Month: September 2024

Based on IRS regulations, club dues are generally not deductible if the organization’s principal purpose is to conduct entertainment activities for its members. 

However, there are exceptions for civic and public service organizations, such as the Lions, Rotary, Kiwanis, and Civitan clubs, which the IRS recognizes as not being primarily for entertainment.

The situation is less clear for clubs like the Masons or Shriners because the IRS did not name them in its regulations. 

The key determinant for deductibility is whether the organization’s principal purpose aligns with civic and public service rather than entertainment. If a member, such as a Mason or a Shriner, can reasonably state that their involvement primarily serves a civic purpose, similar to that of the Lions or Rotary clubs, then the dues may be considered deductible.

It is also important to ensure that any dues claimed as deductions meet the “ordinary and necessary business purpose” criteria set forth by the IRS. For example, membership in these organizations could provide business networking opportunities or enhance your stature in the community, which could qualify as an ordinary and necessary business expense.

If you want to discuss deducting the clubs you belong to, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• September 27, 2024

The story of James Maggard, a minority shareholder in an S corporation, highlights some significant lessons about the importance of vigilance and the need for proper oversight in businesses with multiple owners.

Maggard, who owned 40 percent of the corporation, discovered too late that his fellow shareholders looted the corporation, which led to severe financial and tax consequences for him. Despite being unaware of their misconduct, Maggard was ultimately responsible for taxes on over $784,000 of income he never actually received.

Here are a few key takeaways from the Maggard case for minority shareholders to consider.

Trust but Verify

Even when working with family and friends you trust, it is crucial to maintain checks and balances within the organization to prevent potential misuse of company funds or resources.

Assert Your Rights

As a minority shareholder, you have rights and should assert them when necessary. If you notice irregularities, such as meetings happening without your knowledge or discrepancies in financial statements, it’s essential to take immediate action.

Seek Professional Guidance

Working with a qualified tax professional is vital when dealing with complex business matters, especially those involving taxes. Proper guidance can help prevent costly mistakes and ensure that all required documentation, like K-1s, is appropriately managed.

Stay Informed and Proactive 

If you are entitled to receive specific financial documents such as K-1s, and you don’t receive them, you must promptly address the issue. Failure to do so can result in severe tax liabilities and other financial consequences.

Maggard’s situation underscores the importance of active involvement and due diligence in protecting your financial interests.

If you want to discuss the controls you have in place to protect your financial interests, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• September 24, 2024

After our discussion about ways to save on your Social Security taxes, you might be wondering how these savings impact your Social Security benefits. After all, paying less into Social Security results in receiving lower benefits later in life. 

However, there is a strategy to come out ahead—by creating a side fund and investing the savings from reduced Social Security taxes.

Example Scenario

Let’s say your current taxable Social Security income is $168,600. Using strategies such as forming an S corporation or partnership could reduce your taxable income to 40 percent of that amount, or $67,440. This reduction saves you $12,543.84 in Social Security taxes annually.

If you invest these savings into a side fund with a 3 percent after-tax return over 35 years, your side fund could generate a monthly benefit of $3,785.47 for 20 years. Combined with your reduced Social Security benefit of $3,030.93, this totals $6,816.40 per month—$1,865.60 more than you would receive if you paid Social Security taxes on $168,660.

Additional Considerations

While reducing your Social Security income can lower your future benefits, it does not affect other important benefits such as:

• Spousal retirement benefits
• Medicare eligibility at age 65
• Potential disability benefits
• Dependent benefits for children or other dependents

Key Points to Remember

To qualify for Social Security retirement benefits, you need 40 quarters of coverage.

Social Security calculates your retirement benefits based on your highest-earning 35 years.

Conclusion

Strategically reducing your taxable Social Security income and investing the tax savings can leave you better off financially. You should consider this approach as part of your overall retirement planning strategy.

If you want to discuss your Social Security taxes, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• September 20, 2024