advantage of this credit.

• Financial incentive: With a dollar-for-dollar reduction in tax liability, the research and development credit allow businesses the freedom to invest their money into improving their products and processes.
• Stimulates Innovation and creates competitive advantage: Research and development is meant for discovering new knowledge and developing innovations, creating new products, improving old products, improving processes, and technological advances. The credit helps companies to invest more money in research and development which ultimately allows for more of a competitive advantage over other companies that are not investing in improvements.
• Job Creation: Typically, when companies invest a lot of time and money into research and development, they have personnel specifically assigned to a part of the research and development process. This creates jobs in areas such as engineering, design, and development.
• Offset development costs: Research and development often requires the investment in a larger labor force, materials used in the development, and new equipment used in research and development. Research and development tax credits allow a company to reduce their tax liability, making these investments more financially feasible.
• Compliance with Federal Regulations: Businesses are required to document their research and development processes in order to take the tax credit which leads to increased regulation compliance. Businesses wishing to take this credit must ensure they fit the criteria for the credit and report with transparency.

Research And Development Tax Credit: What Changes Have Occurred in The Last Year?

In both 2022 and 2023, there have been two major changes to the Research and development tax credit. One regarding applying part of the credit to payroll tax liability, and the other regarding Section 174 capitalization requirements.

1. Electing to apply part of the R&D tax credit to payroll tax:

As of 2023, the maximum amount of payroll tax research credit that a qualified small business can elect to apply against payroll tax liability increased to $500,000 for tax years beginning after December 31, 2022. Eligible businesses to take a portion of the credit against payroll taxes must have under $5 million in gross receipts in the current year and no more than five years of generating gross receipts including the current year. As of 2023, the increase to $500,000 will end at the conclusion of the 2023 taxable year, unless the provision is extended by congress.

1. New Section 174 capitalization requirements:

Beginning tax years on or after January 1, 2022, R&D expenditures under section 174 can no longer be deducted. Businesses are now required to capitalize costs identified a research and development and amortized over a five-year period for any domestic research. The R&D expenditures do not currently need to be capitalized on the company’s balance sheet; however, the expenditures do need to be capitalized in terms of the business’s tax return.

Research And Development Tax Credit: How is the Credit Calculated?

The research and development tax credit can be calculated using one of two methods: the Traditional Method and the Alternative Simplified Credit Method.

1. Traditional Method

The traditional method is typically used for businesses who have already claimed the research and development tax credit in the past. Under the traditional method, the credit is 20% of the company’s current year qualified research expenses that exceed a base amount. The base amount is the product of a fixed base percentage and the average annual gross receipts of the taxpayer for the four tax years preceding the tax year for which the credit is being determined. However, the base amount can never be less than 50% of the qualified research expenses for the credit year. Additionally, the base amount cannot exceed 16%.

A huge part of the traditional method is the company having historical qualified research expense data to determine the fixed-base percentage. The fixed-based percentage is computed as the aggregate qualified research expenses for tax years beginning after Dec. 31, 1983 and before Jan. 1, 1989 (base period), divided by the aggregate gross receipts for the same period. For companies defined as start-up companies, meaning any company whose first tax year with both gross receipts and qualified research expenses begins after Dec. 31, 1983, or any company that has fewer than three tax years between Dec. 31, 1983 and Jan. 1, 1989, the fixed base percentage is 3% for the first five years where qualified research expenses exist and then a moving average formula of gross receipts to qualifies research expenses. Below is an example of the traditional method calculation:

For companies who have not claimed the research and development tax credit in the past or do not have the data necessary to determine their historical qualifies research expenses will most likely use the second method.

1. Alternative Simplified Credit Method

The Alternative Simplified Credit Method is equal to 14% of the excess of qualified research expenses for the current tax year over 50% of the average qualified research expenses for the three preceding tax years, also known as the taxpayer’s “base period”. If the company had no qualified research expenses in any of the three preceding tax years, the Alternative Simplified Credit equals 6% of the qualified research expenses for the tax year for which the credit is being determined. Despite the difference in the tax credit rates, the Alternative Simplified Credit Method can be a less complicated methodology to compute the credit when historical data is an issue.

There is a four-step process involved in calculating the Alternative Simplified Credit:

• Figure out the company’s average qualified research expenses for the past 3 years
• Multiply that average by 50%
• Subtract the result of step 2 from the company’s current year qualified research expenses
• Calculate the credit by multiplying the result of step 3 by 14%

Below is an example of the Alternative Simplified Credit Method calculation:

If the company had no qualified research expenses in the three preceding tax years and use the 6% of the qualified research expenses for the credit:

Whether you are currently taking part in research and development or you are considering if this would benefit your company, keep in mind the requirements for taking the credit, qualifications required to determine if the expenditures are research and development costs, how any updates to the credit can affect your business, and which credit calculation method would be best for your business. Please let us know if you have any questions regarding the research and development tax credit or any other tax compliance or planning issues, we can be reached at (480) 980-3977.

