The Good, the Bad and the Overlooked

What you don't know can hurt you!

What small business owners need to know about the 2013 Tax Law changes

Circular Money and the U.S. Tax System

Listening to a financial radio station today I heard something that caused me to say..."what?" Here's the outline:

First the Cash Source:
China has gobs of U.S. dollars that they get from selling us incredible amounts of stuff.
China is catching heat for owning so much U.S. Treasury debt, so they want to use the US Dollars for something other than lending it back to the US Treasury. So why not loan it to U.S. companies?

The Use of Cash:
A big U.S. company, that will remain nameless, pays 1.8% dividend on it's stock. Note, this is important ...Dividends for biz are not tax deductible, meaning companies pay dividends after they pay their tax obligations.

So what to do?
This company borrows US Dollars at 1.7% interest from China. The 1.7% interest is tax deductible which means the effective cost of the interest is about 1.2%...and remember the effective cost of dividends is 1.8% because dividends are not tax deductible. So the cost to the company for borrowing from China is 33% cheaper than the dividend cost.

The solution, borrow US Dollars from China, deduct the interest from taxes and use the cash to buy back the stock which eliminates the 1.8% cash dividend cost and replaces if with an effective $1.2% cash cost.

Incredible but true, another case of the perverted U.S. tax code. Borrowing is more tax effective than returning cash to shareholders as dividends.

Using Tax Logic to Manage the Value of your Business

In the real world of business management ownership you can only create income in 2 basic ways. These two income methods are taxed differently by good 'ol Uncle Sam.

The first method income is "earned" income. Let's say I'm a graphic artist and you hire me to create a logo. I design the logo and you pay me $250. That is earned income to me (assuming it goes to me and not into a corporation). The $250 goes into my gross income and I pay tax on it as high as 35% federal and depending on what state you live in, it could be over 45%. So your $250 of earned income (assumes no state tax) is worth only $162.50 in your pocket.

The second method is capital gains income. Capital Gains can be generated in many ways. Let's look at a simple example. You get on Ebay and find a great bike for $100, you buy it. Then a year later you're riding around the block on your $100 bike and a guy stops you and offers you $350 on the spot. You take it and walk home! You made $250 (same as if you designed a logo above) but this is capital gains and your tax on that is only 15% of your gain ($350 rec'd  - $100 paid = $250 gain). Your tax for this is $37.50 and your net in pocket is $212.50.

You get to keep $50 more if you earned your money through capital gains income.  This is just another reason why accumulating capital is important to long term wealth...if you have capital you can manage your taxes a lot better than if you only have earned income.

When running your business think of all the ways to build value that is taxed at 15% instead of 35%...over time it could be a lot more money in your pocket. Talk to your CPA to see if you have opportunities to maximize the availability of the capital gains tax rates.

Hmmm...Bad news for road-side businesses?...The tax man wants your customers too!

At least someone in government thinks having government employees running gas stations and C-Stores is a good idea..... I have my doubts..

Here's a story on a politician trying to reverse a 50 year old law that prohibits the government from setting up retail businesses on the interstate highway system.

Read Here..

Uh Oh... 13 million people have a surprise tax bill coming.....

Here's an article about confusion and mis-calculation for another overly complicated Federal Tax process of the governments re-distribution of income. Might want to keep this article to show to your employees when they blame you, the employer, for the problem!  CLICK HERE

New Tax Law is ready to go but.......................

The new tax law extending current tax rates and spending a couple of hundred $$Billion$$ more is headed for the president's desk.


However, FYI - the bill does not rescind the obligation for businesses issuing 1099s that was passed in the Obama care bill. Soooo............. unless something changes look for small businesses being burdened with many 1000s of 1099s to be issued. I saw an IRS estimate that they would get over 1 BILLION more 1099s under the new law!  By example, for my business I'll need to go from about 15 issued 1099s now to about 300 required under the new law. Geeeezzz..............................

Small Business Taxes..the Whole Enchilada for Year-End Planning

 Guest Post by Carol Olson, CPA  - DRDA, LLC

Small Business Jobs Act of 2010

The Small Business Jobs Act of 2010 includes a number of important tax provisions for businesses large and small. While a few of the provisions take effect in 2011, the majority of the provisions are effective retroactively for the 2010 tax year.  Following are some of the major provisions:

Bonus Depreciation. Bonus depreciation has been extended for 2010.  You can deduct 50% of the cost of qualifying new business assets as well as depreciate the remaining basis of the asset.  Bonus depreciation of up to $8,000 may be taken on passenger automobiles.

