top of page

There are many ways to reduce your taxable income, some would be approved by the IRS and some may not.  We can look at these 5 Legal ways that are in accordance with the IRC (Internal Revenue Code).

1.  Adjusting your Withholding Tax

2.  Donating / Charitable Contributions

3.  Contributing to Traditional (OR) Roth IRAs

4.  Contributing to 401K or Health Flexible Spending Plans

5.  Standard Verses Itemized Deduction

1. ADJUSTING YOUR WITHHOLDING TAX

Taxes are deducted from your paycheck.  These taxes are called withholding taxes which are adjusted against your tax liability.  If  your taxes are more you can qualify for a REFUND or PAY the Difference..  Refunds to most people are a great thing.  But in reality as the government would be looking at is that "It's a Settlement with the Government"  You could have received that money and put it to good use to earn for you for the whole year.  It could anything from 401K or a savings account.  It DOESN'T LOWER your tax bill.  You will pay at the time of tax filing.  But you can have a pay raise and get control of your hard earned income.  RULE OF THUMB: You can adjust your withholding at any time of the year.  To do so, you would just need to file out a Form W-4 for the IRS and IT-2104 with NYS and submit to your employer.

2. DONATING / CHARITABLE CONTRIBUTIONS

Charitable donations are eligible to be deducted from your income.  You to keep records/receipts given to you by who you donated too.  Donations can be either in the form of cash or items.  Items should be listed with values amounts in accordance to different thrifty store/Salvation Army/Good Will prices.  A smart and clear way to do is clear your wardrobe at regular intervals and donate the unwanted or unused items to charity.  If you are volunteering, you can deduct the mileage of your vehicle that you traveled.  This needs to be documented as well.

3.  CONTRIBUTING TO IRA's

Contributing to Traditional or Roth IRAs is a Great way to reduce Federal tax liability.  Contributions to Traditional IRA's will give you the advantage of decreasing your taxable income in the contributing year.  Whereas the contributions to ROTH IRAs are TAXABLE during the contribution yearThe Traditional IRAs, the withdrawals are TAXABLE during retirement, but in ROTH IRAs the withdrawal during retirement years are TAX-FREE.  So either way, you EITHER PAY tax upfront with the ROTH or in the end with a TRADITIONAL.

Normally, people rather go for ROTH IRAs as you can withdraw the contributions TAX-FREE & PENALTY FREE at ANY time even before the age of  59 1/2 years.

4. CONTRIBUTING TO 401K PLAN OR FLEXIBLE SPENDING ACCOUNT

A 401K plan is a type retirement plan that can only be sponsored by an employer.  In this way, employees can save and invest a specific portion of their paycheck before taxes which helps to again reduce Federal Tax Liability.  Withdrawals before the age of retirement are subject to penalties.  As taxes are paid at the time of the withdrawl, you can save your hard earn money going out in the form of tax.  

Flexible Spending Accounts  is tax-free health flexible spending account.  Contributions to such flexible spending account are NOT subject federal income tax.

5.  ITEMIZED DEDUCTIONS INSTEAD OF STANDARD DEDUCTION

Tax payers usually make a mistake choosing between the Standard and Itemized Deductions.  Standard deductions for tax payers whose income level are Low.  Before choosing Standard or Itmeized dedcutions, you must check how much the amount of itemized deductions will be added to see if it's worth changing your filing deductions.

5 Legal Ways That Could Help You Reduce Federal Tax Liability

INDIVIDUAL TO BUSINESS TO CORPORATE QUARTERLY TO ANNUAL TAXES

Alleviating Stress

Holl Bookkeeping Services will take care of managing your finances so you don’t have to stress about it.  Holl Bookkeeping Services stays up-to-date on all the regulatory and legislative developments, and specialize in this type of service so you won’t waste time and energy trying to make sense of all the Tax complexities. Contact us today and see how we can help you.

How to Deduct Business Losses

and

Net Operating Losses

Businesses Don't Always earn a profit.  This is particularly likely to occur when most businesses are first starting out or when economic conditions are bad.    If your business is in this unfortunate situation, you may be able to obtain some tax relief.

The Inflation Reduction Act of  2022 has extended the limitation of excess business losses of Non-Corporate taxpayers.  According to IRS under section 461(1) through tax year 2028.

If your losses exceed your income from Any/All sources for that calendar year, you have a "Net Operating Loss".   It's not good to lose money in your business but a Net Operating Loss can reduce your tax liability for the current and possible future tax years depending on bad the business has done that current year.

