Use Cost Segregation To Your Advantage

Is Cost Segregation Right For You?

In our previous article entitled “Strategies to Minimize Tax Liability for Business Owners” we talked briefly about the advantages of using Cost Segregation to accelerate depreciation on certain portions of both residential, and commercial real property. In this article, we’ll take a look at how, and why it may work for you. Additionally, we will share what you need to do to take advantage of the potential benefits.

As a reminder, Cost Segregation is a means by which owners of property can break out certain aspects of a building, and treat them like personal property for depreciation purposes. This allows you to depreciate a portion of your commercial property over 5, 7, or 15 years, rather than the standard 39 for commercial, or 27.5 for residential.

While certain aspects, like landscaping are fairly simple to document and segregate, you’d miss out on a number of opportunities to take advantage of all available accelerated deductions if you didn’t dig a little deeper. That’s where hiring a construction engineer who is a cost segregation specialist can be well worth the investment.

When to Hire a Professional

A cost segregation specialist can differentiate between elements of the building which are defined as “dedicated, decorative, or removable” versus what’s considered “necessary and ordinary for operation and maintenance of the building”. Assets included in the building cost which may be treated as personal property for depreciation purposes may include:

  • Carpeting and flooring
  • Bathroom fixtures
  • Dedicated cooling systems for machinery
  • Electrical fixtures and lighting
  • Decorative finishes

If you spent more than $750,000 to purchase, or remodel a building since 1987; which for rental and other commercial property is easy to do, HKMP can help you engage a specialist to perform a detailed study to identify components in your building qualifying for cost segregation, and who will provide supporting documentation for your allocations. This can be extremely insightful if you acquired the property.

A cost-segregation specialist will analyze architectural drawings, mechanical and electrical plans, and other blueprints to break out those components eligible for treatment as personal property from those which are structural components of the building. As part of their analysis, they’ll also identify, and allocate things like architecture and engineering fees, and other indirect costs to each element.

Take Full Advantage of TCIA Changes

The Tax Cuts and Jobs Act of 2017 (TCIA) made it even more attractive to identify assets which qualify for Cost Segregation. TCIA increases bonus depreciation on qualifying assets from 50% to 100%. It also allows you to retroactively utilize cost segregation on previously owned properties acquired after September 27, 2017. Prior tax law only applied to new construction, and remodels.

Before 1996, retroactive savings on property added since 1987 had to be realized over 4 years. However, in 1996, the law changed. Thus allowing cost savings to be realized all at once, upon completion of the cost segregation report. Until TCIA was enacted, it only applied to new construction. Taking advantage of Cost Segregation now allows you to claim retroactive deductions for catch-up depreciation on older buildings acquired since September 27, 2017 which didn’t qualify for cost segregation prior to the enactment of TCIA. Additionally, you can claim all the savings in one tax year.

Weigh the Costs and Benefits

By utilizing your cost-segregation specialist’s report, HKMP can ensure you take advantage of every opportunity to reduce your tax liability by adjusting the timing on your depreciable assets.  Advantages include:

  • Increased cash flow in years when costs are higher
  • Revisiting properties purchased used which were previously ineligible for cost segregation
  • Identifying opportunities to take advantage of catch-up depreciation
  • Possible reduction to real estate taxes by shifting costs away from real property
  • Potential increase in deductions for sales and use tax
  • Documentation of your re-allocations in the event of IRS inquiries

Please keep in mind, when you’re re-allocating assets you’ve depreciated in prior years, you could create a liability for recaptured depreciation. This could trigger understatement penalties, especially if you’re overly aggressive in your use of cost segregation. Also, cost segregation reports do have a cost. Therefore, it’s a good idea to weigh the potential benefits before any study is done.

HKMP can help weigh the costs and benefits of reallocating assets identified in your cost segregation report. Allowing you to make informed and intelligent decisions, and reallocate costs for the best possible outcome.

Financial Benefits of Estate Planning

Estate Planning: Know Your Worth

Estate planning is an oft-overlooked, but no less important part of your overall financial plan. Although the primary goal is to protect your assets postmortem, there are also tax advantages you can use to minimize the amount of assets you use to pay taxes now, and in the future.

One of the most common misconceptions when it comes to estate planning, is it’s only necessary for large estates. Granted, unless the value of your estate exceeds $12.06 million for Federal purposes (though this is scheduled to revert back to $5.49  million in 2026), and $6.11 million for the State of New York, it’s exempt from estate taxes. But taxes are just the tip of the iceberg.

