tax planning Archives - Ullrich Delevati

If your small business has employees, you may need to budget for higher payroll costs next year, especially if you employ many high earners. The Social Security Administration recently announced that the wage base for computing Social Security tax will increase to $192,300 for 2027 (up from $184,500 for 2026). Wages and self-employment income above this amount aren’t subject to Social Security tax.

What’s the Social Security wage base?

The Federal Insurance Contributions Act (FICA) imposes two taxes on employers and employees. One is for Old Age, Survivors and Disability Insurance, commonly known as the Social Security tax, and the other is for Hospital Insurance, commonly known as the Medicare tax.

The Social Security wage base is the maximum amount of compensation subject to Social Security tax, but there’s no maximum for Medicare tax. For 2027, the FICA tax rate for employers will be 7.65%. This includes 6.2% for Social Security and 1.45% for Medicare (the same as in 2026).

Employers generally must withhold income tax and employees’ share of Social Security and Medicare taxes (which equals the employer’s share noted above) from wages and pay the employer’s share of Social Security and Medicare taxes. You’re also responsible for depositing these amounts with the IRS and reporting them on the appropriate payroll tax returns. (By contrast, self-employed individuals generally pay Social Security and Medicare taxes through the self-employment tax rather than through payroll withholding and must pay both the employer’s and employee’s shares.) Additional rules apply to the 0.9% additional Medicare tax, federal unemployment tax, and various state and local taxes.

Nowadays, the Social Security wage base is adjusted annually, but it hasn’t always been. When the federal government introduced the Social Security payroll tax 90 years ago in 1937, the wage base was only $3,000. It remained that amount through 1950. As the U.S. economy grew and wages rose, the wage base needed to be adjusted to maintain Social Security funding. By 1980, it had risen to $25,900, and by 2020, it was $137,700. Inflation and wage growth were key factors in these adjustments.

How much will it increase next year?

For 2027, an employee will pay:

6.2% Social Security tax on the first $192,300 of wages, for a maximum tax of $11,922.60 (6.2% × $192,300), plus
1.45% Medicare tax on all covered wages, plus
0.9% additional Medicare tax on all wages in excess of $200,000 ($250,000 for married taxpayers filing joint returns, $125,000 for married taxpayers filing separate returns).

Employers must match the 6.2% Social Security taxes on wages up to the annual wage base and 1.45% Medicare tax on all covered wages. There’s no employer match for the additional Medicare tax, but the employer must withhold it when an employee’s compensation exceeds $200,000, regardless of the employee’s filing status.

For 2027, the self-employment tax imposed on self-employed people will be:

12.4% Social Security tax on the first $192,300 of net earnings from self-employment, for a maximum tax of $23,845.20 (12.4% × $192,300), plus
2.9% Medicare tax on all net earnings from self-employment, plus
0.9% additional Medicare tax on net earnings from self-employment in excess of $200,000 ($250,000 of combined self-employment income on a joint return, $125,000 for separate filers).

Can you modify withholding for employees with more than one employer?

If you have employees who work for your business and have second jobs, those workers may have payroll taxes withheld by two different employers. However, you can’t stop withholding Social Security tax once their combined wages reach the wage base threshold.

Each employer must withhold Social Security taxes from an employee’s wages, up to the annual wage base for wages that employer pays, even if the combined withholding exceeds the maximum amount that can be imposed for the year. Fortunately, an employee can generally claim a tax credit on his or her return for any excess Social Security tax withheld by multiple employers.

For more information

Do you have additional questions about your payroll tax obligations? Contact us. We’ll help you comply with all applicable reporting and withholding requirements.

Over the years, you’ve invested blood, sweat, and tears into building a successful small business. Now it’s time to sell and move on to the next chapter of your life. What are the tax implications of selling, and how can you reduce or defer your taxes? One possible solution is an installment sale.

How it works

With an installment sale, you don’t receive a lump-sum payment when the deal closes. Instead, you receive installment payments over time. Typically, the buyer makes a down payment at closing and issues a note requiring principal and interest payments over an agreed-upon period. Each principal payment generally includes a tax-free return of basis and taxable gain, while the interest is taxed separately as ordinary income. This spreads your gain over several years.

It’s important to note that the rules are more complicated when a deal is structured as an asset sale rather than a sale of an ownership interest. Installment sales are still possible for eligible assets included in an asset sale, but you must allocate the purchase price among the business’s assets and calculate each asset’s gain or loss separately. If you’re contemplating an asset sale, we can provide more details.

Potential tax benefits

Generally, installment sale gains qualify as low-taxed long-term capital gain or as Section 1231 gain for sales of property held for business purposes. Sec. 1231 gains are usually also taxed at the lower long-term capital gains rates. The 3.8% net investment income tax (NIIT) and state income tax may apply, too.

An installment sale generally defers tax, because you pay most of the tax liability as you receive the payments. It may also reduce your overall tax obligation from the transaction if the arrangement allows you to stay under the thresholds for triggering the 20% long-term capital gains rate or the NIIT for each tax year of the note’s term.

For 2026, the 20% long-term capital gains rate kicks in when taxable income exceeds:

$545,500 for single filers,
$579,600 for heads of households,
$613,700 for married couples who file jointly, and
$306,850 for married filing separately.

If your taxable income for the tax year is below the applicable threshold, you’ll likely pay 15% on your long-term capital gains. However, if your taxable income for the tax year is modest, you could pay no federal long-term capital gains tax. For 2026, the 0% rate applies to those with taxable income up to $49,450 (single and separate filers), $66,200 (heads of households) and $98,900 (joint filers).