Section 179.  The Section 179 deduction has been increased to $500,000 for property placed in service in 2010 and 2011.  The $500,000 deduction is limited if a business acquires more than $2,000,000 of qualifying property.  The Section 179 limit for large SUVs ($25,000) remains unchanged.   Normally, Section 179 expensing only applies to tangible personal property used in a trade or business.  For 2010 and 2011, a taxpayer may elect to treat up to $250,000 of qualified real property as Section 179 property.  Qualified real property includes qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property.

Interesting Small Business Tax Information

Time to start [preparing for 2010 and 2011 tax issues...the IRS never sleeps! Here are a few small business tax items that may apply to you. Talk to your CPA about them.

Deduction for Start up Expenses Increased.  For 2010 only, the amount of start-up expenditures deductible in the current year increased to $10,000.  Any remaining start-up expenses can be deducted ratably over 180 months.

Self-Employed Health Insurance Deduction.  For tax year 2010, health insurance costs for a self-employed taxpayer and his family are deductible in computing 2010 self-employment tax.

Small Employer Health Insurance Credit.  For 2010 through 2013, the health care act provides small employers with a tax credit for providing health insurance for their employees.  The credit is limited to businesses with no more than 25 full-time employees with annual full-time equivalent wages averaging no more than $50,000.

 

More to come. It's time to start your tax planning.

Consult with your CPA before making decisions.

New 1099 Rules effect on Small Business

    This post provided by Paul Ikard, CPA

March 17, 2012  - Some of the below rules may have been modified, check with your CPA before taking any action.

Businesses and not-for-profit organizations are accustomed to IRS rules that require them to report certain payments on annual Form 1099 information returns. However, the recently enacted healthcare law imposes surprising new Form 1099 reporting requirements. Complying with them may add significantly to your organization's paperwork burden. While the new rules don't apply to payments made before 2012, it's not too early to start gearing up to deal with them.

Current Rules in a Nutshell


Background: For many years, businesses have been required to report various payments on different versions of Form 1099. For instance, when a business pays $600 or more during a calendar year to an independent contractor for services, the business must issue the contractor a Form 1099-MISC that reports the amount paid that year. The business must also furnish a copy of the Form 1099-MISC to the IRS. This reporting procedure helps contractors remember to include the payments on their tax returns, and it helps the IRS ensure that income is reported. Under rules now in effect, other types of payments that businesses must report on Forms 1099
include:
1. Commissions, fees, and other compensation paid to a single recipient when the total
amount paid in a calendar year is $600 or more.
2. Interest, rents, royalties, annuities, and income items paid to a single recipient when
the total amount paid in a calendar year is $600 or more.
When a Form 1099 is required, it must show:
The total amount for the calendar year;
The name and address of the payee;
The tax ID number (TIN) of the payee (For privacy reasons, it's okay to show a truncated
TIN on a 1099 issued to an individual);

Contact information for the payer; and

The payer's TIN.

If your business doesn't have a payee's TIN, you may be required to institute backup federal income tax withholding at a 28 percent rate on payments under Internal Revenue Code Section 3406. In most cases, the rules summarized above apply to payments made by not-for-profit organizations since they are generally considered to be businesses for Form 1099 reporting purposes. If a payer inadvertently fails to issue a proper Form 1099, the IRS can assess a $50 penalty. The penalty for each intentional failure can be $100 or more.

Good Article on Corporation vs S Corporation in Sale of Business

Tax Issues, Benefits and Risks.

 

Click Here for Source Article.

All Small Business Owners will Leave Their Business - I Guarantee it!

The question is, will you leave your small business the smart way or leave it the dumb way?

Having an exit plan for your business is smart. A formal plan will look at your options, devise efficient tax strategies and create an estate plan that eliminates any disputes that might result if you suddenly passed away.

Here's a good article on what to consider when looking at your Exit Plan . Take a few minutes to consider how a plan can help you, your family and your business.

And I repeat.....you will leave your business one day...100% Guaranteed. If you gotta go, at least go out on your terms.

When buying a small business - Allocation of Purchase price is important!

Allocation of Purchase Price is done for tax purposes when buying the assets of a small business. The allocation is important because it effects how the person buying a business and the person selling a business will be taxed and what deductions are possible.

Always do the allocation of purchase price before closing the transaction, it's real money! Business brokers should be able to provide you details and the appropriate IRS form 8594.

Here are the issues:

1. Buyer wants shortest depreciation schedule for acquired assets.
2. Seller wants tax treatment at capital gains rates, not ordinary income
3. Buyer wants to write up value in hard assets so buyer can deduct more in depreciation
4. Seller does NOT want to write up assets because it triggers depreciation recapture and tax at ordinary income rates
5. Goodwill and intangible assets are 15 year write off for buyer and cap gains rate for seller.

