Tag Archives: self employed

Act by Dec. 31st to Benefit from the Advantages of a Solo 401(k)

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As a self-employed individual or a small business owner you have several alternatives to consider in selecting the right retirement plan that fits your needs and objectives. The two most common choices are a Simplified Employee Pension (SEP) and a solo 401(k). Contributions to either plan are tax-deductible and allow for the tax-deferred growth of your contributions and the investment earnings.

Choosing the right retirement option can be confusing, and the subtle but very important differences between the plans can often be overlooked.

Many defer to the SEP because it is easier to set up than a 401(k), which is more complex and can be more costly to administer. However, a 401(k) allows you to contribute a greater amount toward your retirement.  If you think you may be earning $25,000 or more every year, it may be worth the additional expense and hassle of setting up the solo 401(k). Since with a solo 401(k) plan you are treated as both the employee and the employer, the contributions can be made to the plan in both capacities. As an owner, you can contribute as follows:

  • Employee Share/Elective Deferral – $17,500 ($23,000 if age 50 or over)
  • Employer Share/Nonelective Contribution – 20% of net self-employment income (which is your business income less ½ of self-employment tax)

Total contributions cannot exceed the IRS prescribed limit of $52,000 (not including the catch-up contributions of $5,500) for 2014[1].

To better illustrate: Let’s say you are a 55-year-old consultant with $80,000 of self-employment income. With a solo 401(k) plan you would be able to contribute $23,000 for the employee portion plus 20% of net self-employment income $14,870 for a total contribution of $37,870. Using the SEP scenario, you would only be able to contribute $14,870.

In order to take advantage of the benefits of the solo 401(k), you must act quickly. You must open the solo 401(k) by December 31, 2014 to qualify to make 2014 contributions, even though you have until April 15, 2015 to contribute the money.

In addition to higher annual contributions, a solo 401(k) has a loan feature similar to a traditional company 401(k) plan. Individual 401(k) loans are permitted up to 50% of the total account value with a $50,000 maximum, a nice benefit if you need extra money.

For more information on your individual retirement planning options, please contact your Aronson advisor or Anatoli Pilchtchikov of Aronson’s Personal Financial Services Group at 301.231.6200.



[1] Based on the IRS COLA adjustments the limit for 2015 has been increased to $53,000 ($6,000 for catch-up contributions).

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Deducting Business Travel Expenses

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Does your job require travel away from home? Expenses for temporarily working away from your home are deductible if properly documented.

In summary opinion 2014-10, the Tax Court ruled in favor of the taxpayer, that his six-month work assignment, which was over 1,000 miles away from his home, was temporary. However, his expense deduction ended up being sharply limited because the taxpayer could not produce the proper documentation as required under the code.

Time and again, we read about and meet with taxpayers who have incurred legitimate expenses, but fall short on the documentation front. Proper substantiation is crucial. While it does not require expensive solutions, it does require time and discipline.

Substantiation means proving what the expense was (via a receipt) and its business purpose (via contemporaneously noting this, if not evident from the receipt. Expense substantiation for travel away from home must meet the extra substantiation requirement outlined in Reg. §1.274-5T(b)(2). The following is excerpted directly from this regulation:

  1. Amount. Amount of each separate expenditure for traveling away from home, such as cost of transportation or lodging, except that the daily cost of the traveler’s own breakfast, lunch, and dinner and of expenditures incidental to such travel may be aggregated, if set forth in reasonable categories, such as for meals, for gasoline and oil, and for taxi fares;
  2. Time. Dates of departure and return for each trip away from home, and number of days away from home spent on business;
  3. Place. Destinations or locality of travel, described by name of city or town or other similar designation; and
  4.  Business purpose. Business reason for travel or nature of the business benefit derived or expected to be derived as a result of travel.

The key to compliance is contemporaneous substantiation. The IRS and courts take a dim view on reconstructions of mileage logs and expenses long after the fact. Making this part of your routine will go a long way to successfully defending such deductions in an audit, as well as helping to ensure that all expenses are captured. There are even apps available for smartphones that provide the ability to record these expenses as they occur.

For further information or if you are faced with an IRS audit on this or any other issue, please contact Larry Rubin, CPA, Aronson’s tax controversy practice lead, at 301.222.8212.

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IRS 2014 Exam and Enforcement Initiatives

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Faris R. Fink, IRS commissioner of the Small Business and Self-Employed Division, announced that 2014 will be the year the IRS moves its examination focus from C corporations to flow-thru entities. A flow-thru entity is any business whose tax is imposed at the owners’ level, on their individual income tax returns. Such entities include partnerships, limited liability companies, and S corporations.

In 2011 the average audit rate for corporate and individual returns was about 1%. For flow-thru entities, it was about 0.4%, reflecting the IRS’s long-standing focus on corporations. Given the rising number and complexity of flow-thru entity returns, however, the IRS believes that the level of noncompliance, unintentional or otherwise, needs to be more formally addressed. Flow-thru returns also provide a gateway to examining the owners’ individual returns and related entities.

Past efforts at targeting the noncompliant, while not imposing exam-induced hardships on the innocent, has been a challenge for the IRS. Various TIGTA (Treasury Inspector General for Tax Administration) found that the incidences of no-change exams was over 50% for flow-thru entities, significantly higher than for individuals and corporations.

While the IRS works out how they are going to do a better job at selecting returns more likely to bear fruit, we expect agents to concentrate on the following, among other areas:

  • Basis substantiation
  • Related party transactions, including loans
  • Probe for personal expenses buried in deductions on the business return
  • Compliance with required disclosures
  • Allocation of income
  • Treatment of withdrawing partners

Submitting a tax return to the IRS is the first step in a potentially disastrous relationship. Investing the time necessary to prepare a return that will withstand IRS scrutiny is the best defense, not only to achieve a no-change audit but to also eliminate the risk that other returns will be pulled into the exam. At minimum, you should understand what aspects of the return carry risks of an adverse finding, and make an informed decision on those tax positions prior to filing.

For further information or to discuss your specific situation, please contact your Aronson tax advisor at 301.231.6200.

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