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Tax Issues That Could Trip Up High-Income Businesses

For businesses that have achieved high levels of success and profitability, tax compliance and planning become an essential part of daily operations. One wrong move with the Internal Revenue Service (IRS) can lead to hefty fines, interest charges, audits, and, ultimately, loss of reputation.


As a high-income business owner or manager, you must stay on top of your tax game to avoid legal or financial entanglements. This post explores two tax issues that can potentially trip up high-income businesses to help you stay compliant and plan your taxes better.


High Tax Rates


High tax rates pose a significant challenge due to the progressive nature of most tax systems, where tax rates increase as income levels rise. This stands in stark contrast to a flat tax system, in which businesses pay an equal percentage of their earnings regardless of their income level. A high-income business is inherently subject to a higher tax bracket, leading to substantial tax liabilities.


While high taxes are not always bad, they can be problematic when business owners are not expecting them. Without effective planning strategies, these high tax obligations can result in cash flow issues, potentially affecting the business's overall financial health.


The high tax burden might also discourage further business growth or expansion, as the additional profits would also be subject to these high tax rates.


Beyond the immediate financial impact, high taxes can also create a complex and time-consuming compliance environment. High-income businesses often have diverse revenue streams and financial structures, which can complicate the tax calculation process and increase the risk of errors or oversights.


The burden of ensuring compliance with tax laws and the severity of penalties for non-compliance places additional stress on these businesses. This complexity and risk can make running the business less efficient and detract from its core operations.


State Tax Obligations


State tax obligations pose a significant challenge for high-income businesses, particularly those operating in multiple states. Each state has its unique tax laws and regulations. As such, a high-income business with operations spread across different states must navigate and comply with multiple tax codes.


This can be quite a struggle since understanding the nuances of each state's tax code requires a deep level of expertise and resources. Even a minor oversight or mistake in state tax compliance can have significant financial or legal repercussions.


High-income businesses must also consider state tax obligations when planning for their taxes. This may involve evaluating which states offer the most favorable tax rates or incentives for their business operations.


For instance, some states offer tax credits or exemptions for certain industries, such as manufacturing or technology. This information can help such businesses make informed decisions about where to expand or relocate their operations.


In addition, varying tax rates and rules among states can lead to instances of double taxation, causing an additional financial burden on these businesses. For instance, a business might be taxed on its income in the state where it has its headquarters and again in other states where it has operations or sales.


Some states might also have unique taxes, such as franchise taxes or gross receipts taxes, which can add to a business's total tax liability. Without careful planning and strategic decision-making, these state tax obligations can abruptly increase a high-income business's overall tax burden, leading to potential liquidity issues and reduced profitability.


Golden Tax Relief works with high-income businesses to provide expert tax planning and compliance services. Our team of experienced tax professionals focuses on maximizing your bottom line while ensuring full compliance with all applicable state and federal tax laws. Contact us today to learn how we can help you navigate these and other potential tax-related issues as you secure a brighter future for your business.

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Its time for some good news for those S Corp Owners who own more than 2% of your S Corp: there are some good updates when it comes to your health insurance. First things first -- ensure that your health insurance deductions are in order, and avoid the $100-a-day penalties for violating the rules of the Affordable Care Act (ACA). To do this, take the following steps: Get the cost of the health insurance on the S corporation’s books, either by making the premium payments directly or through reimbursement. Ensure that the S corporation includes the health insurance premiums on the owner-employee’s W-2 form, including the additional compensation in box 1 but not in boxes 3 or 5. If you are an owner-employee with more than 2 percent ownership, claim the health insurance deduction as “self-employed health insurance” on line 17 of Schedule 1 of Form 1040. However, there are 2 rules you must meet: not having access to employer-subsidized health insurance and having adequate salary. While the S corporation does not have to provide health insurance benefits for its rank-and-file employees, but if it does, it must use an acceptable ACA plan, such as (among others) the qualified small employer health reimbursement arrangement (QSEHRA) or the individual coverage HRA (ICHRA). Its important to note that the S corporation can reimburse more-than-2-percent owners for individually purchased insurance without any penalties, BUT if it reimburses rank-and-file employees without using the QSEHRA or ICHRA, it faces the $100-a-day penalty per employee. If you are looking to provide health benefits to employees through the S corporation, there are many tax-advantaged options available. If the S corporation provides group health insurance to all employees, including the shareholder-employee, the same rules apply. This, and many other important tax savings strategies could help save you thousands of dollars each year through a qualified tax plan! Call us today at 844-229-8936 to set up an appointment with our certified tax planner and tax coach! Let us put you on the path to savings!

Over-extended? Not all Cancellation of Debt (COD) is Tax-Free

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If you, like so many others, have found yourself over-extended – with a debt to income ratio that will not ever clear up? It happens -- especially if we are heading into a recession. And probably more often than anyone knows. However, sometimes lenders will cancel (forgive) debts that are owed by financially challenged borrowers. While that sounds great – it’s not without it’s downside. While a debt cancellation can help a beleaguered borrower survive, it can also trigger negative tax consequences. Or it can be a tax-free event. There are many things to consider when choosing to take the route of having your debt forgiven. Following are some guidelines to consider. General Rule: COD Income Is Taxable When a lender forgives part or all of your debt, it results in so-called cancellation of debt (COD) income. The general federal income tax rule is that COD income counts as gross income that you must report on your federal income tax return for the year the debt cancellation occurs. Failure to claim this COD income will result in fines and penalties. However, there are some exceptions to the general rule that COD income is taxable. While our Tax Code provides ALL the rules and regulations, and they are generally mandatory rather than elective, that could be a rather long, and boring, way to find out what that means for you. We have broken it down into some simpler terms for you. There are two common exceptions to the COD income being taxable: Bankruptcy Insolvency The process that allows the COD income from taxation under the bankruptcy or insolvency exception is a reduction of the borrower’s so-called tax attributes. Generally speaking, you can reduce these tax attributes (future tax benefits) by one dollar for each dollar of excluded COD income. However, you also reduce tax credits by one dollar for every three dollars of excluded COD income. Any tax attribute reductions are deemed to occur after calculating the borrower’s federal taxable income and federal income tax liability for the year of the debt cancellation. This taxpayer-friendly rule allows the borrower to take full advantage of any tax attributes available for the year of the debt cancellation before those attributes are reduced. Principal Residence Mortgage Debt Exception Another way to claim that COD tax-free --- a temporary exception, which was supposed to be a temporary solution, was implemented years ago and then repeatedly extended by Congress applies to COD income from qualifying cancellations of home mortgage debts that occur through 2025. Under the current rules for this exception, the borrower can have up to $750,000 of federal-income-tax-free COD income—or $375,000 if the borrower uses married-filing-separately status—from the cancellation of qualified principal residence indebtedness. That means debt that was used to acquire, build, or improve the borrower’s principal residence and that is secured by that residence. Note that the above exception is very specific – as stated above – this That means debt that was used to acquire, build, or improve the borrower’s principal residence and that is secured by that residence. If you have found yourself with a cancellation of debt issue, and want to find the way out, call us today at 630-278-5023 to set up your complimentary consultation. Our certified tax planner and tax coach will help set up a plan that can save thousands of dollars a year by pro-actively creating a tax plan that will eliminate tax debt.
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