Tax Tips - Business Posts - Encore Partners

Expecting a big revenue year? Consider tax moves before year end

October 12, 2026/in News, Tax Tips - Business/by Betty Kim

For most small business owners, strong revenue growth is something to celebrate. But a profitable year can also significantly increase your income tax liability. If your business is on track for a banner year, now is the time to evaluate tax-reduction strategies. Here’s some guidance for sole proprietors and owners of pass-through entities (such as partnerships, S corporations and most limited liability companies).

Start with a year-end tax projection

Many owners focus on revenue growth without estimating the resulting tax impact. A year-end projection can help identify potential tax obligations while there’s still time to respond.

Your projection should address factors such as:

Year-to-date revenue and expenses,
Expected results for the remainder of the year,
Significant asset purchases,
Owner compensation and distributions, and
Other sources of income reported on the owner’s tax return.

Business growth can also create new compliance responsibilities, including state and local tax filing requirements. Evaluate how operational changes, such as adding employees or expanding into new markets, may affect your 2026 tax situation.

Prepare for higher estimated tax payments

Next, evaluate whether estimated tax payments you’ve made throughout the year will be sufficient. Your fourth payment for the 2026 tax year is due on January 15, 2027. You may need to increase this payment to potentially avoid (or minimize) underpayment penalties. However, increasing your final payment won’t necessarily eliminate penalties for earlier underpayments. Special rules may provide relief if your income increased significantly late in the year.

Even if you make enough estimated tax payments for 2026 to avoid penalties, you may still owe tax when you file your return. Waiting until tax season to address your tax liability can create cash flow challenges. Be sure to set aside funds for both your January 15 estimated tax payment and the amount you expect to owe when you file next year.

However, strong profits don’t automatically translate into strong cash flow. If your growing business is short on cash, you might need to balance certain year-end moves — such as paying year-end bonuses, distributing cash to owners, and investing in new vehicles and equipment — with impending tax obligations and ongoing operating costs.

Make tax-smart moves before year end

Once you’ve assessed your current tax and cash flow position, you’re ready to explore strategies to reduce your 2026 tax bill. Common examples include:

Deferring taxable income. Some businesses may have flexibility in when they recognize taxable income and deduct certain expenses, depending on their accounting method. The traditional approach is to accelerate deductible expenditures into the current year and defer taxable income into next year. In general, this will reduce your 2026 tax obligation.

However, if you expect strong performance to continue next year, you could be in an even higher tax bracket for 2027. In that case, you might take the opposite approach by timing revenue and expenses to accelerate taxable income into this year. That way, more of your business income will be taxed at this year’s lower rate instead of at next year’s higher rate.

Taking advantage of the QBI deduction. You may be eligible for a deduction of up to 20% of your qualified business income (QBI). This deduction is subject to a limit of 20% of taxable income. Additional limits may apply if taxable income for the year exceeds the applicable threshold. These limitations are phased in and are especially important to consider in a big revenue year.

For 2026, the income-based limits begin when taxable income exceeds $201,750 (double that amount for married couples filing jointly). Starting in 2026, the phase-in ranges have been expanded, allowing larger QBI deductions than in previous years for some taxpayers. The limits are fully phased in when taxable income exceeds $276,750 (double that amount for joint filers).

Taxpayers who are affected by these limitations may be able to salvage some or all of the QBI deduction (or be subject to a smaller deduction phaseout) by deferring income or accelerating deductions to keep income under the dollar thresholds. You may also be able to increase the deduction by increasing W-2 wages before year end. The rules are complex, so consult us before acting.

Leveraging first-year depreciation write-offs. If your business is planning to purchase equipment, machinery, vehicles, computers or other qualifying assets, you may be able to write off most or all of the purchase price on your 2026 return. But the asset must be placed in service by December 31, 2026, to provide a 2026 deduction.

Qualified improvement property and many other assets with recovery periods of 20 years or less may qualify for 100% bonus depreciation and Section 179 expensing. The latter is subject to an annual limit ($2.56 million for 2026) that begins to phase out when eligible purchases for the year exceed the phaseout threshold ($4.09 million for 2026).

Immediately deducting qualifying costs can significantly reduce your 2026 tax bill, but tax savings alone shouldn’t drive purchasing decisions. You should also consider your operational needs and available cash flow. If revenue growth continues to accelerate and pushes you into a higher tax bracket in the future, you may save more tax in the long run by deferring purchasing assets (or placing them in service) or by following normal depreciation schedules that spread deductions over multiple years.

Contributing to retirement accounts. If your business offers a qualified retirement plan, you may be able to increase deductible contributions to reduce current-year taxable income. In addition to potentially lowering taxes, retirement plan contributions can help support long-term financial goals.

If your business doesn’t currently sponsor a retirement plan, consider establishing one in time to make deductible 2026 contributions. You can adopt and fund some types of tax-favored qualified employee retirement plans as late as the federal income tax return due date (including any extension) for the adoption year.

