Your Checklist for Paying Taxes Your First Year In Business

business partners working on documents for their business tax

business partners working on documents for their business tax

Reaching the end of your first year in business is a significant milestone. Bringing your idea to life and achieving your business goals is no small feat. As tax season approaches, it’s just as essential to research and understand the tax-paying process for your small business as it is to hit your next big goal.

From organizing your business financial statements to understanding required tax forms, paying taxes during your first year in business takes careful planning. Luckily, Cook CPA Group is always in your corner, anticipating your accounting needs.

Use the information outlined below to create a checklist that will make paying taxes during your first year in business a complete breeze.

Business Taxes You Are Required To Pay Your First Year In Business

The first essential step in planning your tax filing for your first year in business is familiarizing yourself with the different business taxes you’re expected to pay. As a small business owner, there are several business taxes you are required to pay to the IRS that you may not be familiar with. Here are the five types of business taxes you should prepare to file in your first year in business:

Income Tax

Paying income taxes during your first year in business will be no different than paying individual income taxes. In most cases, you will pay both federal and state income taxes, depending on your business entity type.

Sole proprietorships and S corporations report business income on individual tax returns. Your tax bracket will determine the flat tax rate you will pay.

Conversely, C corporations pay taxes based on the business’s net income. At the federal level, the tax rate for C corporations is 21%. Currently, forty-four states impose a corporate income tax ranging from 2.5% to 11.5%. Visit the Tax Foundation’s website to find your state’s corporate income tax rate.

Self-Employment Tax

business owner doing paper works for self employment tax

It’s common for business owners to consider themselves an employee of their company for accounting purposes. You are required to pay self-employment taxes if you earned $400 or more from business activities. That money will be taxed at a flat rate of 15.3% and is used to fund Social Security and Medicare benefits.

Employment Tax

You will be responsible for paying employment taxes if your business employs other individuals. Employment taxes include Social Security and Medicare, federal and state income tax withholding, and federal unemployment tax.

Estimated Tax

Businesses must pay estimated taxes four times per year if they expect to owe more than $500 in taxes as a C corporation or more than $1,000 as another business entity. Estimated taxes are due January 15, April 15, June 15, and September 15.

Excise Tax

Not every business is subject to excise taxes, but it’s critical to understand the goods and services that may apply. You should expect to pay the excise tax if your business sells certain products such as gasoline, cigarettes, or alcohol. Reach out to us for a comprehensive list of what goods and services fall under the excise tax rules.

Know Your Business Tax Forms & Tax Deadlines

calculator calendar and alarm clock on green background

As you gear up to pay taxes for your first year in business, it’s critical to understand the business tax forms you’re required to file and when they’re due.

Schedule C or Schedule K-1

If you run your business as a sole proprietor, you should file a Schedule C with your Form 1040 by April 15 to report your income. If you own an S corporation or a multi-owner LLC, you will file a Schedule K-1 by March 15 to report income to the IRS.

Form 1120 or 1120-S

If you own a C corporation, you will file a Form 1120 by April 15 to report income. An S corporation should use the similar Form 1120-S to file income separately from their personal income tax return by March 15.


Form 1099-MISC is filed to report the self-employment income you’ve earned as a business owner or if you’ve hired independent contractors to perform business-related activities. The deadline to submit copies of this form to the IRS is January 31.

Form 1065

If you own a partnership, you will use Form 1065 to report information, including income, gains, losses, and deductions.

Form 720

If you determine your business is subject to excise taxes, you will use Form 720 to report it.

Sort Your Business-Related Paperwork

female accountant sorting business related paperwork

Paying taxes for your first year in business requires careful planning. But organizing all your paperwork and determining the documentation needed to support your tax filing can be overwhelming. That’s why we suggest you focus on three main areas: financial documentation, business-related expenses, and payroll and employee documentation.

Financial Documentation

  • Balance sheet
  • Income statement
  • Bank account statements
  • Credit card statements
  • Invoices received from outside vendors
  • Invoices paid for services

Business-Related Expenses

  • Auto expenses (including mileage and maintenance)
  • Office Supplies
  • Operational costs (including rent, utilities, and maintenance costs)
  • Marketing and advertising costs
  • Expenses for professional services (including accountants, attorneys, bookkeepers, and consultants)
  • Insurance fees (including property insurance, vehicle insurance, business insurance, etc.)
  • Documentation for all equipment and assets purchased (including the depreciation schedule for each item)

Employment Expenses

  • Employee forms, including:
    • W-9 and I-9 verification forms for each employee
    • W-2 Forms
    • 1099 Forms for contractors
    • 1099-MISC for fees for nonemployee payments
  • Payroll forms
  • Witheld deductions from payroll and other employee wages

Now that you know the necessary forms, due dates, and documentation needed to pay taxes for your first year in business, you’re ready to meet this tax season head-on. If you feel overwhelmed with the process, schedule a free consultation with us. We’ll help you navigate the tax filing process for your first year in business and beyond.

