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Maximizing Tax Strategies for Colorado’s New Entrepreneurs

For first-time small business owners, the thrill of setting up shop often revolves around the tangible aspects of their enterprise: How much inventory to buy, logistics, establishing business banking and securing the right name.

Yet, amongst these foundational decisions, many overlook a crucial component of business ownership: tax obligations.

With recent Census data revealing a record-breaking 5.5 million new business applications in 2023 — marking the most robust year for new ventures on record and the third consecutive year of historic small business growth — the spotlight on financial diligence has never been brighter. As these new business owners navigate their first year, they must remember that for certain entities, filing taxes is mandatory, regardless of their profit margins. Here are some insights that may come as a surprise to many first-timers.

READ: How to Conduct a Mid-Year Tax Strategy Audit

The misconception of “no Income, no Filing”

Even if your new business didn’t earn a single dollar in income, you may still be required to file a return.

This rule catches many first-time entrepreneurs off guard, but it’s a crucial piece of compliance you can’t afford to overlook. Whether you’re operating as an LLC, a C Corp or an S Corp, the IRS expects to see your financial activities on record. This isn’t just bureaucratic red tape. Submitting your tax filings, even in the absence of income, serves as an official acknowledgment of your business’s operational status.

It’s like keeping a detailed diary of your startup’s financial journey, which, in turn, can unlock potential tax credits and deductions down the line.

Beyond just proving your business’s existence, these early tax filings lay the groundwork for a transparent relationship with tax authorities. They can help establish your credibility and financial integrity right from the start, which will be invaluable as your business grows and seeks further investment or loans. It allows you to document and carry forward losses that could offset future profits — a strategic move many new business owners miss.

READ: Simplifying Colorado’s Sales Tax System — One Success at a Time

Foundation for growth

It’s a common pitfall: Many business owners delay seeking legal and tax advice side by side until their operations have scaled significantly. By then, they often discover that their initial, perhaps makeshift, systems and structures are ill-equipped to support their growth.

This oversight can weave a complex, costly web of issues that are challenging to resolve.

For instance, an entrepreneur who initially sets up their business as a sole proprietorship to save on costs may later find that transitioning to a corporation for better tax benefits and liability protection is not only complicated but also riddled with potential legal and tax penalties. Similarly, businesses that expand without proper contracts or fail to protect their intellectual property early on may face disputes or infringement issues that hinder growth and require expensive legal interventions. Laying a solid legal and tax foundation right from the start can save time and money once expansion begins. 

Legal and tax advice are not one-size-fits-all and many issues will not be obvious at the start. There are layers of considerations that must be evaluated at every stage of growth.

From the tax implications of your business structure to the nuances of employment law as you start to hire, every decision has a ripple effect on your company’s future. That’s why it’s critical to ask questions and share planned changes with your advisors, even those you might think the questions are too basic or details immaterial.

Engaging with professionals early on doesn’t just help you build a stronger foundation—it empowers you with the insight to navigate growth strategically, avoiding common pitfalls that can stall or even derail your progress. Remember, in business, being proactive is always better than being reactive.

Married taxpayers and business ownership

Stepping into the business world with your spouse, especially through avenues like jointly owned rental properties or LLCs, introduces a layer of complexity to your tax situation that many don’t anticipate.

A common misconception is that marital unity simplifies business operations and tax obligations. However, the reality is quite the contrary. When you and your spouse own a business together, the IRS views your business as a partnership, irrespective of your marital bond. This distinction mandates the filing of a separate partnership income tax return, a requirement that often catches couples off guard.

This oversight is not just a mere procedural hiccup — it has significant implications for your tax planning and financial management.

Many couples venture into business assuming that their combined personal tax returns will cover their business activities. This misunderstanding can lead to missed opportunities for tax deductions, incorrect filings and, potentially, heightened scrutiny from tax authorities.

Professional tax advice partnered with legal insights becomes invaluable in these situations, guiding you through the complexities of partnership tax returns, optimizing your tax benefits and ensuring compliance.

The bottom line

Launching and running a new business in today’s market demands more than just an entrepreneurial spirit and a solid business plan — it requires a keen understanding of the tax implications that accompany the thrill of entrepreneurship.

In this context, the common narrative that tax considerations are secondary to business operations is not just outdated; it’s potentially detrimental to the longevity and success of your venture.

Whether it’s the unexpected requirement to file taxes without income, the strategic foresight needed to lay a solid foundation for growth or the intricate tax considerations for married entrepreneurs, these aspects underscore the multifaceted nature of running a business.

It becomes about peeling back the layers to reveal the complexities beneath, challenging the notion that tax planning is a concern only for the financially buoyant or the overly cautious when in reality, it’s for everyone from all walks of life. 

Simplifying Colorado’s Sales Tax System — One Success at a Time

Just a few short years ago, Colorado received a “D” rating from the Council on State Taxation, ranking Colorado’s sales tax system as one of the worst in the country. The abysmal rankings are a result of a confusing and cumbersome patchwork of 756 geographic areas with different sales tax rates and bases, and 72 home rule cities that require businesses to individually register and remit sales tax. This complicated and challenging sales tax system puts a significant burden on businesses around the state. 

