Choosing an Entity Structure

One of the first questions a new business owner must consider is what type of entity structure is best for their particular business. As if it isn’t stressful enough with all the decisions needed to be made when you first start your business, deciding what business entity can often be very overwhelming. It is beneficial to seek out a professional’s advice in helping to analyze which structure is the right fit.

PacWest Accounting assists many new businesses in making those often difficult decisions in the beginning stages. Here is a brief outline of the most popular types of entity structures

1. Sole Proprietorship: The most popular entity structure among small business owners; it is the most basic of the entities and meant solely for a single individual opening a business. Sole proprietorships have limited life, meaning that the business ceases once the owner is no longer alive. It is the easiest to file for a license, and a major benefit is single taxation, meaning that profits flow-through directly to the owner’s personal tax return.

However, the owner of the business assumes unlimited liability, meaning that he or she is personally liable for any debts the business might face. Creditors and individuals can go after your personal assets if business assets are insufficient in fulfilling obligations. This factor makes sole proprietorships the riskiest business model an entrepreneur can assume

2. Partnerships are essentially sole proprietorships for businesses where there are two or more owners. Unlimited liability is still present, and for the most basic partnership all owners assume equal liability. Partnerships also possess limited life, so transfer of ownership after a partner’s death can become logistically difficult.

3. Corporations are owned by shareholders of a company. Managers control day-to-day operations of the company, and may or may not hold company shares. One of primary reasons to incorporate is the benefit of limited liability. Corporations are seen as living entities, and therefore liability is limited to the corporation itself. Because the corporation is an entity, it assumes unlimited life, and shares can easily be sold or transferred.

Corporations are not perfect, though. The largest disadvantage of forming a corporation is what is known as double taxation. The corporation pays taxes based on its profits just as a sole proprietorship or partnership does. Those profits are then distributed to shareholders in the form of dividends. Dividends themselves are then also taxed.

4. S Corporations are corporations that elect to pass corporate income, losses, deductions and credit through to the shareholders and assessed tax on their individual income tax rates. One of the greatest benefits is the avoidance of the double taxation of corporate income. In order to qualify as an S corporation, the business must be a domestic corporation, have no more than one hundred shareholders and issue only one class of stock.

5. A Limited Liability Company (LLC) is a business structure allowed by state statute and is popular because of the limited personal liability for the debts and actions of the LLC similar to corporations. Most states do not restrict ownership so members can be individuals as well as corporation, other LLC’s and foreign entities.

If you have more questions on which entity is best suited for your company, please contact us and we can assist you in finding the form to best serve you and your company’s needs.

What exactly is a miscellaneous deduction?

Often one of the most asked questions when preparing tax documents. There are certain employee expenses and many other expenses that can be classified as a miscellaneous deduction taken on Schedule A of form 1040. Of course these deductions are subject to the 2% limit. What does this limit mean? You can deduct the amount left after you subtract out 2% of your adjusted gross income from the total.

What are some of these expenses?
• Employment related educational expenses
• Professional association dues
• Business association dues
• Costs associated with looking for a new job
• Professional books and magazines
• Any unreimbursed employee travel, meals and entertainment
• Home office expenses
• Safe deposit rental to store investment-related items
• Legal fees to collect taxable income such as alimony
• Tax preparation fees

Items which might be deductable but NOT subject to the 2% floor include:
• Moving expenses to a new job location
• Gambling losses to the extent of gambling winnings
• Jury duty turned over to your employer

Items that cannot be deducted include:
• Broker's commissions that you paid in connection with your IRA or other investment property.
• Burial or funeral expenses, including the cost of a cemetery lot.
• Campaign expenses.
• Club dues.
• Commuting expenses.
• Fees and licenses, such as car licenses, marriage licenses, and dog tags.
• Fines and penalties, such as parking tickets.
• Health spa expenses.
• Home repairs, insurance, and rent.
• Home security system.
• Investment-related seminars
• Losses from the sale of your home, furniture, personal car, etc.
• Lost or misplaced cash or property.
• Lunches with co-workers.
• Meals while working late.
• Personal legal expenses
• Personal, living, or family expenses.
• Political contributions.

Hope this makes it a little easier when preparing your documents for tax filing. Have additional questions, please feel free to contact us.

Qualified medical expenses - What is deductible?

With the official opening of the tax season last Friday, we thought it be best to address those popular questions often asked as you are preparing your tax file for 2010.

So what exactly are medical expenses in the eyes of the IRS?

They are those expenses that are for the diagnosis, cure, mitigation, treatment, or prevention of disease. It also includes the cost for treatment for payments for legal medical services rendered by physicians, surgeons, dentists and other medical practitioners.

Also included are the costs for equipment, supplies, and diagnostic devices needed for medical purposes. The premiums you pay for insurance coverage and any amounts paid for transportation to get medical care are deductable. Medical expenses also covers amounts paid for qualified long-term care services.

What does it NOT include?

They do not include expenses that are merely beneficial to general health, such as vitamins or a vacation.

Some other items that cannot be deducted include:

• Diet Foods
• Life Insurance or Income Protection Policies
• Maternity Clothing
• Surgery for purely cosmetic reasons
• toothpaste, toiletries and cosmetics
• nonprescription nicotine gum, patches or lozengers
• nonprescription drugs or medicine
• Teeth whitening
• Hair transplant

Please note that if your doctor has recommended a program as treatment for a specific condition and it is properly documented for expenses such as:

• Health club dues
• social activities such as swimming
• Weight loss program

The IRS has indicated that the cost would be deductable

Of course you will only get these deductions if you itemize on Schedule A and you can only deduct that amount of your medical and dental expenses that is more than 7.5% of your adjusted gross Income
These deductions can be taken for yourself, your spouse and your dependents (the person must have been a dependent either at the time of the medical services were provided or at the time you paid the expense).