5 Ways You May Be Exposing Yourself to a Tax Audit

5 Ways You May Be Exposing Yourself

5 Ways You May Be Exposing Yourself

Tax season is an incredibly stressful time of year. Most of us try our best to keep accurate records of all our finances for smoother tax filing. However, there are still several ways you may unknowingly be exposing yourself to an IRS tax audit.

Each year, the IRS audits a small percentage of taxpayers, most of whom are high-earners or made audacious claims on their returns. But the chances of getting audited are still severe enough that you should be aware of the ways in which you are potentially risking an IRS tax audit.

Claiming work-related expenses on individual filings, recording losses instead of gains, and deducting unusual expenses from taxable income are all ways you may be exposing yourself to a tax audit this year. Keep reading to learn the five ways you are unknowingly exposing yourself to a tax audit and how to avoid getting in trouble with the IRS this year.

Audit Red Flag #1: Underreporting Your Income

One of the first audit risks you should be aware of is underreporting your taxable income. It may be tempting to fib your way through your tax filing by reporting a lower taxable income amount than what you actually earned, especially by including more dependents than you have or reducing the amount of taxes owed.

However, the IRS will cross-check your tax filing with your Form W-2 to ensure you are reporting the correct taxable income. For example, if you made $70,000 in taxable income this year but only reported making $45,000, you are likely to be audited by the IRS. The IRS ensures you are filing accurate income by using a computer algorithm to check your Form W-2 against your return. If your income appears too low or too high, you may be exposing yourself to an IRS audit this tax season.

Audit Red Flag #2: Unjustifiable Business Deductions

worried business woman checking her business deductions

Some taxpayers attempt to justify large tax deductions to lower their overall taxable income. For example, filing a $30,000 deduction for business travel expenses when you only made $100,000 is a huge red flag and can get you in serious trouble with the IRS.

Additionally, filing for unusual deductions can also tip off the IRS that something may not be right with your taxes. If you are self-employed and operate your business from home, you may deduct home-based business expenses, such as depreciation, utilities, rent, and repairs. While these are tax deductions you are eligible to make as a self-employed person, if you file too many or too high of deductions, you may be risking an IRS audit.

Audit Red Flag #3: Unreported Foreign Accounts

If you have any accounts in a country other than the United States, you must report those accounts on your tax filing to the IRS. These accounts can be retirement accounts, checking accounts, or investment accounts in any foreign country. If a foreign account has more than $50,000, it must be reported to the IRS to comply with federal regulations.

Failing to report a foreign account not only comes with an audit but you are also guaranteed to pay a high penalty. In recent years, the IRS has bolstered its investigation team to crack down on taxpayers with foreign accounts who have not accurately reported these accounts in past tax filings.

If you need help accounting for or filing these foreign accounts to the IRS on your next tax return, reach out to us today. Cook CPA Group can help you properly report your foreign accounts to the IRS to avoid unnecessary tax audits.

Audit Red Flag #4: Withdrawing or Depositing Large Cash Amounts

withdrawing large cash amount

Withdrawing or depositing large sums of cash into or from your accounts may put you at risk of an IRS audit. Withdrawing large sums to purchase assets or equipment, such as a vehicle, without reporting the expense on your tax return may raise a red flag for the IRS.

Conversely, depositing more than $10,000 in cash into your bank account will trigger your bank or credit union to report that transaction to the IRS. While depositing more than this amount does not mean you’ve done something illegal, it does raise red flags for the IRS, and you are more likely to be audited.

Audit Red Flag #5: Filing Math Errors

The IRS uncovers millions of math errors on tax returns every year. While many of these mathematical errors are honest mistakes, they can still trigger a tax audit in a small percentage of cases. Luckily, if your deductions are legitimate but are slightly off due to a calculation error, you can easily explain this to the IRS in the case of an audit.

It’s critical you maintain adequate recordkeeping throughout the year for all your expenses in case of an IRS tax audit. With proper documentation, you can easily prove your deductions are legitimate and quickly resolve any questions your auditor may ask you.

If you find maintaining your records and accurately reporting your information on your taxes too overwhelming to do alone, don’t hesitate to reach out to us today. Schedule a call with us to learn more about how we can help you accurately file your tax return to avoid IRS tax audits or aid you in the case you get audited. We’re always here to help!

Tax-Saving Tips for Your College-Bound Kids

Tax Saving Tips


Tax Saving Tips

With colleges across the country opening their campuses for a fresh new set of students, it’s the perfect time to consider the tax savings your family can take advantage of this tax season. While every family’s economic situation differs, several tax credits and deductions are available to most families with college-bound kids.

Continue reading to learn the tax-saving tips your family can use this year to save on college-related expenses come tax time.

Tax-Saving Credits For College-Bound Kids

As the parent or guardian to a first-time college student, you know how much paperwork and filing goes into assuring the child in your life is set up for success. Many families get so bogged down by the overwhelm of it all that they don’t take advantage of several tax-saving options.

