The “ABCs” for New Businesses | Tax Tip of the Week | No. 51 July 28, 2010
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Starting a new business can be an unbelievably exciting time! Unfortunately, due to various governmental agency compliance issues, it can be an overwhelming undertaking.
The statistics don’t lie. Most new businesses will not make it past their first year. The big question is why?
In most cases, it is due to a lack of accounting systems. A new business can be losing money and not even know it.
We’ve also seen situations where the new entity was not compliant with a tax or government agency. Getting behind with payroll taxes, sales tax, or income taxes can be a hole that is seemingly impossible to climb out of. The penalties and interest associated with back taxes or failure to file can be a huge hit to any business, but especially a new business.
Practicing your ABCs
The above is a lot of doom and gloom. But if you practice the ABCs of business you can build the foundation needed to succeed in the market place. What are the ABCs you ask? The ABCs are having an active relationship with an Attorney, a Banker, and a CPA who can give you the extra leg up your business needs to get past the first year hump—and on its way to future success. Below are just a few of the foundational building blocks a great financial team can help with:
- Entity Choice: An Attorney can help your business choose the right legal entity for asset protection and for tax saving strategies. (For more information see Tax Tip #45: Considerations for choosing an entity.)
- Accounting Software: A seasoned accounting team should be able to get you up and running on accounting software that us right for your new business. You need to know if you are selling your products for the right prices and if your overhead is in a good place. Good accounting software and systems will answer these questions and more. (For more information see Tax Tip: Getting Organized part II).
- Banking Relationship: A good relationship with a local banking team can help your business set up separate checking, savings, & credit accounts that are necessary for running a business. Having these accounts separate from your personal accounts can help you with asset protection issues as well make your accounting for income & expenses easier. You will also need their assistance if you plan on taking credit card payments for your goods and services.
It is a big step when you start your own business—it is best not taken alone. Don’t forget your ABCs!
What’s your story?
Do you have a story about when you started your business? What did you learn?
As always, you can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504. Or visit our web site.
Rick Prewitt – the guy behind TTW
…until next week.
Often Misunderstood – The Gift Tax | Tax Tip of the Week | No. 50 July 21, 2010
Posted by admin in : Tax Tip , add a commentBackground: One of the biggest reasons that the federal gift tax law exists is to keep taxpayers from avoiding federal estate tax by giving away their money or assets during their lifetime.
The gift tax is often misunderstood since it is not the recipient that owes the tax but the giver.
Generally speaking, one may be responsible for paying federal gift tax if you give away a lot of money or other assets. Under current federal tax law, up to $13,000 annually may be gifted to any number of individuals without incurring a federal gift tax liability. There is also a one million dollar lifetime limit on gifts. Any gifts exceeding these amounts will most likely require the filing of an IRS Form 709.
Planning opportunities exists to minimize the potential gift tax
If properly executed, gifting may be a very effective estate planning tool. Any large gifts need pre- planning so that neither the giver nor recipient owes a gift tax.
Some other considerations when making large gifts of money or assets follow:
- You and your spouse can gift annually up to $26,000 to any number of persons.
- The gift is money or assets given away without any expected return.
- Giving away money or assets while you are still alive may provide large tax savings to your beneficiaries.
- Paying someone else’s medical expenses is exempt from these rules. However, you must pay them directly to the medical institution to qualify.
- Gifts of educational expenses are also exempt. These include payments directly made for education, books, supplies, and other related living expenses.
- Charitable gifts and gifts to your spouse are also not subject to the gift tax.
Note: As it currently stands for 2010, the federal estate tax was repealed for one year only (don’t confuse that with the Ohio Estate Tax – it is still very much alive and well). However, beginning next year, all estate and gift rates will revert back to their 2001 levels. So in 2011, each estate can exclude only $1 million of their estate tax-free to their beneficiaries. Any estate value above that is subject to federal estate tax. Please be watchful for any new legislation as Congress continues to debate these issues.
Anything you’d like to add?
We know many of the topics covered in TTW can get complicated quickly. The gift tax is a great example. Let us know what has worked for you or if you need clarification.
As always, you can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504. Or visit our web site.
Mark Bradstreet – author of this week’s TTW
Rick Prewitt – the guy behind TTW
…until next week.