Turn growth into a tax-planning opportunity

A successful year can create both opportunities and tax challenges. By proactively reviewing your tax position, you may be able to identify strategies that reduce uncertainty, improve cash flow management and support your long-term business goals. However, tax-planning moves require careful coordination. For example, you might inadvertently reduce your allowable QBI deduction if you claim significant first-year depreciation deductions or make sizable deductible retirement plan contributions.

Contact us to discuss these and other tax-smart moves for the 2026 tax year. We can help you avoid tax-filing surprises and develop a plan tailored to your situation.

Consider an installment sale to optimize taxes when selling your business

September 29, 2026/in News, Tax Tips - Business/by Betty Kim

Over the years, you’ve invested blood, sweat and tears into building a successful small business. Now it’s time to sell and move on to the next chapter of your life. What are the tax implications of selling — and how can you reduce or defer your taxes? One possible solution is an installment sale.

How it works

With an installment sale, you don’t receive a lump-sum payment when the deal closes. Instead, you receive installment payments over time. Typically, the buyer makes a down payment at closing and issues a note requiring principal and interest payments over an agreed-upon period. Each principal payment generally includes a tax-free return of basis and taxable gain, while the interest is taxed separately as ordinary income. This spreads your gain over several years.

It’s important to note that the rules are more complicated when a deal is structured as an asset sale rather than a sale of an ownership interest. Installment sales are still possible for eligible assets included in an asset sale, but you must allocate the purchase price among the business’s assets and calculate each asset’s gain or loss separately. If you’re contemplating an asset sale, we can provide more details.

Potential tax benefits

Generally, installment sale gains qualify as low-taxed long-term capital gain or as Section 1231 gain for sales of property held for business purposes. Sec. 1231 gains are usually also taxed at the lower long-term capital gains rates. The 3.8% net investment income tax (NIIT) and state income tax may apply, too.

An installment sale generally defers tax, because you pay most of the tax liability as you receive the payments. It may also reduce your overall tax obligation from the transaction if the arrangement allows you to stay under the thresholds for triggering the 20% long-term capital gains rate or the NIIT for each tax year of the note’s term.

For 2026, the 20% long-term capital gains rate kicks in when taxable income exceeds:

$545,500 for single filers,
$579,600 for heads of households,
$613,700 for married couples who file jointly, and
$306,850 for married filing separately.

If your taxable income for the tax year is below the applicable threshold, you’ll likely pay 15% on your long-term capital gains. However, if your taxable income for the tax year is modest, you could pay no federal long-term capital gains tax. For 2026, the 0% rate applies to those with taxable income up to $49,450 (single and separate filers), $66,200 (heads of households) and $98,900 (joint filers).

For 2026, taxpayers with modified adjusted gross income (MAGI) over $200,000 ($250,000 for joint filers and $125,000 for separate filers) may owe NIIT on some or all of their investment income.

Beyond taxes

An installment sale also might help you close a deal or get a better price for your business. For instance, an installment sale might appeal to a buyer that lacks sufficient cash to pay the price you’re looking for in a lump sum.

Or a buyer might be concerned about the ongoing success of your business without you at the helm or because of changing market conditions or other economic factors. An installment sale that includes a contingent amount based on the business’s performance might be the solution.

Of course, you should evaluate the buyer’s credit risk before entering into an installment arrangement. Consider collateral, personal guarantees and other protections. Your note may also be subordinated to financing provided by the buyer’s bank.

Beware of potential tax pitfalls

An installment sale isn’t without tax risk for sellers. For example, you must report depreciation recapture as a gain in the year of sale, no matter how much cash you receive.

Depreciation recapture generally results from deductions previously claimed for the property. It may be taxed at ordinary income tax rates, which can be as high as 37%. But in the case of certain depreciated real property, the maximum federal rate on depreciation recapture is generally 25%. The 3.8% NIIT and state income tax may apply, too. If depreciation recapture is an issue, you could owe tax that year without receiving enough cash proceeds from the sale to pay the tax.

Also, beware: If the installment note doesn’t charge adequate interest on the deferred principal payments, the complicated original issue discount (OID) rules can transform some of the payments from principal to interest. That’s unfavorable because interest income recognized by an individual taxpayer is taxed at higher ordinary income rates.

Finally, today’s federal tax rates are relatively low compared to historical rates. If Congress passes legislation that increases the long-term capital gains or NIIT rates (or lowers the applicable thresholds), you could wind up paying more overall tax on your gain from the sale. Weigh this risk carefully against the potential benefits of an installment sale.

One size doesn’t fit all transactions

As you can see, installment sales have both pros and cons. To determine whether one is right for you and your business — and find out about other tax-smart options — please contact us.

