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Presentation on theme: "PETER J CHUDYK, JD, CPA SHAREHOLDER MALONEY + NOVOTNY LLC."— Presentation transcript:


2 What form of business will you use? Legal/Liability Issues Reporting Issues Ownership Issues Limitations due to type of Business being conducted

3 Choice of Entities Sole Proprietor Limited Liability Company Partnership General Limited Corporation C Corporation S Corporation

4 Tax Implications Choice of Entity Pass Through Sole Proprietorship LLC Partnerships S Corporation Entity pays tax C Corporation

5 Choice of Entity Domestic Only (United States) International Payroll Health Insurance Product Liability Tax Implications

6 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

7 Tax Analysis of Entity Choice Double Tax Corporate Entity Taxable Income of Entity Dividends 2012 Maximum Rate- 15% 2013 Maximum Rate- 39.6% plus

8 Tax Analysis Choice of Entity Calculate Tax Consequences Ultimate proceeds on sale of business Asset Sale Stock Sale

9 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?

10 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)

11 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)

12 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

13 Entity Sole Proprietorship Ownership Federal ID Tax Reporting Schedule C Self Employment Tax Expenses Audit Risk

14 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

15 Entity Partnership LLC Tax Reporting Form 1065 K-1 to each Partner Passive/Active Activity FICA Medicare Health Care Issues

16 Entity S Corporation Legally a Corporation Taxed as a Pass Through Entity Ownership Limitations Income Shift Estate Gift Tax Planning

17 Entity S Corporation Tax Reporting Form 1120S Shareholder receives K-1 FICA Medicare Health Care Issues Reasonable Compensation Issue--IRS

18 Entity C Corporation Legally a Corporation Entity Taxed Double Tax Potential Current Tax Rate 35% Proposed Reduction by Tax Reform

19 Entity C Corporation Tax Reporting Form 1120 Wage to Owner Reasonable Compensation Issues Excess Accumulation

20 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.

21 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

22 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

23 Accounting Methods Issues for Revenue Recognition—Cash or Accrual Timing Deposits Installment Sales Completed Contract Method

24 Accounting Methods Issues for Recognizing Expenses- Cash or Accrual Compensation Retirement Plan Contributions Vacation Pay Reserves Obsolete Warranty Bad Debt

25 Accounting Methods Issues for Recognizing Expenses- Cash or Accrual Inventory Start Up Expenses Organization Expenses

26 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

27 Inventory Methods Issues Pricing/Costing Obsolete Overhead Section 263A

28 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.

29 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

30 Accounting Periods Fiscal Year End (Non Calendar) C Corporations Potential benefit for October 31 year end

31 Not all Expenses are Deductible Personal Expenses Life Insurance Premiums Certain Entertainment Expenses Personal Country Club Dues Logue Sky Box Fees 50% of Entertainment

32 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

33 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

34 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.

35 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)

36 Not All Expenses are Currently Deductible Inventory Material Direct Labor Overhead

37 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

38 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

39 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%

40 Business Expenses Meals and Entertainment Substantiation Receipts Who, what/why, when, and where Not Deductible Loge Fees Country Club Dues Personal Expenses

41 Business Expenses Wages Employee, versus Independent Contractor Wages Must be Reasonable For Services Performed

42 Business Expenses Wages Bonuses Life Insurance Owner/Beneficiary company- not deductible Owner/Beneficiary employee- compensation and deductible Education Expenses Qualified Education Assistance Program

43 Business Expenses Wages Vacation Pay Deductible, generally, only in the tax year the employee receives it Sick Pay Periodic Lump Sum

44 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

45 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

46 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

47 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

48 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

49 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

50 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

51 Business Expenses Depreciation Straight Line Accelerated Methods MACRS Double Declining

52 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.

53 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

54 Business Expense Business Bad Debt Ordinary deduction Allowance method not allowed Specific charge off

55 Peter J. Chudyk, JD, CPA Shareholder Maloney + Novotny LLC 1111 Superior Avenue, Suite 700 Cleveland OH 44114 Contact Information


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