Over the past several years, it seems like we have been posting negative information for business owners regarding new regulations and the possibility of significant tax increases in 2013.
Taxmageddon is approaching in January, 2013 if Congress, the Senate and the President don't make any changes to the federal tax laws before then.
Well, amidst all the negative news, here is some great news for NC business owners.
Beginning this tax year (2012), NC business owners who have a Sole Proprietorship, S Corporation, Partnership or LLC will be able to deduct up to $50,000 of business income from their state taxes.
The news is even better if you and your wife are partners or co-owners of one of these entities. The new law allows you to each deduct up to $50,000 of income. So if you are business partners or co-owners, you can deduct up to $100,000 of income between the two of you.
This new income deduction falls under North Carolina statute, N.C.G.S 105-134.6(b)(22) and does not apply to C Corporations or passive income. If you have a rental property or any other investment that generates passive income, you are not allowed to use this income deduction.
A business owner whose business net income exceeds $50,000 can expect to save at least $3,500 on NC state income taxes and for married couples who share ownership of a North Carolina company, that tax savings can double to more than $7,000.
What a great incentive to start a small business in NC. If you are a small business owner or about to start a business, we can assist you. You may contact us here.
So, you're setting up an LLC. What do you know about an LLC, other than a lawyer advised you to set one up to protect your personal assetts.
- Did you you know that has an LLC has no meaning in regards to taxes to the IRS?
- Do you know that an LLC can be a sole propreitorship, partnership, S Corporation or C Corporation?
- Do you know the difference between each of these business structures and the tax implications of each?
What is an LLC
The Limited Liability Company (LLC) is a popular business structure, because of its flexibility and the protection it can provide you for your personal assets, against debts and the actions of your LLC. It is best left up to the lawyers to talk about the benefits of the legal protection that an LLC provides.
This article focuses on the choices you have regarding how you want the IRS to treat your LLC for taxes. Taxes are a a major cost to you and your business. Doesn't this decision merit consideration and at least a few minutes of your time to learn about each entity, and understand how the income from each is treated for taxes?
IRS and the LLC
Although, most people starting a business are familar with the term LLC, they do not fully understand LLCs or the choices they have available to them regarding taxes. It is important for anyone setting up an LLC to understand that the IRS does not recognize an LLC as a classification for tax purposes.
Simply put, when you setup an LLC, you have to tell the IRS how you want them to treat your LLC for tax purposes. If you do not notify the IRS what entity you have selected for your LLC, it will default to a sole propreitorship (for a single member LLC) or a partnership (for more than a two member LLC). This is one of the few times in life, when you can tell the IRS how to treat you...regarding taxes, that is.
Your Choices for an LLC are:
- Sole Properitorship
- S Corporation
- C Corporations
Each of these entities, are different with very different compliance and filing requirements. In Part 2 of this blog post we will take a look at each entity and highlight how the net income for each is treated for taxes.
So, you started a business and bought a copy of QuickBooks. You are going to load up that bad boy on your computer, enter a few numbers and away you go. You're all set to keep detailed financial records.
Who needs to spend a few hundred dollars a month for the services of a CPA. You're a do it yourselfer, you started your own business, so surely you can handle the minor administrative details related to managing the financial administration of your company.
A CPA is an important part of your management team and needs to be considered as such. He or she brings critical experience, knowledge and insight to help you run, manage and strategize your business.
CPAs spend hundreds of thousands of dollars investing in their education, years working and gaining experience and must pass an exam to demonstrate a base level of knowledge before they can practice as a CPA.
They typically deal with hundreds of clients a year and encounter thousands of unique situations. They understand the challenges a new business owner faces and how best to help that business owner.
A CPA can help the business owner:
Maintain accurate financial records. This is critical if you ever want to get a loan from a bank, attract investors or just have accurate financials available to help you make smart decisions in your business. It is not uncommon for us to take a look at a QuickBooks file from a business owner and find information missing or improperly coded, thus making the financials meaningless.