Make Sense of the Dollars and Cents

Knowing not only the components of your estate, but their values is crucial when you’re:

  • Drawing up a will, and allocating assets amongst your heirs
  • Determining how much life insurance to buy

First, you’ll want to make a list of all of your intangible assets, as these tend to be more valuable

  • Bank accounts (checking, savings, CD’s)
  • Brokerage accounts (stocks, bonds, mutual funds)
  • Life insurance policies
  • Retirement plans (IRA, 401(k), pension)
  • HSA’s
  • Ownership interest in any businesses

Second, you’ll want to make a list of your tangible assets: Homes, land, and real estate

  • Vehicles
  • Collectibles
  • Jewelry
  • Household goods including electronics, furniture, power tools, and equipment

You can either estimate the value of these items based on:

  • Recent appraisals or comps, or
  • How you expect your heirs to value them

HKMP is here to help. We can ensure tangible assets are valued accurately, taking current market trends and fluctuations into consideration.

Make sure you include a list of account numbers, contact numbers for the custodians, and the location of relevant documents for all intangible assets. You can utilize bank and brokerage statements, or current financial statements where applicable to determine their current value.

The Pluses and Minuses Matter

Third, create a list of your creditors, and the current amount of debt with each one, even if it’s zero. Like your intangible assets, these things tend to ebb and flow over time:

  • Loans
  • Mortgages
  • HELOCs
  • Credit cards

Again, list all account numbers, contact numbers for whoever holds the debt, and where the statements, contracts, credit cards, or check books are located.

Knowing the value of your estate can provide the information you need to purchase adequate life insurance sufficient to relieve your heirs of any debt attached to your assets, and ensures your will is as complete as possible.

Make Important Decisions Sooner Rather Than Later

This is also the time to make certain important decisions:

  • Assign an Estate Administrator
  • Give medical power of attorney to a trusted individual in the event you’re unable to speak for yourself
  • Assign durable financial power of attorney allowing someone to manage your financial affairs if you’re medically unable to do so. This can include paying bills and taxes, as well as allowing your designee to manage and access your assets.
  • Determine whether or not you want to create either a Revocable or Irrevocable Living Trust.
  • Identify your beneficiaries (or in some cases, identify exclusions)
  • Who gets what?
  • Who are your contingent beneficiaries?
  • Manage designees on accounts such as retirement, insurance, bank, and brokerage
  • Update as circumstances change

Give Your Estate Plan Regular Check-Ups

While there are many low-cost, DIY options available for both managing your estate, and drafting wills and trusts, it’s up to you to determine whether or not it’s in your best interests, and those of your heirs to incur the cost of an attorney and certified public accountant to ensure your assets and heirs are protected, and your wishes are properly documented. Factors affecting your decision may include:

  • The size of your estate
  • Whether your wishes and allocations are simple or complicated
  • If you have concerns for the care of minor children
  • The size, number, and complexity of business interests
  • If you have non-familial heirs

Above all, revisit your estate plan periodically. The one thing you can count on in life is change, and more often than not, changes impact your estate, not only in value, but in how you want it allocated, and whether you need to revise your will.

Certain changes should, by nature and impact, trigger a reassessment:

  • Change of circumstances (job change, marriage, divorce, economic fluctuations)
  • Change of beneficiaries (birth, death, marriage, divorce)
  • Changes in State or Federal laws

With upcoming changes in tax laws affecting estates, let HKMP give your Estate Plan a financial check-up to determine whether there’s a potential favorable, or unfavorable impact from new laws and limitations.

The Importance of an Annual Financial Review

If you’ve ever been through a financial audit, you know they are time consuming and exhausting. Not to mention expensive. What if you could reduce the possibility of needing audited financials? Fortunately, you can. The answer is an annual financial review. They are less time consuming, less costly, and take less time away from you and your staff’s day-to-day business.

As a business owner, you accepted an element of risk the day you decided to launch your business. Continually monitoring and managing that risk affects every decision you make; every relationship you form.

Though annual reviews can help reduce your need for an audit, there are times an audit may be unavoidable, such as:

  • Financing for business expansion
  • Compliance

If you’re talking to lenders or investors about funds for expansion, you can be certain they’ll want reasonable assurance you’re worth the risk.

Depending on the nature of your business, and the industry in which you operate, you may be required to provide regular, audited financial statements to a government regulator. When audited financials are required, the auditor’s opinion is the assurance needed to provide a high level of confidence your company’s financial statements and disclosures conform to generally accepted accounting principles (GAAP) in the United States of America are presented fairly, and are free from any pertinent misstatements. However, if none of this applies to you, you might want to opt for reviews rather than audits.

How is an Annual Financial Review Different from an Audit?

A review is an examination by a CPA, where the auditor evaluates financial data to provide moderate assurance that they are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in accordance with GAAP. Due to the limited scope, a review has significantly less impact on time spent by staff and management than an audit.

While an audit and a review differ in their scope, they both consist of a systematic examination of the inputs to the financial statements in order for the accountant to provide a report which will, hopefully, state that the financials are free of material misstatements, and are prepared in accordance with GAAP.