For 2026, taxpayers with modified adjusted gross income (MAGI) over $200,000 ($250,000 for joint filers and $125,000 for separate filers) may owe NIIT on some or all of their investment income.

Beyond taxes

An installment sale also might help you close a deal or get a better price for your business. For instance, an installment sale might appeal to a buyer that lacks sufficient cash to pay the price you’re looking for in a lump sum.

Or a buyer might be concerned about the ongoing success of your business without you at the helm or because of changing market conditions or other economic factors. An installment sale that includes a contingent amount based on the business’s performance might be the solution.

Of course, you should evaluate the buyer’s credit risk before entering into an installment arrangement. Consider collateral, personal guarantees and other protections. Your note may also be subordinated to financing provided by the buyer’s bank.

Beware of potential tax pitfalls

An installment sale isn’t without tax risk for sellers. For example, you must report depreciation recapture as a gain in the year of sale, no matter how much cash you receive.

Depreciation recapture generally results from deductions previously claimed for the property. It may be taxed at ordinary income tax rates, which can be as high as 37%. But in the case of certain depreciated real property, the maximum federal rate on depreciation recapture is generally 25%. The 3.8% NIIT and state income tax may apply, too. If depreciation recapture is an issue, you could owe tax that year without receiving enough cash proceeds from the sale to pay the tax.

Also, beware: If the installment note doesn’t charge adequate interest on the deferred principal payments, the complicated original issue discount (OID) rules can transform some of the payments from principal to interest. That’s unfavorable because interest income recognized by an individual taxpayer is taxed at higher ordinary income rates.

Finally, today’s federal tax rates are relatively low compared to historical rates. If Congress passes legislation that increases the long-term capital gains or NIIT rates (or lowers the applicable thresholds), you could wind up paying more overall tax on your gain from the sale. Weigh this risk carefully against the potential benefits of an installment sale.

One size doesn’t fit all transactions

As you can see, installment sales have both pros and cons. To determine whether one is right for you and your business, and find out about other tax-smart options, please contact us.

If your small business accepts, uses or invests in Bitcoin, Ethereum or other forms of cryptocurrency, accurate reporting and detailed records are critical for federal tax purposes. The IRS continues to scrutinize digital-asset transactions. Today, business tax returns include a question about digital assets, and brokers are now required to report certain transactions to taxpayers and the IRS on Form 1099-DA. Here’s what you need to know to help you comply with the current tax rules.

The basics

Unlike cash or credit cards, cryptocurrency still isn’t widely accepted by small businesses for routine transactions. However, some businesses may receive it from customers, use it to make purchases, pay workers with it or hold it as an investment.

Cryptocurrencies can be valued in U.S. dollars and digitally traded between users. They may also be purchased or exchanged through online platforms and stored in digital wallets. The IRS uses the broader term “digital assets,” which includes cryptocurrency, stablecoins (a type of cryptocurrency designed to maintain a consistent value) and nonfungible tokens.

Tax reporting

Buying cryptocurrency with U.S. dollars and holding it generally doesn’t produce taxable income. However, selling it, exchanging it for another digital asset, using it to make a purchase or receiving it as payment for goods or services sold generally creates a reportable transaction.

For federal tax purposes, the IRS treats cryptocurrency as property, not currency. As a result, businesses that accept cryptocurrency for goods or services must report gross income based on its fair market value (FMV) when received, measured in U.S. dollars. That amount generally becomes the business’s tax basis in the cryptocurrency.

When the business later sells, exchanges or spends the cryptocurrency, it generally recognizes a separate gain or loss for tax purposes. The gain or loss is based on the difference between the asset’s value when disposed of and its adjusted basis. (Adjustments might include additional acquisition costs or transaction fees, certain blockchain events that affect ownership, and other tax adjustments required under IRS rules.)

Here’s an overview of the tax treatment of some other common business cryptocurrency transactions:

Purchases. From the buyer’s perspective, a purchase made using cryptocurrency may result in a taxable gain if the FMV of the property or services received exceeds the buyer’s adjusted basis in the cryptocurrency. Conversely, a tax loss may result if the value received is less than the adjusted basis. In other words, paying a business expense with cryptocurrency can trigger tax consequences beyond the ones typically associated with a purchase (such as a deduction for the business expense).

Employee wages. For federal tax purposes, wages paid using cryptocurrency are taxable to employees and generally must be reported by employers on Form W-2. They’re subject to federal income tax withholding and payroll taxes based on their FMV on the payment date. Applicable federal and state wage-payment laws must also be considered.

Payments to contractors. Cryptocurrency payments to independent contractors and other service providers are also taxable. The usual self-employment tax and information-reporting rules apply, and the payer may need to issue Form 1099-NEC.

In addition, a business may have a taxable gain or loss from the appreciation or decline in the cryptocurrency’s FMV during the time it was held before it was paid to the employee or independent contractor. Assuming the payer isn’t in the trade or business of buying and selling virtual currencies, the gain and loss will be a capital gain or capital loss (short-term or long-term, depending on how long it was held).

Expanded information reporting

A digital-asset question now appears on federal returns including Forms 1065, 1120 and 1120-S. Businesses must answer it and report applicable transactions even if they don’t receive an information return for a transaction.

Beginning with transactions in 2025, certain custodial brokers must report gross proceeds from digital-asset sales and exchanges on Form 1099-DA. Starting in 2026, they must also report the basis for certain covered digital assets. However, basis generally won’t be reported for assets acquired before 2026 or transferred into the broker’s account. So, a Form 1099-DA doesn’t eliminate the need to maintain your own records.

