Month: April 2019

Preface: “I think it is very interesting in the beginning chapter of the story of Jesus, tax payments are an integral part at his arrival.” Quote from a Bible reader.

Flagstone Crossings To Lower Taxes: What Entity is Right (Segment II)

Credit: Donald Sauder, CPA | CVA

S-Corporations are selected for entrepreneurial businesses often for the asset protection of the corporate umbrella, in addition to lower FICA taxes. Since S-Corporations do not have FICA taxes assessed on net earnings with pass-through profits, and therefore no entity-level income taxes, numerous entrepreneurs can find substantial benefit in the S-Corporation election. An S-Corporation is a C-Corporation or corporate entity registered with the Department of State with that files with the IRS a Form 2553 that changes the tax structure upon approval. This tax advisor prepared form will convert the corporate level taxes to pass-through earnings on Form K-1 similar to a partnership.

The advantages of an S-Corporation with the asset protection feature under the corporate umbrella, hold risks for certain corporate activities from a legal term known as “piercing the corporate veil.”

https://www.law.cornell.edu/wex/piercing_the_corporate_veil

“Piercing the corporate veil” refers to a situation in which courts put aside limited liability and hold a corporation’s shareholders or directors personally liable for the corporation’s actions or debts. Veil piercing is most common in close corporations.

As such, courts typically require corporations to engage in egregious actions to justify piercing the corporate veil. In general, this misconduct may include abusing the corporation (e.g., the intermingling of personal and corporate assets) or having [inadequate funds] at the time of incorporation. 

To fulfill the strand component, the corporation must be 1 of 3 things:

•The alter ego of the parent corporation or its shareholder(s)
•The corporation is used to avoid legal limitations upon natural persons or corporations
•The corporation is a sham to perpetrate a fraud.

Further, the court stated that “actual fraud” occurs when all 4 of the following take place:

•”a party conceals or fails to disclose a material fact within the knowledge of that party.”
•”the party knows that the other party is ignorant of the fact and does not have an equal opportunity to discover the truth.”
•”the party intends the other party to take some action by concealing or failing to disclose the fact.”
•”the other party suffers injury as a result of acting without knowledge of the undisclosed fact.”

A thorough analysis of all features is advised in any tax scenario for purposes of preventing the umbrella from blowing away.

Further to the benefits of S-Corporations in the pass-through taxation, and characterization of income in the form of tax-free distributions to shareholders. Also, the cash method of accounting is permissible in qualifying instances, and the entity has a higher sense of credibility from the legacy of corporation case law. Adding to the S-Corporation features, up to 100 shareholders are permissible with one class of stock, and conversion to the S-Election status are often easy, and maybe too easy, for either multi-member LLC’s, SMLLC’s, or C-Corporations. It is advised to counsel with a tax advisor before deciding the election of an S status for any business.

Looking at the detractors to the S-Corporation include corporate formalities and reports, board minutes and legal formalities within the State of domicile, and tax risks of termination of the S-Election status, restriction to 100 shareholders, one class of stocks, and salary requirements for shareholders who provide services to the business. Therefore payroll is required for S- Corporation who have only one or several shareholder-employees. The Tax Cuts and Jobs Act results in the following changes to S-Corporations that are now applicable.

S-Corp vs. C-Corp: How They Differ (and How to Decide)

The Tax Cuts and Jobs Act—which you might know as the Trump tax plan—will bring changes to both C-corp and S-corp taxation. The new laws take effect when business owners file their taxes in 2019 (for the business’s 2018 year).

There are two main things that small businesses need to know about the new rules:

The corporate income tax rate for C-corps has been cut from 35% to 21%.

Owners of S-corporations and other pass-through entities (like LLCs, sole proprietorships, and partnerships) will be able to deduct 20% of business income on their personal tax returns. This deduction expires in 2025 unless Congress extends the law.

It depends, says John Blake, CPA, and partner with New Jersey-based accounting firm Klatzkin & Company, LLP. He explains, “This will have to be analyzed on a case-by-case basis. In the tax reform, Congress built in the 20% deduction for pass-through entities such as S-corps to make up for the lower C-corp tax rates.”

What the New Law Means for S-corps

The 20% deduction for S-corps and other pass-through entities lets you save money. Businesses with less than $157,500 in annual income (for single filers) or $315,000 (for married joint filers) can take full advantage of the deduction.

There are limits to the deduction based on the type of business, the amount of income, and the number of wages you pay to employees. Professional service businesses like lawyers and doctor’s offices have the most limitations.”

Same as there are varying opinions on hat choices, the right entity choice for optimized tax results is specific and unique for entrepreneurial ventures. The author suggests that the development of the smorgasbord menu for tax entity features would provide specific customization for entrepreneurs. Of course, this is in addition to the idea that firefighters and first-responders are entitled to an additional tax credit or tax rate benefit for the dedicated purpose of necessary community service.

