Tax

Here are some important updates and strategies regarding Social Security and Medicare taxes that may significantly impact your business.

For 2024, the Social Security tax ceiling increased to $168,600, resulting in a maximum Social Security tax of $20,906 for high-earners. The Social Security Administration projects this ceiling to rise annually, reaching $242,700 or more by 2033. Additionally, the government adds a 2.9 percent Medicare tax to all wages and self-employment income, with an extra 0.9% for high-income earners.

If you’re self-employed, these taxes can be particularly burdensome. Here are three strategies that can potentially reduce your tax liability:

1. Operate as an S corporation. This structure allows the corporation to pay you a reasonable salary and distribute the remaining profits to you, exempt from self-employment taxes.
2. Leverage community property rules. Married filers living in community property states can use IRS rules to eliminate or create a spouse partnership in order to reduce self-employment taxes.
3. Avoid the husband-wife partnership classification. With close attention to partnership attributes, you can avoid the husband-wife partnership classification and reduce overall self-employment taxes.

Each of these strategies has specific requirements and potential trade-offs. If you want to discuss the possibilities, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• August 19, 2024

Long-term care costs can be substantial, and neither Medicare nor Medicaid provide comprehensive coverage for most people. Long-term care insurance can help protect your finances, and there may be ways to deduct the premiums, depending on your business structure.

Here are four key points to consider:

1. C corporations can provide long-term care insurance as a fully deductible, tax-free benefit to owners.
2. Sole proprietors or single-member LLCs with a spouse as the only employee may be able to deduct 100 percent of the premiums through a Section 105-HRA plan.
3. S corporation owners, partners, and other sole proprietors may be able to deduct premiums subject to age-based limits.
4. If you don’t qualify for business-related deductions, you might deduct premiums as itemized deductions subject to age-based limits and the 7.5 percent floor.

If you want to discuss long-term care insurance deductions, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• August 15, 2024

Purchasing raw (unimproved) land can be a great way to get into real estate investing. 

Raw land is ordinarily cheaper than land with buildings and other improvements. Moreover, you don’t have the expense of handling building maintenance and other upkeep, not to mention the headaches of dealing with tenants if you rent improved property. 

But the tax benefits for owning raw land as an investor are much more limited than for improved property. Some expenses are deductible as itemized personal deductions. Many others aren’t deductible at all. Moreover, if you don’t itemize, you get no immediate benefit from your deductions.

Here’s what you can deduct:

• Property taxes (not limited to $10,000, as is the personal deduction for other property taxes)
• Interest on money borrowed to purchase raw land (limited to annual investment income)

Here’s what you can’t deduct:

• Other carrying costs that used to be deductible as miscellaneous itemized deductions, including legal and accounting fees, insurance, and travel expenses (these deductions may return in 2026)
• Land preparation costs (such as grading) that are “inextricably associated” with the land itself and not “directly associated” with a building or another structure.

If you don’t have enough total personal deductions to itemize, you get no current deductions at all for the costs of owning raw land. In this case, you should elect to capitalize your deductible costs—that is, add these expenses to your land’s cost basis. 

Capitalization reduces any taxable profit when you sell the property for a capital gain. This isn’t as good as a current deduction at ordinary income tax rates that are as high as 37 percent, but it’s better than no deduction at all. You need to file the election to capitalize each year.

If you have any questions about investing in raw land, call me on my direct line at 408-778-9651.

• By Leon Clinton
• August 6, 2024