The One Big Beautiful Bill Act didn’t change the basic tax treatment of digital assets. Its changes to Form 1099-K apply to third-party payment networks and don’t replace the separate Form 1099-DA rules.

Under the Infrastructure Investment and Jobs Act of 2021, businesses will eventually be required to report certain digital-asset receipts exceeding $10,000 on Form 8300. However, until the IRS issues regulations to implement the change, businesses aren’t required to file Form 8300 solely because they receive more than $10,000 in digital assets.

As a result of the expanded reporting requirements, the IRS now receives more third-party information about digital-asset transactions, making discrepancies easier to identify. Businesses that engage in crypto transactions should maintain records showing the date, number of units, dollar value, tax basis, transaction fees and business purpose of each transaction. Transfers between wallets should also be documented so they aren’t mistaken for taxable transactions.

Review your records

As year end approaches, review your 2026 digital-asset transactions and reconcile your records with statements from brokers and payment processors. Also keep in mind that Congress is considering bills that would change selected digital-asset tax rules. We can help you stay on top of any new developments. Contact us for assistance evaluating your transactions and meeting the current reporting requirements.

If you own a closely held C corporation, you might be looking for ways to withdraw cash from your business. Paying yourself a dividend can be a straightforward option, but it comes at a tax cost. Corporate distributions are generally taxable to you to the extent of your company’s “earnings and profits,” and your company can’t deduct them. Distributions exceeding earnings and profits first reduce your stock basis; any remaining distribution is typically treated as capital gain. To avoid dividend treatment, consider these five alternative methods:

1. Repayment of shareholder loans to the corporation

If you’ve made bona fide loans to your corporation, it can generally repay the principal without the payment being treated as a dividend. A principal payment generally isn’t taxable to you unless it exceeds your adjusted tax basis in the debt. Interest is taxable to you, and the corporation may deduct it, subject to applicable interest-deduction limitations and related-party timing rules.

Whether money you advance to your corporation is treated as debt (as opposed to a capital contribution) depends on the facts and circumstances. Proper documentation is important, but labeling an advance as a “loan” isn’t enough. Relevant factors include whether:

The arrangement has a fixed maturity date and interest rate.
Your corporation is able to repay the loan.
You’ve followed the loan agreement’s terms.
The corporation’s debt-to-equity ratio supports debt treatment.

If an arrangement doesn’t qualify as bona fide debt, payments to you may be treated as corporate distributions and taxed as dividends to the extent of your corporation’s earnings and profits.

2. Loans from the corporation

You may be able to receive cash without immediate taxable income by borrowing it from your corporation. However, to prevent the loan from being treated as a corporate distribution, you must properly document it in a loan agreement or note. The terms should be comparable to those an unrelated lender would require, including a stated maturity date, a repayment schedule and an adequate interest rate. You should also have the ability and intent to repay the loan and make payments according to its terms.

A corporation can generally make de minimis loans of $10,000 or less to shareholders without charging interest. (The exception doesn’t apply if tax avoidance is one of the principal purposes of the loan’s interest arrangement.) If the aggregate outstanding balance exceeds $10,000, shareholder loans may be subject to a complicated set of “imputed” interest rules unless the corporation charges what the IRS considers an adequate rate of interest. Each month, the IRS publishes its applicable federal rates (AFRs), which vary depending on the loan’s term.

A below-market loan may result in imputed interest. Depending on the circumstances, the interest the corporation has foregone may be treated as a constructive dividend or additional compensation to the shareholder receiving the loan. The corporation may deduct reasonable compensation, but it will be subject to payroll taxes. Both dividends and additional compensation may be taxable income to the shareholder personally. A canceled loan may also be treated as a constructive dividend. Be aware that your corporation must report interest income from shareholder loans.

3. Compensation

Your business can deduct reasonable compensation that you receive for services rendered to the corporation. So you may be able to take cash out of your corporation through a salary increase or bonus payment. However, it will be taxable to you as wages and subject to payroll taxes.

You may be able to obtain the equivalent of a cash withdrawal by receiving fringe benefits, which can sometimes be more tax-efficient than a raise or bonus. Certain benefits may be excluded from your taxable income, even though your corporation can generally deduct the related costs. Examples include:

Employer-provided health coverage,
Qualifying dependent care assistance,
Certain retirement plan contributions, and
Up to $50,000 of group-term life insurance coverage.

Each benefit has its own eligibility, dollar-limit and reporting requirements. In addition, highly compensated employees may lose some tax exclusions if a benefit plan discriminates in their favor.

You can also establish a written Section 125 cafeteria plan, sometimes called a salary reduction plan, that allows you (and other employees) to take a portion of compensation as qualifying tax-free benefits rather than as taxable compensation. The plan must satisfy specific eligibility, documentation and nondiscrimination requirements.

4. Rental payments

If you own real estate or equipment, you can lease it to your corporation. Your business may generally deduct reasonable rent as a business expense, and you’ll receive a steady stream of rental payments. You must report these payments as rental income. The tax treatment may be affected by the passive activity and self-rental rules.

Rental rates should reflect the market value of the property provided. If rent is considered excessive, the excess may be treated as a constructive dividend, and your corporation won’t be able to deduct it as a business expense.

5. Property sales

You can get cash from the corporation by selling property to it. However, certain sales have unfavorable tax consequences. For example, you generally can’t claim a loss on the sale of property to a corporation you own more than 50% of. And gain from the sale of depreciable property to a more than 50%-owned corporation is generally treated as ordinary income, rather than capital gain.