HKMP can help you determine if, and when your company requires an external review.

Choosing the Right People for the Job

Audits and reviews must be performed by an independent, outside CPA.

Not every CPA firm is qualified to perform an audit or review. When the time comes for you to invest in an audit, you’ll need a firm who is experienced in your industry and understands your business. Although it could be the same firm who performs other services for your company, they must be able to maintain a position of independence throughout the audit.

It’s also important you feel confident they have a solid reputation, qualifications, and staffing to perform the audit efficiently. You need to ensure you’re ready for the process to begin, and avoid unnecessary, and often costly delays.

HKMP has the knowledge, experience, and reputation to ensure both audits and reviews are performed professionally, and efficiently. As such, they can advise you as to which process best serves your needs.

Is Your Financial Plan Complete?

Protect Your Financial Future: Will and Life Insurance

In a recent post, (Personal Finance-Part 1, “Direct Your Personal Health Towards Prosperity”) we showed you how to monitor your financial health, and understand the various metrics which help you improve your current situation, and ensure a healthy financial future for you and your family. Awareness of your current status, an understanding of both personal and outside factors, and a solid plan are key components. But there’s more you can do to support your plan.

No personal financial plan would be complete without reviewing your will and life insurance periodically. Both are important when your goal is to expect the unexpected, and be prepared to weather changes which could threaten the financial health and well-being of both you, and your family.

Why You Need Life Insurance

You’re probably aware life insurance protects you and your family’s encumbered assets upon the death of the responsible parties. It ensures mortgages, loans, and credit card debt are paid upon your death so your heirs will not have to sell the house or liquidate other assets to satisfy your debts. Depending on the type of life insurance you choose, it may also cover final expenses such as:

  • Outstanding medical bills
  • Estate taxes
  • Funeral costs

Part of your financial planning process will be to determine which form of life insurance best suits your needs, and to review it regularly to ensure it continues to provide the best coverage possible. What may be the most reasonable option when you’re single, or your income is lower may not be the best choice when you’re married, have children, or own a business.

Consider these questions before making decisions about the type, and amount of insurance you need:

  • Is a spouse or children relying on you for financial support?
  • Do you want to cover the costs of final expenses?
  • Do you have a joint mortgage and/or significant debt?
  • Are you a business owner?

Choosing the Right Policy

There are two basic types of life insurance:

  • Term
  • Permanent

Term insurance is for a specific period of time, and only provides death benefits. It may be inexpensive at first, but when the term ends, typically in 10-15 years, rates will increase with each renewal, as it will be based upon your age at the time of renewal. You will also have to to a new medical examination. If your health has changed over the last 10-15 years, your new premiums will reflect this increased risk.

Permanent life insurance comes in three flavors:

  • Whole life
  • Universal
  • Variable

Whole life insurance has a set payout. Initially, premiums are usually higher than Universal or Variable policies but remain constant over your lifetime. The premium also contains a savings component, or cash value over time which:

  • Earns interest on a tax-deferred basis
  • Can be withdrawn or borrowed against for college tuition, home improvements, or retirement income.

Universal life insurance is a combination of two factors:

  1. A portion that pays your annual insurance premium, and offers some flexibility in both face value, and premiums. For example:
  • You may reduce, defer or increase annual Premium Payments without impacting the Face Value of the Policy and it will only affect your Cash Surrender Value
  • Death benefits can also be changed as your needs, or circumstances change. However, death benefits can be decreased but not increased. An increase would be subject to a new medical exam.
  • The excess over your annual insurance premium is invested in interest-based funds which earn money tax free, and add to the Cash Surrender Value of your policy.

Variable life insurance is a more recent take on Universal Life. The difference is, with Variable policies, the excess paid over the annual insurance premium is invested, income tax free, in stocks.

Regardless of the type of Life insurance you choose, upon your death, the proceeds will go to your estate. This increases the value of your estate. For example:

If you have a $5M estate, and $5M in Life insurance, your estate is now worth $10M. Depending on the size of your estate, and the value of your life insurance policy, your taxable estate could increase. There are other alternatives, which would allow your heirs to receive the insurance proceeds without resulting in adverse tax consequences.

HKMP’s advisors can help you navigate the pros and cons of life insurance options, and help you determine the payout and premium best aligned with your budget, circumstances, and financial plan.

Set Your Intentions With a Will

A will is often overlooked as part of the financial planning process, especially in your younger years. It’s your opportunity to make legally binding decisions while you still have a say in the matter. So why do you need a will?

  • A will is a legal document that spells out your wishes regarding the care of your children, as well as the distribution of your assets after your death.
  • Failure to prepare a will typically leaves decisions about your estate in the hands of judges or state officials, and may also cause family strife.

