An S corporation could cut your self-employment tax

If your business is organized as a sole proprietorship or as a wholly owned limited liability company (LLC), you’re subject to both income tax and self-employment tax. There may be a way to cut your tax bill by conducting business as an S corporation.

Fundamentals of self-employment tax

The self-employment tax is imposed on 92.35% of self-employment income at a 12.4% rate for Social Security up to a certain maximum ($142,800 for 2021) and at a 2.9% rate for Medicare. No maximum tax limit applies to the Medicare tax. An additional 0.9% Medicare tax is imposed on income exceeding $250,000 for married couples ($125,000 for married persons filing separately) and $200,000 in all other cases.

What if you conduct your business as a partnership in which you’re a general partner? In that case, in addition to income tax, you’re subject to the self-employment tax on your distributive share of the partnership’s income. On the other hand, if you conduct your business as an S corporation, you’ll be subject to income tax, but not self-employment tax, on your share of the S corporation’s income.

An S corporation isn’t subject to tax at the corporate level. Instead, the corporation’s items of income, gain, loss and deduction are passed through to the shareholders. However, the income passed through to the shareholder isn’t treated as self-employment income. Thus, by using an S corporation, you may be able to avoid self-employment income tax.  

Keep your salary “reasonable”

Be aware that the IRS requires that the S corporation pay you reasonable compensation for your services to the business. The compensation is treated as wages subject to employment tax (split evenly between the corporation and the employee), which is equivalent to the self-employment tax. If the S corporation doesn’t pay you reasonable compensation for your services, the IRS may treat a portion of the S corporation’s distributions to you as wages and impose Social Security taxes on the amount it considers wages.

There’s no simple formula regarding what’s considered reasonable compensation. Presumably, reasonable compensation is the amount that unrelated employers would pay for comparable services under similar circumstances. There are many factors that should be taken into account in making this determination.

Converting from a C corporation 

There may be complications if you convert a C corporation to an S corporation. A “built-in gains tax” may apply when you dispose of appreciated assets held by the C corporation at the time of the conversion. However, there may be ways to minimize its impact.

Many factors to consider

Contact us if you’d like to discuss the factors involved in conducting your business as an S corporation, and how much the business should pay you as compensation.

© 2021


2021 Q3 tax calendar: Key deadlines for businesses and other employers

Here are some of the key tax-related deadlines affecting businesses and other employers during the third quarter of 2021. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

Monday, August 2

  • Employers report income tax withholding and FICA taxes for second quarter 2021 (Form 941) and pay any tax due.
  • Employers file a 2020 calendar-year retirement plan report (Form 5500 or Form 5500-EZ) or request an extension.

Tuesday, August 10

  • Employers report income tax withholding and FICA taxes for second quarter 2021 (Form 941), if you deposited all associated taxes that were due in full and on time.

Wednesday, September 15

  • Individuals pay the third installment of 2021 estimated taxes, if not paying income tax through withholding (Form 1040-ES).
  • If a calendar-year corporation, pay the third installment of 2021 estimated income taxes.
  • If a calendar-year S corporation or partnership that filed an automatic extension:
    • File a 2020 income tax return (Form 1120S, Form 1065 or Form 1065-B) and pay any tax, interest and penalties due.
    • Make contributions for 2020 to certain employer-sponsored retirement plans.

© 2021


The long and short of succession planning





Creating a succession plan may seem overwhelming. But if the past year has taught us anything, it’s that anything can happen. To help get your arms around the concept, you might look at succession planning from one of three perspectives: 1) If you have many years to work with, focus on identifying and mentoring a successor, as well as choosing the best ways to fund your retirement and structure your estate plan, 2) If retirement or another professional opportunity is imminent, you may want to look more at selling the company or even liquidating, 3) Don’t overlook an emergency succession plan; be prepared in case a crisis incapacitates you. Contact us for assistance.

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The IRS has launched a new online tool that can help families determine whether they qualify for the Child Tax Credit (CTC) and the special monthly advance payments that begin on July 15. The interactive tool is called the “Advance Child Tax Credit Eligibility Assistant” and it can be accessed here: https://bit.ly/3j8P1EK 

In order to determine if you’re eligible for the payments, you’ll need to answer a series of questions about yourself and your family members. The tool can be used by anyone, but the IRS states “it may be particularly useful to families who don’t normally file a federal tax return and have not yet filed either a 2019 or 2020 tax return.”

Using this tool can help these parents decide whether they should take the next step and register for the CTC payments on another new IRS tool unveiled earlier (called the “Non-Filer Sign-Up Tool”).