A sale should have a legitimate business purpose and terms comparable to those an unrelated third party would accept. If your corporation pays more than fair market value, the excess may be treated as a constructive dividend. You may need to obtain an independent appraisal to establish the property’s value.

Year-end planning

If you’d like to receive additional cash or benefits before year end, it’s important to evaluate the tax implications for both you and your corporation. Contact us before proceeding. We can help you sort through your options and review your 2026 shareholder-corporation transactions to ensure proper documentation and classification.

Many small businesses start out as sole proprietorships. This structure is simple and inexpensive to establish and maintain — and it gives the owner direct access to profits without having to take formal distributions. But it also makes your taxes more complicated than when you were a W-2 employee. Here are some federal tax issues to consider if your business operates as a sole proprietorship.

Reporting income and expenses

You’ll report income and expenses from your business activities on Schedule C of your personal return (Form 1040). The net income will be taxable to you regardless of whether you withdraw cash from the business. Your business expenses are deductible against gross income, not as itemized deductions. If you have losses, they’ll generally be deductible against your other income, subject to special rules related to hobby losses, “excess” business losses incurred by noncorporate taxpayers, passive activity losses and losses from activities in which you weren’t “at risk.”

Sole proprietors may be eligible for certain deductions that generally aren’t available to other individual taxpayers. For instance, you may qualify for an above-the-line self-employed health insurance deduction for premiums paid for medical, dental and qualifying long-term care coverage, subject to certain limitations. This means your deduction for medical insurance won’t be subject to the rule that limits itemized deductions for medical expenses.

In addition, you may be entitled to deduct home office expenses if:

A home office is your principal place of business (including when you perform management or administrative tasks there and have no other fixed place to perform them),
You use your home as a place to meet or deal with customers, clients or patients in the normal course of business, or
You store inventory or product samples at home.

In general, to qualify, the area must be used regularly and exclusively for business purposes.

The home office deduction may include an allocable part of mortgage interest or rent, insurance, utilities, repairs, maintenance and, if you own the home, depreciation. Alternatively, you can use a simplified method based on the square footage of the qualifying space. You may also be able to deduct travel expenses from your home office to another work location.

Be sure to keep complete records of your income and expenses. Proper documentation is needed to claim all the tax breaks to which you’re entitled. Certain expenses, such as automobile, travel, meals, and home office expenses, require extra attention because they’re subject to special recordkeeping rules or deductibility limits.

Claiming the QBI deduction

Another special tax break that you might qualify for as a sole proprietor is the Section 199A qualified business income (QBI) deduction. It generally equals 20% of QBI, not to exceed 20% of taxable income. QBI generally is defined as the net amount of qualified items of income, gain, deduction and loss that are effectively connected with the conduct of a U.S. business. QBI doesn’t include certain investment items or reasonable compensation paid to an owner for services rendered to the business.

This deduction is taken “below the line,” meaning it reduces taxable income, rather than being taken “above the line” against your gross income. However, you can take the QBI deduction even if you don’t itemize deductions and instead claim the standard deduction.

One word of caution: The QBI deduction is subject to additional limits at higher income levels. For 2026, these limitations generally begin to apply when taxable income (calculated before any QBI deduction) exceeds $201,750 ($403,500 for married couples filing jointly). For 2026, these limitations are fully phased in once taxable income exceeds $276,750 ($553,500 for joint filers). Contact us to learn more about the limitations that apply to your situation.

The One Big Beautiful Bill Act (OBBBA) made the QBI deduction permanent. Starting in 2026, the OBBBA also expands the income ranges over which the limitations phase in, potentially allowing larger deductions for some taxpayers. And it provides a new minimum deduction of $400 for taxpayers who materially participate in an active trade or business if they have at least $1,000 of QBI from it. The minimum deduction will be annually adjusted for inflation after 2026.

Paying self-employment taxes

One downside of owning your own business is that you must pay self-employment taxes. These taxes are the equivalent of federal payroll taxes for employees, but self-employed people must pay both the employer’s and employee’s share of them. They’re imposed in addition to income tax, but you can deduct half of your self-employment tax as an adjustment to income.

For 2026, you must pay self-employment tax (Social Security and Medicare) at a 15.3% rate on your net earnings from self-employment up to $184,500, and Medicare tax only at a 2.9% rate on the excess. An additional 0.9% Medicare tax is imposed on self-employment income in excess of $250,000 for joint filers, $125,000 for married taxpayers filing separate returns and $200,000 in all other cases. The additional Medicare tax threshold isn’t adjusted for inflation.

Establishing a tax-advantaged retirement plan

You might also want to consider setting up a qualified retirement plan. The advantages are that amounts contributed to it are deductible at the time of the contributions and aren’t subject to income tax until they’re withdrawn.

One option is a Simplified Employee Pension (SEP) plan, which requires minimal paperwork. You generally can set up a SEP and make deductible contributions for the tax year as late as the due date of your income tax return for the year, including extensions. The contribution amounts are discretionary, and the annual limits are high. But, if you have employees, they generally must be included in the plan, provided they work enough hours and meet other qualification requirements.

If you don’t establish a qualified retirement plan, you may still be able to contribute to a traditional IRA. But your annual contribution limit will generally be significantly lower.

Making quarterly estimated payments

The U.S. tax system is considered “pay as you go.” So, you’ll probably have to make estimated tax payments each quarter. Estimates should include both federal income tax and self-employment taxes. Estimated payments are generally calculated using Form 1040-ES.