Assist with tax planning and preparation. One of the biggest challenges facing business owners, especially recently, is not knowing the tax consequences of making a profit, hiring employees, providing or not providing healthcare, as well as numerous other tax related questions a business owner must deal with on an on-going basis. A CPA is a key resource to help guide you through this maze.
Business guidance. A CPA has experience and knowledge in dealing with numerous businesses and countless unique situations a business owner may face. He or she can often provide perspective and advice on how to avoid mistakes and provide guidance on some best practices for business owners.
These are just a few areas that a CPA can assist and support you as you launch your business. If you are considering or have started a new business, visit our New Businesses resource web page.
Congress has returned from its August and recess and wasted no time getting down to business. Yesterday, the Senate cleared a hurdle to pass It's Mini-Tarp, aka the Small Business Bill. After the cloture vote passed, the Republicans could not stop it. They then turned their attention to amendments to the bill.
One issue they tried to tackle was to to ease the 1099 requirement that was passed in the Health Care bill. We posted here, here, here and here regarding the 1099 issue and how onerous this will be to all businesses in every industry and every size. Businesses from sole proprietorships to large corporations will be impacted with the additional cost and time required to track every business they sepnd more than $600 per year with and send out a 1099 to each of these businesses. For many business this could mean sending out hundreds to thousands of additional 1099s per year. Unfortunately, both the proposed amendments to correct this issue failed.
For now, starting in 2012, all of your expenditures with any one vendor that total more than $600 will have to be issued a 1099. Although, I would expect over the next year we will see additional efforts to eliminate or modify this requirement. Both parties recognize, how this is a bad idea and was a bad piece of legislation that was allowed to pass.
Do you still file your taxes using paper coupons. If so, you may need to convert over to the IRS EFTPS electronic payment system. The IRS has published a proposed regulation (REG 153340-09), that would eliminate the rules for making deposits via paper coupon. After Dec. 31, 2010 the paper coupon system, maintained by the Department of Treasury, will no longer be maintained.
The Electronic Federal Tax Payment System (EFTPS) was launched in 1996. It is used as a vehicle to make tax payments to the federal government. It is available to individuals, businesses, payroll companies, federal agencies, and tax professionals. Most companies use it as the preferred method for making payroll tax deposits, however many small businesses are still using paper coupons to make payroll tax deposits.
If you are a small business owner and you are still using paper coupons, you will want to check out the EFTPS web site to learn more about the EFTPS system and how to apply for a pin number before the December 31, 2010 deadline.
The Wall Street Journal posted an article yesterday, Too Rich to Live?coincidentally it also happened to be the same day George Steinbrenner passed away. The article and the passing of George Steinbrenner bring to light a major, and very difficult dilemma for many families in regards to when is the right time to die - this year or next.
Because of the estate-tax and the laws that Congress passed previously, they have created a very difficult dilemma for many families to grapple with. In 2001 Congress made several changes to the tax laws including a change to the estate-tax, aka the "death tax." Over the past 9 years the amount exempted from the estate tax increased from $675,000 per person to $3.5 million per person and and the tax percentage decreased from 55% to 45%.
Although, there are very few families and estates that are the size of George Steinbrenner's, his passing illustrates how significant this oddity in the estate-tax is this year. Forbes recently estimated George Steinbrenner's net worth at $1.1 billion. If he had passed away next year, the estate tax on his assets would have been approximately $600 million. If he passed away in 2009 his estate tax would have been around $500 million. Because he passed away in 2010, a year where there is currently no estate tax, his estate tax is zero.
The wall street article does a great job highlighting this dilemma.
Advisers say the estate-tax dilemma is especially awkward for heirs. "At least in December 2009, people wanted to keep their relatives alive," says Ronald Aucutt, an estate-tax attorney with McGuire Woods in Washington area. Now he and others are worried that heirs may be tempted to pull the plugs on Dec 31. Economist might call the taking of a life to reap a tax advantage a "perverse incentive." District Attorneys might call it homicide.
