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SMALL BUSINESS TAX WORKSHOP. PETER J CHUDYK, JD, CPA SHAREHOLDER MALONEY + NOVOTNY LLC. What form of business will you use?. Legal/Liability Issues Reporting Issues Ownership Issues Limitations due to type of Business being conducted. Choice of Entities. Sole Proprietor

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small business tax workshop





what form of business will you use
What form of business will you use?
  • Legal/Liability Issues
  • Reporting Issues
  • Ownership Issues
  • Limitations due to type of Business being conducted
choice of entities
Choice of Entities
  • Sole Proprietor
  • Limited Liability Company
  • Partnership
    • General
    • Limited
  • Corporation
    • C Corporation
    • S Corporation
tax implications
Tax Implications
  • Choice of Entity
    • Pass Through
      • Sole Proprietorship
      • LLC
      • Partnerships
      • S Corporation
    • Entity pays tax
      • C Corporation
choice of entity
Choice of Entity
  • Domestic Only (United States)
  • International
  • Payroll
  • Health Insurance
  • Product Liability
  • Tax Implications
tax rates
Tax Rates
  • Pass Through Entities
    • Owners taxed on the income
      • Maximum rate 2012 ---35%
      • Maximum rate 2013---39.6% plus
  • C Corporation
    • Entity pays Tax
      • Maximum rate 2012—35%
    • Double Tax Potential
tax analysis of entity choice
Tax Analysis of Entity Choice
  • Double Tax Corporate Entity
    • Taxable Income of Entity
    • Dividends
      • 2012 Maximum Rate- 15%
      • 2013 Maximum Rate- 39.6% plus
tax analysis choice of entity
Tax Analysis Choice of Entity
  • Calculate Tax Consequences
    • Ultimate proceeds on sale of business
      • Asset Sale
      • Stock Sale
sale of assets
Sale of Assets
  • Example:
    • Owner Invest $20,000 in Entity
    • Land Bought in 2008 for $20,000
    • Sold in 2013 for $120,000
    • Entity Liquidated and proceeds distributed to the owner
    • How much will he/she receive?
sale of assets1
Sale of Assets
  • C Corporation
    • Gain at entity level
    • $100,000 ($120,000 less $20,000) time 35%
    • No capital gain rates for C corporations
    • Corporate Tax $35,000
    • Liquidation Proceeds - $85,000 (120,000 – 85,000)
    • Gain to Shareholder - $65,000 taxed at 20%
    • Net Proceeds $72,000 (85,000 – 13,000)
sale of assets2
Sale of Assets
  • Pass Through Entity-
    • Gain at Entity Level Taxed to Individual Owner
      • Capital Gain $100,000 ($100,000 less $20,000)
      • Tax Rate LTCG—20% (2013?)
      • Tax $20,000
      • No Additional Federal Tax
      • Net Proceeds to Owner $100,000 (120,000 – 20,000)
tax impact on entity selection
Tax Impact on Entity Selection
  • Type of Income being Generated
  • Time Horizon until Monetization
  • Flexibility allowed in ownership
  • FICA/Medicare/Health Care Impact
  • W-2 versus Self Employed Status
  • Sole Proprietorship
    • Ownership
    • Federal ID
    • Tax Reporting
      • Schedule C
      • Self Employment Tax
      • Expenses
      • Audit Risk
  • Partnership LLC
    • Pass Through Entity
    • Flexibility in Ownership
    • Flexibility in Income Allocation
    • FICA/Medicare/Health Care Issues
    • Expenses
    • Income shift
    • Estate/Gift Tax Planning
  • Partnership LLC
    • Tax Reporting
      • Form 1065
      • K-1 to each Partner
      • Passive/Active Activity
      • FICA Medicare Health Care Issues
  • S Corporation
    • Legally a Corporation
    • Taxed as a Pass Through Entity
    • Ownership Limitations
    • Income Shift
    • Estate Gift Tax Planning
  • S Corporation
    • Tax Reporting
      • Form 1120S
      • Shareholder receives K-1
      • FICA Medicare Health Care Issues
      • Reasonable Compensation Issue--IRS
  • C Corporation
    • Legally a Corporation
    • Entity Taxed
    • Double Tax Potential
    • Current Tax Rate 35%
    • Proposed Reduction by Tax Reform
  • C Corporation
    • Tax Reporting
      • Form 1120
      • Wage to Owner
      • Reasonable Compensation Issues
      • Excess Accumulation
accounting methods
Accounting Methods
  • How do you account for your profit or loss
  • Basic Rule- All income is taxable unless specifically excluded, no deductions are allowed unless specifically allowed.
accounting methods1
Accounting Methods
  • Cash Basis- Income is recognized when received, with limited exceptions, and expenses are deductible when paid, again with limited exceptions.
    • Almost all individuals are on a cash basis
    • Many small business are on the cash basis