When in doubt always ask your tax advisor if the expense is allowable.

Who gets a 1099?

Every year at this time, I get asked this question by many of my small business clients. It is up to you, the business owner to correctly determine whether individuals providing services require the issuance of a 1099. The best way to decipher this is to first understand the relationship with the worker performing the service and the degree of control and independence.
Do you have control over when the worker works? Do you have control over what they are working on and when?
Do you control the finances of the worker’s job to be completed? Are expenses reimbursed?
Are there any types of benefits paid? Is the work they do a key aspect of your business?
It is important to ask yourself these questions in determining whether or not the worker is in fact an employee or independent contractor.

Once you have determined if in fact the worker is an independent contactor, you must then determine if you have paid that worker over $600 for that year. If the answer is yes, they need to receive a 1099 from you.

Here is a helpful list of those payments requiring a 1099 – MISC:

• Any person who rendered service to your business and you paid more than $600 in compensation that are taxed as a sole proprietor

• Any person you paid over $600 in rent to for office space, machines or equipment (excluding corporations or real estate agents)

• Any person providing $600 or more in legal services to your business regardless of whether or not they are a sole proprietor, corporation or partnership need to be issued a 1099.


So as a general rule:

Sole proprietors, partnerships, and LLC’s taxed as sole proprietors or partnerships DO get a 1099.

C Corporations, S Corporations, and LLC’s taxed as C or S Corporations DO NOT need to be issued a 1099.

If you classify an employee as an independent contractor you may be held liable for paying employment taxes unless you have a reasonable basis for not treating the worker as an employee.

And as always, if you have specific questions, we are always more than willing to help you out.

New Year, New Tax Laws and what it means to you

The new tax law temporarily extends the 2001 and 2003 income tax rate cuts and extends unemployment insurance for another 13 months. There are a few other items including new payroll tax breaks and the reinstatement of estate tax. So how does this all affect you? With the new payroll tax relief, the employer's share of the social security tax has gone down by 2 percentage points. So if you make $60,000 a year in 2011, you will see an additional $1,200 in your paycheck this year. Use this 2% increase in your pay and increase your 401k payroll deduction by this amount.

There will be no change in the income tax rates for the next two years although the alternative minimum tax (AMT)patch extends only through 2011 and is not indexed for inflation.

The top capital gains rate will remain at 15% for the next two years as well as for qualified dividends (stocks held longer than 60 days).

The estate tax has been reinstated in 2011 and 2012 at a maximum rate of 3% with a $5 million exemption per person. Beginning in 2013, the per person exemption is reduced to $1 million with a 55% estate and gift tax rate.

The beginning of the year is a great time to sit down with your tax advisor to have a plan for the new year.

Bogged down with Paper and Receipts?

As we close 2010 and look to 2011, many small businesses and individuals are thinking of ways to implement ideas for an organized new year. Now is the time to take those ideas and put them into action. There is nothing more frightening then a desk filled with receipt after receipt, mail envelope after mail envelope. Going paperless, though it sounds like a lot of work, is much easier than you think and can really streamline your procedures and make for a more organized work flow. There are many things to consider when making the commitment:

1. How much of your office do you want to convert and is it something you want to implement going forward or convert previous years?
   
2. What new equipment will be needed and does it fit within your budget? A scanner that can accommodate how much paper you will be scanning is needed as well as a document management system to hold all your digital files.
   
3. How will you handle going paperless on an ongoing basis? Policies and procedures will need to be changed to keep your office paperless on an ongoing basis.
   

The main benefit is cost savings. Paper costs money; for printing, mailing, paper supplies, storage for all the paper and storage space, this can all be reduced. By having all records in a central place, allows you to have quicker response time to clients or customers because the information is easily accessible.

The amount of space it takes to store all of this paper will be greatly reduced. Of course this will be a gradual process, especially if you plan to implement on a "going forward" basis. Document security is an added advantage but it is important to make sure you have a good back-up plan for all your digital files and records. There are many inexpensive options such as box.net, dropbox.com or mozy.com.

PacWest Accounting has already started the transition for many of its small business clients and individuals looking to eliminate the headache of papers and receipts by implementing a paperless system. Have I tweaked your interest at all? Stay tuned for more ways to reduce the headache of mounds of papers and receipts and streamline your businesses or personal information so that you can focus your time on what really matters. If taken one step at a time, switching to a paperless office doesn't have to be as scary as you think.

 

 

 

It's not too late

It is hard to believe that year-end is fast approaching and 2011 is staring us in the face. Some of you have probably thought about it for a second, others might not even be fazed by it. If you are a small business owner, it is an important time to see where you are at financially for a number of reasons. Take the time to make sure you have your books up to date, make sure you are not missing any valuable deductions. It is also a great time to see how you are going to end the year versus how you forecasted for 2010. Have you achieved all you thought you would or did you fall short? What were the reasons why you might not have ended the year how you thought? What can you do a little differently for next year's planning? I have said it before in previous posts, it is most essential for small business owners to write things down. It holds you accountable, especially at year end to see where your short falls were and more positive, all the you accomplished.

Other tips:

Increase your expenses by purchasing those items you will be need to buy in the immediate future to maximize the deductions for this year. It might be a good idea to stock up on supplies OR pay bills before year end such as cell phone bills, utilities, or rent.

It might be a good time to contribute to a Retirement plan or if you do not have one yet, set one up. You need to be certain to check the contribution limits for the type of plan you.

Of course all these tips will apply differently to each business owner's situation

Take the time to review the best strategy with a professional advisor and make the most of the year-end tax planning for your small business.