Don’t go blindly into preparing your will. It’s important you understand:

  • You can prepare a valid will yourself, but you should have the document witnessed to decrease the likelihood of successful challenges later.
  • To be completely sure everything is in order, consider having your will prepared by a trusts and estates attorney.
  • Health proxy’s and other matters should also be addressed by your attorney.
  • Both spouses should have executed wills. Provides consistency among other issues

HKMP is here to help you compile all assets which belong in your will, and where applicable, determine your share of those which are jointly owned.

Prep Tips to Simplify Your Business Taxes

Tax Preparedness

Whether you’re a seasoned pro, or it’s your first-time filing taxes for a business, there are commonalities in what your tax preparer will need to ensure your returns are complete and accurate. Using a checklist will not only save time, but will help your tax professional find all the deductions and credits to which you’re entitled, giving you the lowest possible tax bill. Who doesn’t want to simplify their business taxes and pay less?

First and foremost, you should already have some form of business accounting system in place, capable of tracking your transactions, and generating reports. If you’re just starting out and have a minimum number of transactions, you might be able to keep it simple, using a spreadsheet, or Quicken.

However, you’ll pay for the simplicity by having to migrate to something more robust as your business grows.  Options for sole proprietors, freelancers, and very small businesses include Fresh Books, and Wave, both of which are recommended by Investopedia, Nerd Wallet, and PC Magazine.

If you’re growing, and have, or intend to have payroll, you might prefer something that will grow with you. Top picks include Xero, Quickbooks Online, and Zoho. Prices, functionality, integration and available modules vary from one system to another. For best results, and to avoid the perils of migration sooner than necessary, let HKMP help you determine which system will suit your needs and your growth, and provide the best overall value.

Checklists Simplified

Once you’ve entered all transactions for the year into your chosen accounting system, you can prepare the following reports:

  • Income and Expense (aka P & L)
  • Balance Sheet
  • Statement of Cash Flows
  • Previous Year’s Tax Return

This will help your tax preparer determine where additional detail is needed. You can start by providing detail for the following areas:

  • Assets purchased, depreciated, or disposed of
  • Loans
  • Leases
  • Opening and closing inventory, if applicable
  • Stocks or bonds purchased or sold
  • Payroll reports

Much of this information will also be useful when  tax planning during Q4 of 2022.

Information about your loans may be a little trickier this year if you took advantage of the Paycheck Protection Program (PPP), or Economic Injury Disaster Loan Program (EIDL). Though they may be excluded from income, it’s important to report them accurately so you won’t pay unnecessary taxes on funds which helped keep your business afloat amidst the challenges imposed by COVID regulations.

Detail Made Easy

Other areas for which you might be asked to provide detail are:

  • Officers’ salaries (corporations)
  • Guaranteed payments to partners (partnerships)
  • Dividends received broken down by payer
  • Taxes and licenses
  • Professional fees
  • Interest
  • Charitable contributions

Most of the accounting programs mentioned can create schedules by payee which will satisfy your accountant’s needs. Make sure your detail includes the tax year for which your tax payments were made so any pre-payments are applied correctly.

Staying Tax Prep Ready

Tax preparation shouldn’t be something you ignore until it’s time to give your records to your tax accountant. There are a number of ways to stay ahead of the curve so your accountant can not only prepare your tax returns, but help you with tax planning before the year is over. Above all, they’ll help simplify your business tax information gathering process and the transmitting of required filings at tax time.

  • Adequate accounts for collection of costs and income (e.g. Officers’ Salaries and bonuses separate from Employees)
  • Maintain up-to-date schedules for:
  • Taxes and licenses
  • Depreciation
  • Stocks and bonds
  • Reconcile accounts at least quarterly, if not monthly

Keeping your books and records up to date will enable you to schedule a tax planning appointment during the fourth quarter. There are many opportunities to improve your tax position in both the current, and subsequent year. Don’t lose out on many tax saving strategies by failing to act before the end of the year.

Make HKMP your one-stop-shop for accounting, tax planning, and tax preparation.

Helpful Tips to Minimize Personal Taxes

Yes, You Can Minimize Your Personal Taxes

Every year, people like you pay too much in taxes. In most cases, the reason is lack of knowledge. There are many opportunities to decrease your tax liability and minimize your personal taxes, but if you don’t know they exist, how can you use them to your advantage?

The place to start is by understanding which opportunities are available to you. Do your earnings come from an employer? Self-employment? Both? Is there something you love doing which could be turned into a side hustle, or even a full-time business? The choices you make affect the tax saving opportunities available to you.