Quarterly payments are generally due on April 15, June 15 and September 15 of the current year and January 15 of the following year. If a due date falls on a weekend or legal holiday, the deadline generally moves to the next business day. Paying enough by each deadline is critical; if you fall behind, you’ll likely owe interest and penalties.

Applying for an EIN

Sole proprietors don’t automatically need an employer identification number (EIN). You can generally use your Social Security number for federal tax purposes — unless you hire employees. You might also need an EIN if your business:

Owes employment or excise taxes,
Withholds certain taxes on payments to a nonresident alien,
Establishes certain retirement plans, or
Changes its legal structure, such as incorporating or forming a partnership.

Additionally, you might consider obtaining an EIN voluntarily for banking or administrative purposes. An EIN is available at no cost through the IRS website. To apply, you’ll need to provide identifying information, including a valid Social Security number or other taxpayer identification number, and details about the business. Eligible U.S. applicants generally receive the EIN immediately after completing the online application. You can also submit Form SS-4 by fax or mail.

We can help

Even though your business may be small, tax compliance and planning are a big deal. These are just highlights of federal income tax issues sole proprietors face. State and local income, sales, payroll, and other tax requirements may also apply. Contact us if you’d like additional information regarding the tax aspects of your business, or if you have questions about the reporting or recordkeeping requirements.

Tax problems can happen to even the most organized small business owners. A cash flow crunch, an unexpected tax notice, a missed filing deadline or a payroll tax oversight can be stressful — especially when penalties and interest begin to add up. Fortunately, businesses can get back on track by addressing tax issues promptly and strategically.

What should I do if I receive a tax notice?

If you or your business receives a tax notice from the IRS or a state agency, don’t ignore it. Start by reviewing the notice carefully. It may relate to:

A balance due,
A missing tax return,
A proposed tax adjustment,
A payroll tax deposit issue, or
A request for documentation.

Be aware that tax notices typically include response deadlines — and missing them can limit your options and lead to additional penalties and interest. Tax authorities may eventually pursue collection measures (such as liens or levies) on unpaid amounts. A lien is a legal claim against property, which can affect your ability to secure credit or complete financial transactions. A levy allows the tax agency to seize assets to satisfy the debt.

Before making a payment or sending a response, confirm that the notice is accurate. We can help you compare the notice with your business records, gather supporting documentation and prepare an appropriate response.

How far back can I file unfiled tax returns?

If you have unfiled tax returns, it’s important to address them as soon as possible. In many cases, you’ll need to file past-due returns before you can qualify for certain resolution options, such as a payment plan or settlement program.

How far back you need to file depends on your circumstances, the type of return involved and the tax agency’s requirements. There generally isn’t a simple time limit that makes an unfiled return “go away.”

For federal income taxes, the statute of limitations for the IRS to assess additional tax for a particular tax year generally starts only after a valid return is filed. It’s typically three years, but it’s six years if you understate your gross income by more than 25%. If you fail to file a return (or you file a false or fraudulent return), the IRS has an unlimited amount of time to assess tax for the tax year.

So filing past-due returns can help reduce the risk of penalties, interest and collection activity — as well as the risk that the taxing authority could create a “substitute for return” for you. (This is generally undesirable because the return likely will include your income but not all the deductions, credits and other tax breaks you may be eligible for.)

If you’re owed a refund, filing promptly is especially important because you may lose the ability to receive an otherwise valid refund if you wait too long. Federal income tax refunds and credits generally must be claimed by the later of three years from the date you filed the return or two years from the date you paid the tax.

What are my options if I owe back taxes?

Some business owners who owe tax can’t immediately pay the full balance due. If you owe back taxes, you may have several options depending on the amount owed, the type of tax involved and your financial situation. Ways to manage tax debt may include:

Making a payment,
Asking for a temporary delay in collection due to financial hardship,
Participating in a settlement program (see below), and
Setting up an installment agreement or payment plan.

An installment agreement or payment plan may give qualifying taxpayers extra breathing room to pay the balance over time. However, you must generally stay current with future tax filings and payments. Falling behind again can cause you to default on your payment plan and potentially lead to additional collection actions.

Can I settle my tax debt for less than the full amount owed?

Some tax agencies offer settlement programs that allow eligible taxpayers to settle tax debt for less than the full amount owed. For federal tax debt, the offer in compromise (OIC) program may be available in limited circumstances.

However, an OIC isn’t available to all taxpayers and may not be the best option in every situation. The IRS reviews income, expenses, asset equity and ability to pay when determining whether to approve an OIC request. Before applying, you’ll generally need to have all required tax returns filed. You also must be current with ongoing tax obligations, including estimated tax payments and federal tax deposits.

Can tax penalties be reduced or removed?

Penalty relief may be available in certain circumstances. Depending on the penalty and the facts involved, you may qualify for administrative relief, such as an automatic exemption from penalty, first-time penalty abatement or relief based on reasonable cause.

Reasonable cause may apply when you made a good-faith effort to meet your tax obligations but were unable to do so because of circumstances beyond your control, such as:

A serious illness,
A death in your immediate family,
A natural disaster, or
Loss of records.

Penalty abatement isn’t automatic. You must follow the instructions in the notice. You might need to call the IRS or submit a written request with a clear explanation and supporting documentation. Even if penalties are reduced, interest may still apply, so it’s advisable to respond as soon as possible.

Why are payroll tax-withholding problems so serious?

