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SMALL BUSINESS TAX WORKSHOP

SMALL BUSINESS TAX WORKSHOP. PETER J CHUDYK, JD, CPA SHAREHOLDER MALONEY + NOVOTNY LLC. What form of business will you use?. Legal/Liability Issues Reporting Issues Ownership Issues Limitations due to type of Business being conducted. Choice of Entities. Sole Proprietor

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SMALL BUSINESS TAX WORKSHOP

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  1. SMALL BUSINESS TAX WORKSHOP PETER J CHUDYK, JD, CPA SHAREHOLDER MALONEY + NOVOTNY LLC

  2. What form of business will you use? • Legal/Liability Issues • Reporting Issues • Ownership Issues • Limitations due to type of Business being conducted

  3. Choice of Entities • Sole Proprietor • Limited Liability Company • Partnership • General • Limited • Corporation • C Corporation • S Corporation

  4. Tax Implications • Choice of Entity • Pass Through • Sole Proprietorship • LLC • Partnerships • S Corporation • Entity pays tax • C Corporation

  5. Choice of Entity • Domestic Only (United States) • International • Payroll • Health Insurance • Product Liability • Tax Implications

  6. Tax Rates • Pass Through Entities • Owners taxed on the income • Maximum rate 2012 ---35% • Maximum rate 2013---39.6% plus • C Corporation • Entity pays Tax • Maximum rate 2012—35% • Double Tax Potential

  7. Tax Analysis of Entity Choice • Double Tax Corporate Entity • Taxable Income of Entity • Dividends • 2012 Maximum Rate- 15% • 2013 Maximum Rate- 39.6% plus

  8. Tax Analysis Choice of Entity • Calculate Tax Consequences • Ultimate proceeds on sale of business • Asset Sale • Stock Sale

  9. Sale of Assets • Example: • Owner Invest $20,000 in Entity • Land Bought in 2008 for $20,000 • Sold in 2013 for $120,000 • Entity Liquidated and proceeds distributed to the owner • How much will he/she receive?

  10. Sale of Assets • C Corporation • Gain at entity level • $100,000 ($120,000 less $20,000) time 35% • No capital gain rates for C corporations • Corporate Tax $35,000 • Liquidation Proceeds - $85,000 (120,000 – 85,000) • Gain to Shareholder - $65,000 taxed at 20% • Net Proceeds $72,000 (85,000 – 13,000)

  11. Sale of Assets • Pass Through Entity- • Gain at Entity Level Taxed to Individual Owner • Capital Gain $100,000 ($100,000 less $20,000) • Tax Rate LTCG—20% (2013?) • Tax $20,000 • No Additional Federal Tax • Net Proceeds to Owner $100,000 (120,000 – 20,000)

  12. Tax Impact on Entity Selection • Type of Income being Generated • Time Horizon until Monetization • Flexibility allowed in ownership • FICA/Medicare/Health Care Impact • W-2 versus Self Employed Status

  13. Entity • Sole Proprietorship • Ownership • Federal ID • Tax Reporting • Schedule C • Self Employment Tax • Expenses • Audit Risk

  14. Entity • Partnership LLC • Pass Through Entity • Flexibility in Ownership • Flexibility in Income Allocation • FICA/Medicare/Health Care Issues • Expenses • Income shift • Estate/Gift Tax Planning

  15. Entity • Partnership LLC • Tax Reporting • Form 1065 • K-1 to each Partner • Passive/Active Activity • FICA Medicare Health Care Issues

  16. Entity • S Corporation • Legally a Corporation • Taxed as a Pass Through Entity • Ownership Limitations • Income Shift • Estate Gift Tax Planning

  17. Entity • S Corporation • Tax Reporting • Form 1120S • Shareholder receives K-1 • FICA Medicare Health Care Issues • Reasonable Compensation Issue--IRS

  18. Entity • C Corporation • Legally a Corporation • Entity Taxed • Double Tax Potential • Current Tax Rate 35% • Proposed Reduction by Tax Reform

  19. Entity • C Corporation • Tax Reporting • Form 1120 • Wage to Owner • Reasonable Compensation Issues • Excess Accumulation

  20. Accounting Methods • How do you account for your profit or loss • Basic Rule- All income is taxable unless specifically excluded, no deductions are allowed unless specifically allowed.

  21. Accounting Methods • Cash Basis- Income is recognized when received, with limited exceptions, and expenses are deductible when paid, again with limited exceptions. • Almost all individuals are on a cash basis • Many small business are on the cash basis

  22. Accounting Methods • Accrual Basis- Income is recognized when earned and expenses are recognized when the liability has become fixed and determinable • Certain Taxpayers Must be on the Accrual Basis

  23. Accounting Methods • Issues for Revenue Recognition—Cash or Accrual • Timing • Deposits • Installment Sales • Completed Contract Method

  24. Accounting Methods • Issues for Recognizing Expenses- Cash or Accrual • Compensation • Retirement Plan Contributions • Vacation Pay • Reserves • Obsolete • Warranty • Bad Debt

  25. Accounting Methods • Issues for Recognizing Expenses- Cash or Accrual • Inventory • Start Up Expenses • Organization Expenses

  26. Inventory Methods • Basic Rule lower the inventory, higher the cost sales and the lower taxable income • FIFO • First in First Out • Lower of Cost or Market • LIFO • Last in Last Out

  27. Inventory Methods • Issues • Pricing/Costing • Obsolete • Overhead • Section 263A

  28. Accounting Period • Can’t exceed 12 Months • Elected on First Return Filed • Most individuals automatically file on calendar year. • Large deferral benefit for pass through entity that elected January 31 year end. • Income is reported by owner on their tax return within which the pass through entity’s year ends. • Unfortunately Congress changed that.

