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Accounting and Tax Issues for Small Business 1 Andrew Zhu, manager, China Service group Deloitte Touche LLP May 31, 2003
© Deloitte & Touche 2003 2 Outline of the Presentation q Accounting and Internal Control q Tax Compliance and Planning q Financial Planning q Jobs and Growth Tax Relief Reconciliation Act 2003
© Deloitte & Touche 2003 3 Accounting and Internal Control q Understand the financial statements Balance Sheets Statements of operations Statements of shareholders’ equity Statements of cash flows Notes to financial statements
© Deloitte & Touche 2003 4 Accounting and Internal Control q Interpretation of financial statements Current Ratio: Current assets /Current liabilities Quick Ratio: Quick assets (excl. inventories) / Current liabilities Accounts Receivables Turnover Net revenue/Avg. Accounts receivables Working Capital Turnover Net revenue/(current assets – current liabilities)
© Deloitte & Touche 2003 5 Accounting and Internal Control q Interpretation of financial statements Gross profit margin Gross profit/Net revenue Operating profit margin Operating income/Net revenue Net profit margin Net income before tax/Net revenue Total debt to equity Total debt/Total equity Total debt to tangible net worth Total debt/Total tangible net worth (equity- intangibles)
© Deloitte & Touche 2003 6 Common Control and Management Accounting team: Small Segregation of duties Outsourcing (e.g. payroll) Importance
© Deloitte & Touche 2003 7 Common Control and Management Policy and Procedures: Formalization Completeness Communications
© Deloitte & Touche 2003 8 Common Control and Management Reporting to Board of Directors (“BOD”): BOD – Representatives of Shareholders Periodic BOD Meetings Reporting includes but not limited to: Actual vs Budget Results Ratio Analysis Stock based compensation activities Headcount Significant events
© Deloitte & Touche 2003 9 Internal Financial Control The cycles of internal financial control Revenue cycle Expenditure cycle Treasury cycle Payroll cycle Inventory cycle Fixed assets cycle
© Deloitte & Touche 2003 10 Tax Compliance q Federal and State income tax q Sales / Uses Tax q Property Tax q Payroll Tax q 1099 Reporting Interest Dividend Others q Withholding Tax Backup withholding Foreign withholding
© Deloitte & Touche 2003 11 Tax Planning: Formation q C Corp q S Corp q LLC q Partnership q Sole Proprietorship q Qualified Small Business Stock
© Deloitte & Touche 2003 12 Tax Structure q C corporation Most common used Limited liability No limitation on class of shares and shareholders Qualified for IPO Flexible exchange of ownership But double taxation
© Deloitte & Touche 2003 13 Tax Structure q S corporation Eligible domestic corporation Limited liability Limitations on class of share and shareholders Not qualified for IPO Must be calendar year No double taxation
© Deloitte & Touche 2003 14 Tax Structure q Limited Liability Company (“LLC”) Can check the box Limited liability No limitations on class of share and shareholders Not qualified for IPO Taxed as partnership No double taxation
© Deloitte & Touche 2003 15 Tax Structure q Partnership Genera and limited partners Flexible in allocation of tax attributes and income Not qualified for IPO No double taxation q Sole Proprietorship Must be an individual Unlimited liability Taxable income included in proprietor’s return
© Deloitte & Touche 2003 16 Tax Planning q Eligible depreciation deduction and other deductions q Sales and Use Tax Planning q Basic State Tax Planning (Capital-Based Taxes) q Gifting Stock Options and Early-Stage Estate Tax Planning q Planning for Stock Issuances or for an IPO q Federal and State Research and Development Tax Credits q Analyzing the Economic Costs of Foreign Withholding Taxes q Tax incentives: Manufacturer’s Investment Credit
© Deloitte & Touche 2003 17 Financial Planning q Equity vs. Loans Audit financial reports – Cash vs. Accrual method Thin Capitalization q Collaterals Account receivable Inventory Fixed assets q Factoring – Interest rate, points q Cash Flow Management
© Deloitte & Touche 2003 18 Jobs and Growth Tax Relief Reconciliation Act 2003
© Deloitte & Touche 2003 19 Dividend Tax Relief q Taxes dividends at rates of 15% and 5% Applies to dividends received in taxable years beginning after 2002 and before 2009 Applies to dividends from domestic and “qualified foreign corporations” 5% rate eliminated in 2008 q Some dividends are not eligible for reduced rates
© Deloitte & Touche 2003 20 Reduced Capital Gains Rate q Reduces rates on capital gains to 15% and 5% Effective for sales, exchanges, and payments received on or after May 6, 2003, and before January 1, 2009 5% rate eliminated in 2008 New rates apply to both the regular tax and the AMT, and to assets held more than one year q Some capital gains are ineligible
© Deloitte & Touche 2003 21 Depreciation & Expensing q Increase in bonus depreciation for businesses to 50 percent For property acquired after May 5, 2003 Property with binding contract prior to May 6 does not qualify q Increase small business expensing from $25,000 to $100,000 through 2005 q Increase in the phaseout threshold amount for small business expensing from $200,000 to $400,000
© Deloitte & Touche 2003 22 Individual Tax Cuts q Acceleration of Individual Income Tax Rate Reductions in 2001 Tax Act New rates: 35%, 33%, 28%, 25%, 15% and 10% q Expansion of 10% Bracket For 2003, the taxable income level for the 10% regular income tax rate bracket for single individuals is increased from $6,000 to $7,000, and for married taxpayers filing a joint return from $12,000 to $14,000 For 2004, these amounts are indexed for inflation. In 2005, the taxable income levels for the 10% rate bracket revert to the levels provided under present law
© Deloitte & Touche 2003 23 Individual Tax Cuts (continued) q Accelerates Marriage Penalty Relief Basic standard deduction for married taxpayers filing jointly is twice that of singles (2003-2004) 15% rate bracket for married taxpayers filing jointly is twice that of singles (2003-2004) q Increases Child Tax Credit $1,000 in 2003-2004 $700 in 2005 q Increases Individual AMT Exemption $58,000 for joint filers $40,250 for single filers
© Deloitte & Touche 2003 24 Comparison of Tax Liabilities
© Deloitte & Touche 2003 25 Corporate Estimated Tax q Changes the Corporate Estimated Tax Payment Schedule Twenty-five percent of tax payments due on 9/15/03 is instead required to be paid by 10/01/03
© Deloitte & Touche 2003 26 Questions? Andrew Zhu (408)704-4388 email@example.com
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