accounting methods2
Accounting Methods
  • Accrual Basis- Income is recognized when earned and expenses are recognized when the liability has become fixed and determinable
    • Certain Taxpayers Must be on the Accrual Basis
accounting methods3
Accounting Methods
  • Issues for Revenue Recognition—Cash or Accrual
    • Timing
    • Deposits
    • Installment Sales
    • Completed Contract Method
accounting methods4
Accounting Methods
  • Issues for Recognizing Expenses- Cash or Accrual
    • Compensation
    • Retirement Plan Contributions
    • Vacation Pay
    • Reserves
      • Obsolete
      • Warranty
      • Bad Debt
accounting methods5
Accounting Methods
  • Issues for Recognizing Expenses- Cash or Accrual
    • Inventory
    • Start Up Expenses
    • Organization Expenses
inventory methods
Inventory Methods
  • Basic Rule lower the inventory, higher the cost sales and the lower taxable income
  • FIFO
    • First in First Out
    • Lower of Cost or Market
  • LIFO
    • Last in Last Out
inventory methods1
Inventory Methods
  • Issues
    • Pricing/Costing
    • Obsolete
    • Overhead
      • Section 263A
accounting period
Accounting Period
  • Can’t exceed 12 Months
  • Elected on First Return Filed
    • Most individuals automatically file on calendar year.
    • Large deferral benefit for pass through entity that elected January 31 year end.
      • Income is reported by owner on their tax return within which the pass through entity’s year ends.
    • Unfortunately Congress changed that.
accounting period1
Accounting Period
  • Calendar Year – Preferred by Congress
    • Individuals- almost all
    • Trusts
    • S Corporations- with limited exceptions
    • Partnerships or Entities Taxed as Partnerships
      • Dictated by the accounting period of principal Owners
accounting periods
Accounting Periods
  • Fiscal Year End (Non Calendar)
    • C Corporations
    • Potential benefit for October 31 year end
not all expenses are deductible
Not all Expenses are Deductible
  • Personal Expenses
  • Life Insurance Premiums
  • Certain Entertainment Expenses
    • Personal
    • Country Club Dues
    • Logue Sky Box Fees
    • 50% of Entertainment
not all expenses are deductible1
Not All Expenses are Deductible
  • Hobby Losses – (Form 5213)
    • An Activity is presumed to be carried on for a profit if
      • if it produced a profit in 3 of last 5 years
    • Activities that consist primarily of breeding, training, showing or racing horses, the presumption is met if
      • It produces a profit in at least 2 of the last 7 years
not all expenses are currently deductible
Not all Expenses are Currently Deductible
  • Capital Expenses
    • Business Start-Up Costs
    • Business Assets
      • Land, Building, Machinery (PPE)
      • Franchise Rights, patents (intangibles)
    • Improvements
      • Adds value or appreciable lengthen the time you can use the asset
not all expenses are currently deductible1
Not All Expenses are Currently Deductible
  • Personal vs. Business Expenses
    • Business Use of your Home
      • Business portion used exclusively and regularly
      • That portion must be:
        • Your principal place of business, or
        • A place where you meet with patients, clients or customer in your normal course of business, or
        • A separate structure (not attached to your home) used in connection with your business.
not all expenses are currently deductible2
Not all Expenses are Currently Deductible
  • Business Use of Your Car
    • If you use it exclusively for business, you can deduct your car expenses
    • If you use it only partially for business
      • Must divide your expenses based on actual mileage
      • You can deduct:
        • Actual Expenses
        • Mileage (55.5 cents per mile 2012)
not all expenses are currently deductible3
Not All Expenses are Currently Deductible
  • Inventory
    • Material
    • Direct Labor
    • Overhead
business expenses
Business Expenses
  • Reimbursement Plan
    • Non Accountable Plan
      • Fixed amount per month
        • Compensation and the Employee deducts the business portion on his return
        • Form 2106 and inherent limitation Schedule A
    • Accountable Plan
      • As the name implies, Employee accounts to his Employer
      • No taxable income to the Employee for the Business Portion
business expenses1
Business Expenses
  • Meals and Entertainment (Accountable Plan)
    • Only 50% of any otherwise deductible business related meal and entertainment expenses you reimburse your employees (even if you reimburse them 100%) is deductible.