What’s in Store… Maybe | Dissecting the Healthcare Bill – Part 4 of 4 | Tax Tip of the Week | No. 49 July 14, 2010
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This week we will look at provisions of the Healthcare Bill that take effect in 2013 – 2018.
Looking this far ahead is unpredictable. Who knows how many changes may take place within Congress and the Federal Administration during this time period–or how the winds of politics may shift. However, these highlights give us a roadmap of what to expect:
2013
- Maximum health Flexible Spending Account (FSA) contributions capped at $2,500/year and increased annually by inflation.
- Increases Medicare Part A payroll tax rate by 0.9% on earnings over $200,000 for individuals and $250,000 for married filing joint returns. Note: this increase is only on the employee share of Medicare and not the employer’s share.
- Self-Employed individuals and couples will also pay an additional 0.9% Medicare care tax with incomes above these levels.
- An added Medicare tax (3.8% total) will be assessed on the investment income of individuals and couples meeting the above-stated thresholds. This means there will be an additional tax on all interest, dividend and capital gains income.
- The ability to deduct medical expenses on your Schedule A personal tax return will increase from the current “floor” of 7.5% of AGI to a 10% “floor”. Note: taxpayers over 65 will keep the 7.5% level until 2016.
2014
- Employer and individual mandate to buy health insurance begins. Both self-employed and W-2 employees must buy individual polices if their employer does not provide coverage.
- For low-income individuals, a premium assistance credit becomes available.
- Businesses with 50 or more employees must provide health coverage or pay a $2,000 penalty per employee.
- Penalties will also be assessed against individuals who do not buy health coverage.
- Various “Voucher Programs” will be introduced to help pay for health coverage.
2017 – 2018
- A 40% excise tax will be assessed to employers offering “Cadillac Insurance Plans”. Currently, this is defined as plans where the cost of health coverage for individuals exceeds $10,200 or exceeds $27,500 for family plans.
- States may allow large groups (greater than 100 employees) to purchase coverage through Exchanges.
What Do You Think?
Looks like we’re in for a long ride with the Healthcare Bill! We’ll continue to cover changes in the Tax Tip of the Week, but let’s talk about it. Post your comments here. What do you think about the Healthcare Bill? What are your concerns and comments? Join in the conversation!
As always, you can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504. Or visit our web site.
Rick Prewitt – the guy behind TTW
…until next week.
A Compliance Nightmare for Small Businesses | Tax Tip of the Week | Dissecting the Healthcare Bill – Part 3 of 4 | No. 48 July 7, 2010
Posted by admin in : Tax Tip , add a comment1099 Nightmare
On page 737 of the Healthcare Bill is a three-paragraph section that has nothing to do with hospitals, doctors, drugs or health insurance. Starting January 1, 2012 all business entities will be required to issue 1099s to all individuals and business with which they spend $600 or more annually for goods and services.
Currently, businesses must file 1099-MISC forms only to individuals and unincorporated business for goods and services provided. For example, a small business contracts with an individual to design a web site for the company. The cost is $1,200 to perform the work. A 1090-MISC is issued to that contractor to insure the income is reported on that contractor’s personal tax return.
The intent of the new reporting requirements is to capture an estimated $2 billion in taxes on income that currently goes unreported each year.
So starting in 2012, if a small business purchases a computer from Staples, they will need to get Staples’ federal identification number and address in order to issue them a 1099. Same goes for the provider of their internet services, office supply company, software vendor, utility company, etc.
These reporting requirements will add a HUGE compliance problem for American businesses. Small companies, especially, just don’t have the manpower to track down the information and submit 100 or more 1099s each year. And what about all the companies on the receiving end? There is going to be a flood of 1099s pouring into Office Max, Apple, Proctor & Gamble, etc. each year.
Fortunately, Representative Dan Lungren (R- Calif.) has introduced a bill to roll back this provision. We offer him our support!
We’ll keep you posted.
Questions or comments? In Dayton, call 937-436-3133 and in Xenia, call 937-372-3504. Or visit our web site.
Rick Prewitt – the guy behind TTW
…until next week.
What’s in store for 2011 and 2012 | Dissecting the Healthcare Bill – Part 2 of 4 | Tax Tip of the Week | No. 47 June 30, 2010
Posted by admin in : Tax Tip , add a commentLast week we looked at the changes this bill created for 2010. This week we highlight the changes for 2011 and 2012.
