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Potentially Sizeable Tax Credit for Electric Vehicle Owners!

The IRS enacted a nonrefundable income tax credit for “new qualified plug-in electric drive motor vehicles”. For each qualifying vehicle, the credit is $2,500…. plus $417 for vehicles with at least five kilowatt hours (kwh) of rechargeable battery power, and an additional $417 for each additional kwh above five, to an additional credit of $5,000. This brings the maximum credit to $7,500. 

This is great news considering the 2011 Chevy Volt is advertised as having a battery capacity of 16 kwh, the 2011 Nissan Leaf 24 kwh, and the Ford Focus Electric 23 kwh. For example, Volt owners would be eligible to receive a whopping $7,500 tax credit ($2,500 plus $417 (for kwh of at least 5), plus $4,587 (for the extra 11 kwh (16-5)). 

Electric model requirements for the credit are that the qualified plug-in vehicles must be powered ‘to a significant extent’ by an electric motor drawing power from a battery with a capacity of at least 4 kwh that can be recharged from an external source of electricity. Cars with the ability to use both a plug-in electric engine and gasoline engine, technically known as plug-in hybrid electric vehicles (PHEVs) are eligible. 

Vehicles with fewer than 4 kwh or weighing more than 14,000 pounds are not eligible. 

The credit will have a production phase-out similar to the previous hybrid vehicle credit. The phase-out per manufacturer begins once the total qualifying vehicles manufactured and sold for use in the U.S. since the beginning of 2010 reaches 200,000 units. From there, the applicable credit per vehicle will be cut in half for two calendar quarters, then reduced by 25% in the third and fourth quarters and fully eliminated after that. The phaseout is more generous than the Hybrid credit which started to phase-out at 60,000 vehicles per manufacturer produced and sold after Dec. 31, 2005. 

To claim the credit Form 8834, “Qualified Plug-In Electric and Electric Vehicle Credit” will be filed with the taxpayer’s returns.

What type of entity should I choose? Part 6

Our Firm previously posted a five part series discussing the advantages and disadvantages for the type of entity you choose for your business: Sole proprietor, Partnership, Limited Liability Company, S Corporation, and C Corporation. In a business group I attend, members of the group wanted to see an example of the potential tax savings between the various types of entities. Below is a comparative analysis of an Insurance Agent as a sole proprietor, S-Corp, or C- Corp to illustrate how a taxpayer can reduce FICA tax. A taxpayer can reduce the FICA tax vs. a Sole Proprietor by paying low officer wages reducing FICA tax (in this example) by $17,854. In a C-Corp, the income does not pass-through to the shareholder; therefore, the income would be taxed at the entity level and individual level if the Company pays dividends. The S-Corp appears to have the smallest potential liability of the three, but taxpayers should be aware of the additional compliance costs such as: annual meetings, entity tax return, annual state filings, and bookkeeping.

Sample Insurance Agent
2010 Tax Rate
         
     Sole Proprietor   S-Corp  C-Corp
 Business Income:        
 Commissions $  425,000  425,000   425,000
 Wages     (50,000) (50,000)
 Business Expenses   (110,000) (110,000) (110,000)
 CA Corp. Tax Deduction     (3,860) (22,749)
 Payroll Tax Deduction     (3,825) (3,825)
 State Payroll Tax Deduction     (838) (838)
 Net Taxable Income- Business    315,500 256,477 237,588
 Business Taxes:         
 SS/FICA INC W/H   21,679 3,825 3,825
 Federal Corporate Tax       75,909
 CA (S and C) Corp Tax     3,905 23,014
 Total: Business SS and Corp. Taxes   21,679 7,730 102,748
 Total: Individual FED and STATE Taxes   95,503 100,666 8,497
 Total Taxes Paid  $ 117,182 108,396 111,245
 Assumptions for this Illustration:        
 FICA Tax – ER (7.65%) and EE (7.65%)        
         
 Corporate Tax Rate – 15% to 39%        
 CA S-Corp Tax Rate – 1.5%        
 CA Corporate Tax Rate – 8.84%        
 Individual FED Marginal Tax Rate  – 15% and 33%        
 Individual CA Marginal Tax Rate – 4.3% and 9.6%        
         
         

 Please note, these are simplified illustrations and when preparing actual tax Forms (1120, 1120S, and 1040) there are potential complex transactions involving basis, distributions, alternative minimum tax, etc. Please see your tax professional when considering your personal situation.

IRS requires 1099s for services providers paid $600 or more

The recently enacted Small Business Jobs Act contained a provision that may have escaped the notice of taxpayers who own real property.  In particular, rental property owners making payments of $600 or more to service providers in course of earning rental income are required to provide Forms 1099 to the service providers. Therefore, aside from a tenant calling you in the middle of the night to have a plumber correct a clogged drain, you are required to send a Form 1099-MISC to the plumber (and IRS) if you pay him $600 or more over the calendar year. The provision is effective starting January 1, 2011; however, there are a few exceptions:

  • Individuals who demonstrate that the requirement will create hardship. The IRS is directed to issue regulations, but have yet to do so.
  • Individuals who receive rental income below the filing threshold “not more than a minimal amount”. Again, the IRS is directed to issue regulations on what constitutes the “minimal amount” but has yet to do so.
  • Military personnel if substantially all their rental income comes from renting their principal residence on a temporary basis.