One of the easiest ways to save money on your taxes this year is by carefully considering tax credit options for eligible students and their families. The two most common tax credits your family can leverage to save money this tax season are the American Opportunity Tax Credit and the Lifetime Learning Credit.

American Opportunity Credit (AOTC)

graduation cap with tassel and wrapped 100 dollar bills

The American Opportunity Credit helps college-bound families pay for education expenses in the first four years of post-high school schooling. Although subject to income limitations and strict requirements, your family could receive a maximum annual credit of $2,500 per eligible student. Additionally, your family could receive up to a 40% refund if you owe no tax at the end of the year.

To claim AOTC on your tax return, make sure you and the student in your family check these boxes:

  • The student is you, your spouse, or a dependent listed on the tax return.
  • Must be pursuing a degree or credential.
  • Have qualified education expenses, including tuition, books, and equipment from an eligible. institution. See this page for a list of the U.S. Department of Education’s Database of Accredited Post Secondary Institutions and Programs (DAPIP).
  • Be enrolled at least part-time for at least one academic period beginning in the tax year.
  • Not have finished the first four years of post-high school education at the beginning of the tax year.
  • Not have claimed the AOTC for more than four tax years.
  • Not have a felony drug conviction at the end of the tax year.
  • Modified adjusted gross income (MAGI) is $90,000 or less (or $180,000 for married filing jointly).

If your family meets these requirements and is qualified to apply for the AOTC, complete Form 8863 and attach it to your Form 1040 or Form 1040A to apply.

For more information, visit the IRS webpage for the American Opportunity Tax Credit or reach out to us today.

Lifetime Learning Credit (LLC)

parent and student applying for loan

The Lifetime Learning Credit is another great tax-saving opportunity for families wanting to offset the cost of tuition and education expenses for the student in their life. Although subject to income limitations and other requirements, your family could receive a maximum annual credit of $2,000 per tax return.

Unlike the AOTC, the LLC has no limit on the years you can claim the credit and has less stringent eligibility requirements. Be aware you cannot claim both the LLC and AOT in the same tax year.

To apply for the LLC, make sure the student in your life meets these requirements:

  • The student must be yourself, your spouse, or a dependent listed on your tax return.
  • Have qualified education expenses, including tuition, books, and equipment from an eligible institution. See this page for a list of the U.S. Department of Education’s Database of Accredited Post Secondary Institutions and Programs (DAPIP).
  • Be taking higher education course(s) to get a degree, credential, or improve job skills.
  • Be enrolled for at least one academic period beginning in the tax year.
  • Modified adjusted gross income (MAGI) is between $59,000 and $69,000 (or $118,000 and $138,000 for joint returns).

If your family meets these requirements, and are qualified to apply for the LLC, complete Form 8863 and attach it to your Form 1040 or Form 1040A to apply.

For more information, visit the IRS webpage for the Lifetime Learning Credit or reach out to us today.

Tax-Saving Deductions For College-Bound Kids

stack of coins calculator and miniature college school model

As college tuition and related education fees increase, more and more students and their families must take on student loans. According to recent census data, around 13.5% of Americans have some form of student loan debt. And while this debt is a financial burden, there are some ways to save money during tax season.

The two most common tax deductions your family can leverage to save money on tuition and related college expenses this tax season are the Student Loan Interest Deduction and the 529 Plan Contributions.

Student Loan Interest Deduction

Your family or the student in your life can take advantage of up to a $2,500 tax deduction. Including required and voluntary pre-paid interest payments, the deduction can either be up to $2,500 or the amount of interest you paid during the tax year, whichever is less.

To claim the student loan interest deduction, the following requirements must be met:

  • You paid student loan interest during the tax year.
  • The loan holder is legally obligated to pay interest on a qualified student loan.
  • Tax filing status is married filing jointly.
  • Modified adjusted gross income (MAGI) is less than the annual limit.
  • If filing jointly, neither spouse can be claimed as a dependent on someone else’s return.

If your family and the student in your life meet these requirements, and are qualified to apply for the student loan interest deduction, make the deductions directly on Form 1040.

For more information, visit the IRS webpage for the Student Loan Interest Deduction or reach out to us today.

529 Plan Contributions

graduation cap on calculator with pen and dollar bills

Operated by the state or an educational institution, 529 plans allow your family to save for college and other higher education. Any earnings in the 529 plan are exempt from federal taxes and are often exempt from state taxes when you use the funds for qualified education expenses.

Although 529 plans are not tax deductible at the federal level, many states offer deductions or special tax credits for these types of contributions. Check out this site for a list of states that offer deductions or tax credits and the corresponding deduction or credit.

Regardless of deductions or credits available in your state, investing in a 529 plan remains an advantageous way to grow education-related savings tax-free.

If you have any questions about 529 plans or how your family can leverage tax credits or deductions on your next tax filing, book a consultation call with us. We’ll walk you through all your tax-saving options and ensure you never pay more than you have to.