We’ve Moved: Welcome to Encore’s New Home in La Jolla

February 23, 2026/in Encore Culture, News, Tax Tips - Business, Tax Tips - Individual/by Betty Kim

We’re excited to share that Encore Partners LLP has officially moved into our new office in La Jolla, California. We purchased the building last year and have spent the past months remodeling it into a space that truly reflects who we are as a firm—providing CPA, tax, and accounting services designed for collaboration, discretion, and long-term client relationships.

After many years in UTC, San Diego, California, this move marks an important milestone for us. Since our founding in 2011, Encore has continued to evolve—growing alongside our clients while staying grounded in the principles that define our work: clarity, partnership, and trusted guidance.

While the new space is more intimate in scale, it represents something much bigger. It serves as the headquarters of our operations and a long-term home for the firm—a place where our team can find heart, stability, and connection while continuing to deliver thoughtful, high-touch advisory services.

The design reflects who we are today and where we’re headed: modern yet enduring, established yet forward-thinking. Built for partnership, designed for the future, and grounded in the legacy we continue to build.

New Office Address:

5490 La Jolla Blvd., Suite B
La Jolla, CA 92037

We’re still putting the finishing touches on the space, but we’re fully operational and settling in. Once the season is behind us, we look forward to hosting an open house and welcoming you in—more details to come. In the meantime, please don’t wait for an invitation. Stop by anytime to meet our team, take a walk along the beach, and enjoy the breathtaking views and sunsets that make this location so special.

Thank you for being part of our journey and for the trust you place in our team. We’re proud of this next chapter and excited for what’s ahead.

Last-Minute Tax Strategy for 2025: Improvements, Expensing, and Bonus Depreciation

November 6, 2025/in News, Tax Tips - Business/by Betty Kim

As we head into the final stretch of 2025, many of our clients are evaluating last-minute ways to reduce taxable income — and so are we. At Encore, we’re even looking at a potential office purchase before year-end, and these new rules under the One Big Beautiful Bill Act (OBBBA) make the timing especially interesting.

The OBBBA permanently reinstates 100% bonus depreciation and increases Section 179 expensing limits to $2.5 million, allowing qualified real estate improvements and certain property purchases to be fully deductible in the year placed in service.

If your business has strong 2025 income, this is the time to consider:

Completing interior or structural improvements before December 31.
Purchasing new equipment or qualifying property.
Reviewing whether to expense or depreciate for the best long-term outcome.

We’re helping clients run quick year-end analyses to see which investments make sense under the new rules. A thoughtful review before year-end can turn planned upgrades or acquisitions into meaningful tax savings.

If you’re thinking about capital improvements or real estate purchases, reach out before year-end — the OBBBA provisions could make the timing work in your favor.

QIP defined

QIP includes any improvement to an interior portion of a nonresidential building that’s placed in service after the date the building was placed in service. But expenditures attributable to the enlargement of the building, any elevator or escalator, or the building’s internal structural framework don’t count as QIP.

QIP has a 15-year depreciation period. It’s also eligible for bonus depreciation and Section 179 expensing.

100% bonus depreciation

Additional first-year bonus depreciation is available for eligible assets, including QIP. The One Big Beautiful Bill Act (OBBBA), signed into law in July, increases bonus depreciation to 100% for assets acquired and placed in service after Jan. 19, 2025. It also makes 100% bonus depreciation permanent.

But be aware that bonus depreciation is only 40% for assets acquired Jan. 1, 2025, through Jan. 19, 2025, and placed in service any time in 2025. So, if your objective is to maximize first-year deductions on QIP acquired during that period, you’d claim the Sec. 179 deduction first. (See below.) If you max out on that, then you’d claim 40% first-year bonus depreciation.

In some cases, a business may not be eligible for bonus depreciation. Examples include real estate businesses that elect to deduct 100% of their business interest expense and dealerships with floor-plan financing — if they have average annual gross receipts exceeding $31 million for the previous three tax years.

Sec. 179 expensing

Similar to 100% bonus depreciation, Sec. 179 expensing allows you to immediately deduct (rather than depreciate over a number of years) the cost of purchasing eligible assets, including QIP. But the break is subject to annual dollar limits, which the OBBBA increases.

For qualifying assets placed in service in tax years beginning in 2025, the maximum allowable Section 179 depreciation deduction is $2.5 million (up from $1.25 million before the OBBBA). In addition, the break begins to phase out dollar-for-dollar when asset acquisitions for the year exceed $4 million (up from $3.13 million before the OBBBA). These amounts will continue to be annually adjusted for inflation after 2025.

Another restriction is that you can claim Sec. 179 expensing only to offset net income. The deduction can’t reduce net income below zero to create an overall business tax loss.

One advantage over bonus depreciation is that, for Sec. 179 expensing purposes, QIP also includes HVAC systems, nonresidential building roofs, fire protection and alarm systems, and security systems that are placed in service after the building is first placed in service.