Needless to say, if not resolved, the estate-tax issue will present some very difficult end-of-life decisions for some families. Senator Lincoln and Senator Kyl just introduced a proposal to amend H.R. 5297, the Small Business Lending bill, to permanently fix the estate-tax and set it at 35% with a $5 million exemption. The $5 million exemption amount would be phased in over 10 years. However, unless the tax law is retroactive this year, families could be left with a macabre end-of-life decisions for their loved one.
In a previous post Welcome to Healthcare Tax Compliance Hell, a little known clause that was slipped into the Health Care legislation, was highlighted. This clause required that any taxpayer, with business income, is required to issue a 1099 form to any, and all vendors that they purchase goods or services from, and spend more than $600 per year with.
As highlighted previously, this means that when a painter or contractor goes to Home Depot or Lowes and purchases goods that total more than $600 in a year, they must issue Lowes or Home Depot a 1099. This is applicable to all individuals that generate business income regardless of how small they are.
The IRS is starting to come to grips with how extensive and onerous this new law is for individual taxpayers, small business owners and large businesses.
As always there are unintended consequences when laws such as this are implemented. One significant unintended consequence is that a number of companies may scale back on the number of vendors they use in order to minimize the number of vendors they have to track and issue 1099s to.
Neil deMause, in an article posted on CNN money.com, IRS Starts Mopping up Congress's tax reporting mess, highlights information from a report released by National Taxpayer Advocate Nina Olson.
An estimated 40 million taxpayers will be subject to the requirement, including 26 million who run sole proprietorships.
The article goes onto comment how Nina Olson is concerned with the new requirement.
Like may who have delved into the new rules, Olson is concerned about the far-reaching scope and potential unintended consequences.
"The new reporting burden, particularly as it falls on small businesses, may turn out to be disproportionate with any resulting improvement in tax compliance," the taxpayer advocate wrote in a report released this week.
The intent of the law is to create a paper trail for all business transactions. However, the massive burden and requirements for small business owners to comply may outweigh the benefits. In the CNNMoney article, they highlight how Pennsylvania business networking organization, SMC Business Councils, surveyed its members and found the requirement for issuing 1099s will increase on average from 10 to over 200.
In a previous post, Does Your Business Accept Credit Cards, If so, be Aware of What Awaits You in 2011, we highlighted how starting in 2011, credit card companies will be required to issue merchants a 1099. The purpose is so the IRS can track income to a business from credit card sales. This was a little known provision slipped into the Housing Assistance Tax Act of 2008.
IRS commissioner, Douglas Shulman, announced in May that credit card and debit card transactions to vendors would be exempt from this new 1099 reporting requirement. The reason, being is that the IRS will be capable to track the information based on the 1099s issued from the credit card companies.
This could be a a big boost to credit card processing companies, as more companies may use debit or credit cards in an effort to minimize the 1099s required to be issued. However, it could also drive up costs, since credit card processing fees are typically 2%-3%. of the purchase price. At some point in time, these costs will be passed on, in the form of higher prices.
In addition, it would also be likely that a number of business that use a number of different vendors, would try and consolidate to fewer vendors in order to reduce the reporting requirements. Finally, this law promises to drive up administrative and record keeping costs for businesses in order for the businesses to comply with the new regulations and filing requirements.
All of these new reporting requirements are all about tracking revenue and identifying businesses that are underreporting income. With the issuance of 1099s by the credit card companies, and taxpayers who generate business income, the IRS can cross reference the 1099 payments to reported business income listed on the year-end tax return for that business. If there is a disparity between the 1099s issued to that business and the reported income on the tax return, the return could be flagged.
$994 billion!!! No, it is not the cost of a new stimulus plan, more TARP, another government health care plan. It is the estimated amount that U.S. organizations lost to occupational fraud in 2008.