Payroll tax-withholding problems are among the most urgent tax issues small business owners can face. If you have employees on your payroll, you’re responsible for withholding federal income tax, state income tax (if applicable), Social Security tax and Medicare tax from their wages and remitting those amounts to the government. Tax agencies closely monitor these tax remittances because you’re withholding money on behalf of your employees and holding it in trust until you deposit it with the taxing authority.

In some cases, business owners or other responsible individuals may be held personally liable for unremitted taxes through the Trust Fund Recovery Penalty. The penalty can apply to individuals who are responsible for collecting, accounting for or depositing the taxes and who willfully fail to do so. If your business falls behind on these tax deposits, professional guidance is critical.

How can I avoid future tax problems?

For small business owners, preventing future tax issues starts with strong accounting systems, accurate bookkeeping and timely tax filings. You should also engage in proactive tax planning by reviewing financial reports regularly, setting aside funds for taxes, and making estimated income tax payments and depositing withheld taxes by the required deadlines.

If you’re facing tax resolution issues, contact us. We can help you understand your options, communicate with tax authorities and create a plan to keep your business moving full speed ahead.

Small business owners must answer an important question: Should we use the cash or accrual accounting method for federal income tax purposes? Larger entities are required to use the accrual method. But certain small businesses can elect to use the cash method. You may want to consider this option if it will help lower your taxes. However, it’s not right (or even available) for every situation.

Does your business qualify for the cash method?

Under Internal Revenue Code Section 448(c), your business may be eligible for the cash accounting method if it had average annual gross receipts that don’t exceed a specific, inflation-adjusted threshold for the prior three-year period. For 2026, businesses with average annual gross receipts up to $32 million are eligible.

Some businesses may be eligible for cash accounting even if their gross receipts are above the threshold. Examples include S corporations, partnerships without C corporation partners, farming businesses and certain personal service corporations.

In addition, the Sec. 448(c) gross receipts test serves as the eligibility standard for several other tax provisions available to qualifying small businesses, such as:

Simplified inventory accounting,
An exemption from the uniform capitalization rules,
An exemption from the business interest deduction limit, and
The option to use the completed contract method (rather than the percentage-of-completion method) for certain long-term contracts.

When determining your business’s gross receipts, you may need to include those earned by certain related entities, such as those under common control. Special rules apply to organizations that have existed for less than three years. Also, tax shelters, including syndicates, don’t qualify for small business status, even if their gross receipts are below the threshold.

How do the methods differ?

The cash method often provides significant tax advantages. Because cash-basis businesses recognize income when received and deduct expenses when paid, they have greater control over the timing of income and deductions. For example, toward the end of the year, they can defer income by delaying invoices until the following tax year or shift deductions into the current year by accelerating expense payments.

In contrast, accrual-basis businesses recognize income when earned and deduct expenses when incurred, regardless of the timing of cash receipts or payments. Therefore, they have little flexibility to time the recognition of income or expenses for tax purposes.

The cash method also provides cash flow benefits. Because income is taxed in the year received, it helps ensure that a business has the funds needed to pay its tax bill.

However, for some businesses, the accrual method may be preferable. For instance, if your accrued income tends to be lower than your accrued expenses, the accrual method may result in a lower tax liability. Other potential advantages of the accrual method include the ability to deduct year-end bonuses paid within the first 2½ months of the following tax year and the option to defer taxes on certain advance payments.

Is it time for a change?

Even if your business would benefit from switching its accounting method, you should consider the administrative costs. Changing accounting methods for tax purposes may require IRS approval. And, if your business prepares its financial statements in accordance with U.S. Generally Accepted Accounting Principles, using the cash method for tax purposes would require you to maintain two sets of books (cash-basis tax records and accrual-basis financial reporting records).

Fortunately, you don’t have to make this decision by yourself. We can help determine the right method for your situation. Contact us to learn more.

Start-ups must choose a legal entity for their business activities. The type of entity you select affects how the business is taxed and who may be held personally liable for its debts and obligations, among other things.

Two popular options — assuming you’re going into business with one or more other people — are S corporations and multimember LLCs treated as partnerships for tax purposes. Both are pass-through entities, meaning tax items pass through to the individual owners and are reported on their personal federal income tax returns. And both offer liability protection. But there are subtle differences to factor into your decision. Here’s a closer look at the pros and cons of each.

Multimember LLCs

A multimember LLC essentially combines the legal advantages of corporations with the tax benefits of partnerships. If you operate your business as an LLC, your personal assets are generally protected from exposure to entity-related liabilities under applicable state law. In addition, all LLC members can participate in management without losing their liability protection (unlike partners in a limited partnership).

Members of this type of LLC are subject to the federal income tax rules for partners. That means your share of the LLC’s taxable income items, gains, losses, deductions and credits will pass through to you and be reported on your personal return. The LLC itself doesn’t owe federal income tax.

In addition to paying income taxes on your share of the LLC’s income, you may owe self-employment tax on that income. This includes Social Security tax at a rate of 12.4% on the first $184,500 of self-employment income in 2026 and Medicare tax of 2.9% on all self-employment income. However, half of your self-employment tax is deductible on your return.

It’s also important to note that this business structure isn’t available to all businesses. Certain types of professional practices may be prohibited from operating as LLCs under the laws of some states or applicable professional standards, such as state bar association rules.

S corporations

An S corporation is a special tax designation available to qualifying domestic corporations. Like a traditional C corporation, an S corporation shields its shareholders from personal liability for the corporation’s debts. At the same time, it provides many — though not all — of the tax benefits associated with partnerships.

