Small business tax workshop
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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

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Small business tax workshop

SMALL BUSINESS TAX WORKSHOP

PETER J CHUDYK, JD, CPA

SHAREHOLDER

MALONEY + NOVOTNY LLC


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


Entity

Entity

  • Sole Proprietorship

    • Ownership

    • Federal ID

    • Tax Reporting

      • Schedule C

      • Self Employment Tax

      • Expenses

      • Audit Risk


Entity1

Entity

  • Partnership LLC

    • Pass Through Entity

    • Flexibility in Ownership

    • Flexibility in Income Allocation

    • FICA/Medicare/Health Care Issues

    • Expenses

    • Income shift

    • Estate/Gift Tax Planning


Entity2

Entity

  • Partnership LLC

    • Tax Reporting

      • Form 1065

      • K-1 to each Partner

      • Passive/Active Activity

      • FICA Medicare Health Care Issues


Entity3

Entity

  • S Corporation

    • Legally a Corporation

    • Taxed as a Pass Through Entity

    • Ownership Limitations

    • Income Shift

    • Estate Gift Tax Planning


Entity4

Entity

  • S Corporation

    • Tax Reporting

      • Form 1120S

      • Shareholder receives K-1

      • FICA Medicare Health Care Issues

      • Reasonable Compensation Issue--IRS


Entity5

Entity

  • C Corporation

    • Legally a Corporation

    • Entity Taxed

    • Double Tax Potential

    • Current Tax Rate 35%

    • Proposed Reduction by Tax Reform


Entity6

Entity

  • 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


Small business tax workshop

Contact Information

Peter J. Chudyk, JD, CPA

Shareholder

Maloney + Novotny LLC

1111 Superior Avenue, Suite 700

Cleveland OH 44114

[email protected]

www.maloneynovotny.com


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