Tax Saving Opportunities For Employees

As an employee, your employer might offer you the opportunity to contribute pre-tax dollars into a Flexible Spending Account (FSA), Health Savings Account (HSA), or 401(k) account. By doing so, you reduce the taxable income reported on your W-2, which translates into a lower Adjusted Gross Income (AGI). Your AGI is the starting point for calculating your taxes. The lower your AGI, the less taxes you must pay.

By contributing to an FSA, you get to use pre-tax dollars to pay certain medical and dental expenses not covered by your insurance. Expenses included are:

  • Deductibles
  • Co-pays
  • Prescriptions
  • Over-the-counter medications prescribed by your doctor
  • Certain medical equipment

You get to contribute up to $2,850 per employer in 2022 but there’s a catch. You have to use at least $2,250 no later than 2 1/2 months after the end of the year, but you are allowed to carry up to $570 over into the next year.

If you have a high-deductible, Marketplace health plan, you might prefer to contribute to an HSA plan, if your employer offers you the option. Because these plans mean higher out-of-pocket expenses, you’re allowed to set aside more pre-tax dollars. For 2022, you can contribute up to $3,650 for individual, and $7,300 for families. You even get to contribute an extra $1,000 if you’re 55 or older.

Unlike an FSA, HSA’s have no provision requiring you to use the funds by a certain date, or risk losing part of your contributions. Instead, any funds remaining at the end of the year can be rolled over indefinitely. However, you can only choose this option if you have a high-deductible health plan.

Maximize Your Retirement, Minimize Your Taxes

Whether you’re an employee, business owner, or self-employed, maximizing contributions to your retirement account can not only lower your taxes in the current year, but help you provide for your own future. As an employee, the most common, elective option is a 401(k) plan.

Essentially, you contribute part of your salary to the plan. Like an FSA or HSA, the dollars are pre-tax, and the taxable income reported on your W-2 excludes your contributions. Though contributing to a 401(k) plan doesn’t protect you from paying taxes indefinitely, it can postpone your liability until after you’ve retired, and taxable income is lower.

Not only are you saving for your own future, but you can defer taxes on up to $20,500 for a 401(k) plan, or $14,000 for a SIMPLE 401(k) plan. If you are over 50, you’re also allowed to make catch-up contributions, and defer an additional $6,500 to a 401(k) plan, or $3,000 to a SIMPLE 401(k) plan, but only if your employer’s plan allows catch-up contributions. Be aware these limits might be adjusted by the terms of the plan.

It’s important to understand the rules concerning excess contributions, especially if you contribute to plans with more than one employer. HKMP can review your contributions in case you need to take a distribution by the April 15th deadline, This can potentially minimize your personal taxes and/or avoid being double taxed.

Retirement Plan Options for the Self-Employed

According to this recent article, there are several options for self-employed individuals. The most common are:

  • Traditional IRA
  • Solo 401(k), aka one-participant 401(k)
  • SEP IRA

If you’re just starting your business, a Traditional IRA offers a couple of advantages;

  • Simple to set up
  • You can roll an employer’s 401(k) into it
  • Can be set up easily with an online brokerage

However, if your self-employment income is growing quickly, you might want to choose another option since your contributions are limited to $6,000, or $7,000 if you’re 50 or older.

Tax Advantages for Higher Limit Plans

If your business is established, and enjoys higher earnings, a solo 401(k) might be a better option because it’s higher limits allow you defer more otherwise taxable income. You’re eligible if you’re self-employed, or a business owner with no employees other than a spouse. You can contribute to the plan:

  • As an employee, up to $20,500, plus $6,000 catch-up contributions, if applicable, or 100% of your salary,  whichever is less
  • For an employer, up to 25% of compensation except:
    • A sole proprietor or single owner LLC, up to 25% of net self-employment income
    • Net self-employment income for purposes of this calculation is net profit less half your self-employment tax, and the plan contributions you made for yourself.

If you are also contributing to an employer’s 401(k) plan, be aware your contribution limits apply to all plans in which you participate. Make sure you review your contributions to all plans as you may be double-taxed on any excess contributions.

Keep it Simple With a SEP IRA

As a business owner, or self-employed individual with either no, or a few employees, you can choose a SEP IRA.  Some advantages of a SEP IRA versus a solo 401(k) are:

  • No IRS reporting requirements
  • Allows you to make contributions for your employees
  • You can deduct the lesser of your contributions or 25% of net self-employment earnings, or compensation subject to certain limitations discussed below
  • Can be opened with an online broker like you would a traditional IRA

Possible disadvantages include:

  • No catch up contributions
  • You must contribute an equal percentage of salary for each eligible employee including yourself

Both a solo 401(k) and a SEP IRA are subject to the same compensation limits used to calculate your contribution. For 2022, the limit is $305,000.

Let HKMP help you make an informed decision, so you choose the plan which best fits your needs, both now, and as your business continues to grow. Allowing you to minimize your personal taxes and use that money elsewhere.

