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Before we go on to tax tips for your business, here are tips for making sure your business has all the necessary minimums:
THE 5 MOST IMPORTANT DECISIONS TO MAKE WHEN STARTING YOUR BUSINESS
1) Have a Business Plan
a) Business plans are used for financing.
b) They provide a yardstick against which future performance will be measured.
c) They provide a framework for decision making and coordination of business.
d) They define the business culture that will be communicated to employees, customers, etc.
2) Choose the Entity that is Right for You
a) Sole Proprietorship
b) Partnership
c) Corporation
d) Limited Liability Company (LLC)
3) Set up a Good Recordkeeping System
a) Set up a business bank account.
b) Use a good accounting software program or recordkeeping system.
c) Keep all receipts relative to the business.
d) Stay away from cash transactions.
e) Know the records retention requirements. (attached)
4) Know Your Filing Requirements and Your Tax Responsibilities
a) What forms are required and when are they due?
b) Set up a calendar system to help monitor the due dates.
c) Learn what taxes are due and how you calculate the amount to pay.
d) Learn the rules for taking money from your business account.
5) Engage a Good Banker, Accountant & Attorney
a) A banker will help you with loans, financing, bank accounts and recordkeeping.
b) An accountant will help you with your accounting, taxes and filing requirements.
c) An attorney will help you with all your legal issues and help protect your assets.
Now that we have covered the basics, here are some tax tips for your business. Please note that every business situation is different. Call our office for a consultation for a personalized solution to your tax questions and issues.
2009 Planning: Tax Solutions for S Corporations
An S corporation, such as yours, is a pass-through entity that is treated very much like a partnership for federal income tax purposes. As a result, all income is passed through to your shareholders and taxed at their individual tax rates. However, unlike a C corporation, an S corporation's income is taxable to the shareholders when it is earned whether or not the corporation distributes the income. Because an S corporation has a unique tax structure that directly impacts shareholders, it is important for you to understand the S corporation distribution and loss limitations, as well as how and when items of income and expense are taxed, before developing your overall tax plan.
In addition, some S corporation income and expense items are subject to special rules and separate identification for tax purposes. Examples of separately stated items that could affect a shareholder's tax liability include charitable contributions, capital gains, Sec. 179 expense deductions, foreign taxes, and net income or loss related to rental real estate activities.
These items, as well as income and losses, are passed through to the shareholder on a pro rata basis, which means that the amount passed through to each shareholder is dependent upon that shareholder's stock ownership percentage. However, a shareholder's portion of the losses and deductions may only be used to offset income from other sources to the extent that the total does not exceed the basis of the shareholder's stock and the basis of any debt owed to the shareholder by the corporation. The S corporation losses and deductions are also subject to the passive-activity rules.
Other key points to consider when developing your comprehensive tax strategy include:
- the availability of the Code Sec. 179 deduction at the corporate and shareholder level;
- reporting requirements for the domestic production activities deduction;
- the tax treatment of fringe benefits;
- below-market loans between shareholders and S corporations; and
- IRS scrutiny of distributions to shareholders who have not received compensation.
We can assist you in identifying and maximizing the potential tax savings. Please call our office at your earliest convenience to arrange an appointment.
Fact Sheet on Wage Compensation for S Corporation Officers
As you know, an S corporation is a pass-through entity that is treated very much like a partnership for federal income tax purposes. As a result, all income is passed through to the shareholders and taxed at their individual tax rates.
However, the nature of the shareholders' income is subject to IRS scrutiny, especially if they provide more than minor services to the corporation. Shareholders who receive or are entitled to receive payment are considered employees whose compensation is subject to federal employment taxes. This becomes problematic if shareholders have not received "reasonable compensation" for services rendered to the corporation, but have received significant corporate distributions of cash and property, or loans.
There are numerous factors that are considered when determining "reasonable compensation," including time and effort devoted to the business, duties and responsibilities, training and experience, payments to non-shareholder employees, and what comparable businesses pay for similar services.