Spreading out QIP depreciation

There are a few reasons why it may be more beneficial to spread out QIP depreciation over 15 years rather than claiming large first-year depreciation deductions:

Bonus depreciation can trigger the excess business loss rule. Although you can claim 100% first-year bonus depreciation even if it will create a tax loss, you could inadvertently trigger the excess business loss rule.

The rule limits deductions for current-year business losses incurred by noncorporate taxpayers: Such losses generally can offset income from other sources, such as salary, self-employment income, interest, dividends and capital gains, only up to the applicable limit. For 2025, the limit is $313,000 ($626,000 for a married joint filer).

As a result, your 100% first-year bonus depreciation deduction might effectively be limited by the excess business loss rule. However, any excess business loss is carried over to the following tax year and can then be deducted under the rules for net operating loss carryforwards.

Large first-year deductions can result in higher-taxed gain when QIP is sold. First-year bonus depreciation and Sec. 179 deductions claimed for QIP can create depreciation recapture that’s taxed at your ordinary income rate when the QIP is sold. Under rates made permanent by the OBBBA, the maximum individual rate on ordinary income is 37%. You may also owe the 3.8% net investment income tax (NIIT).

On the other hand, for QIP held for more than one year, gain attributable to straight-line depreciation is taxed at an individual federal rate of only 25%, plus the 3.8% NIIT if applicable.

Depreciation deductions may be worth more in the future. When you claim big first-year depreciation deductions for QIP, your depreciation deductions for future years are reduced accordingly. If you’re in a higher income tax bracket in the future or federal income tax rates go up, you’ll have effectively traded potentially more valuable future-year depreciation deductions for less-valuable first-year deductions.

Keep in mind that, while the OBBBA did “permanently” extend current rates, that only means they have no expiration date. Lawmakers could still increase rates in the future.

What’s best for you

Many factors must be considered before deciding whether to maximize QIP first-year depreciation deductions or spread out the deductions over multiple years. We can help you determine what’s best for your situation.

Tax Court case provides lessons on best recordkeeping practices for businesses

October 6, 2025/in News, Tax Tips - Business/by Betty Kim

We see it every year — business owners doing their best to stay on top of things, then getting hit with an IRS or state notice that stops everything. That’s usually when they reach out to professionals like us — after the fact — and by then, it’s often a tangled mess of missing receipts, unclear records, and questions that take time (and money) to unwind.

Many think the IRS is too busy or underfunded to audit small businesses. The truth is, technology has changed that. Automated systems now flag discrepancies faster than ever — and while fewer cases may be handled by humans at first, once you’re selected, it can take months to get resolution because of those same budget and staffing cuts.

At Encore Partners, we don’t see these cases every day — but when we do, they’re messy, stressful, and entirely preventable. Records make or break your case. Clean, consistent documentation not only protects you but opens real tax-saving opportunities when it’s done right.

Below, we share a recent Tax Court case that shows exactly how poor recordkeeping can undo years of good work — and why getting it right upfront is the best investment you can make.

Why it matters

The IRS requires all businesses — no matter how small — to maintain records that accurately reflect income, expenses, assets and liabilities. Without these records, it’s nearly impossible to:

Substantiate tax deductions and credits,
Track cash flow and profitability,
Prepare accurate financial statements,
Monitor the progress of your business,
Support decisions for financing, and
Demonstrate compliance during an IRS audit.

In short, strong recordkeeping protects your business, both for operational and tax law purposes.

Taxpayer loses deductions due to insufficient records

In one case, a union power‐line worker also had business interests in a storm response partnership, a salon and a rental property. He claimed significant losses and business expenses on his return for the year in question. Among his claimed deductions were partnership losses and expenses for tools, clothing and travel.

In Tax Court Memo 2025-12, the court disallowed substantial deductions because the taxpayer couldn’t properly substantiate them. Some invoices or receipts were missing or didn’t tie clearly to the business purpose.

For example, with vehicle or travel expenses, the court noted the lack of contemporaneous logs and details that distinguished business vs. personal use. For partnership losses, the taxpayer needed to show his basis in the partnership, but couldn’t provide clear documentation of all his capital contributions.

In addition to denying many of the taxpayer’s deductions, the court upheld an accuracy‐related penalty. This is an extra charge (typically 20% of the underpayment) that can be assessed when a taxpayer makes substantial mistakes on a tax return.

This case isn’t unique. Year after year, businesses lose valuable deductions for the same reason: poor recordkeeping.

