Here are a few headlines from that issue. To read any of these articles, click on the link at the end of this e-mail.
HEALTH CARE REFORM LAW GETS UNDERWAY FOR INDIVIDUALS
Although the employer mandate for providing health insurance coverage to workers under the “Affordable Care Act” (ACA) was postponed for one year – until January 1, 2015 – the rules for individuals remain in place, at least for the foreseeable future.
1099s: A LITTLE FORM WITH A PAINFUL BITE
When Congress tried unsuccessfully to expand the Form 1099 filing requirements a couple of years ago, at least one thing was accomplished.
It raised awareness of an important IRS business reporting rule.
BUSINESS OR HOBBY? NINE FACTORS HELP THE IRS DECIDE
The dividing line between a business and a hobby may be thin, but it can look like a canyon when you are on one side and your tax deductions are on the other. The gap is a function of differing treatment of expenses.
HOW TO HANDLE THE FINANCIAL ISSUES AFTER THE DEATH OF A SPOUSE
The death of a spouse can be a devastating experience, both emotionally and financially. As the survivor, you’ll have to make important decisions while you’re in what could be the most vulnerable and distracted stage of your life. The suggestions that follow might at least help ease your financial stress.
To read these articles and more, click here: Hall & Company CPAs 2014 Winter NewsletterPosted in Accounting, Business Consulting, News, Tax | Leave a comment
Bradford Hall, managing director, will be interviewed live by Bill Black of ExitCoachRadio.com today at 12:30 pm PST.
ExitCoachRadio.com is the premier “information station for Age 50+ business owners.” Tune it at www.octalkradio.net.
Be sure to tune in!!Posted in News | Leave a comment
How to Know When to Issue a 1099-MISC
• Calculate if you paid $600 or more during the tax year in the course of your trade or business to an individual, sole-proprietor, LLC or partnership. Professional fees to an attorney, doctor or other professional are included. Payments to corporations are included only if they are for medical, health care or legal fees.
• Calculate if you paid $10 or more in royalties.
• Issue 1099-MISCs if you have or manage a trade or business and have paid $600 or more to an individual, LLC or partnership (or certain corporations) or have paid $10 or more in royalties.
• Issue a separate 1099-MISC to each individual , LLC or partnership (or specific corporations).
Payments Requiring 1099-MISC
• Determine that you paid $600 or more in compensation for services rendered by a nonemployee to your trade or business. Include the gross amount of payments in box 7, including anything you paid the contractor for supplies and materials.
• Determine that you paid $600 or more in rent for office space, machines, equipment or land in the course of your trade or business. Write the amount in box 1. You are not required to include amounts paid to corporations for rent.
• Verify that your trade or business gave any prizes or awards to an individual who is not your employee. Include only amounts of $600 or more. Put amounts in box 3. But don’t report it if the prize was transferred directly to charity.
• Verify that your trade or business paid $600 or more in medical or health care payments to an individual, partnership or corporation. Put the amount in box 6.
• Verify that your trade or business paid $600 or more to an attorney or law corporation for any legal services. Write the amount in box 7. If you cannot determine the amount paid that applies to legal services, write the gross amount paid, even if less than $600, in box 13 and put the letter A after the amount.
• Determine if you paid $600 or more in taxable fringe benefits to nonemployees in the course of your trade or business. Write the amount in box 7.
• Determine if your trade or business paid $600 or more in punitive damages. Write the amount in box 3.
• Determine if your trade or business paid $600 or more in director’s fees. Write the amount in box 7.
• Determine if your trade or business paid $600 or more to a deceased employee’s estate or beneficiary. There are some tricky rules on this one, so be careful and get some help from us if needed. Write the amount in box 3.
The general rule is that you do not have to send 1099-MISCs to a corporation. The exceptions to the rule are for medical, health care, legal and attorney, and fishing related payments.
The 1099-MISC should be used for reporting payments to independent workers — not payments to employees. For employees, you use form W-2 instead to report employment income.