We can help you determine the range of reasonable compensation for your business, and where shareholders' compensation should fall within that range, by evaluating your current compensation practices and other pertinent data. In addition, we can review your employee fringe benefits package and discuss the impact of those benefits on more than 2% shareholders.
Open Account Debt Between S Corporations and Their Shareholders
Final regulations have been released regarding the treatment of open account debt between S corporations and their shareholders. The regulations provide rules regarding the definition of open account debt, and adjustments in basis of any indebtedness of an S corporation to a shareholder for shareholder advances and repayments of loans to the S corporation. Since you have outstanding loans from your shareholders, you may be interested in the tax impact of these regulations.
In general, if a shareholder's basis in a debt owed to him or her by an S corporation has been reduced by pass-through losses from the S corporation, gain must be recognized by the shareholder if the corporation pays down the debt. The repayment of open account debt may result in ordinary income.
Regulations were originally proposed in response to a court ruling in which advances of open account debt by taxpayers to their closely held S corporations provided the taxpayers with basis to offset repayments of open account debt made by the corporation prior to each advance. Because the multiple advances by the taxpayers and repayments by the S corporations were treated as open account indebtedness, they were treated as a single indebtedness rather than separate indebtedness. The basis of the indebtedness was, therefore, computed by netting the advances and repayments at the close of the year. As a result, by restoring the basis in their debts, the advances that the taxpayers made to the S corporations shielded them from the realization of gain on debt repayments.
Under final regulations, open account debt cannot exceed $25,000 per shareholder at the close of the year. For example, an S corporation with ten shareholders could have up to $250,000 of open account debt as long as no single shareholder advances more than $25,000. If the balance of the indebtedness at the end of the year exceeds $25,000 for a shareholder, the entire amount is no longer considered open account debt and the shareholder may have to report income on repayments.
These regulations are important to your shareholders if their basis in their open account debt is reduced for prior pass-through losses. If you have questions regarding the tax treatment of the repayments of open account debt or taxpayer basis in general, we will be happy to assist you. Please call our office at your convenience.
2009 Recovery Act: Businesses
Since the inauguration of Barack Obama as our nation's 44th president, everyone's attention has been focused on what he and lawmakers in Congress will do to turn around the distressed U.S. economy. The daily drumbeat of bad economic news is drowning out almost everything else. Business owners know first hand the challenges of trying to increase sales in a slowing economy and at the same time avoid layoffs.
President Obama signed a massive $800 billion economic stimulus package, which Congress had passed a few days earlier. The American Recovery and Reinvestment Act is a mixture of tax incentives, including business tax cuts, and direct spending. Although the business tax cuts are not as numerous as many taxpayers may have hoped, they are nonetheless valuable. In this letter, we'll highlight the key incentives targeted to businesses. As always, please contact our office if you have any questions.
- Bonus depreciation. Bonus depreciation is back for 2009. The new law extends the 50 percent bonus depreciation authorized by the Economic Stimulus Act of 2008, which generally expired at the end of 2008. Businesses can take advantage of bonus depreciation throughout 2009 (and longer for certain types of property). Bonus depreciation is taken on top of regular depreciation. Keep in mind that a large current depreciation deduction results in smaller future deductions so careful planning is an absolute must. To allow vehicles to continue to be depreciated at a higher level, the new law also adds $8,000 to the "caps" ordinarily placed on such deductions. Especially useful to businesses with accumulated AMT and research tax credits on their tax books, the new law also allows eligible businesses to monetize these credits in lieu of taking bonus depreciation for 2009.
- Code Sec. 179 expensing. Increased Code Sec. 179 expensing is also back for 2009. The Economic Stimulus Act of 2008 increased Code Sec. 179 expensing for 2008 to $250,000 and the threshold for reducing the deduction to $800,000. However, the enhanced provision expired at the end of 2008. The new law revives it for 2009.