Six key practices to protect tax breaks

To avoid costly mistakes, businesses should implement a recordkeeping system that’s both practical and compliant. Here are six best practices to consider:

Separate business and personal finances. Open a dedicated business checking account and credit card. Mixing personal and business expenses is one of the fastest ways to create confusion — and attract IRS scrutiny.
Maintain contemporaneous records. Document expenses when they occur, not months later. For example, keep mileage logs for business driving and note the purpose of each trip.
Use accounting software. Modern accounting platforms (like QuickBooks® or industry-specific tools) streamline recordkeeping. They allow you to categorize expenses, generate reports and integrate with bank accounts to minimize errors.
Keep source documents. For example, retain purchase and sale invoices, receipts, bank statements, canceled checks, and credit card bills. Scanning or photographing receipts ensures they won’t fade or get lost. Also, keep copies of Forms 1099-MISC and 1099-NEC. There are also specific employment tax records you must keep.
Retain records for the right amount of time. Generally, the IRS recommends keeping records for at least three years. That’s the amount of time that the tax agency can audit a tax return. However, some records (such as payroll tax or property records) should be kept longer. The length of time can be extended to six years if the income is underreported by more than 25%. And if no return is filed or fraud is involved, the IRS can conduct an audit for an indefinite amount of time.
Establish internal controls. For businesses with employees, internal checks help ensure the accuracy and integrity of records. Examples of these controls include requiring dual signatures for large expenses and segregating duties so that different employees handle authorization, custody of assets and recordkeeping.

Reliable records are vital

The lesson from the Tax Court case described above is clear: Without reliable records, even legitimate deductions can vanish. Don’t let poor documentation cost your business money. We can help your business:

Set up a recordkeeping system tailored to your business,
Learn which expenses are deductible (and how to document them),
Review its books to catch issues before the IRS does, and
Manage any IRS challenges to tax deductions.

Run a business with your spouse? You may encounter unique tax issues

September 9, 2025/in News, Tax Tips - Business/by Betty Kim

“Love, business, and taxes — a tricky trio”

Some couples thrive working side by side, while others find it more challenging. We have seen all versions. Whether it’s out of passion, practicality, or pure necessity, one thing is certain: the tax rules don’t make it easier just because you’re married.

Running a business with your spouse often means extra compliance and higher self-employment taxes — unless you plan ahead. The good news is, there are smart strategies to structure things, so you protect both the business and the relationship.

This article highlights the unique issues spousal businesses face and three approaches that can save headaches and dollars.

The partnership issue

An unincorporated business with your spouse is classified as a partnership for federal income tax purposes, unless you can avoid that treatment. Otherwise, you must file an annual partnership return using Form 1065. In addition, you and your spouse must be issued separate Schedules K-1, which allocate the partnership’s taxable income, deductions and credits between the two of you. This is only the beginning of the unwelcome tax compliance tasks.

The self-employment tax issue

Self-employment (SE) tax is how the government collects Social Security and Medicare taxes from self-employed individuals. For 2025, the SE tax consists of 12.4% Social Security tax on the first $176,100 of net SE income plus 2.9% Medicare tax. Once your 2025 net SE income surpasses the $176,100 ceiling, the Social Security tax component of the SE tax ends. But the 2.9% Medicare tax component continues before increasing to 3.8% — because of the 0.9% additional Medicare tax — if the combined net SE income of a married joint-filing couple exceeds $250,000. (This doesn’t include investment income.)

With your joint Form 1040, you must include a Schedule SE to calculate SE tax on your share of the net SE income passed through to you by your spousal partnership. The return must also include a Schedule SE for your spouse to calculate the tax on your spouse’s share of net SE income passed through to him or her. This can significantly increase your SE tax liability.

For example, let’s say you and your spouse each have net 2025 SE income of $150,000 ($300,000 total) from your profitable 50/50 partnership business. The SE tax on your joint tax return is a whopping $45,900 ($150,000 × 15.3% × 2). That’s on top of regular federal income tax. (However, you do get an income deduction for half of the SE tax.)

Here are three possible tax-saving solutions.

Use an IRS-approved method to minimize SE tax in a community property state

Under IRS guidance (Revenue Procedure 2002-69), there’s an exception to the general rule that spouse-run businesses are treated as partnerships. For federal tax purposes, you can treat an unincorporated spousal business in a community property state as a sole proprietorship operated by one of the spouses. By effectively allocating all the net SE income to the proprietor spouse, only the first $176,100 of net SE income is hit with the 12.4% Social Security tax. That can cut your SE tax bill.

Convert a spousal partnership into an S corporation and pay modest salaries

If you and your unincorporated spousal business aren’t in a community property state, consider converting the business to S corp status to reduce Social Security and Medicare taxes. That way, only the salaries paid to you and your spouse get hit with the Social Security and Medicare tax, collectively called FICA tax. You can then pay reasonable, but not excessive, salaries to you and your spouse as shareholder-employees while paying out most or all remaining corporate cash flow to yourselves as FICA-tax-free cash distributions. Keep in mind that S corps come with their own compliance obligations.

Disband your partnership and hire your spouse as an employee

You can disband the existing spousal partnership and start running the operation as a sole proprietorship operated by one spouse. Then hire the other spouse as an employee of the proprietorship. Pay that spouse a modest cash salary. You must withhold 7.65% from the salary to cover the employee-spouse’s share of the Social Security and Medicare taxes. The proprietorship must also pay 7.65% as the employer’s half of the taxes. However, because the employee-spouse’s salary is modest, the FICA tax will also be modest.

