September 2014

Tax filing reminders

• September 15 – Third quarter installment of 2014 individual estimated income tax is due.
• September 15 – Filing deadline for 2013 tax returns for calendar-year corporations that received an automatic extension of the March 17 filing deadline.
• September 15 – Filing deadline for 2013 partnership tax returns that received an extension of the April 15 filing deadline.
• October 1 – Generally, the deadline for businesses to adopt a SIMPLE retirement plan for 2014.
• October 15 – Deadline for filing 2013 individual tax returns on extension.

IRS publishes 2015 HSA contribution limits

The IRS has announced the inflation-adjusted contribution limits for health savings accounts (HSAs) for 2015. HSAs allow taxpayers with high-deductible health insurance plans to set aside pretax dollars that can be withdrawn tax-free to pay unreimbursed medical expenses. The 2015 contribution limit for individuals is $3,350; the limit for family coverage is $6,650. A catch-up contribution of an additional $1,000 is permitted for individuals who are 55 or older.

C or S Corporation: Consider tax changes in reviewing your options

Changes to the federal income tax code can prompt you to review the legal structure of your business. Last year’s increase in the top tax rate for individuals is one such change, since corporate rates remain the same. At the most basic level, businesses are taxed as either stand-alone or pass-through entities, and a significant difference between corporate and individual tax rates is reason for a new assessment.

If you’re debating between operating as a C corporation or an S corporation, here are three tax aspects to consider.

• Income taxes. A difference you’re probably aware of between the two types of corporations is the way earnings are taxed. C corporations are stand-alone entities and pay federal income tax at the corporate level, based on business earnings. If the corporation has a loss, the loss offsets business income in past or future years.

S corporation earnings and losses are passed through to you, as a shareholder. Earnings are taxed on your individual income tax return at your personal tax rate. This is true even if you receive no cash from the business. Losses can offset other income, assuming you participate in corporate business on a regular and substantial basis.

• Tax rules limit the number and type of shareholders who can own an interest in your S corporation. For example, an S corporation can have no more than 100 shareholders, and they must all be U.S. citizens or residents. In addition, your S corporation can issue only one class of stock, meaning all shareholders have the same liquidation and distribution rights. When you form a C corporation, foreign owners can hold stock in your business. You can also issue stock with different ownership privileges, such as preferred stock, which grants priority in receiving corporate dividends.
• Dividends and distributions. In general, when corporate income is distributed to you as a shareholder, the distribution is a dividend. Whether your corporation is taxed as a C corporation or an S corporation, the business gets no deduction.

However, as a C corporation shareholder, you’re required to include income distributions on your personal tax return. In effect, distributions are taxed twice, once on the corporate return and once on your return.

When you own stock in an S corporation, distributions can be considered a return of the money you invested in the business. The distinction means you may not owe income tax, assuming you have basis in the corporation.

Many tax and nontax reasons will affect your choice of the best type of structure for your business. Please call our office for a complete evaluation.

Deadline for Roth change coming up

It turns out you can go back after all – at least when it comes to last year’s decision to convert your traditional IRA to a Roth. The question is, do you want to?

You might, if your circumstances have changed. For example, say the value of the assets in your new Roth account is currently less than when you made the conversion. Changing your mind could save tax dollars.

Recharacterizing your Roth conversion lets you go back in time, as if the conversion never happened. You’ll have to act soon, though, because the window for undoing a 2013 Roth conversion closes October 15, 2014.

Before that date, you have the opportunity to undo all or part of last year’s conversion. After October 15, you can change your mind once more and put the money back in a Roth. That might be a good choice when you’re recharacterizing because of a reduction in the value of the account. Just remember you’ll have to wait at least 30 days to convert again.

Give us a call for information on Roth recharacterization rules. We’ll help you figure out if going back is a good idea.

This newsletter provides business, financial, and tax information to clients and friends of our firm. This general information should not be acted upon without first determining its application to your specific situation. For further details on any article, please contact us.