- Net operating losses. Many taxpayers expected Congress to extend the carryback period for net operating losses (NOLs) to five years. The new law expands the carryback period to five years for qualified small businesses (businesses with average gross receipts of $15 million or less). The treatment is also temporary and only applies to NOLs for any tax year beginning or ending in 2008. Qualified businesses can choose to carry back NOLs three, four or five years. Immediate refunds are available to businesses that qualify.
- Cancellation of indebtedness. Many taxpayers also expected Congress to provide tax relief for companies that purchase their own or related party debt at a discount. The new law addresses cancellation of indebtedness but not as generously as many taxpayers had hoped. Eligible businesses will be able to recognize cancellation of certain indebtedness over five years, beginning in 2014, under the new law. This treatment applies to specified types of business debt repurchased or forgiven by the business after December 31, 2008 and before January 1, 2011.
- Work Opportunity Tax Credit. Congress has taken a special interest in the Work Opportunity Tax Credit (WOTC) as a mechanism to encourage employers to hire individuals who are economically-challenged. The new law modifies the definitions of eligible veterans and disconnected youth to bring more individuals under the WOTC. This treatment is temporary.
- S corporations. A built-in gains tax applies to corporations that make an S corporation election. The tax is computed by applying the highest corporate tax rate to the net recognized built-in gain of the S corporation for the tax year. The new law reduces the recognition period for assets subject to the built-in gains tax from 10 to seven years.
- Small business stock. Generally, an investor other than an entity doing business as a C corporation, may exclude 50 percent of the gain from the sale or exchange of "qualified small business stock." The new law raises the 50 percent exclusion to 75 percent. However, the increase is temporary and applies to stock acquired after the date of enactment and before January 1, 2011. Holding period rules also apply.
- Executive compensation. The economic slowdown cast a spotlight on the executive compensation practices of Wall Street firms and many lawmakers are unhappy with what they see as "excessive" compensation. The new law reflects the changing mood in Congress. Lawmakers especially singled-out expenditures for luxury items by companies receiving financial assistance from the government's Troubled Asset Relief Program (TARP) for more regulation. Congress also directed the Treasury Secretary to review bonuses, awards and other incentives paid to senior executives at these firms and determine if the payments were contrary to public interest. Separately, the Treasury Administration has recently heightened its oversight of these firms and placed additional limits on executive compensation.
- COBRA. Individuals who are involuntarily separated from employment between September 1, 2008 and January 1, 2010 can elect to pay 35 percent of their premiums for COBRA coverage and will be treated under the new law as paying the full amount. The former employer will pay the remaining 65 percent of the premium. In return, the employer will be able to credit its share of this temporary COBRA subsidy against wage withholdings and payroll taxes. The new law is extremely technical application, especially with notice requirements and time-frames for eligibility for coverage.
- Energy incentives. Producers of alternative and renewable energy are definite winners under the new law. Congress has rewarded them with significant increases in energy tax incentives. Among the incentives are an enhanced renewable electricity production tax credit, an expanded energy investment tax credit, an increased alternative fuel pump tax credit, and an investment credit election. The incentives are temporary.
- First-time homebuyer credit. While the first-time homebuyer credit is thought of as being targeted to individuals, it will impact businesses, especially home construction. The U.S. housing market is in one of its steepest slumps in recent memory. The new law extends the first-time homebuyer tax credit through November 30, 2009, raises it to $8,000 and eliminates the repayment requirement. Home builders, sellers and others in the housing industry need to market this credit aggressively.
- More incentives. The new law also prospectively revokes a controversial IRS notice affecting NOL limitations on banks and expands the health coverage tax credit for eligible taxpayers. The new law also increases the New Markets Tax Credit program, modifies the low income housing credit, decreases estimated tax payments for certain individuals whose incomes come from small businesses and delays withholding on government contractors. Congress also enhanced many tax-exempt and tax-credit bond rules to help states and local governments generate revenue.
This is just a brief snapshot of the business incentives. As you've noted, most are temporary. Don't delay in contacting our office to learn more about these tax incentives. We're ready to help you maximize your tax savings.
