Month: December 2021

When the individual production activity of a partner is outside his or her capacity as a member of the partnership, the partnership has two choices:

1. Allocate the production income to the partner, and have the partner treat the expenses as unreimbursed partner expenses (UPE).
2. Treat the partner as a 1099 independent contractor for the individual production.

Unreimbursed Partner Expenses

As a partner in a partnership, you generally can’t deduct any of the partnership expenses on your individual tax return—the partnership should pay for and deduct its own business expenses.

But if your partnership agreement or business policy forces you as an individual partner to pay for expenses out of pocket, with no reimbursement available, then you can deduct the business expenses in full on your individual tax return as UPE.

Because the UPE is a trade or business expense, it also reduces your self-employment tax. 

Treatment as a 1099 Independent Contractor

The tax code is clear on how this works. IRC Section 707(a)(1) states:

If a partner engages in a transaction with a partnership other than in his capacity as a member of such partnership, the transaction shall, except as otherwise provided in this section, be considered as occurring between the partnership and one who is not a partner.

Thus, under this treatment, you would treat that activity as independent contractor activity and report the income to the partner on IRS Form 1099-NEC, Nonemployee Compensation.

The partnership agreement should clearly define how it will treat a partner’s individual production. If you have questions on how to treat one of your partners, please don’t hesitate to call me on my direct line at 408-778-9651.

• By Leon Clinton
• December 30, 2021

If you hire an employee for your Schedule C business, you can qualify for several valuable tax credits. 

Each credit is different, and certain limitations apply to all or most employer tax credits.

Remember, tax credits are the best. They beat deductions. Note the difference below (using the 32 percent bracket): 

• A $1,000 deduction for wages reduces your income taxes by $320. 
• A $1,000 credit reduces your taxes by $680 ($1,000 – $320).

Many tax credits are not available if you hire a person related to you, including children, stepchildren, a spouse, parents, siblings, step-siblings, nephews, nieces, uncles, aunts, cousins, or in-laws.

Eight Valuable Tax Credits for Business Owners

Below are listed the eight non-refundable tax credits that Schedule C business owners can claim when they hire employees. 

1. Work Opportunity Tax Credit (WOTC)

The WOTC rewards employers for hiring employees from groups the IRS has identified as having “consistently faced significant barriers to employment.” 

2. Family and Medical Leave Credit

Federal law doesn’t require that you give paid leave to your employees who need to take time off for family reasons (such as the birth of a child) or due to their illness or that of a family member. (A few states require some paid leave that’s funded through payroll deductions.) 

But if you choose to provide such paid leave, the federal tax code may reward you with a family and medical leave tax credit. 

3. Credit for Small Employer Health Insurance Premiums

If you have fewer than 50 full-time-equivalent employees, you are not required to provide your employees with health insurance. But if you elect to do so, you may qualify for the small business health care tax credit. This tax credit is available to eligible employers for two consecutive tax years.

4. Credit for Small Employer Pension Plan Start-Up Costs

This credit is for the cost of setting up an employee pension plan, including a new 401(k) plan, 403(b) plan, defined benefit plan (a traditional employee pension plan), profit-sharing plan, SIMPLE IRA or SIMPLE 401(k), or SEP-IRA. 

The costs covered by the credit include the expenses to establish and administer the plan and to educate employees about retirement planning.

5. Credit for Employer-Provided Childcare Facilities and Services

This little-used credit is intended to encourage employers to provide childcare to their employees. There are two ways to get the credit:

1. Build, acquire, rehabilitate, or expand an on-site childcare facility for your employees’ children, and help pay to operate it.
2. Contract with a licensed childcare program, including a home-based provider, to provide childcare for your employees.

The second option is more realistic for smaller businesses. Businesses often partner with childcare companies such as the Learning Care Group, Bright Horizons, and KinderCare to offer this benefit.

6. Empowerment Zone Employment Credit

Is your business located in one of the designated empowerment zones? 