How to Account for Independent Contractors in Your Business Taxes (4 Questions You May Be Asking)

How to Account for Independent Contractors

How to Account for Independent Contractors

With nearly 60 million Americans identifying as independent contractors, it’s important to understand how your business should account for these types of workers come tax season. Your company may hire independent contractors for a wide variety of projects, many of which fall outside the scope of your existing team’s responsibilities.

With an increasing freelancer workforce, you may be considering how you can leverage independent contractors for your own business. This post guides you through four questions you may be asking about accounting for independent contractors in your business taxes this year, including:

  1. What is an independent contractor?
  2. Are independent contractors treated as a payroll expense?
  3. What independent contractor documents should my business retain for tax purposes?
  4. How do I deduct independent contractor expenses from my business taxes?

How Does the IRS Define an Independent Contractor?

american flag cheque and dollar bill

The IRS provides specific guidelines to determine whether a person is an employee or an independent contractor. There is a fine line between the two classifications so it’s important your business understand the difference.

Generally, your business can determine how to treat this difference by understanding the business relationship. You can do this by following the IRS’s Common Law Rules – three distinct questions to help you determine the degrees of control your business has in the relationship:

  1. Behavioral Control – Ask yourself this: “Does my company control what the worker does and how the worker does their job?” This question will help you determine the type of instruction you provide the individual, the degree of the instruction, and the evaluation system you use to measure the details of the job.
  2. Financial Control – Ask yourself this: “Are the business aspects of the worker’s job controlled by me, the payer?” The financial control question gauges how significant of an investment the relationship is, any unreimbursed expenses, and the payment method.
  3. Type of Relationship – As yourself this: “Are there written contracts or employee-type benefits, including insurance or paid vacation?” This question will help you determine how you and the worker perceive the working relationship. Employee benefits and the timeline of the worker-business relationship can help you determine if the worker is truly an independent contractor for tax reasons.

If you need more guidance on this issue, check out the IRS’s Independent Contractor or Employee guide.

Are Payments to Independent Contractors a Payroll Expense?

employee listing payments to independent contractors

As we’ve just determined, hiring an independent contractor shares many similarities with hiring an employee. However, just as there is a difference in the relationship, there is a difference in the way you pay your workers.

When you hire an employee for your business, you request that they fill out a Form W-4. You then pay for certain standard employee benefits and taxes.

You would not do the same for independent contractors. Because each independent contractor is responsible for paying his or her own payroll taxes, unemployment insurance, social security, and other payroll taxes, you would not treat independent contractors as a payroll expense.

Rather than a payroll expense, independent contractors should be treated like any contract work. Your business likely hires other service professionals like lawyers and accountants on a contract basis. Independent contractors fall under this same category. And, as such, the work they perform should be treated as a tax-deductible expense.

What Independent Contractor-Related Documents Do I Need to Retain For Tax Preparation?

female worker checking documents for tax preparation

Hiring an independent contractor for your business requires far less recordkeeping than hiring full-time employees. Because independent contractors handle most of their own important tax documents, you may only need to retain a few important documents for tax filing purposes.

Before hiring an independent contractor, ensure you have the following three documents in place:

  1. A Form W-9 with updated contact information for the independent contractor, including a taxpayer ID number (EIN or SSN). Note that your business is not required to send the completed W-9 form to the IRS. Ensure you keep the form for recordkeeping purposes in the case of an audit or other concerns.
  2. A written contract outlining the scope of work the independent contractor is being hired to complete, including deliverables, timeline, and ownership. Both parties should sign the contract and retain a copy for their records.
  3. Any payments made to the independent contractor, including deposits before work begins and invoices for expenses or materials your business is responsible for covering.

These are three important documents to retain for tax-paying purposes, but you may want to consider the need for other documents. Including sub-agreements like confidentiality, non-solicitation, or non-compete agreements are documents aimed at protecting your business trade secrets, your clients, and your unique business process.

How Do I Deduct Independent Contractor Expenses From My Business Taxes?

The first step in deducting independent contractor expenses from your business taxes is retaining compensation documents. If your business has paid an independent contractor more than $600 for the year, you must complete Form 1099-NEC. This form serves to report how much your business paid independent contractors and other nonemployees for the year. You should fill out this form and then submit a copy to the IRS and the freelancer by January 31st each year.

You can download a copy of Form 1099-NEC from the IRS here.

Once you have properly filled out Form 1099-NEC, reach out to an expert accounting firm like Cook CPA Group. We’ll help you file Form 1099-NEC and other eligible business deductions to save your business money this tax season.

9 Lesser Known Tax Write-Offs for LLCs and S-Corps

nine lesser known tax write offs

nine lesser known tax write offs

As the owner of an LLC or S-Corp, paying less money in taxes means you have more to spend on building your business to new highs. The more deductions your small business can take at tax time, the lower your tax bill will be.

