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.
Because of the increased strain on states' budgets in recent years, every state is looking for additional sources of tax revenue to balance it's budget while minimizing the budget cuts they must make
Last years in a post titled Are You an On-Line retailer? If So, You have a Big Time Ally in Amazon, we highlighted the battle brewing between some of the states and Amazon. Over the past year additional states have jumped into the fray and have attempted to pass legislation requiring Amazon to collect sales tax.
Amazon, is fighting back aggressively, discontinuing relationships with its affiliates and pulling jobs in states requiring sales tax be collected. Jeannine Pogi posted a great article "Amazon Sales Tax: The Battle State by State" and map that details the state by state battles between the states and Amazon.
Source: Jeannine Poggi, Amazon Sales Tax: The Battle, State by State from theStreet.com
In addition to the state by state battle being fought, Senator Dick Durbin (D-Ill.) plans on introducing a bill later this month called the Main Street Fairness Act. If passed, it would require all businesses to collect sales tax in the state where the consumer resides.
Currently there are approximately 30,000 state and local sales-tax jurisdictions. Imagine, as a business owner keeping up with all of the requirements and changes for some 30,000 locales where the sales tax requirements are constantly changing. What may be taxable in one jurisdiction may not be subject to sales tax in all other locales.
This was part of the basis for a 1992 US Supreme Court ruling (Quill vs. North Dakota). It ruled states could not force retailers to collect sales tax, unless the retailer had a presence in that state. The court reasoned that because the rates in every state, city and county and the products or services taxed were all different, it would be impossible for a retailer to keep track and conform to all the various sales tax laws and rates across the country.
Despite this Supreme Court ruling, a number of states are pressing forward to force Amazon and all other e-commerce retailers to collect and report the sales tax collected.
If you are expanding into another state it is important to understand the laws, licensing and tax reporting requirements of each state. To assist you we put together a list of links to connect you to each state's business web site. Go here to get your list of links.
In part 1 of this post, the choices an owner has to make when setting up and LLC were highlighted. This post features the choices of entities available to LLCs and highlights how each is treated for taxes.
Sole Proprietorship - The simplest structure of all the choices. The owner, if he has no employees, will have no payroll, or payroll tax reports to worry about. They also will not have to file a separate year-end corporate tax return or partnership return for the LLC. The year-end taxes are determined on your personal return. A Schedule C for the LLC is filled out and is part of your 1040 personal return. The downside of a Sole Proprietorship, is the owner will have to pay self-employment taxes on the income earned from the LLC. Also, the owner cannot take W2 wages fro the LLC Sole Proprietorship. The owner will have to track net income carefully and pay estimated quarterly taxes based on the net income of the business each quarter. If he or she does not pay attention to the net income generated by the business, during the year, and fails to pay estimated quarterly taxes they could be looking at having to write a very large check in April when they file their personal tax return. Taxes, from the business, can be 25% to 60% of the net income of the business depending on your personal income tax bracket. For example, If you haven't paid any taxes during the year and the business generated $50,000 in income, The self-employment taxes would be approximately $7,650; federal taxes at the 15% tax bracket would be an additional $7,500; and if you pay state taxes at 7% on earned income you would be looking at an additional $3,500. In this example, come April, if no estimated quarterly payments were made, you'd have to pay almost $18,650 in taxes on $50,000 of business income. This is assuming you are at the low end of the federal income tax bracket.
Partnership- When two or more individuals form an LLC, it will default to a Partnership. A Partnership, like a Sole Proprietorship, if it has no employees, will have no payroll, or payroll tax reports to worry about. At the end of the year, the LLC will be required to file a Partnership return. The net income of the LLC will be divided up amongst the Partners based on the percentage of ownership. Each Partner receives a K1 reflecting his or her share of income (or losses) from the Partnership. Each Partner is required to record the income (or losses) they earned from the LLC Partnership on their personal tax return. The Partners pay self-employment taxes, federal taxes and possibly state taxes. The amount of federal, and in some cases state taxes, paid by each Partner is determined based on their personal income tax bracket. Because of this, the total amount of taxes paid from Partner to Partner can vary, since each Partner's personal tax return will be vastly different. It is possible for one Partner to have to pay little to no taxes on income earned by the Partnership, while other partners could have to pay up to 35% in federal taxes. As with a Sole Proprietorship, each Partner will have to track net income carefully, and pay estimated quarterly taxes. Like the owner of a sole Proprietorship, If a Partner does not pay attention to the net income earned by the LLC during the year, the Partner may have to write a sizable check for taxes. Like a Sole Proprietor, a Partner may have pay anywhere from 25% to 60% in taxes on their share of income earned from the Partnership.
S Corporation- A corporation that passes corporate income, losses, deductions and credits through to shareholders for federal tax purposes. In other words, the earnings or losses by the S corporation, are passed through and recorded on an owner's personal tax return. The owner pays taxes on the earnings based on his or her own personal tax rate. Unlike a Partnership or Sole proprietorship, an owners of an S Corporation must, by law, take a reasonable and customary salary. This type of entity allows the owner to take W2 wages and have income tax, as well as social security taxes, and Medicare taxes to be deducted from their wages. It also allows them to take some compensation out as distributions, which are not subject to social security, Medicare taxes. A CPA should be consulted to help determine an appropriate salary and reasonable distributions.