The IRS explained that most families don’t need to take any action. Eligible families who already filed, or plan to file, 2019 or 2020 income tax returns shouldn’t use the Non-Filer Sign-Up Tool. Once the IRS processes their 2019 or 2020 tax returns, the information will be used to determine eligibility and issue advance payments.

Yet Another IRS Tool

The IRS also launched a “Child Tax Credit Update Portal” that allows parents to view information about payments and lets them opt out of receiving payments if they wish. You can access the portal here:https://bit.ly/3zKckKO . You need to verify your identity in order to use the portal.

About the CTC payments

The advance CTC payments were established under the American Rescue Plan Act (ARPA). The IRS has stated that “roughly 39 million households — covering 88% of children in the United States — are slated to begin receiving monthly payments without any further action required.”

Taxpayers are allowed a CTC for each qualifying child. The credit was temporarily expanded and made refundable for 2021 by the ARPA. It phases out for taxpayers with adjusted gross incomes (AGIs) over certain thresholds.

Eligible families will receive up to $300 per month for each child under age 6 and up to $250 per month for each child age 6 and older.

The increased credit amount will be reduced (or phased out), for households with modified adjusted gross income (MAGI) above the following thresholds:

$150,000 for married taxpayers filing jointly and qualifying widows/ widowers;
$112,500 for heads of household; and
$75,000 for other taxpayers.
Who Is a Qualifying Child?

For 2021, a qualifying child is defined as one who is under age18 and a child whom the taxpayer can claim as a dependent (in other words, a child related to the taxpayer who generally lived with the taxpayer for at least six months during the year). The child must also be a U.S. citizen or national, or a U.S. resident.

The ARPA increased the maximum CTC — for 2021 only — to $3,600 for children under age 6 and to $3,000 per child for children ages 6 to 17, provided their parents’ income is below a certain threshold.

Under prior law, the maximum annual CTC for 2018 through 2025 was $2,000 per qualifying child but the income thresholds were higher and some of the qualification rules were different.

Advance Payments

Under the ARPA, the IRS was required to establish a program to make periodic advance payments that in total equal 50% of the IRS’s estimate of an eligible taxpayer’s 2021 CTC. These payments are to be made during the period July 2021 through December 2021.

The IRS announced the payments will begin on July 15, 2021 and thereafter, they’ll be made on the 15th of each month unless the 15th falls on a weekend or holiday.

Recipients will receive the monthly payments through direct deposit, paper check or debit cards. The IRS explained that it is committed to maximizing the use of direct deposit. The tax agency also warned families to watch out for scams related to the CTC payments and the Economic Impact Payments the IRS is sending out to help mitigate the financial effects of the COVID-19 pandemic. “The only way to get either of these benefits is by either filing a tax return with the IRS or registering online” at IRS.gov, the IRS stated. “Any other option is a scam.”

Higher-Income Parents May Get a Lower Credit

If your income is too high to receive the advance CTC payments, you may still qualify to claim the $2,000 CTC on your tax return for 2021. The rules are complex. Contact us with any questions at 856.985.5688 or 215.641.8300.

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Are you ready for the return of trade shows and other events?

It’s happening. With vaccination rates rising and the more severe effects of the pandemic trending downward, several industries have announced in-person trade shows for later this year. Meanwhile, over the summer, businesses will likely see marketing opportunities in other events such as “sidewalk days” and local festivals.

Are you and your team ready to get back out there? Here are some ways to improve the odds that you’ll get a satisfying return on investment:

Do your research. Well before the trade show or event, contact the host city’s convention and visitor’s bureau or chamber of commerce. These offices often offer concierge services such as tours and free press releases. Determine whether any such perks could help you establish a strong presence early.

Reach out to top customers and prospects. Make sure those most likely to buy from you know about the trade show or event. It costs little to nothing to add to business correspondence: “P.S. We’ll be attending the XYZ Association Conference, September 16 through 19. Please stop by Booth #1234 and see us!” Have your customer service staff mention the trade show or event in phone calls. Add a banner to your email signatures.

Arrive ready to do business. Don’t assume a trade show or other event will be all talk and no action. Bring purchase order agreements, contractual paperwork, point-of-sale devices — whatever you need to close a sale should the opportunity arise.

Go easy on the freebies. All too often, trade shows or other events devolve into trick-or-treating for adults. Handing out goodies with little or no conversation isn’t cost-effective. Even if you ask visitors to fill out a questionnaire, they may write down bogus contact info to avoid follow-up calls. Generally, it’s best to start with a conversation. If that discussion goes somewhere, then your staff member can ask for contact info and give the person one of your cards as well as an incentive gift.