With this strategy, you file only one Schedule SE — for the spouse treated as the proprietor — with your joint tax return. That minimizes the SE tax because no more than $176,100 (for 2025) is exposed to the 12.4% Social Security portion of the SE tax.

Additional bonus: You may be able to provide certain employee benefits to your spouse, such as retirement contributions, which may provide more tax savings.

We can help

Having a profitable unincorporated business with your spouse that’s classified as a partnership for federal income tax purposes can lead to compliance headaches and high SE tax bills. Work with us to identify appropriate tax-saving strategies.

A Tax Guide to Choosing the Right Business Entity

August 18, 2025/in News, Tax Tips - Business/by Betty Kim

Choosing the right business entity isn’t just paperwork—it’s one of the most important decisions you’ll make as a business owner. Also the smartest decisions come from understanding how your structure fits your business, your industry, and your goals.

I’ve seen firsthand how the right entity can make a big difference in taxes and day-to-day operations, while the wrong one can create headaches down the road. At Encore Partners, we specialize in helping entrepreneurs and business owners choose the right entity to minimize taxes, simplify compliance, and set up for growth.

In this guide, we break down the main entity types so you can make informed, strategic choices that support growth, minimize risk, and keep your business running smoothly.

Sole proprietorship: Simple with full responsibility

A sole proprietorship is the easiest structure to set up. It’s owned and operated by one person and requires minimal administrative effort. Here are the main features:

Taxation. Income and losses are reported on the owner’s personal tax return on Schedule C of Form 1040. Income is subject to 15.3% federal self-employment tax, and the business itself isn’t taxed separately. The owner may also qualify for a Qualified Business Income (QBI) deduction, potentially reducing the effective tax rate.
Compliance. Aside from obtaining necessary licenses or a business name registration, there’s little required paperwork. However, the owner is personally liable for all business debts and legal obligations.

S Corporation: Pass-through entity with payroll considerations

An S corp is a tax designation offering pass-through taxation benefits while imposing stricter rules. Here are the highlights:

Taxation. S corps don’t pay income tax at the entity level. Instead, profits or losses are passed through to shareholders via Schedule K-1 and reported on individual returns. A key tax benefit is that shareholders who are employees receive a salary (subject to payroll tax), while additional profit distributions aren’t subject to self-employment tax. However, the salary must be reasonable. The business is eligible for QBI deductions.
Compliance. To qualify, S corps must have 100 or fewer shareholders, all U.S. citizens or residents, and only one class of stock. They must file Form 2553, issue annual Schedule K-1s and follow corporate formalities like shareholder meetings and recordkeeping. An informational return (Form 1120-S) is also required.

Partnership: Collaborative ownership with pass-through taxation

A partnership involves two or more individuals jointly operating a business. Common types include general partnerships, limited partnerships, and limited liability partnerships (LLPs). Here’s what makes it unique:

Taxation. Partnerships are pass-through entities. The business files Form 1065 (an informational return), and income or loss is distributed to partners on Schedule K-1. Partners report this on their personal returns. General partners must pay self-employment tax, while limited partners usually don’t. The business is eligible for QBI deductions.
Compliance. Partnerships require a detailed partnership agreement, coordinated recordkeeping and clear profit-sharing arrangements. While more complex than a sole proprietorship, partnerships offer flexibility for growing businesses.

Limited liability company: Flexible and customizable

An LLC merges elements of corporations and partnerships, offering owners — called members — both operational flexibility and liability protection.

Taxation. By default, a single-member LLC is taxed like a sole proprietorship, and a multimember LLC like a partnership. However, LLCs may elect to be taxed as a C or S corp by filing Form 8832 or Form 2553. This gives owners control over their tax strategies. LLCs that don’t elect C corp status are eligible for QBI deductions.
Compliance. LLCs require articles of organization and often must have an operating agreement. Though not as complex as corporations, they still generally face state-specific compliance requirements and annual filings.

C Corporation: Double taxation with scalability

A C corp is a distinct legal entity offering the most liability protection and growth potential through stock issuance. Here are its features:

Taxation. C corps face double taxation — the business pays taxes on earnings (currently at a 21% federal rate), and shareholders pay taxes again on dividends. However, C corps can offer deductible benefits (for example, health insurance, retirement plans) and retain earnings without immediately distributing profits. C corps aren’t eligible for QBI deductions.
Compliance: These entities require the most administrative upkeep, including bylaws, annual meetings, board minutes, and extensive state and federal reporting. C corps are ideal for companies seeking venture capital or IPOs.

After hiring employees

Regardless of entity type, adding employees increases compliance requirements. Businesses must obtain an Employer Identification Number (EIN) and withhold federal and state payroll taxes. Employers also take on added responsibilities related to benefits, tax deposits, and employment law compliance.

What’s right for you?

