This issue’s “Tax Tips” article covers the research credit, why taxpayers should consider a charitable IRA rollover, and the risks associated with falling behind on payroll taxes.
Take another look at the research credit
After more than 30 years of short-term extensions, the research tax credit (often referred to as the “research and development,” “R&D” or “research and experimentation” credit) was finally made permanent by the Protecting Americans from Tax Hikes (PATH) Act of 2015. The act also enhances its benefits, particularly for smaller businesses. So, if you haven’t taken advantage of the credit before, it may be worth another look. For example, eligible small businesses may now offset the credit against the alternative minimum tax, and qualifying start-ups may offset the credit against the employer portion of FICA payroll taxes.
Consider a charitable IRA rollover
The PATH Act reinstated qualified charitable distributions (QCDs) from IRAs, and made this tax break permanent. If you’re 70½ or older, a QCD — commonly known as a charitable IRA rollover — allows you to transfer tax-free up to $100,000 per year directly from an IRA to a qualified charity, and to apply that amount toward any required minimum distributions for the year.
The alternative would be to take a taxable distribution, donate it to charity, and claim a charitable deduction. The problem with this approach is that the charitable deduction is available only if you itemize. And, even if you do so, it’s disallowed to the extent it exceeds 50% of your adjusted gross income (AGI). So, depending on your tax situation, you may be unable to use the deduction to offset the tax on the distribution. In addition, taking a taxable IRA distribution increases your AGI, which can raise taxes on your Social Security benefits and net investment income, or decrease your itemized deductions.
A charitable rollover avoids these problems because it goes directly to charity and is never included in your income. Also, certain states don’t allow charitable deductions. Thus, high income taxpayers may lose a portion of their itemized deductions.
Are you current with your payroll taxes?
Don’t underestimate the risks associated with falling behind on your payroll taxes. It’s not unusual for employers that are short on cash to tap withheld taxes for operating expenses. But unless cash flow improves, these businesses can find themselves with a significant tax liability that’s quickly spinning out of control. And the penalties can be severe.
What’s more, “responsible persons” — including certain officers, directors and shareholders — can be held personally liable for unpaid taxes and penalties, and in extreme cases may even face jail time. If your business is experiencing cash-flow problems, talk to your financial advisors about potential solutions that won’t jeopardize your payroll tax deposits.