If you structure your start-up as an S corporation, your share of the business’s taxable income items, gains, losses, deductions and credits will pass through to you and be reported on your personal return. The entity itself doesn’t owe federal income tax.

S corporations have one important advantage over LLCs treated as partnerships: Shareholder-employees aren’t required to pay self-employment tax on their shares of the profits, provided they receive “reasonable” compensation that’s subject to Social Security and Medicare taxes.

However, there are some downsides to consider. Notably, some partnership tax rules that apply to multimember LLCs and their members are significantly more favorable than the rules that apply to S corporations and their shareholders. Here are some examples:

LLC members receive additional tax basis for loss deduction purposes from entity-level liabilities, but S corporation shareholders receive additional tax basis only from loans they make to the corporation. This difference allows LLC members to deduct more losses.
When an LLC member purchases an interest from another member, the tax basis of the new member’s share of LLC assets can be stepped up. This lowers the new member’s tax obligation when LLC assets are sold or converted to cash.
LLCs and their members have greater flexibility to arrange tax-free transfers of assets (including cash) between themselves.

In addition, LLCs can make disproportionate allocations of taxable income, losses and other tax items among their members. In contrast, S corporations must allocate all pass-through tax items among the shareholders strictly in proportion to their stock ownership percentages.

Also, be aware that not all entities are eligible to make a Subchapter S election. S corporations must comply with strict requirements that limit the number and types of shareholders, prohibit complex capital structures, and impose other restrictions (such as transfers to ineligible shareholders).

Make a tax-smart choice

Choosing your business entity requires careful consideration. Taxes play a pivotal role in this decision. Electing S corporation status or forming an LLC that’s treated as a partnership for tax purposes can provide tax advantages, but only if you structure the entity correctly. Before making your decision, consult with us. We can work with you and your legal advisors to determine the optimal setup for your situation.

Do you operate a side gig in addition to your regular day job? Whether you’ve turned a love for crafting into an online store or you play the guitar at a local venue, you’ll need to report the income from your sideline activity on your tax return. But can you deduct the related expenses? The answer depends on whether the IRS classifies your activity as a business or a hobby. Let’s take a closer look.

Why the distinction matters

If your activity incurs significant expenses — or even losses in some years — how the IRS classifies it can have a major impact on your taxes. For-profit businesses can deduct “ordinary and necessary” business expenses.

So, if you operate an unincorporated for-profit business activity that generates a net tax loss for the year (deductible expenses in excess of revenue), you can use the loss to offset income from other sources, such as salary and self-employment income, subject to annual limits. In 2026, the limit is $256,000 ($512,000 for married couples filing jointly). You can carry any excess losses forward to later tax years.

Conversely, hobbies receive less favorable treatment. Before 2018, hobby expenses could be claimed as miscellaneous itemized deductions subject to the 2% of adjusted gross income floor. Recent tax law changes permanently repealed itemized deductions for miscellaneous business expenses. So you generally can’t deduct hobby-related expenses for federal income tax purposes — even though you’re still required to report 100% of hobby-related income.

Potential safe harbors for profitable ventures

If you can show a profit motive for your sideline activity, the IRS will classify it as a for-profit business, and you can generally write off related expenses as the cost of doing business. Two safe harbors create a presumption that an activity is engaged in for profit:

Your activity produces positive taxable income (revenues in excess of deductions) for at least three out of every five years.
You’re engaged in a horse racing, breeding, training or showing activity, and your activity produces positive taxable income in at least two out of every seven years.

Proactive tax planning can help you qualify for these safe harbors — and earn the right to deduct your losses in unprofitable years.

Factors that demonstrate a profit motive

If you aren’t eligible for one of the safe harbors but can demonstrate an honest intent to make a profit, you may still be able to treat your side gig as a for-profit business. After all, many start-ups take years to become profitable. Questions the IRS considers when determining whether your activity is a business or a hobby include:

Do you carry on the activity in a business-like manner?
Does the time and effort put into the activity indicate an intention to make a profit?
Do you depend on income from the activity?
If there are losses, did they occur due to circumstances beyond your control or in the start-up phase of the business?
Have you changed methods of operation to improve profitability?
Do you (or your advisors) have the knowledge needed to carry on the activity as a successful business?
Have you made a profit in similar activities in the past?
Does the activity make a profit in some years?
Do you expect to make a profit in the future from the appreciation of assets used in the activity?

The degree of personal pleasure you derive from the activity is also a factor. For example, most people would say that woodworking is more fun than working in a high-stress executive position — so the IRS is far more likely to classify the former is a hobby if you start claiming recurring losses on your tax returns.

Year-by-year determination

The IRS tests each year separately when determining whether an activity is a for-profit business or a hobby. So what once was considered a hobby can become a business — and vice versa. However, you generally bear the burden of proving your profit motive each year.

For example, you might be able to persuade the IRS that you’ve established a profit motive by keeping more detailed records, advertising and devoting more time to your side gig. It also helps to report profits for a few years, rather than just recurring losses. In fact, a pattern of losses over multiple years can sometimes trigger IRS scrutiny of whether an existing business is operating with a profit motive.

Start planning now

If you have a side business that isn’t yet profitable, we can evaluate your situation and offer suggestions to help improve your odds of business tax treatment. But don’t wait until year end — many factors the IRS considers when evaluating your profit motive require proactive planning throughout the year. We can help strengthen your position in case the IRS questions your deductions. Contact us to learn more.