    • 50% applies to meals
      • While traveling away from home on business
      • Entertaining business customers
business expenses2
Business Expenses
  • Meals and Entertainment
    • Taxes and Tips are included in the 50%
    • Cover charges for admission, rent paid to host a dinner or cocktail party, or amount you pay for parking at a sports arena—all subject to the 50%
    • Transportation cost to the business entertainment activity– not subject to the 50%
business expenses3
Business Expenses
  • Meals and Entertainment
    • Substantiation
      • Receipts
      • Who, what/why, when, and where
    • Not Deductible
      • Loge Fees
      • Country Club Dues
      • Personal Expenses
business expenses4
Business Expenses
  • Wages
    • Employee, versus
    • Independent Contractor
    • Wages Must be
      • Reasonable
      • For Services Performed
business expenses5
Business Expenses
  • Wages
    • Bonuses
    • Life Insurance
      • Owner/Beneficiary company- not deductible
      • Owner/Beneficiary employee- compensation and deductible
    • Education Expenses
      • Qualified Education Assistance Program
business expenses6
Business Expenses
  • Wages
    • Vacation Pay
      • Deductible, generally, only in the tax year the employee receives it
    • Sick Pay
      • Periodic
      • Lump Sum
business expenses7
Business Expenses
  • Rent Expense
    • Amount you pay for the use of property which you do not own
    • Unreasonable rent – not deductible
    • Rent your own home and use part of it for business- you may be able to deduct the business portion
    • Lease cancelation payments- generally deductible
business expenses8
Business Expenses
  • Interest Expense
    • The allocation of the loan proceeds and the related interest is not generally affected by the use of property.
    • Tracing Rules what is the loan used for
      • Business,
      • Personal, or
      • Investment Activities
business expenses9
Business Expenses
  • Interest
    • The easiest way to trace disbursements to specific uses is to keep the proceeds of a particular loan separate from any other funds.
    • Allocation Period
      • Begins on the date the proceeds are used, and ends on the earlier of
        • The date the loan is repaid
        • The date the loan is reallocated to another use
business expenses10
Business Expenses
  • Interest Expense
    • Interest you can Deduct
      • Business
      • Investment
      • Mortgage Interest
        • Limitations no more than two residences
          • $1 million limit
          • $1oo,ooo secured line of credit
business expenses11
Business Expenses
  • Interest
    • Non Deductible (not an exhaustive list)
      • Interest on Income Tax
      • Penalties
      • Interest on loans from life insurance policies
      • Personal –credit card debt
business expenses12
Business Expenses
  • Income Taxes
    • Federal Income Tax is not deductible
    • A Corporation or Partnership can deduct state and local income tax imposed on them as business expenses
    • An individual cannot- that portion is deductible on Schedule A – typically gets lost due to Alternative Minimum Tax
business expenses13
Business Expenses
  • Depreciation Expense
    • Capitalization Threshold
    • Bonus Depreciation
      • 2012 – 50% immediate write-off of qualifying property
      • 2013 – N/A
    • Section 179
      • 2012 Limit is lesser of $139,000 or taxable income
      • 2013 limit is lesser of $25,000 or taxable income
business expenses14
Business Expenses
  • Depreciation
    • Straight Line
    • Accelerated Methods
      • MACRS
      • Double Declining
business expenses15
Business Expenses
  • Bad Debts
    • Business bad debt- is a loss from the worthlessness of a debt that was either:
      • Created or acquired in your trade or business, or
      • Closely related to your trade or business when it became partly or totally worthless.
business expenses16
Business Expenses
  • Bad Debt
    • A debt becomes worthless when there is no longer any chance the amount owed will be paid.
    • To demonstrate worthlessness, you must only show that you have taken reasonable steps to collect the debt, but were unable to do so
    • If you receive property in partial settlement, reduce the debt by the property’s FMV
business expense
Business Expense
  • Business Bad Debt
    • Ordinary deduction
    • Allowance method not allowed
    • Specific charge off

Contact Information

Peter J. Chudyk, JD, CPA


Maloney + Novotny LLC

1111 Superior Avenue, Suite 700

Cleveland OH 44114

[email protected]