In 2015, the Coalition to Simplify Colorado Sales Tax was founded by a non-partisan and diverse group of business and community leaders to address these challenges with one mission in mind — to simplify Colorado’s sales tax system. 

READ: Stay Ahead of Changes to the Tax Treatment of R&E Expenditures

This is not an issue that lands in news headlines very often. It is, however, critical to businesses and cities across Colorado and to our state government. Simplifying Colorado’s sales tax system will result in a thriving business climate, more jobs and an economy that is flourishing. This is an ongoing challenge, but we have come a long way since Colorado received that less-than-passing grade from the Council on State Taxation.

Working hand-and-hand with the General Assembly’s bipartisan Sales and Use Tax Simplification Task Force, the Simplify coalition has achieved tremendous success. One of the most substantial achievements has been the creation of SUTS, a one-stop portal designed to facilitate licensing and the collection and remittance of sales and use tax. SUTS will ultimately remove a significant amount of red tape and paperwork for businesses, untangle the more than 700 sales tax jurisdictions, and free up time to do what businesses do best — grow our economy.

READ: Higher Costs, Higher Crime, and More Red Tape — How Government Interference May Be Hurting Coloradans’ Wallets

SUTS is a remarkable tool for our small businesses and taxing districts. But it will soon be even better since House Bill 23-1017 passed in the most recent legislative session. The measure requires modifications that improve ease of use for businesses and municipalities remitting sales tax. The bill also requires the Department of Revenue to increase the awareness and participation of SUTS.

Another success of the 2023 legislative session is the passage of Senate Joint Resolution 23-004, which creates a process to achieve uniformity in the collection of sales and use tax for construction materials among municipalities, also improving Colorado’s business environment.

And one piece of legislation that has received some media attention and that the coalition fully supports is Senate Bill 23-143, which lends additional flexibility to the Colorado business community. Since it was made effective July 1st, 2022, the retail delivery fee has raised significant concerns with many Colorado businesses, particularly the costs of compliance and implementation of the fee. Signed by Governor Polis a few weeks ago, SB23-143 helps to alleviate some of those concerns by simplifying the fee collection and remittance process and providing an exemption for our state’s smaller businesses.

In light of the work of the coalition and the legislation that has passed, Colorado has climbed 18 spots — from 39th to 21st of states since 2017 — on the sales tax component in the Tax Foundation’s 2023 State Business Tax Climate Index. But there is still much work to be done continuing to simplify sales tax administration and address Colorado’s highly complex construction use tax and its equally complex lodging tax.

 

Paul ArcherPaul Archer is the president of the Simplify Colorado Sales Tax coalition and founder/CEO of Automated Business Technologies.

Act Now to Stay Ahead of Changes to the Tax Treatment of R&E Expenditures

Since the passage of the Tax Cuts and Jobs Act (TCJA) in late 2017, companies have been working to interpret and implement changes prompted by the new law. Most companies are aware of the legislative change that requires taxpayers to capitalize Section 174 research or experimental (R&E) expenditures for tax years beginning after December 31, 2021, but have been monitoring Congressional legislative activity that could defer the implementation of this capitalization provision.

READ —How the Inflation Reduction Act May Impact Your Business

The regulations under Section 174 define R&E expenditures as all such costs incident to the development or improvement of a product, process, formula, invention, computer software, or technique. Before the TCJA became law, taxpayers had the option of deducting R&E expenditures in the year incurred or recovering these costs over 60 months. Most taxpayers elected to deduct these expenditures in the tax year in which they were incurred. The TCJA repealed the option to currently deduct R&E expenditures and now requires taxpayers to capitalize and amortize these costs over five years for domestic R&E and 15 years for foreign R&E.

This change in law is effective for tax years beginning after December 31, 2021, and will impact substantially all taxpayers filing federal and Colorado income tax returns. For example, a manufacturer developing improved products and manufacturing processes will be subject to this capitalization requirement.

The requirement to change the method of accounting for R&E costs from a current deduction method to a capitalize and amortize method will increase taxable income in the year of implementation. Therefore, taxpayers will need to account for this change when computing financial statement tax provisions and quarterly estimated tax payments.

Although there is bipartisan Congressional support to defer the implementation of this R&E capitalization provision, the deferral was not included in the recently enacted Inflation Reduction Act or the CHIPS Act. As a result, the last chance for deferral in 2022 depends on whether the post-mid-term election lame-duck session of Congress takes up a year-end tax “extender” package which presumably would include a deferral provision.

Based on the inaction of Congress to date to defer the implementation of this provision, taxpayers will need to evaluate whether they are conducting R&E activities and then compute an estimate of expenditures that will be subject to capitalization. Since most taxpayers will be affected by this change in law, and the likelihood of deferral is unclear, it is important that taxpayers understand the impact this provision will have on (1) federal tax liability and estimated tax payments, (2) state tax liability, and (3) financial statement reporting.

 

Liza RothhammerLiza Rothhammer is a Principal in Grant Thornton’s Strategic Federal Tax Services (SFTS) practice. She leads a team responsible for specialty tax projects such as accounting methods, fixed asset, cost segregation, and research and development (R&D) tax credit studies. Her experience extends to federal R&D credit calculations, state R&D credit reviews, FIN48 analysis, R&D studies that rely on statistical sampling, the ASC 730 Directive, and IRS and state examinations.