While you may be aware of a few more common tax deductions your LLC or S-Corp can take this tax season, we’re sharing a list of lesser-known small business deductions you can use on your tax return to lower your taxable profit for the year.

  1. Self-Employment Tax
  2. First-Year Start-up Costs
  3. Training and Education Costs
  4. Professional Services Fees
  5. Pass-through Entity Deduction
  6. Independent Contractor Deduction
  7. Charitable Contributions and Gifts
  8. Association and Membership Dues
  9. Retirement Contributions

Self-Employment Tax

The first tax deduction you should take advantage of this tax season is the self-employment deduction tax. Every year, you can claim 50% of what you pay in self-employment tax as a federal income tax deduction. These are Social Security and Medicare taxes you pay as a self-employed citizen.

Deducting the employer-equivalent portion of this tax is done with your adjusted gross income and only affects your overall income tax.

To read more about eligibility requirements, check out this helpful IRS website.

First-Year Startup Costs

The first year in business is one of the toughest. Luckily, there are tax advantages for your start-up LLC or S-Corp you should know.

Start-up costs, as defined by the IRS, are expenses your LLC or S-Corp paid or incurred for creating your business or researching the creation or acquisition of your business. To be eligible for this deduction, your LLC or S-Corp must meet both of these requirements:

  1. You can deduct the expense if you paid or incurred the cost to operate an existing business if it is in the same field as the business entered into.
  2. The expense is something you paid for or incurred before your business began.

To see a list of eligible start-up costs, visit this page.

Training and Education Costs

woman completing her assignment

Building a successful small business requires constant learning and growth. Your LLC and S-Corp may save money this tax season by deducting the cost of business-related training and education.

Eligible training and education expenses must:

  1. Maintain or improve job-related skills
  2. Be required by law to keep your current salary, status, or job.

Note that the training you take cannot be part of a program that educates or trains you for a new business. All training, certifications, and education programs must enhance your current trade or business.

Visit the IRS guide on the topic for more information on filing requirements.

Professional Services Fees

Running a business often means hiring and engaging with professional service providers to help keep daily operations running smoothly.

Your LLC or S-Corp can deduct fees paid to accountants, lawyers, consultants, and other service professionals. However, the expenses must be directly related to your current business and not for work to acquire business assets.

Additionally, you can deduct the cost of hiring tax professionals like Cook CPA Group to prepare for and file your LLC and S-Corp business taxes. Save money on your small business taxes this year by contacting us today.

Pass-Through Entity Deduction

Pass-through entities, like your LLC or S-Corp, are uniquely qualified for up to a 20% deduction on net business income from federal income taxes. There are some limitations, including:

  1. Your taxable income
  2. The type of trade or business
  3. The amount of W-2 wages paid
  4. Unadjusted basis immediately after acquisition of any qualified property held by the business

If you are interested in reading more about what taxable income includes, please see this IRS article for a detailed breakdown.

Independent Contractor Deduction

business owner instructing an independent contractor to paint walls

With the upswing in workers taking to freelancing or independent contractor work, it’s only natural that your LLC or S-Corp hire a nonemployee to perform services for your business. If your business hired an independent contractor, the expense is deductible from your year-end taxes.

For more information on deducting independent contractor expenses, read our recent blog post, How to Account for Independent Contractors in Your Business Taxes.

Charitable Contributions and Gifts

Your LLC or S-Corp can deduct qualified charitable contributions if they are in the form of cash contributions. Otherwise, this deduction is more advantageous for an individual come tax time.

That being said, any expenses your LLC or S-Corp incurs for business gifts can and should be deducted. Exceptions to this deduction include:

  1. Business gifts of more than $25 for every direct or indirect gift
  2. Gifts expenses that include any incidental costs (like packaging and mailing)
  3. Gifts with a permanent  imprint of the company’s name
  4. Gifts meant for wide distribution, such as pens, bags, and cases

For more information on exceptions, read IRS Publication 535.

Association and Membership Dues

Many small businesses are not aware that the IRS allows tax deductions for membership or association dues that are required or directly related to your business.

For example, if you join your local Chamber of Commerce or pay dues for a similar business-related association, your LLC or S-Corp can claim the fee as a deduction.

These expenses can be claimed on your Schedule C form. Reach out to us today to ensure you never pay more than you have to.

Retirement Contributions

woman calculating her retirement contribution

Saving for future financial needs is more important than ever. Make sure your LLC or S-Corp takes advantage of the retirement contributions deduction.

The IRS outlines a special rule you should use to calculate retirement contributions for yourself as a self-employed individual. Essentially, your retirement plan contribution is calculated based on compensation. To calculate this plan compensation, you should:

  1. Deduct a portion of your self-employment tax, and
  2. The amount of your retirement plan contribution

Once you have that number, you’ll calculate your own contribution and deduction.

