Today’s year-end planning tip is regarding Planning for business owners
It’s worth discussing with business owner clients about how to transform net operating losses or NOLs into tax-free income with a Roth IRA conversion: Business owners who will record a net operating loss this year may be able to use it to their advantage. Unlike net capital losses, where taxpayers are limited to using only $3,000 annually to offset ordinary income, taxpayers can generally apply NOLs against 80% of taxable income. Clients carrying forward large NOLs can use those losses to offset the additional income from a Roth IRA conversion. The rules on calculating and utilizing NOLs are complicated, so it is critical to consult with a tax professional. It’s worth noting that more information on NOLs can be found within IRS publication 536.
And by the way, business owners should also have in mind Qualified Business Income Deductions: The Tax Cuts and Jobs Act created a new tax deduction for business owners known as the qualified business income, or QBI, deduction. It permits certain pass-through entities like sole proprietors, partnerships, and S corporation owners, to deduct up to 20% of their business income, subject to certain income thresholds and other limits. This deduction is slated to sunset at the end of 2025. As a result, accelerating income to obtain the 20% deduction may provide significant tax benefits for business owners who qualify for this exemption.