Strategies To Minimize Tax Liability For Business Owners

As a business owner, you strive to run a profitable, thriving business. But you’re not in business to support the IRS, so how do you avoid paying more than your fair share? As in life, knowledge and information are your best defense, and your greatest assets for ensuring profits remain available for business expansion, including capital purchases, and increased staff.

By now, you’ve probably closed the books on 2021, and are setting your sights on a strong, profitable 2022. You still have time to take advantage of options to minimize your taxes for 2021, and implement tax efficient strategies for 2022.

Your first line of defense is to hire a knowledgeable accountant like HKMP who can help you navigate the muddy waters of the tax code, avoiding costly mistakes, and taking advantage of strategies to minimize your tax liability.

Make the Most of Depreciable Assets

If you’ve purchased tangible capital assets such as machinery, vehicles, computers, or cell phones, consider taking advantage of Bonus Depreciation and/or the Section 179 deduction. Both allow you to accelerate depreciation on new, or used equipment by deducting up to 100% of the cost in the year of purchase. You can also deduct up to 100% of a capital lease in the first year, although you spread the purchase price over multiple years.

Section 179 does contain certain limitations:

  • You must show a profit for the year
  • A maximum deduction of $1.05 million in 2021 and $1.08 million in 2022
  • Maximum equipment purchases of $2.62 million in 2021 and $2.7 million in 2022
  • Smart phones and laptops available for personal use have a 50% limit
  • Vehicles available for personal use have an $11,600 depreciation limit in the year purchased

Bonus depreciation gives you a little more leeway, especially since the limit increased from 50- to 100-percent in 2021. Be aware, the limit will begin decreasing in 2023, until it bottoms out at 20% in 2025. Also, if you take Bonus Depreciation on one asset in a class, you must use it for all assets in that class purchased in the same tax year. Here is where a conversation with your accountant is imperative so you take full advantage of the tax benefits.

Key advantages to using the section 179 deduction:

  • Flexibility
  • You can use all or part of an assets cost
  • Can be used for different classes of assets
  • Does not need to be used for all assets in a class
  • Can be used for Leasehold Improvements

Key advantages to using Bonus Depreciation:

  • You don’t have to show a profit for the year
  • No upper limit on purchases, or bonus depreciation claimed

Above all, you can use both the Section 179 deduction and Bonus depreciation in the same year. Just make sure you’re not applying both to the same asset.

There are other considerations affecting how and where you use Bonus Depreciation and the Section 179 deduction so it’s critical to discuss your options, and best course of action with your tax accountant. Some slippery slopes include:

  • Recapture rules
  • When you have to opt out of Bonus Depreciation
  • Section 179 ceilings on deductions and annual purchases
  • Changes in the allowable percentage of Bonus Depreciation after 2022

Now is the time to plan your future capital purchases, to ensure you’re taking full advantage of the tax savings both options offer.

Accelerating Depreciation on Real Estate

If you invest in real estate, you may want to consider cost segregation to help you pay little or no taxes on your investments. Cost Segregation is a tax strategy that allows real estate owners to utilize accelerated depreciation deductions to increase cash flow and reduce both federal and state income taxes on their rental income.

By breaking down, and reclassifying certain interior and exterior components of a building to personal property or land improvements, you can take advantage of accelerated depreciation Instead of depreciating the entire building over 39 years for commercial property, or 27.5 for residential property, you can depreciate the portions you break out over 5, 7, or 15 years.

Let HKMP help you decide how best to apply these strategies to minimize your tax liability for 2021 and beyond. They can provide invaluable insight, so you optimize all available tax saving opportunities. They’ll guide you through the constantly changing landscape of tax law, helping you use those changes to your advantage, and avoid costly mistakes in the future.

Year-End Tax Planning Gives You the Advantage

Make Tax Planning Part of Your Year End

…in this world, nothing is certain except death and taxes.  – Benjamin Franklin

Filing and paying annual income taxes may be an integral part of doing business, but that doesn’t mean you have to like it, nor pay more than your fair share. Whether you face the task with acceptance, resignation, or dread, you know it’s inevitable once the year ends, and you close your books. The question is, when do you start to address your year-end tax planning?

Running a successful business means keeping abreast of new rules, laws, regulations, and lately, mandates which impact not only costs, but how you manage both day to day, and long-term activities. You have enough on your plate without trying to keep up with the changing environment for income taxes too.

Your customers or clients depend on you to be the expert in your field. Call on HKMP to keep you abreast of changes in tax laws which impact you both positively and negatively, allowing you to focus on your own areas of expertise, while protecting your business interests, and cash flow. Don’t miss the opportunity to take advantage of HKMP’s expertise to review your books and records prior to year-end, and advise you of opportunities to minimize your tax liability. Our knowledge and experience will ensure you make informed decisions like scheduling expansion, and major purchases in years when tax laws are more favorable.