Strategize sales pitches. The most productive trade show or event interactions tend to be conversations in which the visitor leaves the booth feeling like your business could solve a problem. Work with your staff to devise strong opening lines and a concise “elevator pitch” for the products or services you’ll be focusing on.

During discussions, ask open-ended questions. Which features of our product could help you the most? What challenges do you face that our services could enable you to overcome? Inspire prospects with the real-world advantages of what you do rather than force them to sit through a canned speech.

Devise a winning game plan. Trade shows and other events are usually like competitive sports. You’re going to win some and you’re going to lose some. The most important thing is to come up with a cohesive game plan — including a sensible budget — and stick to it.

© 2021


The IRS has announced 2022 amounts for Health Savings Accounts

The IRS recently released guidance providing the 2022 inflation-adjusted amounts for Health Savings Accounts (HSAs).

Fundamentals of HSAs

An HSA is a trust created or organized exclusively for the purpose of paying the “qualified medical expenses” of an “account beneficiary.” An HSA can only be established for the benefit of an “eligible individual” who is covered under a “high deductible health plan.” In addition, a participant can’t be enrolled in Medicare or have other health coverage (exceptions include dental, vision, long-term care, accident and specific disease insurance).

A high deductible health plan (HDHP) is generally a plan with an annual deductible that isn’t less than $1,000 for self-only coverage and $2,000 for family coverage. In addition, the sum of the annual deductible and other annual out-of-pocket expenses required to be paid under the plan for covered benefits (but not for premiums) can’t exceed $5,000 for self-only coverage, and $10,000 for family coverage.

Within specified dollar limits, an above-the-line tax deduction is allowed for an individual’s contribution to an HSA. This annual contribution limitation and the annual deductible and out-of-pocket expenses under the tax code are adjusted annually for inflation.

Inflation adjustments for next year

In Revenue Procedure 2021-25, the IRS released the 2022 inflation-adjusted figures for contributions to HSAs, which are as follows:

Annual contribution limitation. For calendar year 2022, the annual contribution limitation for an individual with self-only coverage under a HDHP will be $3,650. For an individual with family coverage, the amount will be $7,300. This is up from $3,600 and $7,200, respectively, for 2021.

High deductible health plan defined. For calendar year 2022, an HDHP will be a health plan with an annual deductible that isn’t less than $1,400 for self-only coverage or $2,800 for family coverage (these amounts are unchanged from 2021). In addition, annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) won’t be able to exceed $7,050 for self-only coverage or $14,100 for family coverage (up from $7,000 and $14,000, respectively, for 2021).

Many advantages

There are a variety of benefits to HSAs. Contributions to the accounts are made on a pre-tax basis. The money can accumulate tax free year after year and be can be withdrawn tax free to pay for a variety of medical expenses such as doctor visits, prescriptions, chiropractic care and premiums for long-term care insurance. In addition, an HSA is “portable.” It stays with an account holder if he or she changes employers or leaves the workforce. If you have questions about HSAs at your business, contact your employee benefits and tax advisors.

© 2021


Award-Winning New Jersey Accounting and Consulting Firm Baratz & Associates Expands by Merging In Pennsylvania’s Robin, Kramer & Green

Marlton, New Jersey— Baratz & Associates, P.A., a leading Delaware Valley accounting and consulting firm founded nearly 40 years ago, is expanding its operations and geographic reach by merging in Robin, Kramer & Green, L.L.P. (RKG), a full-service accounting firm based in Fort Washington, Pennsylvania.

“We are thrilled with this new partnership and what it will mean to all of our clients,” remarked Raymond Giunta, CPA/PFS, Managing Partner, Baratz & Associates. “Our synergies in business consulting and valuation will allow enhanced client services. Additionally, our firm cultures and focus on excellence are aligned.”

As of November 2, 2020, the two firms and approximately 60 total team members will operate as Baratz & Associates, maintaining offices in Marlton, New Jersey, and Fort Washington, Pennsylvania.

“We are excited by the opportunity to join Baratz & Associates,” added Steven Green, CPA/CGMA, Managing Partner at RKG, a firm established in the 1950s. “We have always served as true partners with our clients, working with them to enhance and profitably grow their businesses. And we know that will continue as a combined firm.”

In 1987, RKG broadened their services into litigation support and estate planning when attorney David Kramer joined the firm in 1987. Steven Green joined in 1994 bringing additional expertise to the audit, accounting and tax services of the firm.

Through partnerships with clients, colleagues and community, Baratz & Associates creates solutions for financial success. The firm has developed a well-established reputation for distinction in accounting, auditing, business acquisition, healthcare consulting, litigation support, tax planning and valuation. Having won awards from the Burlington County Times, South Jersey Biz magazine, Suburban Family magazine, and Inside Public Accounting, Baratz & Associates has a proven track record of success and client satisfaction. For more information, visit www.baratzcpa.com.

