Month: February 2025

A common question among business owners is how to pay themselves from their businesses properly. The correct method depends on your business structure, so I wanted to give you this quick guide to help you navigate this issue.

Sole Proprietors and Single-Member LLCs

• You cannot be on payroll. Instead, you take owner’s draws as needed.
• You report net earnings on Schedule C of your personal tax return.
• You pay self-employment taxes (15.3 percent) on self-employment net income.

Partnerships and Multimember LLCs

Partners cannot receive W-2 wages. Instead, they receive:

• guaranteed payments for services, taxed as income and subject to self-employment taxes
• profit distributions, which are generally subject to self-employment tax (except for passive limited partners)

Cash withdrawals are made through partner draws or profit distributions per the partnership agreement.

S Corporations

• You must pay yourself a reasonable salary as an employee via W-2 wages, which are subject to FICA taxes (15.3 percent, split between you and the corporation).
• Any additional profits are taxed to you personally but can be distributed tax-free.

C Corporations

The corporation pays taxes at a flat 21 percent rate.

You can receive compensation in two ways:

• W-2 wages, subject to payroll taxes
• dividends, which are taxed twice—once at the corporate level and again at your personal level

If you want to discuss how your business pays you, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• February 27, 2025

If you are considering purchasing a business vehicle, you may be eligible for significant tax deductions, especially when combined with a qualifying home office. Here’s how:

Heavy Vehicle Deductions

In 2025, businesses can take advantage of:

• Section 179 expensing – Deduct up to $1,250,000 of qualifying business equipment, including heavy vehicles. SUVs are subject to a $31,300 limit, while pickups and vans meeting specific criteria are not.
• Bonus depreciation – Claim 40 percent first-year depreciation on a qualifying heavy vehicle.
• Business-use requirement – You must use the vehicle more than 50 percent for business to qualify for these deductions.

A “heavy” vehicle has a gross vehicle weight rating (GVWR) of over 6,000 pounds. Certain SUVs, pickups, and vans qualify, but lighter vehicles are subject to much lower annual depreciation limits.

Home-Office Deductions

A deductible home office that meets the principal place of business test converts commuting miles into business miles, making it easier to meet the more than 50 percent business-use test. 

For your home office to qualify as your tax code–defined principal office, you must use it regularly and exclusively for your business, and the home office must serve as

• your primary income-generating space, or
• the location where you perform substantially all your administrative tasks.

Example of Tax Savings

A $90,000 heavy SUV used 100 percent for business could generate $61,824 in first-year deductions, while with a qualifying pickup truck, you could deduct the entire $90,000 in Year One under Section 179.

For Corporate Owners

If you own the vehicle personally, but operate as a corporation, ensure your corporation reimburses you for business use to capture the full tax benefit.

If you want to discuss vehicle and/or home office deductions, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• February 25, 2025

Do you own a traditional IRA, Roth IRA, SEP-IRA, or SIMPLE IRA? Usually, the income earned within these accounts is tax-free. This applies to common investments such as stocks, bonds, mutual funds, ETFs, CDs, and Treasury Bills.

But if your IRA makes alternative investments, it may be subject to a special tax called the unrelated business income tax (UBIT)—and that’s true even if it’s a Roth IRA.

When Does UBIT Apply?

Investing in active businesses. If your IRA invests in an S corporation, a limited partnership, a regular partnership, or an LLC engaged in an active business, it may owe UBIT. This does not apply to investments in C corporations because such corporations pay their own taxes.

A common example of a UBIT-generating investment is an investment in a master limited partnership.

Using debt financing in a self-directed IRA. If your self-directed IRA buys real estate or other assets using debt, it may owe the UBIT on its unrelated debt-financed income.

For example, if your IRA buys a $500,000 rental property with $250,000 of debt, 50 percent of the rental income is subject to UBIT.

How UBIT Works

Tax rates. UBIT is taxed at trust tax rates, reaching the top 37 percent bracket at just $14,450 of taxable income.

Exemption. Each IRA gets a $1,000 exemption from UBIT annually.

Filing requirements. If an IRA generates more than $1,000 in unrelated business taxable income, it must file Form 990-T electronically and the IRA (not you personally) must pay the tax. The IRA custodian handles this filing separately. It’s not part of your personal tax return.

Double taxation for traditional IRAs. A traditional IRA paying UBIT faces double taxation—first at punitive trust rates and then at ordinary income rates when you, the traditional IRA owner, withdraw funds.

Key Point

IRAs should generally avoid investments that generate UBIT.

If you want to discuss UBIT, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• February 18, 2025