If you’re self-employed, you probably have questions about deducting business expenses on your federal income tax return. Here’s a quick overview of the filing requirements for sole proprietors and independent contractors, and five examples of expense deductions that are commonly overlooked or misunderstood.

Filing basics

Sole proprietors and independent contractors must report their business activity on Schedule C, “Profit or Loss From Business,” of their personal tax returns (Form 1040). Business income includes money earned from customers, side gigs, online sales and other self-employment activities. Income may be reported on Forms 1099-NEC or 1099-K, but you must report all taxable business income, even if you don’t receive a tax form.

Although employees can no longer deduct unreimbursed business expenses, self-employed individuals can offset their business income with various deductions for business-related expenses. This is a major tax advantage for the self-employed.

When evaluating whether costs are deductible, follow this golden rule: Business expenses must be ordinary (common in your industry) and necessary (helpful and appropriate for the business). Of course, you’ll need to keep detailed records to support your business deductions. Obvious examples of potentially deductible expenses are supplies, materials, and, if you have employees, payroll and benefits. Other business-related expenses may also be deductible on Schedule C, though the rules are sometimes confusing. Below are five common examples.

1. Home office

Unlike employees who work remotely, you can deduct the costs for a workspace in your home that’s used regularly and exclusively as your principal place of business. This can include a portion of actual indirect home expenses — such as rent or mortgage interest, insurance, utilities and repairs — based on your business-use percentage. For instance, if you use 10% of your apartment’s square footage for business, you can deduct 10% of your rent.

You can also fully deduct direct expenses (for example, the cost of painting your office) and, if you own your home, claim a depreciation allowance under IRS tables. In lieu of tracking your actual expenses, the IRS also offers a simplified method of $5 per square foot for up to 300 square feet.

2. Education

The costs of refresher courses, continuing education classes, vocational training and other education programs may be deductible if you’re required to take them to maintain or improve skills required for your current trade or business. Qualifying expenses include tuition, books, supplies and fees, and potentially travel costs to attend education programs.

However, costs of education that’s needed to meet the minimum requirements for a trade or business or that qualifies you for a new trade or business generally aren’t deductible. For example, you can’t claim the cost to obtain an undergraduate degree as a business expense.

3. Business meals

You generally can deduct 50% of the costs of business meals if they aren’t “lavish or extravagant.” This applies to food and beverages provided to customers, clients, suppliers, employees, agents, partners or professional advisors — whether established or prospective.

Although entertainment costs aren’t deductible under current law, food and beverages might be deductible even if they’re provided at a nondeductible entertainment activity. But such a deduction is available only if:

The food and beverage items are separately purchased or identified from the entertainment costs on bills, invoices or receipts, and
The amount charged for food or beverages reflects the venue’s usual selling price for those items if purchased separately from the entertainment or approximates the reasonable value of those items.

Say, for example, that you take a customer to a World Cup match this summer. The ticket costs aren’t deductible. But if you buy the customer popcorn, nachos and drinks while there, you can deduct half of those costs as long as you have proper documentation, such as the itemized receipt, and records showing who attended and the business purpose.

4. Business travel

If you travel to a temporary location for business purposes, you can deduct your travel expenses, including round-trip airfare, hotel costs and other incidentals (such as tips and cab fares). However, the primary purpose of your trip must be business related. For instance, you might travel to a different city or country to attend a trade show or educational conference.

Beware: Some allocations may be required if a trip combines business and pleasure — for example, if you fly to a location for four days of business meetings and stay for an additional three days of vacation. Only the reasonable cost of lodging and 50% of meals incurred during the business days are deductible. Lodging and meal costs incurred for the personal vacation days aren’t deductible.

On the other hand, with respect to the cost of the travel itself (for example, plane fare), if the trip is primarily for business purposes, the travel cost can be deducted in its entirety, and no allocation is required. Conversely, if the trip is primarily personal, none of the travel costs are deductible.

If your spouse joins you, his or her travel expenses generally aren’t deductible, unless your spouse is your employee and has a bona fide business reason to be there. But the restrictions apply only to additional costs incurred by having your nonemployee spouse travel with you. For example, the expense of a hotel room or for traveling by car would likely still be fully deductible because the cost to rent the room or travel by car alone vs. with another person would be the same, even in a rented car.

5. Business vehicle expenses

If you drive your personal vehicle for business purposes, you may be eligible to deduct some auto-related expenses on Schedule C. The amount of your deduction is based on the percentage of business use.

For example, suppose you use your car 60% for business driving in 2026. That means you can deduct 60% of your vehicle costs — such as gas, repairs and insurance — plus a generous depreciation allowance, subject to certain limits for “luxury cars.” And, if you buy the vehicle in 2026, you may also qualify for a Section 179 deduction and 100% bonus depreciation, subject to applicable eligibility requirements and limitations.

Be aware that the IRS is a stickler for documentation. Briefly stated, you must keep a contemporaneous log listing every business trip and proof of your expenses. Alternatively, you can cut down on recordkeeping by using the standard mileage rate of 72.5 cents per business mile (plus business-related tolls and parking fees) in 2026.

Don’t leave tax savings on the table

Many self-employed taxpayers miss legitimate deductions because they fail to keep adequate records or misunderstand the rules. Tracking expenses throughout the year can make tax filing easier, help ensure you don’t miss legitimate deductions and strengthen your position if the IRS questions a deduction.

We can help you identify qualifying business expense deductions and establish recordkeeping practices that support them. Contact us to start discussing a tax strategy tailored to your small business.

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