Summer is around the corner, so you may be thinking about hiring young people at your small business. At the same time, you may have children looking to earn extra spending money. You can save family income and payroll taxes by putting your child on the payroll. Keep reading to learn four tax advantages of hiring your child for the summer.

Shifting Business Earnings

You can turn some of your high-taxed income into tax-free or low-taxed income by shifting some business earnings to a child as wages for services performed. For your business to deduct the wages as a business expense, the work done by the child must be legitimate and the child’s salary must be reasonable.

For example, suppose you’re a sole proprietor in the 37 percent tax bracket. You hire your 16-year-old son to help with office work, full-time in the summer and part-time in the fall. He earns $10,000 during the year (and doesn’t have other earnings). You can save $3,700 (37 percent of $10,000) in income taxes at no tax cost to your son, who can use his $13,850 standard deduction for 2023 to shelter his earnings.

Family taxes are cut even if your son’s earnings exceed his standard deduction. That’s because the unsheltered earnings will be taxed to him beginning at a 10 percent rate, instead of being taxed at your higher rate.

Claiming Income Tax Withholding Exemption

Your business likely will have to withhold federal income taxes on your child’s wages. Usually, an employee can claim exempt status if he or she had no federal income tax liability for last year and expects to have none this year.

However, exemption from withholding can’t be claimed if: 1) the employee’s income exceeds $1,250 for 2023 (and includes more than $400 of unearned income), and 2) the employee can be claimed as a dependent on someone else’s return.

Keep in mind that your child probably will get a refund for part or all of the withheld tax when filing a return for the year.

Saving Social Security Tax

If your business isn’t incorporated, you can also save some Social Security tax by shifting some of your earnings to your child. That’s because services performed by a child under age 18 while employed by a parent aren’t considered employment for FICA tax purposes.

A similar but more liberal exemption applies for FUTA (unemployment) tax, which exempts earnings paid to a child under age 21 employed by a parent. The FICA and FUTA exemptions also apply if a child is employed by a partnership consisting only of his or her parents.

Note: There’s no FICA or FUTA exemption for employing a child if your business is incorporated or is a partnership that includes non-parent partners. However, there’s no extra cost to your business if you’re paying a child for work you’d pay someone else to do.

Saving for Retirement

Your business also may be able to provide your child with retirement savings, depending on your plan and how it defines qualifying employees. For example, if you have an SEP plan, a contribution can be made for the child up to 25 percent of his or her earnings (not to exceed $66,000 for 2023).

We Can Help You Understand the Rules

Contact us if you have any questions about your situation. The business tax team at Ramsay & Associates can help you understand the rules and tax advantages of hiring your child for the summer. Keep in mind that some of the rules about employing children may change from year to year, which may require your income-shifting strategies to change, too.

Under tax law, businesses can generally deduct advertising and marketing expenses that help keep existing customers and bring in new ones. This valuable tax deduction can help businesses cut their taxes. But what expenses are eligible? Keep reading to learn more.

Ordinary and Necessary

In order to be deductible, advertising and marketing expenses must be “ordinary and necessary.” As one taxpayer recently learned in U.S. Tax Court, not all expenses are eligible. An ordinary expense is one that’s common and accepted in the industry. And a necessary expense is one that’s helpful and appropriate for the business.

According to the IRS, here are some advertising expenses that are usually deductible:

• Reasonable advertising expenses that are directly related to the business activities.
• An expense for the cost of institutional or goodwill advertising to keep the business name before the public if it relates to a reasonable expectation to gain business in the future. For example, the cost of advertising that encourages people to contribute to the Red Cross or to participate in similar causes is usually deductible.
• The cost of providing meals, entertainment, or recreational facilities to the public as a means of advertising or promoting goodwill in the community.

Determining Eligibility: Facts of the Recent Case

An attorney deducted his car-racing expenses and claimed they were advertising for his personal injury law practice. He contended that his racing expenses, totaling over $303,000 for six tax years, were deductible as advertising because the car he raced was sponsored by his law firm.

The IRS denied the deductions and argued that the attorney’s car racing wasn’t an ordinary and necessary expense paid or incurred while carrying on his business of practicing law. The Tax Court agreed with the IRS.

Defining Proximate Relationship

When making an ordinary and necessary determination for an expense, most courts look to the taxpayer’s primary motive for incurring the expense and whether there’s a “proximate” relationship between the expense and the taxpayer’s occupation.

In this case, the taxpayer’s car-racing expenses were neither necessary nor common for a law practice, so there was no “proximate” relationship between the expense and the taxpayer’s occupation. And, while the taxpayer said his primary motive for incurring the expense was to advertise his law business, he never raced in the state where his primary law practice was located. Additionally, he never actually got any legal business from his car-racing activity.

The court noted that the car “sat in his garage” after he returned to the area where his law practice was located. The court added that even if the taxpayer raced in that area, “we would not find his expenses to be legitimate advertising expenses. His name and a decal for his law firm appeared in relatively small print” on his car.

This form of “signage,” the court stated, “is at the opposite end of the spectrum from (say) a billboard or a newspaper ad. Indeed, every driver’s name typically appeared on his or her racing car.”

Keep Meticulous Records

There are no deductions allowed for personal expenses or hobbies. But as explained above, you can deduct advertising and marketing expenses in a bona fide business if those expenses are ordinary and necessary. The key to protecting your deductions is to keep meticulous records to substantiate them. The tax professionals at Ramsay & Associates are here to answer your questions. Contact us today to help with your situation.