2011 Highlights
- A new national employee-funded long-term care benefit known as the “Community Living Assistance Services and Supports Act” (CLASS Act). Estimated monthly premium of $120 for a $50/day benefit
- The value of employer provided group health coverage to be reported on each employee’s W2
- Distributions of proceeds from HRAs, FSAs and HSAs will no longer be non-taxable for over-the counter medications.
- Any distributions from HSAs and MSAs for non-medical expenses will have an additional 20% penalty tax (currently 10% for HSAs and 15% for MSAs
- Brand-name drug manufacturers and importers will pay an added $2.5 billion in annual taxes
2012 Highlights
- Employers must provide a Summary Plan Description (SPD) of group policies to all employees
- A new tax of $2/covered individual will be assessed to all those covered by self-insured health plans.
- Payors (including all corporations) will need to issue 1099s to report all payments of $600 or more for goods and services purchased.
Next week we will look at this “1099 Nightmare” in more detail.
Questions or comments? In Dayton, call 937-436-3133 and in Xenia, call 937-372-3504. Or visit our web site.
Rick Prewitt – the guy behind TTW
…until next week.
What you need to know for 2010 – Dissecting the Healthcare Bill – Part 1 of 4 | Tax Tip of the Week | No. 46 June 23, 2010
Posted by admin in : Tax Tip , add a commentWe are going to start a four-part series of Tax Tips to take a look at the Patient Protection and Affordable Care Act and the Health Care & Education Affordability Act. These acts represent over 2400 pages of new laws and are collectively called the Healthcare Bill.
Despite widespread belief that health coverage is mandatory now, the mandate for health insurance coverage does not actually take effect until 2014. In fact, some provisions of the Healthcare Bill do not take effect until 2018.
This week we will highlight the changes that take effect in 2010. Subsequent Tax Tips will look at future changes.
Here is what you need to know for 2010:
- Health care coverage availability for children up to age 26 (by 9/23/2010)
- Ban on lifetime benefit limits of health care plans
- Ban on exclusion of coverage for pre-existing conditions for those under age 19, (2014 for all)
- Policies must cover preventive checkups without employee co-pays
- Tax credits available to small business owners to offer health care coverage
- 10% sales tax on tanning salon services
- Businesses must provide the same coverage for all employees
- 20% – 40% penalties associated with transactions that do not meet the “Economic Substance” test
- Medicare Part D “donut hole” will be narrowed by providing a $250 rebate to senior citizens
- A new $13,170 refundable Adoption Credit
There are many unknown and unanswered questions about this mammoth and far reaching bill. As Speaker of the House, Nancy Pelosi said, “Let’s pass this bill and see what is in it.”
We’ll find out together.
Questions? In Dayton, call 937-436-3133 and in Xenia, call 937-372-3504. Or visit http://www.bradstreetcpas.com.
Rick Prewitt – the guy behind TTW
…until next week.
Tax and Asset Protection Considerations in choosing a business entity | Tax Tip of the Week | No. 45 June 16, 2010
Posted by admin in : Tax Tip , add a commentWhen your accountant or attorney wants to discuss entity choice, they are referring to the various types of business entities or structures available. Generally speaking, the relevant options available for most businesses including start-ups are:
1. LLCs (limited liability company)
2. S corporation
3. C corporation
4. Limited partnership
5. General partnership
6. Sole proprietorships
When considering the pros and cons of each type of entity, the many multifaceted issues may be grouped into two broad categories:
A. Taxation
B. Asset protection
Taxation
Taxation issues may vary significantly by entity choice. For example, the sale and liquidation of a C corporation may result in double taxation whereas the sale of an S corporation, LLC, or a partnership may result only in single taxation. Entity differences also exist between the different categories of income – ordinary, capital gain, passive, investment, and self employment income. All of which may be taxed at different rates.
Taxable compensation inside corporations is affected by the number of owners and their involvement in the business. For both C and S corporations, reasonableness of compensation can be a huge issue. For C corporations, the issue can be whether an owner’s salary is too high in comparison to any dividends paid. For S corporations, the issue is whether the salary is too low in relation to distributions paid.