Independent workers are typically self-employed individuals or small service firms that you hire as independent contractors. Examples of independent workers might include a graphics designer, web developer, cleaning service, freelance writer, landscaper or gardener service, business consultant, IT or HR company, marketing consultant or any other self-employed provider. The key is that the independent worker is self-employed — and not your employee.
You are required to complete a 1099-MISC reporting form for an independent worker if you paid that independent worker $600 or more. You add up all payments made to a payee during the year, and if the amount is $600 or more for the year, you must issue a 1099 for that payee.
The following penalties will be in effect for the year 2014:
• $30 penalty for filing a 1099 not more than 30 days late;
• $60 penalty for filing a 1099 more than 30 days late and before August 1;
• $100 penalty for filing a 1099 on or after August 1;
• $250 penalty for intentional failure to file.
The following penalties are in effect for the year 2013:
• $30 penalty for each filing of a 1099 not more than 30 days late;
• $60 penalty for each filing of a 1099 more than 30 days late and before August 1;
• $100 penalty for each filing of a 1099 on or after August 1;
• $250 penalty for intentional failure to file
Deadlines for 1099-MISC Forms
• Provide the recipient with his or her copy of the Form 1099-MISC by January 31 reporting income for the previous calendar year.
• Mail the Form 1099-MISC to the IRS no later than February 28.
• Remember we are here for you if you have questions or would like us to prepare the necessary forms.
Of the many business entities that owners consider, Limited Liability Companies (LLCs) and Subchapter S Corporations (S-Corps) are two of the most popular. Although they share the distinction of being ‘pass-through’ entities in addition to providing liability protection, they do have several differences. An owner must also consider operational ease, administrative requirements, profit-sharing and employment tax implications.
Before choosing one or both of these options, determine which features are most important to you and your company. The needs of every business are different so it’s worth an hour or two with a knowledgeable attorney to investigate all of the issues that will affect you.
What Is an LLC?
An LLC has a default business structure similar to a sole-proprietorship or a partnership. According to the IRS, ‘It is designed to provide the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership.’ As a pass-through entity, all profits and losses pass through the business to the LLC owners (aka ‘members’). Similar to partnerships, the members themselves report the profits/losses on their federal tax returns.
What differentiates the LLC is the limit of the liability for which a member is responsible. Typically, the member’s investment in the company is that limit. Conversely, a sole proprietor or the partners in a general partnership are each liable for all of the debts of the company. Keep in mind that neither LLCs nor S-Corps necessarily shield owners from their or their employees’ tort actions such as accidents. Be sure to consult with a good business attorney.
Pros and Cons of the LLC
One of the features that distinguishes the LLC from an S-Corp is its operational ease. There are far fewer forms required for registering and there are fewer start-up costs. Filing taxes is a once-a-year affair on April 15: a single-member LLC files a 1040 and Schedule C like a sole proprietor; partners in an LLC file a 1065 partnership tax return like owners in a traditional partnership. Moreover, LLCs are not required to have formal meetings and keep annual minutes.
Some states do charge the LLC an income tax. California not only charges an $800 annual tax but also a gross receipts fee ranging from $900 to $11,790 depending on the level of annual business receipts attributable to California. This fee starts off once receipts hit $250,000 and reaches the maximum fee of $11,790 once receipts hit the $5 million mark.
There are also fewer restrictions on profit-sharing within an LLC as members distribute profits as they see fit. Members might contribute different proportions of capital and sweat-equity. Consequently, it’s up to them to decide who has earned what percentage of the profits or losses.
But LLCs are not the perfect entity for all businesses. First, an LLC has a limited life: when a member dies or undergoes bankruptcy the LLC is dissolved. Typically, you would determine in advance the length of the LLC’s duration when you file it with your state. If your plans include taking your company public or issuing shares to your employees, essentially prolonging its life, then you would need to convert to a corporate business structure.
Second, the owner of an LLC is considered to be self-employed and must pay the 15.3% self-employment tax contributions towards Medicare and social security. As such, the entire net income of the LLC is subject to this tax. It costs money to have some operational ease!