Take Advantage of the Right Timing

Timing is everything. Whether it’s capital investments, year-end bonuses, hiring, or inventory, you want to make informed decisions. In many of these areas, you’re already doing your research, and mapping out a plan before reaching final decisions. Yet all too often, the impact on both your current and future tax liability is overlooked. In many ways, it’s as important as ROI.

One area which has seen significant change over the last 40 years or so is depreciation. Not only have Section 179 limits changed over the years, but so have limits on first-year depreciation. Looking back, a mere 13 years, the Section 179 limit has grown from $250,000 in 2008 to $1,050,000 in 2021. Not all years have seen increases, but don’t you want the option of deciding whether to escalate or delay a major purchase if the limit increases the following year?

Many companies experienced decreased revenue, and increased costs for the last two years thanks to COVID. As you prepare your budget for 2022, knowing how those costs will affect both actual and projected net income will keep more money in your pocket. Better still, you’ll have more money to spend on the original dream with which you launched your business in the first place.

Year-end tax planning areas

Protect Your Investments With Year-End Tax Planning

Would you wait until January of February to create next year’s budget? Probably not, as you know you’d start the year blind to objectives and opportunities. You don’t wait until January or February to start making estimated tax payments either, as you don’t want your cash flow to take one, large hit. You certainly haven’t achieved your current level of success by ignoring the numbers, or failing to see how they measure up to your projections and expectations.

Tax laws can be shark-infested waters. If you’re unprepared, they can bite off far more than you’re willing, or even able at times, to give. Knowing there’s an expert ready to take the wheel and guide you through those waters unscathed protects your assets, leaving you free to focus your attention and resources on the present challenges, and future opportunities.

Ask yourself this. If your dream was important enough to create a plan, and map out at least part of the route to making it a reality, isn’t it equally important to allocate time, energy, and resources to protect what you’ve built?

Scout Ahead to Minimize Setbacks

To put it simply, year-end tax planning is the security team’s scout who heads out before dawn to ensure the way forward is clear of perils and pitfalls. He alerts you to blocked roads, washed out bridges, and potential ambushes, giving you time to set up defenses, and re-map your route. Without him, you’d walk right into those ambushes, or find yourself mired in quicksand, causing expensive delays and missed opportunities. Clearly, the money you spend on his services will be recouped many times over.

You could choose to fly by the seat of your pants, hoping your business grows, and thrives. You can navigate the expensive mistakes, in the belief they’re simply a cost of doing business. Or you can build a team which includes people who are there to protect what you’ve built, and clear the way forward. I’m guessing you didn’t take unnecessary chances when you first started out, nor did you try to do more than you had to by yourself.

If you’re ready to clear a few obstacles from your path, HKMP is the scout you need to navigate the tax waters, and avoid the sharks.

Tax Considerations When Retiring In Another State

Moving to another state is a key part of many peoples’ retirement plans. However, not everyone takes in to account all of the tax considerations when retiring in another state.

Some couples want to enjoy better weather so they can participate in more outdoor activities, such as those living up north who decide to relocate to Florida or Arizona. Others want to be closer to family members who may live far away.

Some retirees decide to move to lower their tax burden. There are seven states where individual income is not subject to state tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. And New Hampshire and Tennessee only assess state taxes on dividends and interest.

Identify All Applicable Taxes

It might seem like a no-brainer to simply move to a state with no personal income tax. To ensure you make a good decision, you must consider all taxes that can potentially apply to a state resident. In addition to income taxes, these may include property taxes, sales taxes and estate taxes.

If you’re considering moving to a state that does not have personal income tax, look closely at what types of income are taxed. Some states don’t tax wages but do tax interest and dividends, as noted above. And some states offer tax breaks for pension income and retirement plan and Social Security distributions.

For example, distributions from 401(k)s, IRAs and pensions are exempt from state tax in Illinois, Mississippi and Pennsylvania. However pension, but not 401(k) or IRA, income, is exempt from state tax in Alabama and Hawaii.

Watch Out For State Estate Tax

The federal estate tax currently doesn’t apply to many people. For 2021, the federal estate tax exemption is $11.7 million (or $23.4 million for a married couple). But some states levy additional estate taxes with a much lower exemption. Some may also have an inheritance tax in addition to (or in lieu of) an estate tax.

Establish Domicile In Your New State

If you make a permanent move to a new state and want to escape taxes in the state you came from, it’s important to establish legal domicile in the new location. The definition of legal domicile varies from state to state. In general, your domicile is your fixed and permanent home location and the place where you plan to return, even after periods of residing elsewhere.