 
Liza conducts R&D tax credit studies across numerous industries, including software, video gaming, technology, aerospace and defense, and manufacturing. She serves on the Board of the Denver Economic Development Corporation under the Denver Chamber.

Maximize Your Charitable Giving Donations: Aligning With Your Budget and Passions

If you have the means and desire to financially contribute to charitable organizations, it’s important to understand how and why you are allocating your funds to the causes you care about. Here are a few considerations and tips to ensure you’re making the most impact when planning your charitable giving.

Giving USA 2022: The Annual Report on Philanthropy for the Year 2021 reported that total charitable giving in 2021 grew 4.0% from 2020 to a total of more than $484 billion. As needs and donations increase nationwide with inflation on the rise and a potential recession ahead, it’s important to understand your personal goals and desires to ensure your contributions are making a meaningful impact on the causes you care about.

READ — Snooze Partners with World Central Kitchen to Support Ukraine

Pick Your Passion

With all the options to make an impact, it can be overwhelming to decide where to donate your funds. Consider the causes you are passionate about and identify organizations that match the cause.

From healthcare studies to humane societies, there is sure to be a charity that fits your passions. As part of your research, determine the organization’s public presence by reviewing annual giving reports, social media, press releases and partnerships. Also, review ratings given by third-party sources, such as Charity Navigator and other rating organizations. These ratings can help individuals understand how efficiently a charity will use its support, how well it has sustained its programs and services over time and their level of commitment to good governance and openness with information.

Spread the Love

You don’t have to limit yourself to one charitable organization. If you’re passionate about different causes, consider splitting your contributions between various charities to spread the love and make more of an impact.

You can also consider donating to one organization while volunteering your time to another. Giving back with your time can be just as meaningful to the charity and gives you a chance to develop a meaningful connection with the organization you decided to support.

Consolidate Your Giving

Rather than donating smaller amounts annually, consider consolidating your giving to every three or five years to make a bigger impact on one organization or cause. This could also help you reach the annual amount for a charitable giving tax deduction. For 2022 taxes, single filers may claim a $12,950 standard deduction, while married couples filing jointly can claim a $25,900 standard deduction. Compared to 2021, this is an increase of $400 for single filers and $800 for married couples. This method also provides a significant boost to your selected charity.

Budget for Giving

If you’re ready to begin consistently contributing to these causes, consider making charitable giving part of your budget. Using the spend, save and share budget method can help you create a formula that works for your personal finances. For example, you can allocate 50% of your take-home pay to your spending funds, 30% to savings, and 20% to sharing or donating.

While your personal breakdown might look different, the underlying philosophy for planned giving remains the same. Also, be sure to maximize your giving by taking advantage of any employer match programs your company may offer.

Take Advantage of Employer-matching Gift Programs

If your employer offers an employee matching gift program, be sure to review the criteria to ensure your cause and/or charity qualifies. From there, you can leverage your employer’s match each year to avoid leaving donation money on the table. These programs not only bolster your donations to do more good, but also help your employer contribute to worthy causes in their communities.

Involve the Whole Family

Talk with your family and children about your charitable giving plans and why giving is important. Include them in your plans and invite them to volunteer alongside you. Also, discuss what causes are important to them—especially if they are different from your own—and let them pick who they want to support. This will set a strong foundation of charitable giving and volunteering for them as they grow older.

Build your Legacy

Depending on your financial situation, ensuring your donations are continuing once you’ve passed is a great legacy to leave, but does require thoughtful planning. There are many options to achieve this. For example, consider including charitable contributions in your will or establish a dedicated memorial fund in your name where people can submit donations.

READ — Guest Column: UMB Bank — How to Select a Fiduciary

Wherever you are on your charitable giving journey, taking the time to think through where you most want to make an impact and what charities align with your passions is a great start to ensuring you are making the most of your dollars. Remember even a small donation can have a big impact on an organization as we navigate the cycles of the economy together.

 

Wendel AbbyAbby Wendel, president of consumer banking at UMB Bank.

How the Inflation Reduction Act May Impact Your Business

The Inflation Reduction Act (IRA) became law on Aug. 16, but some have criticized it as another round of spending in an already inflated economy. Still, others saw it as a necessity for the future of the country.

When asked about the implications of the IRA, Larry Summers, the former treasury secretary under both presidents Clinton and Obama and one of the key drafters of the Inflation Reduction Act said, “We will bring down prices, particularly of pharmaceutical goods, by using the government’s purchasing power more effectively to procure at low costs. So, the net effect of this bill is going to be to reduce inflation, while at the same time doing very, very important things for the environment, very important things for fairness and access to health care, doing very important things in terms of strengthening the tax system by assuring that all who should pay, do pay.”

The question many business owners are wondering, however, is how the IRA will impact their business. The answer is in the key items addressed in the IRA: taxes, audits, credits, and climate change.

READ — What Does a Recession Mean for Your Finances?