  29. Accounting Period • Calendar Year – Preferred by Congress • Individuals- almost all • Trusts • S Corporations- with limited exceptions • Partnerships or Entities Taxed as Partnerships • Dictated by the accounting period of principal Owners

  30. Accounting Periods • Fiscal Year End (Non Calendar) • C Corporations • Potential benefit for October 31 year end

  31. Not all Expenses are Deductible • Personal Expenses • Life Insurance Premiums • Certain Entertainment Expenses • Personal • Country Club Dues • Logue Sky Box Fees • 50% of Entertainment

  32. Not All Expenses are Deductible • Hobby Losses – (Form 5213) • An Activity is presumed to be carried on for a profit if • if it produced a profit in 3 of last 5 years • Activities that consist primarily of breeding, training, showing or racing horses, the presumption is met if • It produces a profit in at least 2 of the last 7 years

  33. Not all Expenses are Currently Deductible • Capital Expenses • Business Start-Up Costs • Business Assets • Land, Building, Machinery (PPE) • Franchise Rights, patents (intangibles) • Improvements • Adds value or appreciable lengthen the time you can use the asset

  34. Not All Expenses are Currently Deductible • Personal vs. Business Expenses • Business Use of your Home • Business portion used exclusively and regularly • That portion must be: • Your principal place of business, or • A place where you meet with patients, clients or customer in your normal course of business, or • A separate structure (not attached to your home) used in connection with your business.

  35. Not all Expenses are Currently Deductible • Business Use of Your Car • If you use it exclusively for business, you can deduct your car expenses • If you use it only partially for business • Must divide your expenses based on actual mileage • You can deduct: • Actual Expenses • Mileage (55.5 cents per mile 2012)

  36. Not All Expenses are Currently Deductible • Inventory • Material • Direct Labor • Overhead

  37. Business Expenses • Reimbursement Plan • Non Accountable Plan • Fixed amount per month • Compensation and the Employee deducts the business portion on his return • Form 2106 and inherent limitation Schedule A • Accountable Plan • As the name implies, Employee accounts to his Employer • No taxable income to the Employee for the Business Portion

  38. Business Expenses • Meals and Entertainment (Accountable Plan) • Only 50% of any otherwise deductible business related meal and entertainment expenses you reimburse your employees (even if you reimburse them 100%) is deductible. • 50% applies to meals • While traveling away from home on business • Entertaining business customers

  39. Business Expenses • Meals and Entertainment • Taxes and Tips are included in the 50% • Cover charges for admission, rent paid to host a dinner or cocktail party, or amount you pay for parking at a sports arena—all subject to the 50% • Transportation cost to the business entertainment activity– not subject to the 50%

  40. Business Expenses • Meals and Entertainment • Substantiation • Receipts • Who, what/why, when, and where • Not Deductible • Loge Fees • Country Club Dues • Personal Expenses

  41. Business Expenses • Wages • Employee, versus • Independent Contractor • Wages Must be • Reasonable • For Services Performed

  42. Business Expenses • Wages • Bonuses • Life Insurance • Owner/Beneficiary company- not deductible • Owner/Beneficiary employee- compensation and deductible • Education Expenses • Qualified Education Assistance Program

  43. Business Expenses • Wages • Vacation Pay • Deductible, generally, only in the tax year the employee receives it • Sick Pay • Periodic • Lump Sum

  44. Business Expenses • Rent Expense • Amount you pay for the use of property which you do not own • Unreasonable rent – not deductible • Rent your own home and use part of it for business- you may be able to deduct the business portion • Lease cancelation payments- generally deductible

  45. Business Expenses • Interest Expense • The allocation of the loan proceeds and the related interest is not generally affected by the use of property. • Tracing Rules what is the loan used for • Business, • Personal, or • Investment Activities

  46. Business Expenses • Interest • The easiest way to trace disbursements to specific uses is to keep the proceeds of a particular loan separate from any other funds. • Allocation Period • Begins on the date the proceeds are used, and ends on the earlier of • The date the loan is repaid • The date the loan is reallocated to another use

  47. Business Expenses • Interest Expense • Interest you can Deduct • Business • Investment • Mortgage Interest • Limitations no more than two residences • $1 million limit • $1oo,ooo secured line of credit

  48. Business Expenses • Interest • Non Deductible (not an exhaustive list) • Interest on Income Tax • Penalties • Interest on loans from life insurance policies • Personal –credit card debt

  49. Business Expenses • Income Taxes • Federal Income Tax is not deductible • A Corporation or Partnership can deduct state and local income tax imposed on them as business expenses • An individual cannot- that portion is deductible on Schedule A – typically gets lost due to Alternative Minimum Tax

  50. Business Expenses • Depreciation Expense • Capitalization Threshold • Bonus Depreciation • 2012 – 50% immediate write-off of qualifying property • 2013 – N/A • Section 179 • 2012 Limit is lesser of $139,000 or taxable income • 2013 limit is lesser of $25,000 or taxable income

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