Each state has its own rules regarding domicile. You don’t want to wind up in a worst-case scenario: Two states could claim you owe state income taxes if you established domicile in the new state but didn’t successfully terminate domicile in the old one. Additionally, if you die without clearly establishing domicile in just one state, both the old and new states may claim that your estate owes state income taxes and any applicable state estate tax.

The more time that elapses after you move to a new state and the more steps you take to establish domicile in the new state, the harder it will be for your old state to claim that you’re still domiciled there for tax purposes. Some ways to help lock in domicile in a new state include:

  • Buy or lease a home in the new state and sell your home in the old state (or rent it out at market rates to an unrelated party).
  • Change your mailing address at the post office.
  • Change your address on passports, insurance policies, your will or living trust and other important documents.
  • Register to vote, get a driver’s license and register your vehicle in the new state.
  • Open and use bank accounts in the new state and close accounts in the old one.

Also, if an income tax return is required in the new state, file a resident return and file a nonresident return or no return (whichever is appropriate) in your old state. We can help with these returns.

Make an Informed Choice

Before deciding where you want to live in retirement, do your research and contact your tax professional. We can help you better understand the tax considerations when retiring in another state. This will allow you to avoid unpleasant tax surprises that could be very costly.

Advantages of Outsourced Accounting You Can’t Ignore

Outsourcing certain business functions to third-party service providers is not a new concept. Businesses have been outsourcing functions like payroll, IT and human resources for years.  

However, many companies haven’t given much thought to outsourcing their accounting and finance functions. Doing so can result in a host of benefits — including freeing up your team to spend more time on tasks that add strategic value to the organization. 

Who Typically Outsources Their Accounting Function & Why? 

Often the best candidates are companies whose growth trajectory requires that they begin to think bigger, better define their place in the market and how they’re going to move forward. They need better financial clarity but might not be able to afford full-time financial and accounting professionals. These organizations need expertise related to their industry and would benefit from knowledgeable consultants who can offer comprehensive solutions to complex hurdles facing the business. 

Outsourced accounting also works well for leaders who find themselves spending too much time in the business processes and not enough time working on long-term strategic planning. This can lead to a number of problems, including misaligned directives, unchecked risk exposure, a lack of focus and direction, and a limited ability to pursue business growth opportunities. 

More Advantages of Outsourced Accounting 

In addition to freeing up executives to spend more time on high-level strategic planning activities, your company could realize a number of other advantages of outsourced accounting to a third-party service provider that specializes in this. These include the following: 

  • Saving time and money — Compared to hiring, training and maintaining an internal department, outsourcing your accounting and financial work is not only more cost effective, but also solves business capacity issues. Outsourcing can lower your total costs by eliminated expenses related to employee benefits, training and technology/software costs while redirecting valuable time back to growing your business.  
  • Anytime, anywhere access to financial data — Use of the leading-edge cloud accounting technology will allow you to close your books quicker and give you real-time reporting. You’ll gain visibility into your financial health with access to financial data and records anytime, anywhere. 
  • Improved operational efficiency and processes — Outsourcing your day-to-day activities such as billing, payroll and month-end close will free up valuable time to focus on business goals and growth. Rather than chasing after unpaid invoices or manually cutting checks, you can automate these processes and streamline operations.  
  • Access to expert financial resources — It’s challenging to find and retain staff that have the knowledge and expertise in all areas of your accounting and finance function. Additionally, it’s hard enough trying to juggle the responsibilities of running a business and managing the staff. Outsourcing to a team of virtual accountants ensures your financial records are accurate and up to date, giving you the confidence to make decisions about the future without a lot of oversight on your part.    
  • Reduced risk of fraud — Maintaining proper internal controls to protect against fraud, theft and human error is required for any accounting and finance function. If you are leaning on just a few people to fill multiple roles, this puts your business at higher risk. By outsourcing, you can have a clear separation of duties and greater oversight to mitigate these risks.  
  • Greater peace of mind — If your accounting and finance operations are in order, risks of potential threats are low and visibility into the financial health is readily available, this can put your mind at ease and help you focus more on your overall business strategy.  

Additional advantages of outsourced accounting and finance function are stronger planning and execution. This will result in better decision making, improved direction and tactical outcomes, and higher profitability. 

Fit is Crucial 

When searching for a provider, look for a partner — a firm capable of establishing a relationship with the right levels of communication and trust. 

Also, business owners should look for industry experience and a firm that has a suite of advisory offerings that can complement the accounting and finance functions. A company’s services can be enhanced by the firm’s expertise in these areas, putting more eyes on the business, which leads to more proactive advice. 

Fit is crucial because business owners need to have a strong relationship with their service provider. Trust between the provider and owner is critical in order to eliminate the need for an owner’s day-to-day oversight. But that shouldn’t eliminate the need for the owner’s participation, as their input is key to making financially sound business decisions.