FOR IMMEDIATE RELEASE

Pinnacle Business Solutions LLP
19332 N. 100th Way
Scottsdale, Arizona 85255
September 6, 2023

Contact:
Paul J. Beckert MBA, CPA
President, Pinnacle Business Solutions
Email: paul@pinnacle-business.com
Phone: 480-980-3977

Pinnacle Business Solutions LLP Welcomes Tori J. Schott as Experienced Staff Accountant

Scottsdale, Arizona—Pinnacle Business Solutions LLP, a leading name in the Certified Public Accounting industry, is thrilled to announce the addition of Tori J. Schott to our growing team as an Experienced Staff Accountant. With over 2 and a half years of experience as an intern for Pinnacle Business Solutions LLP, Tori has demonstrated her expertise in providing financial, accounting, and tax services to a broad range of clients.

Ms. Schott graduated Magna Cum Laude from Arizona State University in May of 2023 with a Bachelor of Science in Accountancy, a Bachelor of Science in Management, and a dual minor in both Design and Real Estate. Her academic achievements and dedication to her studies exemplify her commitment to excellence.

In addition to her academic accomplishments, Ms. Schott is currently working toward becoming a Certified Public Accountant, further demonstrating her commitment to professional growth and ensuring she can provide top-tier services to our clients.

“We are excited to welcome Tori J. Schott to the Pinnacle Business Solutions LLP family,” said Paul J. Beckert MBA, CPA, President of Pinnacle Business Solutions. “Her extensive experience as an intern with our firm, her exceptional academic achievements, and her dedication to becoming a CPA make her a valuable asset to our team. We look forward to her continued contributions as we strive to provide the best financial services in the Certified Public Accounting industry.”

Tori J. Schott expressed her enthusiasm for joining Pinnacle Business Solutions LLP, saying, “I am thrilled to be joining the Pinnacle Business Solutions LLP team in this new role. My experiences as an intern with the company have prepared me well, and I am eager to continue providing excellent financial, accounting, and tax services to our clients while helping out my fellow Pinnacle team members.”

As an Experienced Staff Accountant, Tori J. Schott will leverage her experience and academic background to deliver outstanding results to our clients and support her fellow Pinnacle team members in their collective mission to provide exceptional service.

Please join us in extending a warm welcome to Tori J. Schott. We are confident that she will play an essential role in our continued growth and success.

For more information about Pinnacle Business Solutions LLP, please visit our website at www.pinnacle-business.com.

As real estate developers, investors, and business owners minimizing ordinary income tax is crucial to retain more of your profits and optimize financial outcomes.  There are various business strategies that can help you achieve this goal while complying with applicable tax regulations.  One of these strategies includes preserving capital gains on real estate development transactions by examining the structure of using separate legal entities for land appreciation and development. This approach can offer significant advantages, including tax optimization, risk management, and flexibility.

Real Estate Development and Ordinary Income Tax

Ordinary income tax applies to the earnings generated through regular business activities, such as rental income, development profits, and other operational income in real estate. Reducing or avoiding ordinary income tax is vital for developers since it can significantly impact the bottom line.  The federal married filing jointly (“MFJ”) ordinary income tax rates for individuals in 2023 are as follows:

10%: Up to $22,000 of taxable income
12%: $22,000 to $89,450 of taxable income
22%: $89,450 to $190,750 of taxable income
24%: $190,750 to $364,200 of taxable income
32%: $364,200 to $462,500 of taxable income
35%: $462,500 to $693,750 of taxable income
37%: Over $693,750 of taxable income

Understanding Capital Gains

Capital gains refer to the profit earned from the sale of a capital asset, such as real estate, stocks, or other investments. For real estate developers, capital gains represent the difference between the property’s purchase price and the selling price. It’s important to differentiate between short-term capital gains (assets held for one year or less) and long-term capital gains (assets held for more than one year). The tax treatment of these gains differs significantly, with long-term gains typically being taxed at a lower rate.

Short-Term Capital Gains: Assets held for one year or less are subject to the ordinary income tax rates.

Long-Term Capital Gains: Assets held for more than one year enjoy preferential tax rates, which are generally lower than ordinary income tax rates. The long-term capital gains Married Filing Jointly (“MFJ”)  tax rate is 15% when taxable income is $553,850 or less and 20% when taxable income is more than $553,850

Preserving capital gains is essential for real estate developers because it directly impacts the overall profitability of the project. By minimizing taxes and optimizing gains, developers can allocate more resources to future projects, expand their portfolio, or reinvest in their business. There are several effective strategies to achieve this goal.