The IRS also limits the ‘characteristics’ of your company. An LLC may only have two of the four characteristics that define corporations: ‘Limited liability to the extent of assets, continuity of life, centralization of management, and free transferability of ownership interests.’ Therefore, if you wish to have more than two of these characteristics, you’ll need to convert to a corporate business structure.
What is an S-Corp?
An S-Corp is a corporation that has received the Subchapter S designation from the IRS. A business must first be chartered as a corporation in the state where it’s headquartered then file to be considered an S-Corp. According to the IRS, S-Corporations are ‘considered by law to be a unique entity, separate and apart from those who own it.’ This allows for a limit on the financial liability for which an owner (aka ‘shareholder’) is responsible. Nevertheless, liability protection isn’t perfect. The plaintiff may be able to ‘pierce the corporate veil’ and go after your personal assets in a lawsuit.
What differentiates the S-Corp from a traditional corporation (C-Corp) is the ability to have profits and losses pass through to the shareholder’s personal tax return. Consequently, the business is not taxed itself, only the shareholders. There is an important caveat: any shareholder who works for the company must pay him or herself ‘reasonable compensation.’ Basically, the shareholder must be paid fair market value, or the IRS might reclassify any additional corporate earnings as ‘wages.’ We’ll see the tax implications of this below.
Pros and Cons of the S-Corp
One of the best features of the S-Corp is the tax savings for you and your business. Recall that members of an LLC are subject to employment tax on the entire net income of the business. Conversely, only the wages of the S-Corp shareholder who is an employee are subject to employment tax. The remaining income is not subject to employment taxes.
As mentioned above, the shareholder must receive reasonable compensation. If you try to pay yourself an extremely low salary and high distributions you might get a tax advantage for the year, but the IRS may flag you for audit.
Keep in mind that some benefits that shareholder/employees receive can be written off as business expenses. A member of an LLC can write off business expenses personally against his or her allocable share of LLC income. An S corporate shareholder would be limited by 2% of AGI as well as being subjected to Alternative Minimum Tax (AMT) negating any benefits to unreimbursed business expenses paid personally.
An S-Corp also allows the business to have an independent life separate from the shareholders. If a shareholder dies, leaves the company, or sells his or her shares, the S-Corp can continue doing business relatively undisturbed. By maintaining the business as a distinct corporate entity, clearer lines are defined between the shareholders and the business that improve the protection of the shareholders.
The tax savings and solidity of the S-Corp also come with a price. As a separate structure, S-Corps require scheduled director and shareholder meetings, minutes from those meetings, adoption and updates to by-laws, stock transfers and records maintenance.
In addition to all of this paperwork are the tax forms required by the IRS. Such forms include:
- Form 1120S: Income Tax Return for S Corporation (state tax return)
- 1120S K-1: Shareholder’s Share of Income, Credit, Deductions
- Form 4625 Depreciation
- Employment Tax Forms (941, 940, W-2 and state forms)
- Form 1040: Individual Income Tax Return
- Schedule E: Supplemental Income and Loss
- Schedule SE: Self-Employment Tax
- Form 1040-ES: Estimated Tax for Individuals
- Forms 2553 S Election
These forms are due at various times during the year, so the burden to file them increases.
Also, states do not treat S-Corps equally. Most recognize them similarly to the federal government and tax the shareholders accordingly. In California, S corporations are taxed at the higher of $800 or 1.5% of net income (C corporations are taxed at the higher of $800 or 8.84% of net income). The big difference between an LLC and a corporation is that this tax is based on net income vs. gross receipts as it is in an LLC. An example of this is a business that has $3MM of gross receipts but only $150,000 of net income. An LLC would pay the $800 plus the gross receipts fee of $6,000 for a total of $6,800. An S corporation would pay just the net income tax based upon 1.5% or $2,250. In a second example let’s assume the business has the same $3MM of gross receipts with $1.25MM net income. An LLC would pay exactly the same amount ($6,800) but the S corporation would pay 1.5% of the net income or $18,750.
Combining the Benefits of an LLC with an S-Corp
There is always the possibility of requesting S-Corp status for your LLC. Your attorney will advise you on the pros and cons. You’ll have to make a special election with the IRS to have the LLC taxed as an S-Corp using Form 2553. And you must file it before the first two months and fifteen days of the beginning of the tax year in which the election is to take effect.