Making meaning of dental practice valuations during the viral pandemic

by Bruce Bryen, CPA, CVA

As the pandemic continues and more and more dental practices are suffering financial and emotional losses, owners of these practices are being subtly forced into selling their offices.  The trauma of day to day ownership and its worries about employees, patients, cleanliness of the office and the monetary fallout from these problems have created in their minds, a “no win,” situation for many of these owners.  Having reached the point of no return for the dentists, they now are looking to sell their practices and hope for the highest price and best terms that they may be able to get. Their own dental CPAs and other financial advisors are probably requesting that the dentists retain an expert to prepare a dental practice valuation in advance of meeting with any potential buyers.  Having the valuation assists in determining the price for listing the practice with a broker as well. This report would give them an idea of what their practices are worth.  The evaluator will be preparing a report that will probably be like no other that he or she has ever written. The main reason is the substantial reduction in gross revenue and earnings that the dental practice is experiencing because of covid-19 and the effect that the virus has had on the financial results of the dental practice.  The analysis of the dental practice’s past operations is an important factor that must be taken into consideration when the valuation is being prepared.  The methodologies used in the valuation are critical when the computation of value is being undertaken. The present situation should be explained in great detail and should not be so heavily weighted that the actual value is reflected solely by the most current year’s results.  The pandemic has substantially reduced the most recent reports of operations compared to the past.  Relying on this year is most likely a grave error on the evaluator’s part and undermines the real value of the practice.  A potential buyer is almost always interested in whether the operating profits will pay for the acquisition debt as well as leaving enough cash flow to allow for a comfortable life style for him or herself.  An improper reporting will dramatically affect the seller on a long term basis.

What meaning should be made of the results of the valuation? 

Without understanding what the actual net earnings of the dental practice at issue are, it is almost impossible to know whether the valuation is accurate. Without that information, understanding what a transition price should be is a guess. The “normalized earnings,” of the office are one of the most important items to understand as it is the benchmark for almost all of the other calculations and ratio comparisons in the valuation. Comparing the dental practice valuation to other similar practices for gross revenue, net operating profit, goodwill and the like will reveal how the practice under consideration will fit into those transition plans for the buyer and seller.  It will let the buyer know whether the practice has a strong possibility to prosper by regaining its profile before the virus struck or to continue to struggle.  Not adding back charges unnecessary to operate the practice will reflect lower net earnings for repayment of the acquisition debt. It will also limit the potential purchaser from seeing what he or she will have to support the expected lifestyle assumed from the acquisition.  The offering price and the acceptance of that price depends a great deal on the results of the valuation and those add backs of expenses paid and written off by the practice but not necessary to operate it.  The ratio comparisons of the valuation will be distorted compared to other similar practices that have sold with comparable characteristics but without adding back unnecessary overhead to profit.  Examples of practice expenses that are not needed for a successfully functioning practice include salaries to family members that may or may not be actually performing the duties satisfactorily in their job descriptions.  There may be excessive owner salaries paid to reduce the taxable profit of the dental practice.  Retirement plan expenses to family members and excessive payroll tax liabilities are additional expenses not necessary to operate the practice and should be added back to increase the “normalized profit,” of the dental practice.  Sometimes excessive rent is paid to the owner to reduce his or her social security taxes.  There may also be unnecessary seminar and educational travel expenses for the owner and family that are written off by the practice but are not needed to support its growth or success.  These items can substantially increase the profit of the practice which in turn increases the value of the practice and the subsequent transition price. 

Evaluating the dental practice with the covid-19 results included but not weighted so heavily as to misinform a potential buyer and the seller:

Using methodologies that reflect what has occurred at the practice but taking into account the trends from previous years is an attribute that the experienced dental practice evaluator understands.  If the operating results of the dental practice for the last few years have shown an upward trend in gross revenue and normalized earnings, the problems caused by the pandemic must be considered to be an anomaly for the results of operations.  On the other hand, if the normalized profits and gross revenue have been on a downward trend, it may be that covid-19 and the financial results caused by it could have occurred anyway under normal circumstances.   A lower dental practice valuation because of the effects of the virus is probably what all valuations will present during the 2020 year’s results of the financial affairs of the practice.  By delving into the valuation and its reporting, methodologies and presentation about the past, the lower value will not be looked at as the end of the negotiations for the transition.  The seller will be able to report the findings in the report and offer the upside of what had occurred during the normal times.  That upside should assist in overcoming the results of the virus and its effect on the dental practice.