These are areas of high poverty and unemployment identified by the U.S. Department of Housing and Urban Development or Secretary of Agriculture. You can find a list and map on the HUD website. 

Key point. You might be surprised which places the government designates as having high poverty and unemployment. It’s worth checking out.

You can claim a credit equal to 20 percent of the first $15,000 in wages you pay to full- or part-time employees who both live and work in an empowerment zone. Thus, the maximum credit is $3,000 per employee (20 percent x $15,000). The employees must work for you for at least 90 days.

7. Credit for Employer Differential Wage Payments to Military Personnel

This credit is available if you have an employee in the military reserves who is called to active duty for more than 30 days. If you continue to pay the employee all or part of that employee’s wages while he or she is on active duty, you can claim a credit equal to 20 percent of the payments, up to $20,000.

8. Indian Employment Credit

This credit is available only if you hire an enrolled member of an American Indian tribe who both lives and works on an Indian reservation. If this is the case, you may claim a tax credit equal to 20 percent of the wages and health insurance benefits you provide the employee. The Indian employment credit ends December 31, 2021.

If you would like to discuss how to take advantage of these or other tax credits, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• December 25, 2021

After reaching age 50, you can make additional “catch-up” contributions to certain types of tax-advantaged retirement accounts. For the 2021 tax year, this opportunity is available if you’ll be age 50 or older on Friday, December 31, 2021.

Specifically, with an employer-sponsored 401(k), 403(b), 457, or SIMPLE plan, you can make extra salary-reduction catch-up contributions to your account—assuming the plan allows catch-up contributions. 

If you are self-employed and have set up a 401(k) plan or SIMPLE IRA for yourself, you can also make extra catch-up contributions to your account.  

Finally, you can make extra catch-up contributions to a traditional or Roth IRA. 

These catch-up contributions can carry a hefty punch because they are above and beyond the “regular” annual contribution limits that otherwise apply. 

The following table shows maximum allowable catch-up contributions for the 2021 tax year: 

If you’re married and both you and your spouse are age 50 or older, the amounts shown above can potentially be doubled, assuming both spouses have accounts set up in your respective names. 

But with an employer-sponsored plan, maximum salary-reduction catch-up contributions to your account might be less than the indicated amounts—depending on employee participation levels and the terms of the plan. 

The Question: How Much Are Catch-Up Contributions Worth?

This is where it gets interesting. While some folks eagerly embrace any chance to contribute more money to tax-advantaged retirement accounts, others might need some encouragement. Those in the latter category may dismiss catch-up contributions as inconsequential unless proven otherwise. Fair enough. So let’s prove otherwise.

Proof: Make 401(k), 403(b), or 457 Plan Catch-Up Contributions 

Assume you turn 50 during 2021 and contribute an extra $6,500 to your account for this year, and then you do the same for the subsequent 15 years (for a total of 16 years), up to age 65. Here’s how much extra you could accumulate by that age in your 401(k), 403(b), or 457 account (rounded to the nearest $1,000), assuming the annual rates of return indicated below:

These are substantial amounts. Of course, we are talking before-tax numbers here.  

Proof: Make SIMPLE Plan Catch-Up Contributions 

Say you turn 50 during 2021 and contribute an extra $3,000 for this year, and then you do the same for the subsequent 15 years (for a total of 16 years), up to age 65. Here’s how much extra you could accumulate by that age in your SIMPLE plan account (rounded to the nearest $1,000), assuming the annual rates of return indicated below:

Not bad! Once again, remember that these are before-tax numbers.  

Proof: Make IRA Catch-Up Contributions 

Say you turn 50 during 2021 and contribute an extra $1,000 for this year, and then you do the same for the subsequent 15 years (for a total of 16 years), up to age 65. Here’s how much extra you could accumulate by that age in your IRA (rounded off to the nearest $1,000), assuming the annual rates of return indicated below:

These are before-tax numbers for traditional IRAs but after-tax numbers for Roth IRAs.

If you would like to discuss your retirement plans, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• December 18, 2021