The Dual-Entity Structure: Land Appreciation and Development

The dual-entity structure involves using two separate legal entities for distinct phases of a real estate project:

a. Entity A: Land Holding Entity – This entity is primarily responsible for acquiring and holding land. Its primary objective is to benefit from land appreciation over time. The land holding entity typically generates minimal or no income during the holding period and focuses on capital growth.

b. Entity B: Development and Sales Entity – This entity takes over the active development, construction, and marketing of the real estate project. Its main goal is to generate income through the sale or lease of the developed property.

Advantages of the Dual-Entity Structure

a.Tax Optimization: One of the key benefits of this approach is the ability to optimize taxes. By segregating the land appreciation from the active income generated during development and sales, developers can manage their tax liabilities more efficiently.  The development activities will be subject to ordinary income tax rates.  However, the land appreciation will be subject to the lower capital gains tax rates.

b. Capital Gains Tax Deferral: The land holding entity can also utilize strategies like 1031 exchanges to defer capital gains taxes when acquiring new properties or transitioning to other investments. This allows developers to continually grow their land portfolio without triggering immediate tax liabilities.

c. Reduced Ordinary Income Tax: The development and sales entity can focus on generating ordinary income, which may be subject to higher tax rates. By separating this income from the land holding entity’s capital appreciation, developers can potentially minimize their overall tax burden.

d. Risk Mitigation: By using separate legal entities, developers can isolate potential liabilities. For instance, if a legal issue arises from the development and sales activities, it is less likely to affect the land holding entity’s assets and vice versa.

e. Flexibility in Exit Strategies: The dual-entity structure allows developers to explore various exit strategies for their projects. They can choose to sell developed properties, sell land parcels individually, or even retain land for long-term appreciation, depending on market conditions and their investment objectives.

f. Timing and Coordination: It’s crucial to plan the land sale and the commencement of development activities in sync. Proper coordination between the land holding entity and the development entity is essential to facilitate a smooth transaction.

Selling Land at Fair Market Value

As part of the dual-entity structure, the land holding entity, which focuses on capital appreciation, can sell the land to the development entity at its current fair market value. This transaction should occur before the development and construction activities begin. By doing so, the land holding entity realizes the appreciation in the land’s value and converts it into a capital gain.

2. Advantages of Selling Land at Fair Market Value

a. Preserving Capital Gains: The sale of land at fair market value enables the land holding entity to capture the accumulated appreciation as a capital gain. This gain can be deferred or reinvested using tax-deferral strategies like 1031 exchanges.

b. Reducing Ordinary Income Tax: As the land holding entity generates capital gains instead of ordinary income through the sale, the overall tax burden can be reduced. Capital gains are taxed at the more favorable rates than ordinary income.

3. Considerations for the Transaction

a. Fair Market Value Assessment: The land sale should be conducted at a fair market value to ensure compliance with tax regulations and avoid any potential issues with the tax authorities. Engaging a qualified appraiser can help determine the accurate fair market value of the land.

b. Timing and Coordination: It’s crucial to plan the land sale and the commencement of development activities in sync. Proper coordination between the land holding entity and the development entity is essential to facilitate a smooth transaction.

c. Legal and Tax Advice: As with any real estate transaction, developers should seek advice from legal and tax professionals to ensure proper documentation and adherence to tax regulations.

Utilizing an Installment Sale

An installment sale is a transaction in which the seller receives payments from the buyer over an extended period rather than in one lump sum. In the context of real estate development, the land holding entity can sell the land to the development entity through an installment sale agreement. The payment for the land is then received in multiple installments, allowing for the deferral of capital gains tax and providing developers with a steady cash flow over time.

Advantages of an Installment Sale

a. Deferral of Capital Gains Tax: By spreading the receipt of payment over several years, the installment sale enables the land holding entity to defer the recognition of capital gains tax. This deferral can free up funds for reinvestment in other projects or assets.

b. Reduced Tax Liability: As the tax liability is spread over the installment period, developers may be subject to lower tax rates due to being in a lower tax bracket. This can result in overall tax savings compared to a one-time lump sum payment.

c. Enhanced Financial Flexibility: The installment sale provides developers with a steady stream of income over time, which can be beneficial for financing other projects, meeting ongoing business expenses, or making strategic investments.

Conclusion

Preserving capital gains on real estate development transactions is a multifaceted endeavor that requires careful planning and a comprehensive understanding of tax regulations.  The dual-entity structure for real estate development, where one entity focuses on land appreciation and the other on development and sales, offers several benefits for preserving capital gains and optimizing tax outcomes. By segregating capital appreciation and active income, developers can take advantage of various tax-deferral strategies and mitigate risks. However, it’s essential to seek professional advice and ensure effective coordination between the entities to make the most of this strategy. So if you find yourself buying, selling and developing a lot of property for your business, it is in your best interest to consider the dual entity structure. With a little upfront planning, you can significantly reduce your tax liability and improve your bottom line!

Please let us know if you have questions concerning dual entity structures or any related concepts, we can be reached at (480) 980-3977!