There’s no universal answer to which entity is best. The right choice depends on your growth goals, ownership structure and financial needs. Tax optimization is a critical factor. For example, an LLC electing S corp status may help minimize self-employment taxes if set up properly. Contact us. We can coordinate with your attorney to ensure your structure supports both your tax strategies and business goals.

The new law introduces a game-changer for business payment reporting

August 5, 2025/in News, Tax Tips - Business/by Betty Kim

As much as this update is about a new rule coming in 2026, we’re sharing it now because the headaches around 1099 reporting are already real for 2025—and frankly, have been for years. Whether you’re a business client, Schedule C, E, or F filer, you’ve probably heard from us (more than once) asking about W-9s or confirming 1099 issuance. Some of you have even laughed at the persistence—until the IRS notices start rolling in.

This is both a heads-up and a reminder: if you’re paying vendors or contractors, get those W-9s now and stay ahead of the reporting curve. The upcoming threshold change under the One Big Beautiful Bill Act will ease things eventually, but for now, the $600 rule still applies. Read on for the details.

The current requirement: $600 threshold

For decades, the IRS has required that businesses file Form 1099-NEC (previously 1099-MISC) for payments made to independent contractors that exceed $600 in a calendar year. This threshold amount has remained unchanged since the 1950s!

The same $600 threshold is in place for Forms 1099-MISC, which businesses file for several types of payments, including prizes, rents and payments to attorneys.

Certain deadlines must be met. A Form 1099-NEC must be filed with the IRS by January 31 of the year following the year in which a payment was made. A copy must be sent to the recipient by the same January 31 deadline.

A Form 1099-MISC must also be provided to a recipient by January 31 of the year following a payment, but unlike Form 1099-NEC, the 1099-MISC deadline for the IRS depends on how it’s submitted. If a business is filing the form on paper, the deadline is February 28. If the form is being submitted electronically, the deadline is March 31.

The new rules raise the bar to $2,000

Under the OBBBA, the threshold increases to $2,000, meaning:

Fewer 1099s will need to be issued and filed.
There will be reduced paperwork and administrative overhead for small businesses.
There will be better alignment with inflation and modern economic realities.

For example, let’s say your business engaged a freelance graphic designer and pays the individual $650 this year. You’ll need to send a 1099-NEC to the designer for calendar year 2025. But if you hire the same individual in 2026, you won’t be required to send a 1099 to the graphic designer or the IRS in 2027 unless the designer earns more than $2,000.

The money is still taxable income

Even if an independent contractor doesn’t receive a 1099-NEC because the amount paid was below the threshold amount, the payment(s) are still considered part of the individual’s gross income. The contractor must report all business income received on his or her tax return, unless an exclusion applies.

In addition, businesses must continue to maintain accurate records of all payments

There are changes to Form 1099-K, too

The OBBBA also reinstates a higher threshold for Forms 1099-K, used by third-party payment processors. The reporting threshold returns to $20,000 and 200 transactions, rolling back the phased-in lower thresholds that had dropped toward $600 by 2026. This rollback undoes changes from the 2021 American Rescue Plan Act and earlier IRS delay plans.

Simplicity and relief

Raising the threshold will ease the filing burden for millions of businesses, especially small operations that rely on contractors. There will also be less risk that an IRS penalty will be imposed for failing to file a Form 1099 when required. Contact us with any questions about the new rules or your filing requirements.

Hiring independent contractors? Make sure you’re doing it right

May 19, 2025/in News, Tax Tips - Business/by Betty Kim

About a month ago, I shared a note on the considerations of hiring family members — and it sparked great conversations with many of you around proper classification and tax reporting. Building on that, I want to highlight an equally important and often overlooked issue: how we classify independent contractors.

This isn’t just about compliance — it’s become one of the most common triggers for IRS audits. We’ve seen cases where it starts with a missing or incorrect 1099, then quickly expands into broader scrutiny around worker relationships, payroll taxes, and even employee benefits.

In this issue, we’re sharing a deeper dive into how to approach independent contractor relationships the right way — from classification to documentation — so your business stays protected and audit-ready.

Many businesses turn to independent contractors to help manage costs, especially during times of staffing shortages and inflation. If you’re among them, ensuring these workers are properly classified for federal tax purposes is crucial.

Misclassifying employees as independent contractors can result in expensive consequences if the IRS steps in and reclassifies them. It could lead to audits, back taxes, penalties, and even lawsuits.

Understanding worker classification

Tax law requirements for businesses differ for employees and independent contractors. And determining whether a worker is an employee or an independent contractor for federal income and employment tax purposes isn’t always straightforward. If a worker is classified as an employee, your business must:

Withhold federal income and payroll taxes,
Pay the employer’s share of FICA taxes,
Pay federal unemployment (FUTA) tax,
Potentially offer fringe benefits available to other employees, and
Comply with additional state tax requirements.