Taxes

The IRA imposes an Alternative Minimum Tax of 15% on “Applicable Corporations.” Applicable Corporations are corporations that average an annual Adjusted Financial Statement Income for three years greater than $1 billion, with some exceptions.

Some view the AMT as an additional complicating factor to the already intricate U.S. tax code in the form of the new AFSI test. However, Reuven Avi-Yonah, director of the International Tax LLM Program at the University of Michigan and a world-renowned tax expert, curbs the criticism by noting that this measure will only impact approximately 125 large corporations that “can afford the complexity in the sense that they can pay the best accountants and tax lawyers to deal with this.”

Other than the additional complexity of calculating a corporation’s tax liability, the new AMT could play a role in the M&A market. Large corporations would likely attempt to reduce AFSI by acquiring growth companies because such companies “often have large annual revenue growth rates but little or no net income for GAAP or IFRS purposes” or through “spinoffs and other corporate breakups (i.e., taxable or tax-free dispositions of noncore assets) [that] will also reduce AFSI.”

Thus, the new AMT could provide creative opportunities in the M&A world for large businesses looking to reduce their AFSI by acquiring small growth companies or by breaking existing business branches out of their corporate structure.

Audit Risk

One of the key items in the Inflation Reduction Act that received much media attention is the additional $80 billion in funding to the IRS, $46 billion of which is designated for enforcement that will result in an estimated 87,000 new IRS agents and staff members.

Increased funding for the IRS has been a long time coming. The IRS claims it has been underfunded and understaffed for decades and in desperate need of more personnel and updated technology. The new funding, however, heightened the concern among individuals and business owners of increased audit risk. Nevertheless, many of the bill’s authors and IRS Commissioner Charles Rettig promised the public that only households that earn over $400,000 would be subject to increased audit scrutiny.

To provide further assurance to the public, Treasury Secretary Janet Yellen, in a letter to Rettig, explicitly directed, “Any additional resources — including any new personnel or auditors that are hired — shall not be used to increase the share of households below the $400,000 threshold or any small businesses that are audited relative to historical levels.”

Yellen’s letter is a clear declaration of intent by the Treasury for its audit treatment of individual households. However, the letter leaves some unanswered questions regarding small businesses. Yellen does not determine what qualifies as a small business. Would the IRS auditors decide for themselves before reviewing businesses’ returns? Does the Treasury or the IRS have an unpublished threshold for auditing small businesses, and if so, what is it? Are we likely to see an increase in audits for smaller businesses, or is that, once again, a concern for only very large corporations?

These questions remain unanswered, but it is fair to say that we will likely find out within the next tax year or so.

READ — Conduct a Mid-Year Tax Strategy Audit

R&D Credit

The IRA doubled the refundable R&D credit for small businesses from $250,000 a year to $500,000. Section 41(h)(1) of the Internal Revenue Code defines a small business for purposes of the R&D credit as a business with gross receipts of less than $5 million during the current taxable year and the past five taxable years. This new measure appears to provide a large advantage for small businesses regarding their tax liability.

According to the OECD R&D Tax Incentive analysis in 2021, between 2000 and 2018, the number of R&D tax relief recipients in the U.S. more than doubled from 10,500 recipients in 2000 to 26,000 in 2018. Companies with gross receipts of less than $50 million a year accounted for approximately 70% to 75% of the total recipients. However, despite the increase in R&D tax relief recipients in the past 20 years, the total use of the credit remains fairly low. From my personal experience working as a tax consultant for over two years and reviewing hundreds of transactions and tax returns, I can say that most of the R&D credits claimed by small businesses are in the tens of thousands. One of the reasons for the low threshold is that R&D credits are fairly difficult to claim and are often subject to audit. Claiming R&D credits require a business to go through at least an internal study or preferably hire an outside expert to do the same. This fact deters many businesses from claiming the credits.

Nonetheless, with the right knowledge and preparation, claiming R&D credits could still be possible and worthwhile. Small businesses should be aware of the new changes to the law and understand the rules and regulations for claiming R&D credit.

Climate Change

According to the White House, “The Inflation Reduction Act represents the most aggressive action to combat the climate crisis and improve American energy security in our nation’s history.” The assertion made by the executive branch is that the IRA would cut social costs related to climate change by up to $1.9 trillion by 2050, with the ambitious goal of reducing greenhouse gas emissions by 40% in 2030.

The Inflation Reduction Act allocates approximately $370 billion to climate change-related projects. Such projects may include, among others, air quality monitoring, assisting farmers in shifting to sustainable practices, research in climate impact on agricultural practice, endangered species recovery plans, and protection and restoration of coastal communities and ecosystems. It is important to note that businesses operating in the renewable energy environment may benefit from the additional IRA funding that authorizes billions in federal loans and loan guarantees “for energy and automotive projects and businesses.”[3] To emphasize the impact of the new federal funding on renewable energy projects, Dan Reicher, a former assistant energy secretary under President Clinton, said, “[This is a sleeping giant in the law and a real gold mine [emphasis added] in deploying these resources.”

Businesses should, therefore, be mindful of the new opportunities presented by the IRA and estimate whether they can benefit from a federal loan to fund a climate change-related project.