Head over to the IRS’s guide on Calculation Your Own Retirement-Plan Contribution and Deduction, for a detailed overview of how to calculate your retirement contribution deduction

If you are interested in paying fewer taxes this tax season for your LLC or S-Corp, book a call with us today. Our team of expert accountants has decades of experience filing taxes and saving money for LLCs and S-Corps, and we’d be happy to help you take advantage of these lesser-known deductions!


90 90 90 Rule

the 90 90 90 rule

This is the final series with Ed Cotney as he concludes with an in-depth discussion of the IRA rules to consider other approaches to address required minimum distributions.

If you have an IRA or 401k and live to be age 90, and if all you do is take the required minimum distributions out once you turn 72, chances are you’re still going to have 90% of your IRA intact. So if you have a million-dollar IRA today and you’re 72 years old, chances are when you die, about $900,000 will still be in your IRA.  Hence the 90 90 90 rule.

2020 Inherited IRA Distribution Rules and Risks of the 10-year rule

Giving It All At Once

2020 inherited ira distribution rules

Proceeds will be distributed all at once when you die. This will go on top of your children’s earned income resulting in a higher tax bracket.

10 Year Rule

The kids can let the money stay in the IRA for up to 10 years, and they just have to fully take out the inherited IRA after you die within ten years. There’s some risk exposure with this. The Kids have the right to take out their portion at any given time within the ten years after you die, and they will need to file a 1099r form.

If we do this ten-year rule, while the money is in the 10-year stretch rule; you need to ensure your kids don’t get enough bankruptcy or judgment. If one child does, they could lose the inherited IRA and could even pay a tax bill. You can check the Clark V. Ramaker Case as an example.

A Story Of How Converting IRA To CRUT Helps A Widowed Spouse

family smith scenario

Tim and Susan want to transfer their wealth when they’re dying, their children free from tax, safe from lawsuits, and safe from creditors and predators. Tim passed away, and Susan’s age now is 80.

They have four kids, Susan has a house worth four hundred thousand dollars, and they have cash of $400,000, and Susan and Tim’s combined IRAs are $800,000.

The 1st kid, Mike, is a successful doctor and has a wonderful job. The 2nd daughter, Mary, didn’t marry very well. In fact, after Tim dies, his husband says, “I can’t wait for your mom to croak. This way, we can go buy a new truck and a bass boat”.

The 3rd son, Ed, is in a rocky third marriage, but he’s good with money. He’s good-looking too. The last son, Dan, is not good with money, is divorced, and looking for work.

Susan’s concerned that Dan will just waste his inheritance money and have to borrow from his siblings.

Taxes Issues Upon Death Of Susan

  1. House – No tax, because of Step up in basis
  2. Cash – No tax, because of Step up in basis
  3. IRA/401K – Will have an Ordinary Income Tax

How The Charitable Trust Come In-Play

ira to charitable remainder unitrust tax benefits

Calculating the total value of the asset, we got $1,600,000. We know that the non-ira assets, the house, and the cash will go to the children with zero tax, and the estate plan says that when Tim and Susan die, the $800,000 IRA goes in four equal distributions to the kids.

When Susan dies, the $800,000 will go to a charitable trust. This trust is designed to be a 20-year income payout to the four children using a very conservative number of 5.3%. We’re going to distribute $42,000 divided by four, so each child will get about $10,000 to $11,000 for the next 20 years. In total, we’re going to distribute out $896,000 of taxable income to the kids.

Now, here’s what’s cool about this strategy. This $800,000 has a high degree of asset protection from judgment, creditors, and predators. So, for example, in year 4, after Susan dies, Brother Dan gets into a divorce. He is receiving an income stream from the charitable trust but can’t take any money from it—that way, protecting himself.

And for Mike, the doctor, this is a smart deal too. It’s not a question of will Mike be in a lawsuit as a doctor. It’s a question of how many lawsuits he will be in during the rest of his life. So the last thing he needs to get is something that doesn’t have some form of creditor protection.

The last benefit from this is at the end of 20 years, after this charitable trust has paid out nearly $900,000 to the kids, almost $900,000 will go to her designated church.


This is not a multi-million dollar Warren Buffett strategy. This strategy works for anybody with at least $500,000 in qualified money, like a traditional IRA or 401k. This is a strategy where using a charitable trust provides a beautiful income stream to the kids and a beautiful gift to your designated charity.

There’s nothing severely advanced or complex here. You may have to spend a little bit of money for the lawyers to draft this, but this blows the doors of leaving an inherited IRA to a child so that they can take the money out over ten years at some point. By using charitable trust, we are making money off the IRS.


Charitable Tax Harvesting

putting coins in a piggy bank

The next video is part two of advanced tax planning options as this topic covers how to use charitable deductions to minimize capital gains.  Please feel free to watch the video or read the transcript.


The Government Confiscatory Tax System

We all know that we live in a confiscatory tax system. We make money from income capital gains, and we know that we get the keep a part of it and that we get to be mandatory donors to the IRS and franchise tax board charities.