A good allocation of purchase price can reduce the total amount paid for a business after tax, and after tax is all we really care about, right? Same issue for seller, a good allocation of purchase price can maximize the after tax benefit to seller.

For buyer the difference is WHEN they can deduct the price, for the seller it's the difference between cap gains rates and ordinary income! Big difference!!

Talk to your business broker about how to address this issue in any offers.

Due Diligence for Buying a Business - Part 3

Assuming you've read Part 1 and Part 2 here we go with Part 3.

Sales Tax and Due Diligence in a small business purchase: Make sure the seller provides you with the Sales Tax Reports for at least 3 years. Double check those with the reports filed with the state. It is pretty unusual for small business owners to over-report sales and pay taxes they don't owe ,so this is a good source for determining the minimum sales level. If the sales tax reports and payments are not up to date seek legal advice on what effect that could have on you if you purchase the assets. In some states the sales tax "chase" the assets and you could be in for a surprise when the tax man shows up for old taxes on the assets you just bought.

If you are working through a business broker they probably already have the sales tax reports an can provide them to you in due diligence. But as always, trust but verify. Cross reference with the official state reports.

Financing the Small Business in Today’s Environment

Guest post from Mr. Tim Stamps DRDA, PC

Most of us have encountered a budding entrepreneur who has spent the majority of his/her career in the corporate world and then finally musters the courage to step out on a limb and start their own small business. They face a few problems, though: despite his long-standing corporate career and a nice 401(k) for retirement, they have very few liquid assets and are in need of some capital for their business start-up.

For many small business owners the prime source of funding comes from personal savings, or by refinancing their personal residence with a home equity line of credit. Even so, entrepreneurs still often use outside sources such as friends and family, capital markets, or private equity groups. Funding from third parties can prove undesirable, though, because outside sources usually expect a lion’s share in the business in return for equity financing.

BORSA: A compelling, yet widely unheard of source of equity is the Business Owners Retirement Savings Account. BORSA, for short, is a tool which allows entrepreneurs to fund the purchase or recapitalization of a franchise, business start-up, or business property using their holdings in a 401(a) pension profit sharing 401(k), 403(b), 457, or IRA rollover. By utilizing the BORSA these purchases can be accomplished without distributions, taxes, penalties, or the use of retirement plan loans.

DRDA, P.C., a CPA firm, designed the BORSA (c) in 2005 as a result of extensive research for a tax and penalty-free solution for clients with the need to access their retirement accounts to start a business. They analyzed the provisions of the Internal Revenue Code (IRC) and the Employee Retirement Income Security Act (ERISA), as well as professional publications and court cases that they felt were pertinent. Additionally, DRDA sought the expertise of a nationally recognized ERISA attorney to solidify the legality of such a solution. Today, the BORSA is recognized and is available in all 50 states.

There are three basic requirements for setting up a BORSA for a business venture. First, the business owner must have an existing retirement account such as an IRA or one of the other aforementioned accounts and have the ability to transfer or rollover the funds in the BORSA. Second, the business must be an eligible “active trade or business” that will have at least one employee. Third, the individuals need to work with professionals familiar with BORSA rules and governing laws.

To clarify, a BORSA is not a loan, nor a self-directed IRA. A direct investment into an “active trade or business” by a self-directed IRA is prohibited. The federal government does recognize the use of money from a 401(k) plan as an equity investment. In fact, the Small Business Administration SOP 50-10(5) that was released August 1, 2008 stipulates the SBA will not require a 401(k) plan owning more than 20% or more of a company to guarantee the loan. What’s more, unlike other sources of funding such as credit cards, SBA or asset-backed loans the BORSA plan does not generate additional debt for the business owner.

For additional information on the BORSA plan visit www.borsaplan.com or contact Tim Stamps at DRDA, P.C: 1521 Green Oak Place, Ste 198, Kingwood, TX 77339; telephone: 281-852-3131; email tim@drdacpa.com.

Tax Law Changes effecting Biz Sales

The new benefits offered by congress allow small businesses to reduce their tax bill which makes the business sale more appealing for the sellers.

S Corporation Built-In Gains Tax Relief. For tax years beginning in 2009 and 2010, ARRA shortens, from ten to seven years, the amount of time that an S corporation that has converted from a C corporation must hold on to its assets to avoid taxes on any built-in gains at the time of the conversion.

Tax law changes and business sale net values

Tax changes are on the way! What does it mean for a business owner who may wish to sell his business in the next 3 - 5 years? Here's a link to an article you might find interesting, click here.