Next, we will delve into partnership taxation for entrepreneurs.

 

Preface: Shining some sunlight on the business landscape, the Tax Cuts and Jobs Act of 2017, one favorite from the Trump law revisions, has brought surprising and welcome lower tax costs for all business owners, and nearly all selections of tax entities. This blog provide a perspective on what entity maybe right for your business.

Flagstone Crossings To Lower Taxes: What Entity is Right?

Credit: Donald J. Sauder, CPA | CVA

Say, taxes have never been plain or simple. Yet, maybe one day in the future; right? No risks in business owners envisioning that day? Let’s add the Canadian English expression “eh” to that question as a reader’s (and writer’s) agreement.

Choosing the right entity for your business startup is a tax decision with what could include unknown long-term ramifications for any business owner. Getting it right is not as easy as it seems. Making the best decision for your specific tax attributes, that will support a lower tax burden usually requires collaboration with your tax advisor. Often, optimized preplanning can easily pay big dividends with lower future year tax costs. Then again, time has always brought change, and with that change tax law revisions. Flipping a coin is not advised.

Shining some sunlight on the business landscape, the Tax Cuts and Jobs Act of 2017, one favorite from the Trump law revisions, has brought surprising and welcome lower tax costs for all business owners, and nearly all selections of tax entities. With those regulation revisions, in this blog we’d like to discuss some of the current applicable tax planning features for entrepreneurs 2019.

Sole Proprietorship or Single Member LLC’s

Independent contractors, entrepreneurial startups, and business ventures with only one owner can organize as a Schedule C tax entity. The taxes are filed with the owners 1040 tax filing. While this is the simplest approach to entity taxation, because it doesn’t require an independent and additional business tax filing, FICA taxes are always assessed on all earnings for both the employer and employer in a higher tax costs, exemplified in a coffee and tea type tax filing for higher income earners. Rates begin above 15% for FICA and income tax costs are added on top as an additional 15% to 30% for most tax payers.

Taxpayers who are FICA tax exempt, with an approved Form 4029 exemption, have a solid and favorable tax structure with the Schedule C in single owner businesses. A Single Member LLC (SMLLC) is taxed the same as a Sole Proprietorship, but has the LLC legal umbrella with the State Department. Talking with an attorney with regards to this optimal legal decision is advised.

A SMLLC also is eligible for the 199A deduction, that is a 20% deduction on qualified taxable earnings up to $207,500 for singles, and $415,000 for married filers. Certain service professions are excluded from the 20% deduction from 199A, but for the majority of cornerstone small businesses in the United States, the deduction substantially lowers tax costs with the current tax laws.

Quoting excerpts from WatsonCPAGroup.com here’s an example of the applicable 199A for a SMLLC.

The basic Section 199A Qualified Business Income pass-through deduction is 20% of net qualified business income which is huge. If you make $200,000, the deduction is $40,000 times your marginal tax rate of 24% which equals $9,600 in your pocket.

(2) DETERMINATION OF DEDUCTIBLE AMOUNT FOR EACH TRADE OR BUSINESS. The amount determined under this paragraph with respect to any qualified trade or business is the lesser of-

(A) 20 percent of the taxpayer’s qualified business income with respect to the qualified trade or business, or

(B) the greater of-

 (i) 50 percent of the W-2 wages with respect to the qualified trade or business, or

 (ii) the sum of 25 percent of the W-2 wages with respect to the qualified trade or business, plus 2.5 percent of the unadjusted basis immediately after acquisition of all qualified property (in other words, prior to any depreciation).

Wilma makes $100,000 in net business income from her sole proprietorship but also deducts $5,000 for self-employed health insurance, $7,065 for self-employment taxes and $10,000 for a SEP IRA. These are not business deductions- they are adjustments on Form 1040 to calculate adjusted gross income. Her deduction is the lessor of 20% of $100,000 (net business income) or 20% of her taxable income, which could be less. This might change as the IRS clarifies.

Barney owns three rentals with net incomes of $20,000 and $5,000, with one losing $8,000 annually. These are aggregated to be $17,000. He would deduct 20% of $17,000.

https://www.watsoncpagroup.com/section-199a-deduction/

Yes, 199A regulations are very complex, and as new chapter to the tax laws, there are many regulation nuances that require tax advisor guidance for assurance of accurate tax compliance, including services, rentals, and other applicable tax planning attributes. Yet for SMLLC’s or sole proprietorships this tax deduction now saves and lowers single owner business taxes. It is also applicable to partnerships and S-Corporations as we will examine next.

Preface: Tom Jordan, Market President, Lancaster, Univest Bank and Trust Co. provides this weeks sponsorship contribution with the art of financing for business construction projects.