The LLC remains a limited liability company from a legal standpoint but for tax purposes it’s treated as an S-Corp.Posted in Accounting, Business Consulting, Tax | Leave a comment
Washington, D.C. (October 18, 2013)
By Michael Cohn
After re-opening operations on Oct. 17, the IRS said in an email to tax professionals Friday that its employees are reporting back to work, and the agency is assessing the impact of the 16-day shutdown on its national operations.
“At this point, we know we received a large amount of correspondence during the closure,” the IRS said on its Web site. “We know there will be a substantial increase in demand for our phone services and many other operations. On Oct. 17, we started reopening our phone lines and our Taxpayer Assistance Centers, both of which will take time to ramp up to normal operating status. In addition, other business operations have started resuming, including the processing of billions of dollars of refunds for individuals and businesses and honoring transcript and authorization requests from third parties.”
Given the high demand for services, the IRS said it is encouraging taxpayers to wait to call or visit if their issue is not urgent, and to continue to use automated applications on the IRS website, www.IRS.gov, whenever possible.
Taxpayers who need immediate assistance are being encouraged to visit Taxpayer Assistance Centers in their area or try call centers but should be aware there will be delays. The IRS also has delayed the start of its 2014 renewal season for tax preparers to apply for their Preparer Tax Identification Numbers, or PTINs (see IRS Delays PTINs for 2014).
“In the days ahead, we will continue assessing the effect of this unprecedented situation on IRS operations, and we will do everything we can to resume our normal operations as quickly as possible so that we can best serve the needs of the American taxpayer,” the IRS added. “We greatly appreciate the patience of taxpayers and tax professionals during this period.”
Accounting Today OnlineUncategorized | Leave a comment
Washington, D.C. (October 2, 2013)
By Michael Cohn
The Internal Revenue Service has temporarily stopped sending out tax refunds, and the Tax Court has suspended operations during the federal government shutdown, as lawmakers in Congress continue their battle over delaying or defunding “Obamacare” for a year.
The IRS announced contingency plans for the government shutdown on Monday ahead of the looming shutdown (see IRS Releases Gov’t Shutdown Contingency Plan). On Tuesday, with the House and Senate failing to reach an agreement on a budget resolution to continue funding government operations—and with the impasse continuing over the insistence by Republican lawmakers that the health care reform law should be delayed as a necessary pre-condition for agreeing to a budget deal—the IRS elaborated on the shutdown plans on its Web site, including a temporary stoppage in tax refunds.
“Tax refunds will not be issued until normal government operations resume,” said the IRS. The IRS emphasized, however, that the underlying tax law remains in effect, and all taxpayers should continue to meet their tax obligations as normal.
“Individuals and businesses should keep filing their tax returns and making deposits with the IRS, as they are required to do so by law,” said the IRS. “The IRS will accept and process all tax returns with payments, but will be unable to issue refunds during this time. Taxpayers are urged to file electronically, because most of these returns will be processed automatically.”
In addition, the IRS noted that no live telephone customer service assistance will be available. However, most automated toll-free telephone applications will remain in operation. IRS walk-in taxpayer assistance centers will be closed, though.
While federal government offices are closed, people who have appointments with the IRS related to examinations and audits, as well as tax collection, appeals or Taxpayer Advocate cases should assume their meetings are canceled, the IRS noted. IRS personnel will reschedule the meetings at a later date once the government shutdown ends.
In addition, IRS computer systems will continue to mail out automated notices to taxpayers, but IRS employees will not be sending any paper correspondence during the period when the federal government is shut down. The IRS provided some basic steps to follow during this period:
• Continue to file and pay taxes as normal. Individuals who have requested an extension of time to file should file their returns by Oct. 15, 2013.
• All other tax deadlines remain in effect, including those covering individuals, corporations, partnerships and employers. The regular payroll tax deadlines remain in effect as well.
• Taxpayers can file their tax returns electronically or on paper—although the processing of paper returns will be delayed until full government operations resume. Payments accompanying paper tax returns will still be accepted as the IRS receives them.