In contrast, if a worker qualifies as an independent contractor, these obligations generally don’t apply. Instead, the business simply issues Form 1099-NEC at year end (for payments of $600 or more). Independent contractors are more likely to have more than one client, use their own tools, invoice customers and receive payment under contract terms, and have an opportunity to earn profits or suffer losses on jobs.

Defining an employee

What defines an “employee”? Unfortunately, there’s no single standard.

Generally, the IRS and courts look at the degree of control an organization has over a worker. If the business has the right to direct and control how the work is done, the individual is more likely to be an employee. Employees generally have tools and equipment provided to them and don’t incur unreimbursed business expenses.

Some businesses that misclassify workers may qualify for relief under Section 530 of the tax code, but only if specific conditions are met. The requirements include treating all similar workers consistently and filing all related tax documents accordingly. Keep in mind, this relief doesn’t apply to all types of workers.

Why you should proceed cautiously with Form SS-8

Businesses can file Form SS-8 to request an IRS determination on a worker’s status. However, this move can backfire. The IRS often leans toward classifying workers as employees, and submitting this form may draw attention to broader classification issues — potentially triggering an employment tax audit.

In many cases, it’s wiser to consult with us to help ensure your contractor relationships are properly structured from the outset, minimizing risk and ensuring compliance. For example, you can use written contracts that clearly define the nature of the relationships. You can maintain documentation that supports the classifications, apply consistent treatment to similar workers and take other steps.

When a worker files Form SS-8

Workers themselves can also submit Form SS-8 if they believe they’re misclassified — often in pursuit of employee benefits or to reduce self-employment tax. If this happens, the IRS will contact the business, provide a blank Form SS-8 and request it be completed. The IRS will then evaluate the situation and issue a classification decision.

Help avoid costly mistakes

Worker classification is a nuanced area of tax law. If you have questions or need guidance, reach out to us. We can help you accurately classify your workforce to avoid costly missteps.

Can you turn business losses into tax relief?

May 13, 2025/in News, Tax Tips - Business/by Betty Kim

At Encore, we know even the best-run businesses hit a few bumps. But a down year doesn’t have to mean defeat. With the right planning, that loss could actually be a valuable tool, lowering future tax bills and giving your business some breathing room to bounce back stronger.

Whether you’re navigating real estate, professional services, or just had a uniquely challenging year, our team is here to turn those numbers into strategy.

Read on to learn how Net Operating Losses (NOLs) work, who qualifies, and what’s changed under current law. Because sometimes, the comeback starts with the right deduction.

Who qualifies?

The net operating loss (NOL) deduction levels the playing field between businesses with steady income and those with income that rises and falls. It lets businesses with fluctuating income to average their income and losses over the years and pay tax accordingly.

You may be eligible for the NOL deduction if your deductions for the tax year are greater than your income. The loss generally must be caused by deductions related to your:

Business (Schedules C and F losses, or Schedule K-1 losses from partnerships or S corporations),
Casualty and theft losses from a federally declared disaster, or
Rental property (Schedule E).

The following generally aren’t allowed when determining your NOL:

Capital losses that exceed capital gains,
The exclusion for gains from the sale or exchange of qualified small business stock,
Nonbusiness deductions that exceed nonbusiness income,
The NOL deduction itself, and
The Section 199A qualified business income deduction.

Individuals and C corporations are eligible to claim the NOL deduction. Partnerships and S corporations generally aren’t eligible, but partners and shareholders can use their separate shares of the business’s income and deductions to calculate individual NOLs.

What are the changes and limits?

Before the Tax Cuts and Jobs Act (TCJA), NOLs could be carried back two years, forward 20 years, and offset up to 100% of taxable income. The TCJA changed the landscape:

Carrybacks are eliminated (except certain farm losses).
Carryforwards are allowed indefinitely.
The deduction is capped at 80% of taxable income for the year.

If an NOL carryforward exceeds your taxable income of the target year, the unused balance may become an NOL carryover. Multiple NOLs must be applied in the order they were incurred.

What’s the excess business loss limitation?

The TCJA established an “excess business loss” limitation, which took effect in 2021. For partnerships and S corporations, this limitation is applied at the partner or shareholder level, after the outside basis, at-risk and passive activity loss limitations have been applied.

Under the rule, noncorporate taxpayers’ business losses can offset only business-related income or gain, plus an inflation-adjusted threshold. For 2025, that threshold is $313,000 ($626,000 if married filing jointly). Remaining losses are treated as an NOL carryforward to the next tax year. In other words, you can’t fully deduct them because they become subject to the 80% income limitation on NOLs, reducing their tax value.

Important: Under the Inflation Reduction Act, the excess business loss limitation applies to tax years through 2028. Under the TCJA, it had been scheduled to expire after December 31, 2026.

Plan proactively

Navigating NOLs and the related restrictions is complex, especially when coordinating with other deductions and credits. Thoughtful planning can maximize the benefit of past losses. Please consult with us about how to proceed in your situation.

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