Final Regulations on Employer-Owned Life Insurance Reporting Requirements
Proceeds received from a life insurance policy generally are excluded from income. Further, the cost of premiums for life insurance, annuity, or endowment contract are not deductible, if the payor is directly or indirectly a beneficiary under the contract. However, the amount excluded from gross income with respect to an employer-owned life insurance contract cannot exceed the premiums and other amounts paid by the policyholder for the policy. Thus, the excess death benefit is included in the employer's income.
Fortunately, there is an exception that applies to contracts issued for any individual who was an employee at any time during the twelve months before their death, or who, at the time the contract was issued, was a director, highly compensated employee or highly compensated individual. The IRS has issued final regulations detailing the information reporting requirements for policyholders that own employer-owned life insurance contracts.
An employer-owned insurance contract is one in which the employer owns a policy and is a beneficiary under a contract that covers the life of an employee in the employer's trade or business. To be entitled to full exemption of the death benefit from gross income with regard to such contracts issued after August 17, 2006, the employer-policyholder must meet notice and consent requirements. Specifically, before the issuance of the contract, the employee:
- must be notified in writing that the employer intends to insure the life of the employee and the maximum face amount of the policy for which the employee can be insured;
- must provide written consent to being insured under the contract, and that such coverage may continue after the insured terminates employment; and
- must be informed in writing that the employer will be a beneficiary of any proceeds payable upon the death of the employee.
In addition, the employer is required to keep records and to file an annual report to the IRS on Form 8925, Report of Employer-Owned Life Insurance Contracts by attaching it to the policyholder's income tax return for each tax year ending after November 13, 2007. The report must include the following information:
- the number of employees at the end of the tax year;
- the number of employees insured under an employer-owned life insurance contract at the end of the year;
- the total amount of insurance in force at the end of the year under such contracts;
- the employer's name, address, and taxpayer identification number and the type of business engaged in; and
- a statement that the policyholder has a valid consent from each insured employee, or, if not all such consents are obtained, the number of insured employees for whom such consent was not obtained.
If you wish to take advantage of the death benefit exclusion, it is important that you meet all the applicable requirements. Our office can assist you with preparing the documentation and filing the correct IRS form. Please call us at your convenience. We will be happy to answer any questions that you have regarding employer-owned life insurance policies.
Employee Expense Rules and Substantiation Requirements
As you know, business meals, lodging, and incidental expenses incurred while traveling away from home are deductible if properly substantiated. Although taxpayers have the option of keeping the actual records of travel expenses, IRS-provided per diem allowances can be used instead to substantiate the business travel expenses.
Within the continental United States, different per diem rates have been established for the many different localities to which an employee may travel. These simplified per diem rates that employers can use to reimburse employees for expenses incurred during business travel away from home have recently been updated, and are effective for travel on or after October 1, 2008. For travel within the continental United States (CONUS), the taxpayer has the option of using the 2007/2008 fiscal year per diem rates, or the October 1 -- December 31, 2008 rates, as long as they are consistently applied.
An alternative per diem method called the "high-low" substantiation method has been provided to simplify the employer's administrative burden. Under the "high-low" method, a uniform per diem rate has been established for localities that are classified as high-cost, and another rate for all other localities within the continental US, which are classified as low-cost. For transportation industry employees, business travel expenses may be computed periodically rather than daily, and special M and IE rates apply.
Transition rules have been provided for taxpayers who want to switch their method of substantiation.
Because you travel on business or employ business travelers, these updated rules will have an effect on your business travel expense and reimbursement procedures. We would be happy to answer any questions and discuss your options in greater detail. Please call our office at your earliest convenience to arrange an appointment.
The tax tips above can not possibly cover all the circumstances that a business like yours encounter on a daily basis. Be careful of cookie-cutter software or solutions that will not take into account the uniqueness of your business. Don't leave money on the table or get in trouble by not understanding the tax laws and how to apply it to your situation. Give us a call and we can tailor a strategy that makes sense to your business.