• Tax refunds will not be issued until normal government operations resume.
• Tax software companies, tax practitioners and Free File will remain available to assist with taxes.
A number of IRS services will remain available, but in a limited way. For taxpayers and preparers seeking assistance, only the automated applications on the regular (800) 829-1040 telephone line will remain open.
The IRS Web site, www.IRS.gov, will remain available, but some interactive features may not be available. IRS Free File partners—tax software vendors who partner with the IRS to provide free tax prep and processing for taxpayers with incomes up to a certain threshold—will continue to accept and file tax returns. Tax software companies in general will also continue to accept and file tax returns, the IRS noted.
Tax Court Closed
The U.S. Tax Court also said on its Web site Monday that it would suspend operations in the event of a shutdown. The Tax Court Courthouse in Washington, D.C., was only open on Tuesday from 8:00 a.m. until 12:00 noon. Petitions, motions and other papers were received only during those four hours on that day. “After 12:00 noon no documents will be received by the court until the shutdown is concluded or the court posts other further notice on this Web site,” said the court.
Documents could be submitted to the Tax Court’s Web site for e-filing only until noontime on Tuesday, October 1, but the Tax Court said it would not receive submissions of documents for e-filing after that time until further notice.
In addition, the Tax Court said it would serve no documents starting Oct. 1, 2013 if the federal government was shut down.
Due dates previously set by a Tax Court Rule or Order for filing a document or completing discovery or any other act will be extended, with all such due dates on or after Oct. 1, 2013 extended by the number of days that court operations are suspended, up to a maximum extension of five days from the date the Tax Court resumes operations. If the extended due date falls on a Saturday, Sunday or a legal holiday as defined in the Tax Code, the due date will then be the next succeeding day that is not a Saturday, Sunday or a legal holiday.
However, the Tax Court said it lacks the authority to extend statutory filing deadlines imposed in the Tax Code. For example, Section 6213(a) provides that a taxpayer must file a petition with the court to re-determine a deficiency within 90 days after the mailing of a notice of deficiency, and Section 6330(d)(1) provides that a taxpayer must file a petition to review a determination involving a proposed lien or levy within 30 days after the mailing of the notice of determination.
Even though hand delivery to the courthouse is not available during the period the Tax Court is closed due to a government shutdown, taxpayers still need to comply with the statutory deadlines by mailing a petition to the Tax Court on a timely basis. “Timeliness of mailing of the petition is determined by the United States Postal Service’s postmark or the delivery certificate of an approved private express delivery company,” the Tax Court noted.
For further information, visit the Tax Court’s Web site at www.ustaxcourt.gov, where notices about the Court’s closure and resumption of operations will be posted and updated throughout the period of any shutdown.
IRS Employee Furloughs
The IRS also provided a link to information for its employees. “An IRS-wide furlough began on Oct. 1, 2013 for everyone except already-identified excepted employees,” said the site.
For continuing information on the furlough, the IRS encouraged its employees to monitor news outlets, the Web page for employees or the 24/7 Emergency Hotline, (866) 743-5748.
The National Treasury Employees Union, which represents IRS employees, said Wednesday that it supports legislation introduced in the House and Senate to provide back pay to federal employees who have been sidelined by the furlough caused by the government shutdown. Sen. Ben Cardin, D-Md., and Reps. James Moran, D-Va., and Frank Wolf R-Va., introduced the Federal Employee Retroactive Pay Fairness Act. Approximately 800,000 federal workers—including many represented by NTEU—were forced off their jobs by the shutdown.
In separate letters to the lawmakers who introduced the legislation, NTEU president Colleen M. Kelley thanked them and stressed that through no fault of their own, dedicated federal employees “are being held hostage—unsure when they might be able to return to their federal offices, unsure whether or not they will be able to make their next rent or mortgage payments, and frustrated and scared about their future.”
The NTEU noted that retroactive pay for shutdown-related furlough days requires congressional action. Such a step was taken in the last government-wide shutdown in 1995 and 1996.