However, the same cannot be said for businesses operating in the oil and gas industry. The latter will see an increase in the Superfund Tax from 9.7 cents a barrel to 16.4. This might be regarded as a negligible amount but such that could have an aggregated impact on oil and gas producers.

Conclusion

The White House, along with the drafters of the IRA, made two important claims about the bill when introducing it to the American public. First, the IRA is an aggressive and ambitious act that will fight the climate change emergency; second, the investment the act provides will eventually reduce consumer prices and consequently bring inflation down.

Our analysis focused only on the key elements addressed by the IRA and what they mean to the everyday American business owner. Though the criticism of the bill may be valid, we can hope that the new investments, along with the additional tax measures and credits, would incentivize the market, encourage investors to increase M&A activity, and provide new opportunities and relief to businesses suffering from the high costs due to inflation.

However, appreciating the implications of the IRA would require business owners to give up a precious asset – time. It may take a few months or even more, and we can only hope that the legislators’ intent will indeed come to fruition in the near future.

 

Duekevysquare 1Evy Duek is a corporate attorney with Sherman & Howard LLC in Denver. Evy has extensive knowledge of M&A deals from a legal and tax perspective.

Finding the Silver Lining Amidst Rising Interest and Inflation Rates

Between bear markets in both stocks and bonds and mortgage rates doubling in 2022, is there any good news out there? Believe it or not, there is. Because of the massive rise in inflation this year, starting January 1, 2023, the Federal government is increasing Social Security payouts, raising 401k and IRA contribution limits, expanding the standard tax deduction, and increasing estate tax and annual tax-free gifts limits. For the first time in 14 years, you can also earn 4% on short-term treasury bills. Taking advantage of these changes next year could help you financially. According to the Wall Street Journal, here are some specific ways to improve your financial situation in 2023.

READ — What Does a Recession Mean for Your Finances? 

Social Security and Payroll Tax

Thanks to inflation this year, Social Security checks will be 8.7% higher than in 2022, the biggest increase in 40 years. For retirees, the average check will go up from $1,669 to $1,814. The Social Security payroll tax, which applies to W2 earnings, will go up 8.9% from $147,000 to $160,200, allowing taxpayers to shield an extra $13,200 from being taxed.

READ — Mapping Out Financial Success with Retirement Planning

Bigger Standard Tax Deduction, Higher Tax Brackets Limits, and Higher HSA Amounts

The standard personal tax deduction increases 7% next year, going from $12,950 to $13,850 for individuals and from $25,900 to $27,700 for couples. The HSA healthcare flexible spending account amount will go up from $2,850 to $3,050. All the marginal tax brackets have been adjusted 7% higher to reflect higher inflation. All these changes will help taxpayers keep more of their income.

Higher Estate Tax Limit and Annual Gift Change

Individuals will be able to transfer $12.92 million to their heirs tax-free during their lifetimes. The old amount was $12.06 million. This is a 9.3% increase. Combined couples can give away $25.84 million in 2023. However, this estate tax law is set to revert back to $5 million adjusted for inflation on January 1, 2026, when the 2017 tax cuts expire.

The annual tax-free gift increases from $16,000 to $17,000 next year. Married couples will be able to give away a total of $34,000 a year tax-free. These gifts can be a great way to reduce the size of your estate, particularly if you make them on an annual basis.

Higher 401k and IRA Contribution Limits

There is a 10% increase in the amount of money people can contribute to their 401k(s) in 2023. The limit for 401ks last year was $20,500; in 2023, it will go up to $22,500. The IRA limit will increase by 8% or $500 (from $6000 to $6,500). If you are over 50, the amounts are even higher: $7,500 from $7,000 last year.

Three-Month Treasury Bills Yield 4%

You haven’t been able to earn 4% on short-term treasury bills since 2008. Today, because of the much higher Fed Funds rate, the Federal government is paying 4% on 3-month treasury bills. A year ago, it was practically zero. If interest rates continue to rise, you can reinvest at a higher rate or get your money back when these bills mature. If you want to have 6-9 months of cash in reserve, treasury bills are a great alternative now. Cash is no longer trash.

It’s not all bad news heading into the new year. These inflation-adjusted changes and higher short-term treasury rates are a real benefit to Americans. And suppose the Federal Reserve is successful in bringing inflation down from 8.2% today to a more manageable level in 2023. In that case, we could potentially see a relief rally in both the stock and bond markets and a stabilization in mortgage rates.

READ — Choose Your Own Adventure: What’s Your Investment Path?

 

Important Disclosure:

Thumbnail Fred Taylor HeadshotFrederick Taylor is a Partner, Managing Director at Beacon Pointe Advisors, LLC. The information contained in this article is for general informational purposes only. Opinions referenced are as of the publication date and may be modified due to changes in the market or economic conditions and may not necessarily come to pass. Forward-looking statements cannot be guaranteed. Past performance is not a guarantee of future results. Beacon Pointe has exercised all reasonable professional care in preparing this information. The information has been obtained from sources we believe to be reliable; however, Beacon Pointe has not independently verified or attested to the accuracy or authenticity of the information. The discussions, outlook, and viewpoints featured are not intended to be investment advice and do not consider specific investment objectives or risk tolerance you may have. All investments involve risks, including the loss of principal. Consult your financial professional for guidance specific to your circumstances.