We live in a philanthropic confiscatory tax system where depending on how much money you make, you may pay more or less, but a portion of whatever you’re doing will support the IRS.

What We Don’t Know

reactive tax planning and proactive tax planning

  • 60% of our income tax is optional
  • 100% of long-term capital gains tax can be optional
  • 100% of estate tax is optional

How Do You Pay Less Tax?

No tool makes it work for everybody and everything. But generally, the three main things that can help you pay less tax are insurance, business or trust, and a charity. Effective tax planning usually involves these three different things working together to create optimized opportunities.

Question: What is the maximum amount of money or assets a person can donate to a charity each year?

Answer: No Limit!

Maximum Charitable Adjusted Gross Income Deduction Rules

Schedule A, Line 11 –  Cash= 60% (Can be 100% as of 2022 because of the Secure Act)

Schedule A, Line 12 – Appreciated Assets(Eg. Stocks and Real Estate) = 30%

If your adjusted income this year is $100,000, the most you can claim as a charitable deduction for cash under most circumstances usually is sixty percent or sixty thousand dollars.

If you give up to 60,000 to charity and claim it as a gift, you have reduced your adjusted gross income from 100,000 down to a 40,000 tax event. In doing so, you have probably not only reduced your taxable AGI, but you may have a lower tax rate. You can drop down one or two thresholds to get you into a more favorable income tax deduction

Example of using charity for people in 50% tax Bracket

If you have a $1,000,000 AGI, normally, you will be in a 50% tax bracket and have to pay 50% tax to the IRS. That means $500,000 goes to your tax, and you take home $500,000. But if you decide to gift $50,000 in cash to your IRS-approved charity, you can save $25,000.

This is how it works. Now that you gift $50,000 to a charity, you can include that in your Schedule A, Line 11. By doing so, you can get a $25,000 tax deduction. Your current AGI now becomes $950,000; you only have to pay $475,000 of your tax and used the $25,000 tax deduction.

Income and Captain Gains Tax Rescue Play

income and capital gains tax rescue play

Now, let’s make this more interesting. What if five years ago, you had $40,000 burning a hole in your pocket. You went out to your financial planner to buy four positions for $10,000 a piece. That will be your basis, after-tax money.

Two of those positions did really well, and we call them racehorses. One of these positions started out pretty good, and then about two years down the road becomes flatlined. It grew to $50,000 in value, but for the last three years, it’s been doing nothing. Technically, you have lost an opportunity cost in this case. We call that one a donkey. The last position that you bought is hanging on for his dear life. It’s still worth $10,000, but you lost on opportunity cost.

What if you gave the $50,000 donkey to a charity? If you tried to sell the $50,000 stock and gain $40,000, you’re going to pay tax. Well, let’s think a little bit differently. So if you give the $50,000 as a block of stock that has a basis of $10,000 to a charity, technically, the charity’s going to turn it around and sell it. The charity has the same net effect.

If your charity doesn’t have a brokerage account, tell them to open up one. They’re not making it easy for donors to donate by not having one. So you better ask them to have one.

So you tell your financial planner to give the $50,000 value of the stock to the charity. The Charity converted that stock into cash. You get rid of the donkeys that are going to cost you money if you sell them, and you get $15,000 of money off the IRS. You may be confused, but let’s check out the image below.

giving cash or stock to charity comparison

On the left side, it shows you gave $50,000 of cash and bought you $25,000 off the tax statement. On the right side, you gave a charity $50,000 of stock that had a basis of $10,000. Now you’re in a 50% tax bracket on the tax form.

On the tax form, it’s the same. It’s the same deduction on the tax form except for one thing. Notice the basis here. In this case, $10,000 of basis bought you $25,000 of tax savings. Now, that’s $15,000 money you made off the IRS.


Overall, first, determine if you have highly appreciated poorly performing assets. You may want to consider making money off the IRS while still accomplishing your philanthropic objective.

At an early age, most of us were taught just to give cash to charity, and that’s all we’ve ever been doing. If you like making money off the IRS and still want to help your chosen charity, you may want to look at this concept.


Charitable Trust Tax Planning

building and operating business tax exit play

This is part one of a video series discussing various advanced tax planning concepts.  The majority of this discussion covers charitable remainder trusts. Feel feel to watch the video or read the transcript.

John And Mary Smith likes to sell their 11 million dollar business. The total value of the assets (Business and Commercial Building) is around 11 Million Dollars. If they do nothing, their tax with the business will cost them around $1,650,000.000 and $2,000,000 for the commercial building. They go home with 7.35 Million, and the IRS goes home with 3.65 Million.

Using Charitable Trust

building and operating business tax exit play

A charitable trust is an irrevocable trust. A charitable trust is a tool that has two jobs. One, to give you an income stream normally for life, and when you and your spouse die, whatever is left in that trust goes to the charitable structures you like. This could be Red Cross, Salvation Army, or whatever charity comes to mind.