Kelley pointed out that that many federal employees, like many Americans, live paycheck to paycheck and face similar financial obligations and pressures. She also noted that many federal employees have in recent months needed to take unpaid furlough days as a result of sequestration, and that all of them have been operating under a three-year pay freeze.
“NTEU is continuing its efforts not only to bring the current shutdown to a prompt end, but to secure the end of the damaging policy of sequestration and ensure that federal agencies have sufficient funding moving forward,” she said.
http://www.accountingtoday.com/news/IRS-Suspends-Tax-Refunds-Tax-Court-Closes-Government-Shutdown-68228-1.html?ET=webcpa:e9370:218392a:&st=email&utm_source=editorial&utm_medium=email&utm_campaign=tpt_100413&taxproPosted in News | Leave a comment
As Summer officially comes to a close and the Fall Season is upon us, the last quarter signals the need to assess revenue trends, analyze tax strategies, and revisit financial goals to ensure a strong close to the year. Below you’ll find our 2013 Fall Newsletter and we’ve packed it with important updates, strategies and tools to help you in this quest. We never tire of letting you know what a privilege it is to serve you and may this fourth quarter be one of your best ever, both professionally and personally.
MANAGE YOUR MAGI TO PRESERVE TAX BREAKS
How close to the edge are you when it comes to tax phase-outs? As you begin your fall tax planning, consider the effects of these benefit-limiting provisions, many of which are based on modified adjusted gross income, or MAGI.
Read More >
EMBEZZLEMENT: YOU NEED TO KNOW HOW IT WORKS AND HOW TO PREVENT IT
It has been said that if fraud were a country, it would be the fifth most productive country in the world. Whether this is true or not, fraud is responsible for crippling many businesses.
Read More >
DON’T GET TRIPPED UP BY A WASH SALE
Are you eyeing your portfolio with year-end investment loss harvesting in mind? Before you place those sell orders, take a moment to review the “wash sale” rules.
Read More >
DO YOU HAVE OBSOLETE INVENTORY?
Walk through most commercial warehouses and you’ll find products that have been collecting dust for months, even years. Tires that no one wants to buy, raw materials that are no longer used, tubes of caulking that are good for nothing but the dumpster, textbooks that college professors revised two years ago – all may be considered obsolete inventory.
Read More >
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Just click on the link to read the full articles: Hall & Company CPAs Fall 2013 Newsletter
American Medical News – “Tax Breaks for Medical Practices” – Here’s the link to the article: American Medical News: Tax Breaks for Medical Practices. Brad’s responses are featured in the “tips and warnings on business tax deductions” section, under “additional information.”
Construction Today – “Health Reform and the Contractor” – The article is on pages 186-187. Here is a link to the digital edition: Construction-Today.
Medical Office Today- Here is a link to the full text: Medical Office Today.Posted in News, Uncategorized | Leave a comment
In August, we welcomed four new staff members to the Hall & Company team:
Please see each person’s profile for more information on their areas of specialty, background, photo, etc.Posted in News | Leave a comment
We have posted the SUMMER 2013 CLIENT UPDATE on our website.
Here are a few headlines from that issue. To read any of
these articles, click on the link at the end of this e-mail.
GIVE YOUR CHILDREN A GOOD FINANCIAL EDUCATION
Financial illiteracy appears to be rampant in the younger
generation. The same kid who is adept at using a smartphone
or iPad may have trouble with basic math skills, balancing
a checkbook, or managing money.
RECORDKEEPING: HOW TO GET ALL THAT PAPER UNDER CONTROL
It’s spring cleaning time, and that includes your tax paperwork.
While it can get a bit confusing, there are some general guidelines
that you can follow.
SIX MISTAKES TO AVOID IN SELLING YOUR BUSINESS
Most entrepreneurs eventually think about selling their businesses,
whether as a prelude to retirement or to pursue other activities.
In doing so, they often underestimate the effort required for a
satisfactory outcome and overestimate the value and salability of
FOREIGN ASSETS MAY REQUIRE TWO FILINGS
Do you know where your money is? If some of it is offshore, you might
have tax reporting responsibilities. Here are two.
Just click on the link below to read the full articles.