Can I write it off?

Once again, Americans are plunging into tax season on the tail of the holiday season. However, this tax season may come with more questions and complications than ever before for some families and small business owners. Many solo lawyers and small law firms have experienced changes in the way they do business over the past year, leading to additional tax questions.  

It’s crucial to meet with a financial professional to begin the process of getting organized to file your taxes as early as possible after the new year. Meeting with them early on gives you more time to collect essential information and documents and to help develop a tax strategy. 

Part of that strategy should be identifying expenses you can write off when filing your 2021 taxes. Here’s an overview of items that solo attorneys and small law firm owners may not know they can deduct when filing their taxes. 

Startup Cost Deduction 

Often, the IRS requires significant expenses to be deducted over time instead of all at once by categorizing them as capital expenses. However, if you went solo in 2021 or opened a small law firm, you may be eligible for a deduction of up to $5,000 in business startup cost. 

Tax-deductible startup costs include expenses such as: 

  • Market research 
  • Travel-related expenses for starting the business 
  • Searching for potential business locations 
  • Advertising 
  • Attorney fees 
  • Accountant fees 

Additionally, professional fees paid to consultants, attorneys, accountants, and others are typically deductible at any time during the life of a business, even if they aren’t startup costs. 

Travel Deductions 

Suppose your business travel lasts longer than a typical workday, necessitates that you get to sleep or rest, and takes you to somewhere away from the city where you normally conduct business. In that case, your expenses may qualify for a deduction. However, keep in mind that you: 

  • Should have a specific business purpose planned before leaving home  
  • Must engage in business activity (finding new clients, meeting with clients, or learning new skills directly related to your business) while you are traveling 

Maintain ample and precise records and receipts for your business travel expenses and activities. Travel deductions are frequently under scrutiny from the IRS, and you should be prepared to justify yours. Deductible travel expenses may include: 

  • Transportation to and from your destination 
  • Transportation at your destination—car rental, Uber fare, or bus or subway tickets 
  • Lodging 
  • Meals 

Publications Deductions 

Expenses for specialized journals, magazines, and books directly related to your business are tax-deductible under the category of supplies and materials. For example, a daily local newspaper won’t count as specialized, whereas a subscription to Best Lawyers Business Edition, if you are a business lawyer, would be.  

Interest Deductions 

While it is always cheaper to spend money you already have instead of using a loan, you can get a tax deduction for loan interest. Business loan interest is a tax-deductible business expense as long as they are from a bank. Suppose a loan is for both business and personal reasons. In that case, the business portion of the loan’s interest expense is assigned according to the assignment of the loan’s proceeds. 

It’s essential to keep track of the disbursement funds if you aren’t using the entire loan for business purposes. Note that credit card interest isn’t tax-deductible when incurred for a personal purchase. However, if the interest accrues from business purchases, it’s tax-deductible. 

Unexpected Expenses from COVID/Socially Distant Business Practices 

Almost every law firm and solo attorney experienced a rise in unexpected expenses related to the COVID-19 pandemic. Since it’s been a while since many of these costs were initiated or increased, it’s crucial to remember them at tax time. These might include: 

  • Cost related to your digital ecosystem: Most companies implemented a remote working model to continue as close to normal as possible business operations. Costs associated with implementing a remote work environment, such as IT consultation, related hardware installations, obtaining additional equipment, and others, can be considered restructuring costs and treated accordingly. 
  • Marketing expenses: Your practice may have needed to change some of its marketing practices in the face of the pandemic. Perhaps marketing was more focused online than ever before, or you had to invest more in client relationship expenses. Whatever the reason, they should be included in your business expenses at tax time.  
  • Sanitization costs: Even if the number of staff and clients coming in and out of your office was significantly reduced, you likely still made extra efforts to ensure your office space was clean and sanitized. Whatever you spend on supplies such as cleaning agents, hand sanitizer, tissues, or hiring people to clean can also be written off in your taxes.  

With the 2021 tax season in full swing, now is the time to meet with an experienced tax professional to ensure you don’t miss any critical deductions. Remember that the more time you have between meeting with them and the tax filing deadline, the better. 

Mark Candler and Dave Owens of Maia Wealth are go-to wealth advisers for lawyers and law firms in Colorado. Specializing in debt reduction, investment management, retirement efficiency, and legacy planning, Mark Candler and Dave Owens are trusted professionals for attorney-focused wealth management strategies in the Denver metro area.

Selling your business in 2021? There’s still time to save estate taxes

Tax Law Changes on the Horizon

Odds seem increasingly likely that Congress will succeed, using the budget reconciliation process, in passing a tax bill between October 1 and the end of the year.

Income and capital gains tax rate increases are anticipated, along with a reduction in the estate tax exemption amount from the current $11.7 million to possibly $5.0 million or even $3.5 million per person.

If you’re a business owner, current market optimism, coupled with looming tax law changes, present a unique climate of urgency in deciding whether to sell your business. 

Fortunately, closing a sale  before year-end  is still feasible. Good businesses brought to market now may sell more quickly and at higher than normal multiples because of historically low interest rates, readily available debt financing, and high levels of “cash on the sidelines” to invest—all of which are driving buyer interest. 