Although the national price of gas is a bit lower than it was a year ago, the optional standard mileage rate used to calculate the deductible cost of operating an automobile for business is going up. Keep reading to learn about the standard mileage rate updates for 2023 and the rules for deducting vehicle expenses.

Cents-Per-Mile Increase

The IRS recently announced that the 2023 cents-per-mile rate for the business use of a car, van, and pick-up or panel truck is 65.5 cents. These rates apply to electric and hybrid-electric automobiles, as well as gasoline and diesel-powered vehicles. In 2022, the business cents-per-mile rate for the second half of the year (July 1 – December 31) was 62.5 cents per mile, and for the first half of the year (January 1 – June 30), it was 58.5 cents per mile.

How Rate Calculations Are Done

The 3-cent increase from the 2022 midyear rate is somewhat surprising because gas prices are currently lower than they have been. On December 29, 2022, the national average price of a gallon of regular gas was $3.15, compared with $3.52 a month earlier and $3.28 a year earlier, according to AAA Gas Prices. However, the standard mileage rate is calculated based on all the costs involved in driving a vehicle — not just the price of gas.

The business cents-per-mile rate is adjusted annually. It’s based on an annual study commissioned by the IRS about the fixed and variable costs of operating a vehicle, including gas, maintenance, repair, and depreciation. Occasionally, if there’s a substantial change in average gas prices, the IRS will change the cents-per-mile rate midyear, as it did in 2022.

Standard Rate Versus Actual Expenses

Businesses can generally deduct the actual expenses attributable to business use of vehicles. This includes gas, oil, tires, insurance, repairs, licenses, and vehicle registration fees. In addition, you can claim a depreciation allowance for the vehicle. However, in many cases, certain limits apply to depreciation write-offs on vehicles that don’t apply to other types of business assets.

The cents-per-mile rate is beneficial if you don’t want to keep track of actual vehicle-related expenses. With this method, you don’t have to account for all your actual expenses. However, you still must record certain information, such as the mileage for each business trip, the date, and the destination.

Using the cents-per-mile rate is also popular with businesses that reimburse employees for business use of their personal vehicles. These reimbursements can help attract and retain employees who drive their personal vehicles a great deal for business purposes. Why? Under current law, employees can’t deduct unreimbursed employee business expenses, such as business mileage, on their own income tax returns.

If you do use the cents-per-mile rate, keep in mind that you must comply with various rules. If you don’t comply, the reimbursements could be considered taxable wages to the employees.

The Standard Rate Can’t Always Be Used

There are some cases when you can’t use the cents-per-mile rate. It partly depends on how you’ve claimed deductions for the same vehicle in the past. In other situations, it depends on if the vehicle is new to your business this year or whether you want to take advantage of certain first-year depreciation tax breaks on it.

We Can Help

Now that you know the standard mileage rate updates for 2023, you can better determine whether to use this rate to deduct vehicle expenses. As you can see, there are many factors to consider. The business tax professionals at Ramsay & Associates can help. Contact us if you have questions about tracking and claiming such expenses in 2023 — or claiming 2022 expenses on your 2022 income tax return.

If you’re launching a new business venture, you’re probably wondering which form of business is most suitable. Here is a summary of the pros and cons of a C corporation — which is the most common — if you choose to do business as such.

A C corporation allows the business to be treated and taxed as a separate entity from you as the principal owner. A properly structured corporation can protect you from the debts of the business yet enable you to control both day-to-day operations and corporate acts such as redemptions, acquisitions, and even liquidations. In addition, the corporate tax rate is currently 21 percent, which is lower than the highest noncorporate tax rate.

Following Formalities

In order to ensure that a corporation is treated as a separate entity, it’s important to observe various formalities required by your state. These include:

• Filing articles of incorporation,
• Adopting bylaws,
• Electing a board of directors,
• Holding organizational meetings, and
• Keeping minutes of meetings.

Complying with these requirements and maintaining an adequate capital structure will ensure that you don’t inadvertently risk personal liability for the debts of the business.

Potential Disadvantages

Since the corporation is taxed as a separate entity, all items of income, credit, loss, and deduction are computed at the entity level in arriving at corporate taxable income or loss. One potential disadvantage to a C corporation for a new business is that losses are trapped at the entity level and thus generally cannot be deducted by the owners. However, if you expect to generate profits in year one, this might not be a problem.

Another potential drawback to a C corporation is that its earnings can be subject to double tax — once at the corporate level and again when distributed to you. However, since most of the corporate earnings will be attributable to your efforts as an employee, the risk of double taxation is minimal since the corporation can deduct all reasonable salary that it pays to you.

Providing Benefits, Raising Capital

A C corporation can also be used to provide fringe benefits and fund qualified pension plans on a tax-favored basis. Subject to certain limits, the corporation can deduct the cost of a variety of benefits such as health insurance and group life insurance without adverse tax consequences to you. Similarly, contributions to qualified pension plans are usually deductible but aren’t currently taxable to you.

A C corporation also gives you considerable flexibility in raising capital from outside investors. A C corporation can have multiple classes of stock — each with different rights and preferences that can be tailored to fit your needs and those of potential investors. Also, if you decide to raise capital through debt, interest paid by the corporation is deductible.

Although the C corporation form of business might seem appropriate for you at this time, you may in the future be able to change from a C corporation to an S corporation, if S status is more appropriate at that time. This change will ordinarily be tax-free, except that built-in gain on the corporate assets may be subject to tax if the assets are disposed of by the corporation within 10 years of the change.

The Optimum Choice

This is only a brief overview of the pros and cons of a C corporation. If you’re starting a business and have questions, the business tax professionals at Ramsay & Associates can help. Contact us to discuss your options and explore the best choice of entity for your business.