Often, in the early years of a business or in today’s economy, the ability to use losses can be important in the choice of a business structure. Generally speaking, third party debt may create tax basis for owners. In this respect, LLCs, partnerships, and sole proprietorships provide better opportunities for passing through losses to the owners than do S corporations.
Asset Protection
Asset protection will vary by state and type of entity. One should consult with their attorney for the particular details. Remember that the limited liability or asset protection is usually designed to protect the owner’s personal assets and not to protect the entity itself. Thus, the entity may not be the safest place to save money.
Please let us know if you have any questions while walking through this mine field of entity choice. Future laws will affect this process as well. Sometimes, one entity may be later exchanged for another but often in reality you may be locked into your existing structure, thus, making entity choice a very important decision.
In Dayton, call 937-436-3133 and in Xenia, call 937-372-3504. Or visit http://www.bradstreetcpas.com.
Mark Bradstreet – Author of this week’s TTW
Rick Prewitt – the guy behind TTW
…until next week.
Energy Tax Credit Update | Tax Tip of the Week | No. 44 June 9, 2010
Posted by admin in : Tax Tip , add a commentGo Green and Save Some Green
During the recent 2009 tax filing season, we saw many clients take advantage of the Residential Energy Tax Credit.
As a reminder, this credit is available to homeowners who install energy-efficient:
- Exterior Windows and Skylights
- Storm Windows
- Exterior Doors
- Storm Doors
- Central A/C
- Air Source Heat Pumps
- Natural Gas or Propane Furnaces
- Oil Furnaces
- Gas, Propane or Oil Hot Water tanks
- Electric Heat Pump Water Heater
- Insulation
- Some metal and asphalt Roofs
- Biomass Stoves
The credit is 30% of the cost of the qualified energy-efficient property up to a maximum of $1,500 (example: $5,000 new windows X 30% = $1,500.)
If you did not take the maximum credit in 2009, it is still available to be taken on your 2010 tax return. Note: The $1,500 credit is the maximum you can claim for 2009 and 2010 combined.
In addition, this is one of the few credits that is not limited by AGI—meaning higher income taxpayers can also use this credit.
Take a look at your home this summer and see what improvements need to be made with Uncle Sam’s help!
As always, give us a call before you do something – not after!
In Dayton, call 937-436-3133 and in Xenia, call 937-372-3504. Or visit http://www.bradstreetcpas.com.
Health Coverage Tax Credit for Small Employers | Tax Tip of the Week | No. 43 June 2, 2010
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One of the provisions of the Patient Protection and Affordable Care Act is a credit designed to encourage small employers to offer health insurance coverage for the first time or maintain coverage they already have. In general, the credit is available to small employers that pay at least half the cost of single coverage for their employees.
The maximum credit is 35% of premiums paid in 2010 by eligible small business employers. In 2014, this maximum credit increases to 50%.
The credit is specifically targeted to help small businesses that primarily employ low and moderate income workers. It is generally available to employers that have fewer than 25 full-time employees paying wages averaging less than $50,000 per employee per year.
There are also special rules for non-profit organizations to encourage health insurance coverage.
Give us a call if you want to discuss the details of this new act.
In Dayton, call 937-436-3133 and in Xenia, call 937-372-3504. Or visit http://www.bradstreetcpas.com.
Rick Prewitt – the guy behind TTW
…until next week.
Young adult children get expanded coverage | Tax Tip of the Week | No. 42 May 26, 2010
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Changes made by the recently enacted Patient Protection and Affordable Care Act, provide tax-free health coverage for an employee’s children who are under age 27. The change is effective March 30, 2010. These changes immediately allow employers with cafeteria plans to permit employees to begin making pre-tax contributions to pay for this expanded benefit.
In addition to extending coverage to older children, the act also requires plans that provide dependent coverage to continue to make the coverage available for an adult child until the child reaches age 26. The extended coverage must be provided no later than plan years beginning on or after September 23, 2010. The favorable tax treatment applies to the extended coverage.
IRS Notice 2010-38 explains these changes in greater detail and provides further guidance to employers, employees and health insurers.
As always, feel free to call us anytime to discuss these ever changing laws.
In Dayton, call 937-436-3133 and in Xenia, call 937-372-3504. Or visit http://www.bradstreetcpas.com.
Rick Prewitt – the guy behind TTW
…until next week.