Tax changes alone shouldn’t dictate your decision to sell. That said, specific proposals under President Biden’s American Families Plan are impacting exit planning. Most salient include the proposal to nearly double the top long-term capital gains tax rate to 39.6% (43.4% if you include the net investment income tax), and taxing the appreciated value of unsold assets at the owner’s death. Long-embraced strategies for tax planning efficiencies are being upended by these proposals. 

Consider, for example, a business owner planning to make a bequest of family business interests to his or her children at death. The owner could see that bequest treated as if it were a sale for income tax purposes, taxable at the 43.4% capital gains rate (subject to certain exemptions and payment deferrals); in effect, the owner could see a loss of the basis step-up tax benefit for gifts from holding those assets until death. Moreover, this tax would be independent of the gift and estate tax, currently assessed at 40% on amounts gifted or transferred at death in excess of $11.7 million per person.  An increased estate tax rate and a lower exemption amount under the Biden plan would exacerbate the tax hit. 

Often you as an owner don’t have the luxury of scripting the precise timing and path between formation and exit.  If external forces (e.g., market conditions or tax law changes) are driving the sale of your business before year-end, there’s still time for effective estate planning measures. 

3 Proactive Steps You Can Take To Mitigate Estate Taxes: 

1. Put governing documents in order

Be sure your Operating Agreement, Voting Agreements, Shareholders’ Rights Agreements, Buy-Sell Agreements, and the like are current and complete, and consistent with your overall estate and business succession plan. Consider whether any provisions are stale and in need of an update (such as a valuation formula in a buy-sell agreement). Confirm all necessary signatures are on file and ownership information is up-to-date. Because time kills deals, eliminating potential hiccups in the due diligence phase is even more critical now if you’re seeking to close before year-end and mitigate the impact of higher taxes. 

2. Leverage Generational Gifting

If the sale of your business will create a taxable estate, there is powerful leverage pre-sale to gift and sell interests in your business, prior to a market value being set by an outside buyer. You can take advantage of lack of marketability and lack of control discounts for minority, non-voting interests ranging from 25-35% or more, depending on the circumstances.

Ideally, you should complete any gifting of business interests long before signing the Letter of Intent with the buyer. The IRS has taken the unofficial position that the execution of an LOI sets a price.

Pre-LOI, you can maximize lifetime gifting planning by removing business interests from your estate at the discounted value. Any increase in value at the time of sale, along with future appreciation on the business interests, would occur outside of your estate. 

If you simply don’t have time to focus on estate planning before signing the LOI, all is not lost. You may still be eligible for discounts “before the deal is done” based on uncertainties inherent in any deal. 

Discounts for the time value of money held in escrow, probabilities of hitting earnout targets, and risk arbitrage regarding whether a deal will happen at all provide a basis for taking discounts on pre-sale gifts of business interests, potentially in a range of 12-13%.  

3. Leverage Charitable Gifting

If you’re charitably inclined, charitable gifting pre- sale can help you achieve your goals and at the same time yield tax efficient results. For highly appreciated assets, pre-sale is a perfect time to consider a contribution to a charitable remainder trust (CRT).  You can gift an interest in your business to a charity and retain an interest in a periodic payment (such as an annuity) for a specified term.

At the end of the term the remaining assets would pass to the charity.  Tax benefits are three-fold: [1] there would be no gift tax on the gift to the charity; [2] as a tax-exempt entity the charity would pay no income tax on the sale of the interests (notwithstanding the gain on the appreciation of the company’s assets at the time of sale), and [3] you as the business owner would receive an income tax deduction for the value of the assets given to charity in the year of transfer.

IRS Section 7520 interest rates, used to calculate the annuity amount that is paid to the owner, remain low, making this a good time to consider a CRT. 

If your goal is to close on the sale of your business before year-end, it’s not too late to implement certain business succession and estate planning techniques. Acting now could have a meaningful impact. 

Photo Maribeth Younger Maribeth Younger, Counsel, Williams Weese Pepple & Ferguson.

How President Biden’s tax proposal could impact businesses

Benjamin Franklin famously wrote, “In this world, nothing can be said to be certain, except death and taxes.”

If you’re nervous about upcoming changes to tax laws and the economy in general, you’re not alone. But before you radically overhaul your portfolio and gift away your assets, pause and take a closer look under the surface.  

In late May, specific details of President Biden’s tax proposals were released, including: 

  • The treatment of gifts at death as sales that require capital gains tax to be paid on amounts over $1 million;  
  • A retroactive (to April or May of 2021) increase in long-term capital gains rates for taxpayers with adjusted gross income above $1 million; and  
  • The elimination of Section 1031 exchanges to defer capital gains on real property.  

Interestingly, and likely because of the proposed changes to capital gains taxes, no changes to the current federal estate and gift tax exemption were included in the proposals. This would leave the present, historically high exemption of $11.7 million to sunset back to $5 million (indexed for inflation) at the end of 2025.  

The most frightening of these proposals for many investors may be the retroactive increase in capital gains tax rates. Is this a real possibility?  