Construction Financing for your Business

Are you considering building your own building or doing a major renovation to your current building? If so, this article provides insight on the process of working with a bank to fund your project. When providing funds to support construction financing, the bank assumes the risk associated with the customer’s ability to successfully complete a proposed project on time and within budget. To monitor each project’s progress, costs and loan disbursements, the bank has an established construction loan administration process. This process is essential to effectively controlling construction risk and providing the client, contractor and bank with a predictable and smooth process…..

Read the entire article here.

 

Preface: Although there is not an exact formula to guide a business owner or manager through the process, asking the right strategic questions before every hire is always advised.

Help Wanted (Segment III)

Credit: Jacob M. Dietz, CPA

Advantages of Employees

One advantage of having employees, if the laws and taxes are complied with, is the safety and peace of mind of doing things right. You do not need to worry that the authorities will justly punish you for evil doing.

Another benefit can be a tax deduction. Under the federal tax system, there is a 20% Qualified Business Income Deduction that sometimes needs wages for it to take effect. The deduction is complex, and all the complexities of it are beyond the scope of this article.

Another advantage of an employee is that you may have greater control over when they do the work, and how they do the work. For example, if due to a scheduling conflict you need to move a job up two weeks, you may be able to rearrange the schedule of your employees so that they can do the work. If you are depending on a subcontractor, it may be harder to get them to rearrange their schedule.

Also, if you are finicky about what materials to use and how to do it, it may be easier to oversee an employee. While you could stipulate in a contract how a subcontractor works, you may find it easier to train employees more specifically than subcontractors.

 

Disadvantages of Employees

One major disadvantage of adding employees is the payroll taxes and insurance and filings that can come with payroll. One way of handling these administrative burdens is to hire a bookkeeping employee to do that. Another way is to outsource the payroll to a firm that handles much of the compliance and filings for you. Both options cost money.

Another disadvantage is that if you do payroll taxes wrong, there could be penalties. Outsourcing your payroll to experts can help minimize these risks.

There is also the potential to violate labor laws. That is beyond the scope of this blog and you can consult with an attorney for more information.

Checklist Before Hiring New Employees

Before hiring employees, consider going through a checklist.

1. From where will the money come to pay the employee (new sales, cost savings, etc.)?
2. Will there be additional overhead that comes with the employee (tools, taxes etc.)?
3. Will there be additional administrative work and compliance issues?
4. How will the new employee affect the bottom line?
5. How many hours of work do you have available, and for how many hours does the potential employee want to work?
6. Are there any legal issues or risks? Consider consulting with an attorney if there are risks.

Hiring employees comes with both advantages and disadvantages. Although there is not an exact formula to guide a business owner or manager through the process, asking questions before hiring can be wise. If the business knows how it will pay for the employee, it can make it easier than if the business hires an employee and cannot make payroll. Count the costs before putting out the “Help Wanted” sign.

This article is general in nature, and it does not contain legal advice. Please contact your accountant to see what applies in your specific situation.

Preface: Counting the costs accurately requires appropriate knowledge and expertise. The ability to ask the right questions are a quintessential value of business advisors, because with that question you often have opportunity to formulate an effective and right answer. Example: Doubling or tripling “fish on the line!” usually begins with a question too. 

Help Wanted (Segment II)

Credit: Jacob Dietz, CPA 

New Employee to Replace Subcontractors

Pay new employee by efficiencies Another situation may arise when a company wants to hire an employee to do work that a subcontractor was doing. In that situation, cost savings may pay for the new employee.

Imagine a remodeling company that specializes in remodeling bathrooms. In the past, they always subcontracted the electrical work. Now, they add an electrician employee team to do that. Even though there may be no increase in sales to pay for the new employee, they may save enough money on subcontracting work to pay for the new employee. An employee will likely have a lower per hour rate than a subcontractor.

There are other costs from an employee, however, in additional to the hourly rate. For example, the employer may be paying employment taxes, tools, uniforms, etc.

In the electrician example, the remodeling company could perhaps get by with less tools when they subcontracted out the work. If they bring the electrical work in-house, then they may need to make some tool purchases. The company can run some calculations on what those additional costs would be per working hour.

Consider Number of Hours to be worked

With a subcontractor, the remodeling company can structure the relationship so that the subcontractor only helps on jobs on which they are specifically contracted. If the remodeling company does not have any jobs currently running on which they need the subcontractor, then they do not pay the subcontractor a dime. Sometimes that can be done with a part-time employee as well, but the employee may want to work at least a minimum number of hours per week.

If that is the case, then the employer may pay him even if he is not doing the type of work that they would want him to do, if that work is not currently available. If that happens frequently, then the remodeling company may want to increase its calculation of what the employee is costing per hour for electrical work. To have the employee available to do wiring, they may need to pay that same employee to sweep the shop floor and sort screws occasionally.

When replacing a subcontractor with an employee, consider how many hours you have available, and how many hours the new employee will want to work.