DEDUCTING A NET OPERATING LOSS

ON  YOUR TAXES

Previous years, business owners were allowed to "Carry a Loss Back" this means, they could apply an Net Operating Loss to past tax years by filing an application for a refund or an amended return.  This allowed past business owners to get a refund for all or part of the taxes they paid in the past years.  Net Operating Loss would be carried  back (2) two years.  

BAD NEWS:   The Tax Cuts & Jobs Act  "TCJA" has ELIMINATED carrybacks for Net Operating Losses.  In 2018, a Net Operating Loss may only be deducted against the current year's taxes.  

A (2) Year carry back continues to apply for certain losses incurred by farming businesses ONLY.

The IRS limits this "deduction to 80% of taxable income by default, determined without regard to the Net Operating Loss deduction (meaning an Net Operating Loss cannot ENTIRELY ZERO OUT taxable income)  The Net Operating Loss that is more than 80% of taxable income for the year is an Net Operating Loss carryforward " per IRS Publication 536.

HOW TO DETERMINE HOW THE LOSS AFFECTS YOUR TAXES

1.  If  your business is a Sole Proprietor, you may deduct any loss your business incurs from your other income for the year - Other income can come in forms such as a side job, investment income or your spouse income (if you file a joint return). Sole Proprietor who files IRS Schedule C, the expenses listed on the form will exceed your reported business income.

2.  If your business is operated as an LLC, S-Corporation or a Partnership, your share of the business's losses are passed through the business to your individual return and deducted from your other personal income the same way as a Sole Proprietor.  .LLC & S-Corporation shareholders, you share the business losses which will pass through the entity to your personal return.  This business loss will be added to all your other deductions and then subtracted from all your income for the year.  The result is your Adjusted Gross Income (aka your AGI).

3.  However... If your business operates as a C -Corporation, you can't deduct a business loss on your personal return.  It is part of the corporation and it stays with the corporation.

HOW TO FIGURE OUT A NET OPERATING LOSS

Most businesses can figure out the Net Operating Loss is NOT as Simple as deducting your losses from your annual income.  

  • Determine your annual losses from your business (or) businesses.  

  • If you have a Net Operating Loss, You would start by looking for your AGI on your tax return for the year reduced by your itemized deductions or standard deductions ( but not your personal exemption).

  • THIS MUST BE A NEGITIVE NUMBER or you will not have a Net Operating Loss for the year.

  • Your AGI already includes all the deductions you have for your losses.  

  • Add back to this amount any Non-Business deductions you have that exceed your Non-Business income.  

  • These INCLUDE :

    • Standard Deduction​

    • Itemized Deductions

    • Personal Exemption

    • Non-Business Capital Loss

    • IRA Contributions

    • Charitable Contributions

  • IF the result is still a Negative number, You Have an Net Operating Loss for the year..

 

NET OPERATING LOSS DEDUCTION LIMITATIONS

Net Operating Loss deduction for tax years beginning after December 31, 2020, cannot exceed the sum of:

  • The Net Operating Loss carried to the year from tax years beginning before January 1, 2018.

  • tThe LESSER OF:

    • The Net Operating Loss carried to the year from tax years beginning after December 31, 2017​

    • 80% of the excess (if any) of taxable income computered without regard to deductions for Net Operating Loss, or Qualified Business Income, or section 250 deductions, over the Net Operating Loss carried to the year from tax years beginning before January 1, 2018.

ANNUAL LOSSES ARE LIMITED

The Tax Cuts and  Jobs Act, section 11012, as amended by the CARES ACT, section 2304, revised section 461(I) to limit the amount of losses from the trades or businesses of Non-Corporate taxpayers that the tax payer can claim each year, beginning after 2020 and ending before 20206.  You Can not deduct net losses in excess of a threshold amount in the current year.  The amount of the excess business loss is treated as an Net Operating Loss for the current year for purposes of determining any Net Operating Loss carryover for later years.

There are so many rules and regulations in regards to Net Operating Losses.  We at Holl Bookkeeping  & Tax Services are trying our best to inform you of the recent changes in Tax Laws.  We are not CPA's but we are educated in Bookkeeping and Tax Preparation.  We may not know all the answers at the moment you ask the question, but give us a few moments and we will do our absolute best in giving you reliable and correct answers to your questions or we can refer you to someone who is.

  •  

  •  

images.png
bottom of page