A way to prepare for this provision is to obtain a Form W-9 for each service provider you use during the year. This will reduce the hassle of trying to obtain the service providers taxpayer identification number, and to sift through providers who do not want to comply.  The penalty for noncompliance is $100 per 1099 not filed.  Please see a tax professional for any further information you may need on this requirement.

A sale is a sale even for nonprofits…

 “Nonprofit and religious organizations are exempt from taxes including California sales and use taxes.” This is a common misunderstanding for nonprofit and religious organizations.  Although many nonprofit and religious organizations are exempt from federal and state income tax, there is no similar broad exemption from California sales and use tax. Nonprofits commonly conduct a variety of activities that are considered sales, therefore, requiring a collection/payment of sales tax. The following are a few scenarios to consider:

Sales of tickets for fundraising events when the ticket price includes amounts for meals consumed on-site: This gets tricky (See Publication 18). Generally, the business or organization that serves the meal at a fundraising event is responsible for reporting. Meaning, if the organization serves the meals at the event, it’s liable for the tax based on the ticket price for the meal. There is a specific exemption for “religious organizations” where tax does not apply to sales of meals and food when all of these conditions are met:

  • You sell the food at a social or other gathering you conduct.
  • You furnish the meals to raise funds for your organization’s functions and activities.
  • You use the proceeds to carry out those functions and activities. 

The tax exemption applies regardless of who serves the meals. If a third party serves the meals, the religious organization must provide a resale certificate in order to purchase the meals without tax. 

Sales of merchandise on the Internet, live auctions, and silent auctions: A sales transaction occurred to the highest bidder; therefore, sales tax is calculated based on the successful bid. For sales tax, it is the retailer’s legal obligation to collect and pay the tax. If use tax applies, it is the consumer’s legal obligation to pay the tax. 

Merchandise or goods donated by a donor where the donated items are resold by the nonprofit:  Generally, a sale has occurred and the Organization needs to collect sales tax from the buyer. There is certain exempt tangible personal property (See Publication 61).  For example, zoological society’s sale, purchase, trade, or exchange of certain plants and animals is exempt from sales and use tax when the following conditions are met:

  • Animal or plant is on the threatened or endangered species list in the CITES Appendixes
  • The buyer and the seller are nonprofit zoological societies.

For plants that are classified as “Food for Human Consumption”, there is no sales tax charged to the purchaser. (Ex. Selling an apple tree is tax exempt) 

Sale of artwork where the nonprofit (not a museum) is the consignee:  The collection of sales tax is based on whether the consignee has the power to transfer title “without any further action on part of the owner.” If the organization can transfer title of the property then they are required to collect the sales tax from the buyer otherwise it moves to the artist. 

Other considerations:  

Nonprofits that make three or more sales in a period of 12 months are required to hold a seller’s permit. Also, an Organization must present a signed Resale Certificate to the California retailer if it plans to resell the merchandise to generate income as a form of fundraising. Temporary seller’s permits are available (for example: where an annual gala is the only event in which sales tax is collected). 

In conclusion, it is not always clear whether a nonprofit entity is liable for collection of sales tax. Each situation has its own unique twist, so when in doubt contact a professional with any questions you may have.

The “Needs” Checklist for Small Business Owners

The small business owner is faced with many challenges during these economic times, and it’s important for the owner to “come up for air” and focus on issues that will help guide them on creating a successful business.

The following is a list of certain items the owner should review on a periodic basis to assess their current situation and implement changes if necessary:

  1. Business Profitability Improvement
  • How is business? What keeps you up at night?
  • Do you have a business plan?
  • What are your marketing activities?
  • Do you perform a budget analysis – compare actual vs. budget? Do you have a budget? If you answered “no”…
  • How do you compare to your industry?
  • Do you analyze the Income Statement for profit improvement potential? Consider cutting out some discretionary expense items.  (I wonder if we could get Congress to do the same thing… not likely)
  1. Taxation Planning
  • What are the current results and what are your expectations for year end?
  • What tax planning strategies can we implement for this year?
  • Is there enough cash to pay the tax and implement the tax savings strategies?
  1. Finance
  • Do you have a line of credit?
  • Do you need to increase your line of credit?
  • Do you need new financing? The banks are still being quite stingy with the funds so this could take some work.
  1. Wealth Creation
  • What investments do you have in your portfolio?
  • What is your current net worth?
  • What action needs to be taken to achieve your goals?
  1. Risk Management
  • Do you have a valid will that reflects your current wishes?
  • Do you have a partnership or shareholder agreement?
  • Do you have a buy/sell agreement?
  • Is adequate insurance coverage in place?
  1. Succession Planning
  • When do you want to retire?
  • What is your selling price for the business? You need to be realistic during down economic times; most businesses aren’t worth what they were in 2005.
  • What is the current value of the business?
  • Are you dispensable? While you’d like to say no, when trying to position your business to sell, it’s better if the answer is yes. 

The key is to develop a plan, measure it periodically, and implement changes as necessary.

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