On multiple occasions, the U.S. Supreme Court has held that retroactive changes to the Internal Revenue Code may be made if the changes are supported by a legitimate purpose “furthered by rational means.” Historically, however, retroactive changes which increase taxes are rare. The last time a significant tax increase was enacted retroactively was in August 1993, when the top estate tax rate was increased.  

Because of ongoing supply chain uncertainty, uneven economic recovery, and the lingering specter of the pandemic, Congress is most likely to use its broad discretion to enact any tax increases later this year or in 2022 without retroactive application to avoid rocking a rather precarious financial boat. 

The IRS has also provided reassurance for families worried about whether gifts made prior to a reduction in the federal gift and estate tax exemption would be subject to a “clawback” – that is, the IRS requiring that money be paid back – if those gifts exceeded the later reduced exemption amount. Regulations published in November 2019 made clear that this will not be the case, and that the higher exemption amount may be used to calculate an estate’s tax credit.   

For example, if a person uses their full exemption to make a gift of $11.7 million in 2021 and dies in 2026 after the current exemption sunsets back to an indexed $5 million, the estate may compute its tax credit using the full earlier exclusion amount of $11.7 million. For this reason, gifts to Spousal Lifetime Access Trusts are rapidly becoming more popular as an estate tax planning tool for married couples to take advantage of the current estate and gift tax exemption. 

Low interest rates dominated 2021 and contributed to robust real estate markets, the increased use of intrafamily loans, and the use of certain types of irrevocable trusts in estate tax planning. Interest rates are expected to remain quite low well into 2022, and these loans and trusts will only become more popular going into the next year as planning tools for wealthy families. Property sales and leasing, especially in connection with commercial properties and the development of mixed-use projects in the Denver metropolitan area, are also primed to continue to thrive in this environment and provide investment opportunities.  

As long as materials are available (and relatively reasonably priced), there will be no shortage of cranes on the horizon any time soon. 

The overall best course of action right now is to stop, take a breath, and remember that change is usually quite slow in coming. Congress is in charge of public funds and taxation, and all of these changes must first be crafted into bills to be debated, rewritten, and passed by congressional vote before they become law. 

Thin majorities in both the Senate and the House will make passing any tax increases into law difficult, and concessions and compromises will need to be made on both sides. It is very doubtful that any new tax laws will be passed this year; in addition, the current gift and estate tax exemption will likely stay in place until its built-in expiration at the end of 2025, allowing plenty of time to plan and make lifetime gifts.  

A thoughtful wait-and-see approach for the rest of 2021 will avoid premature planning moves, which could do more harm than good in the long run. 

Heidi J Gassman Heidi J. Gassman is a partner at Denver-based law firm Moye White where she serves as the co-chair of the firm’s Business Section. She can be reached at [email protected] or 303.292.7929. 

What small business owners and entrepreneurs need to know this 2020 tax season

Still on the heels of dealing with the major tax reforms incited by the Tax Cuts and Jobs Act that went into effect in 2018, many business owners are wondering what tax code updates they can expect when filing their 2020 business tax return.

And because of COVID-19 there were many notable changes for 2020 as well.

Small business owners should keep in mind a number of changes when working with their tax accountants:

  • Forgiven PPP loans will not be included in taxable income and are completely tax-exempt. Deductible expenses like payroll, rent, and utilities that have been paid for using funds from a PPP loan can be written off like business expenses under normal circumstances.
  • Form 1099-MISC has been redesigned and form 1099-NEC for reporting nonemployee compensation has been reintroduced for the tax year 2020.
  • Employee retention credits are available in 2020, even if you received a PPP loan and your business had a 50% reduction in quarterly revenue compared to the same quarter in 2019.
  • Employers who deferred payroll taxes on behalf of their employees can now withhold and pay the deferred taxes throughout 2021 instead of just within the first four months of the year.
  • Net operating losses (NOLs) can now be carried forward at 100% instead of 80%.There is now a $300 above-the-line charitable contribution deduction for individuals who use the standard deduction and do not itemize deductions. For corporations, the taxable income limit has been increased from 10% to 25% when it comes to charitable contributions.
  • Qualified improvement property is now eligible for bonus depreciation and a 15-year life instead of 39 years.
  • Retirement plan rules have been loosened as per the SECURE Act including provisions for:
    • The required minimum distribution moved from 70.5 to 72 years old.
    • There is no required minimum distribution in 2020.
    • If the IRA owner dies, beneficiaries can extend distributions over 10 years.
    • Now any age can make IRA contributions (formerly this was capped at age 70.5).
    • The small employer credit for setting up a qualified retirement plan increased.
    • A new credit is available for employers who set up automatic employee enrollment.
  • The non-resident (1040-NR) form was redesigned to match up with the 1040 return.
  • The Families First Coronavirus Response Act provides small and midsize employers refundable tax credits that reimburse them, dollar-for-dollar, for the cost of providing paid sick and family leave wages to their employees for leave related to COVID-19.

This outline of tax law updates is by no means exhaustive, and we encourage you to speak further with your preferred tax expert to make sure you have taken into account all tax updates that apply to your specific industry, business and tax return.

Lorne Noble is the Co-Founder and CEO of Simple Startup.