The Association of Certified Fraud Examiners recently issued its report - Report to the Nation on Occupational Fraud and Abuse. The report was conducted by compiling data from 959 cases of occupational fraud between January, 2006 and February, 2008. It was Certified Fraud Examiners who provided data for the study. As you will see from the highlights below, fraud is a costly matter for all businesses regardless of size. Small businesses are as susceptible to it as large organizations and the private sector as susceptible as the public sector.
Because fraud is so costly, it's important to implement controls, processes and procedures for detecting fraud or potential fraud before it occurs. One of the best models you can follow is the IRS model - compliance through fear. Most taxpayers are not enthused about paying taxes and filing their returns each year, but they do so because it's the law! Most tax payers are fearful of the IRS and the consequences of not complying with the tax laws. If someone knows that their work will be reviewed, and there are procedures in place to detect fraud, it is much more likely that an individual will not attempt fraud.
Some common tips for preventing fraud are surprise audits, having a second person review work, having a follow behind to double check the bookkeeping and preparing financial statements, calling vendors to check on orders and verify they are real orders, and reconciling invoices to payments.
Here are some quick highlights of the Report To the Nation on Occupational Fraud and Abuse:
- Median loss by fraud - $175,000
- 25% of the frauds committed cost organizations more than $1 million
- Typical time frame for a fraud is 2 years
- Often times, the fraudster is a first time offender
- Most frequent way to catch frauds was through tips - 46% of cases were uncovered based on tips from employees, customers and vendors
- Anti-fraud controls did help reduce or catch fraudulent schemes. Organizations that conducted surprise audits had a median loss of $70,000 compared to $207,000 for those that did not have a plan in place.
- Most common industries victimized by fraud: banking and financial services - 15% of cases; government - 12% of cases; health care - 8% of cases
- Small businesses are not immune to fraud: Median loss for businesses with fewer than 100 employees - $200,000.
- inadequate internal controls are most common reasons that permitted fraud to occur.
- most organizations closed the barn door after the horses escaped. Anti-fraud controls were implemented by 78% of the organizations after they discovered the fraud.
- Most frequent perpetrators of fraud were upper management and accounting departments. Median loss for fraud committed by upper management was $853,000.
As a business owner you may now have an opportunity to either receive a payroll tax savings for the rest of 2010 on employees you hire or take a tax credit against business income on your 2011 tax return.
The Work Opportunity Tax Credit offers business owners to take a tax credit against the income of the business if they hire an individual that is part of a "targeted group." Currently there are 11 differented targeted groups. The Work Opportunity Tax Credit Guide includes the list of targeted groups along with the definitions and the amount of credit that you can obtain by hiring a new employee from one of these groups.
The HIRE Act of 2010, aka '"The Jobs Bill", passed last month includes an opportunity for businesses to not have to pay the 6.2% employers portion of social security tax if they hire an individual that has not worked for more than 40 hours in the previous 60 days. the employee will have to fill out and sign an affidavit to that effect. This HIRE Act Guide of 2010 includes a more detailed summary of the Act and here is the HIRE Act affidavit that has to be filled out and signed.
If you have been in noncompliance with the tax laws, playing around the edges of the tax laws, hiring 1099 contractors, rather than employees and are not worried about an audit, because the chances of an audit are low, then the next couple of posts are a must read for you.
The post, Are You Self Employed or a Small Business Owner? If So, The IRS Is Gearing Up to Evaluate How you Classify Workers, is in regards to the Dept of Treasury's recent Internal Audit Report: Employment Tax Compliance Could Be Improved with Better Coordination and Information Sharing. The othe other post, What Whistleblowers and Hedge Fund Investors have in Common should make you take notice that your business and complaince to tax law will be under the scrutiny of many prying eyes including your employees.
Both posts underscore the seriousness that the IRS is taking regarding tax fraud including the misclassification of 1099 contractors as employees. As the budget deficits grows and additional revenue is needed by the government the logical thing to do is to raise revenue through increased compliance.