We put the building in this charitable trust. This charitable trust is a tax-exempt irrevocable trust.  By doing this, we bypass all the capital gains and recapture tax. So, in this case, if they put a 5.5 million dollar highly appreciated building into a charitable trust, there’s no tax. Another benefit is that the IRS is going to give them a charitable income tax deduction, in this case, 1.65 Million Dollars.

john and mary smith transaction

So if they sell the business and donate that building into the charitable trust, they’re almost going to be zero tax. It may take them a couple of years as far as tax returns to enjoy all these benefits, but it boils down to higher annual income.

Now you may say, that their kids aren’t getting the value of that building when they die. Then, let’s just use some money to buy a life insurance policy to replace that value. In effect, the IRS just paid for the life insurance policy.

john and mary smith annual income comparison

This strategy is not new. It’s just new to some people or even you. So when you hear people talking about charitable tax planning, those are the people who have figured out that there’s a way that we can do more good for everybody involved and put a lot of money in the hands of a charitable organization.

We’ve done several strategies now on the death of John and Mary. We’ve done seven million dollars going to charity.  We replace the value going to the charity using life insurance.  The life insurance all goes tax-free, assuming the law doesn’t change in respect to step up in basis rules. We’ve increased the income to 159,000 a year for the rest of their life.

tax savings upon death


A Tax Strategy You May Be Missing

One of my joys in April (just before tax season is over) is getting the iPad all cleaned up and updating the app to watch the Masters. The beautiful course is a needed refresher that helps me to persevere the last few days until April 15. The scenery is stunning, the competition is rigorous and the unexpected seems to happen. The app has many ways to watch the competition such as focusing on specific holes like Amen corner or player groupings. As my mind drifts into a post tax season mode, I wonder what it would be like to watch in person one year.

Augusta tax rule
Amen Corner at Augusta Golf Club

There are houses on the course that one must be able to rent….

How much is it to rent?  Do they pay taxes on the rental income?  Surprisingly, the answer to the tax question is they probably don’t pay taxes: the tax code has something called the “Augusta Rule.”  This strategy was created to allow residents of Augusta, Georgia to rent their homes during the Masters’ golf tournament, without having to include this rental income on their tax returns.

The Augusta Rule 

The Augusta Rule has become a tax planning strategy that allows your business to pay rent to you for the purpose of holding business-related meetings in your primary residence or vacation home. For example, if you have a monthly meeting with the board of directors, your company can pay a reasonable amount to rent your home to conduct these meetings. Your company gets to take an expense deduction on the business tax return and you do not have to report the income on your personal tax return. This can be used for a maximum of 14 days each year. Keep in mind that if you go over the maximum of 14 days, you will have to report the entire rental income, and you will not receive any tax benefit since you will have to report the money as rental income on your personal return.

Tax Savings for Your Business 

According to the Augusta rule, you can rent out your home to your business (or for other purposes like Airbnb) for a total of up to 14 days each year. This home can be located anywhere in the United States, and the income from the rental will be excluded from your taxable income. For example, a rental expense of $35,000 (paid to you) generates your corporation $7,350 in tax savings while providing you $35,000 of tax free income.

Establish Rental Rate  

To establish a reasonable rental price you first need to document local pricing standards. You can do this by contacting at least three local establishments where businesses would normally have meetings, such as country clubs or hotels, to get an idea of venue costs in your area. 

You can use your home for a variety of business purposes, including planning sessions and even company parties. It’s recommended that you schedule your meetings in your calendar system and send out an agenda, if possible, since this provides additional documentation at tax time. 

There is no minimum participant requirement for these meetings, but keep in mind: 

  • The daily rental rate doesn’t include the cost of business meals. 
  • The home can’t be considered a full-time rental property. 
  • If you rent out your home for more than 14 days, you’ll have to report all of the income, and you won’t get the tax benefit.

Execute a Rental  Agreement 

To comply with the tax code, a written rental agreement is required between yourself and your company.  Additionally, thorough documentation supporting the rental price must be maintained as well as meeting documentation such as meeting minutes or notes.

Furthermore, to take advantage of the Augusta rule, the business entity structure must be an S corporation, C corporation, or partnership. It can’t be a Schedule C (self-employment income), unless the entity is a Single Member LLC. 

So, if you want to make your accountant and other employees happy, post tax season, consider scheduling a tax planning meeting at your house, on that course near the Masters…and we can help you be compliant with IRS regulations.

Augusta Rule
Augusta Golf Club at Sunset
References: Internal Revenue Code sections and related regulations include PLR 8104117; IRC Section 280A; IRC Section 274(a)(1)(B);IRC Section 267(a)(2); IRC Section 262; IRC Section 162; Gregory v Helvering, 293 U.S. 465 (1935); Frank Lyon Co. v United States, 435 U.S. 561, 573 (1978); Rev. Rul. 76-287; Leslie A. Roy v Commr., TC Memo 1998-125 PLR 8104117