C Corporations- The C Corporation is the only structure where the income earned by the Corporation does not flow through to the owners personal tax return. Instead, the corporation is recognized by the IRS as a separate taxpaying entity. When people talk about the corporate tax rate, they are referring to the tax rate paid by C Corporations. One of the biggest downsides of a C Corporation, for business owners, is the double taxation. The Corporation has to pay taxes on earned income. If the company then distributes any of its earnings, as dividends to its shareholders, the shareholder has to pay taxes on the dividends received. This results in income being taxed twice, once at the corporate level and again by the shareholder on their personal tax return. Certain circumstances dictate the selection of a C Corporation for the LLC.
It is always advisable to speak with a CPA when setting up an LLC and choosing the most beneficial tax treatment of the LLC.
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.
Businesses scored a big win yesterday as the Senate voted to repeal the 1099 reporting requirements that was part of the Healthcare bill. This requirement had been the topic of several blog articles that can be found here, here, here and here. In these blog articles, we highlighted the devastating impact and high costs that this requirement would have had on businesses. Fortunately, both parties realized this was a burdensome reporting requirements.
This provision was slipped into the Healthcare bill and required that businesses would have had to report all business transactions with any single person or business that totaled more than $600 in a calendar year. According to Kenneth Schortgen, JR in his article that appeared on examiner.com today, he highlights the cost to businesses: "The sheer cost of doing this, coupled with the cost many people would have incurred by hiring accounting help just to deal with this provision, could have burdened small businesses to the point that up to 40% would have had to close their doors, or layoff workers."
The bill must still pass the House and be signed into law. Few problems are anticpated with it passing the House and President Obama during the State of the Union address indicted hew was willing to compromise on the 1099 reporting requirement.
All North Carolina LLC's must file their annual report before April 15'th. If the annual report is not filed before the deadline and the annual renewal fee of $200 is not paid, the LLC will be dissolved by the NC Secretary of State. The web site address for the NC Secretary of state is http://www.secretary.state.nc.us. If you need assistance, do not hesitate to contact us.
On Friday, December 17, 2010, President Obama signed into law, the much talked about, tax compromise and extension of the President Bush tax cuts. Included in the bill were some additional benefits to taxpayers and employees. Here are eight highlights from the recently passed tax bill:
- The tax rates for all individuals and all income groups, including the top 2% of earners has been extended for an additional two years.
- The capital gains and dividends tax rate remains unchanged at a top rate of 15%.
- A $2,500 college tax credit has been extended for two years.
- A $1,000 child tax credit has been extended for two years.
- The estate tax will be set at 35%, with a $5 million dollar individual exemption.
- Long-term unemployment insurance benefits will be extended for 13 months. Individuals can receive the unemployment benefits for up to 99 weeks.
- Employees will see a 2% reduction of Social Security withholdings. For employees the Social Security withholding amount will decrease from 6.2% to 4.2%. Employers do not receive a corresponding reduction in SS withholding amounts.
- The Alternative Minimum tax, which was originally set up to make sure the wealthy pay some income taxes, will be indexed to inflation. This had not been done previously and on a year to year basis, temporary adjustments had to be made. Indexing this to inflation, will prevent some 20 million middle-class taxpayers from having to pay the AMT. A group that the tax was never intended to target.
As lawmakers embark on their lame duck session, CPA firms, business owners and corporations are hopeful that Congress and the President are sincere in their desire to repeal the onerous, 1099 reporting requirements that was attached to the Healthcare reform legislation passed last March.
We have posted several articles that can be found here, here and here about this issue. In short, all consultants, sole proprietors, partnerships, S corporations, C corporations and farming businesses, will have to issue a 1099 for any vendor or individualthat they sepnd more than $600 with.
According to a Taxpayer Advocate Service (TAS) analysis of 2009 IRS data, about 40 million businesses and other entities will be subject to this new reporting requirement. It would require a painter to issue a 1099 to Home Depot or Lowes, if he or she spends more than $600 on supplies with them for the year. This would be true for landscapper, to issue a 1099 to the gas station, he purchases gasoline from, or the consultant who spends more than $600 with Office Depot on office supplies.
If each business entity has to issue, on average, just twenty-five 1099s each year, more than 1 billion 1099s would be issued annually. A volume that would seem difficult for the IRS to even be capable of handling.
Max Baucus (D-Mont), Chairman of the Senate Finance Committee has stated that he would introduce legislation to repeal the expanded 1099 reporting requirments, that will start in 2012
In an article published by CNNMoney.com, Max Baucus is quoted: "I have heard small businesses loud and clear and I am responding to their concerns ," Baucus said in a prepared statement. "Small businesses are the backbone of our economy in my home state and across the country, and they need to focus on creating good-paying jobs -- not filing paperwork."
In addition to the new reporting requirements, the fines and penalties for incorrect and late filings of 1099s, w2s and other information returns, has also increased significantly.
If this reporting requirement stands, CPA firms envision, a major increase in work volume and increased cost, for the business owner, in order to stay compliant with this burdensome and onerous piece of legislation.
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.