Archive for the ‘Business’ Category

Do you own a small business using QuickBooks or Peachtree as your accounting software?  Most likely you have stored critical unrelated financial information within the framework of the software.  By unrelated financial information we are referring to customer/client lists, personnel data, confidential client information, and other information used for business purposes.

Jump forward a few months from now and imagine receiving a letter from the IRS giving your business an examination notice (meaning you’re under audit).  How concerned would you be, or your clients for that matter, if the IRS requested your software database containing all this unrelated financial data?  Unfortunately this request is occurring more frequently and is being explained as the IRS’ attempt to modernize.  The IRS has purchased copies of various small-business accounting software to accomplish this task.  Requesting the electronic files is now standard operating procedure.

In recent years the IRS has ramped up efforts to more aggressively collect taxes from small businesses.  Statistics show that small businesses are one of the largest contributors to the “tax gap” (taxes owed but not paid or reported).  What better way to close the gap than to increase audits on small businesses where non-compliance is an issue?  Let’s face it…large corporations have their own accounting armada to keep everything straight with laws, regulations, and the taxes they pay.  Small businesses don’t have that luxury.

The main concern we have in providing IRS access to an accounting database is whether the auditor will stay within the scope of the requested information.  Do you want to IRS potentially contacting one of your clients?  Seeing what they purchase from you? Seeing what you purchase from vendors?  The fact that you are being audited is not something to brag about, but client relationships could be affected if some of their private information is handed over.  How would you feel if your personal information was handed over to IRS?  What would you do if you found out?  Another concern would be your reputation if  word got out that your business was under audit.  Questions could arise regarding the circumstances of the audit (randomly selected as opposed to improper filing). 

If a company turns over complete electronic records, there is no way of knowing what the IRS will do with that information.  The IRS has not addressed this issue except to say “privacy of return information” is of utmost importance to the agency.  Virtually all professional organizations in our industry are vehemently opposing this policy.

In subsequent posts we will discuss ways to approach this dilemma if you are audited and IRS requests your data base.

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.

 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.

Steve Harrington is a local banker our firm has worked with for years.  His articale below provides very valuable information about potential SBA loans for commercial real estate.  Finally, some positive banking news during this slow economic recovery.

By the way, if you are interested in contributing to our blog, email Mary for more information.  mmm@politoeppich.com  

Steve Harrington
Senior Vice President
California Community Bank
sharrington@calcommunitybank.com
(760) 542-4230
(760) 542-4289 fax
(760) 390-4771 cell

I came across an interesting accommodation the SBA is allowing due to the challenging times in which we have found ourselves.  Many business owners utilize the SBA 504 loan program to purchase commercial real estate.  This program’s key benefit is 90% financing of the real estate and the improvements.  The financed portion is split between a bank loan in 1^st trust deed position for 50% of the property value or proposed project cost and an SBA loan in 2^nd position for 40%.  

The impact of the economic challenges we have faced over the last couple of years is that the value of the real estate, in most cases, has fallen more than the 10% equity.  I have a customer that would like to refinance his 1^st trust deed loan, but assumed that the SBA would be reluctant to subordinate to a new first trust deed.  This assumption was based upon his opinion that SBA would see that the current value of the real estate has exposed their 2^nd and would not approve a subordination request for a new 1^st trust deed.

 What I found through conversations with the local SBA representatives is that the SBA will require a copy of the new appraisal, but will not base their decision to approve a subordination request on the current loan to value ratio.  What is of concern is whether their loan is current and handled as agreed, and whether the new first improves the cash flow of the business.

We were introduced to Brendan Foote and his company, Cal Tax Group, Inc., through a client of ours who was able to claim quite a bit in California tax credits related to the Enterprise Zone.  This article gives the quick facts of what you need to know about the Enterprise Zone credits. 

By the way, if you are interested in contributing to our blog, email Mary for more information. mmm@politoeppich.com

Brendan Foote, Partner

Cal Tax Group, Inc.,  San Diego, CA  92101   

619-202-4198; bfoote@caltaxgroup.com

 “A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.” We are clearly in the midst of difficult economic times that limit our ability to grow a business, but for companies in certain areas of San Diego County, there is one program that may be the perfect catalyst to take steps in the expansion direction. The San Diego Regional Enterprise Zone is a California funded tax incentive program that encourages businesses and business owners in certain parts of the state to create job opportunities and buy equipment. Through lucrative tax incentives, companies creating eligible jobs and purchasing qualified equipment can look forward to tens of thousands of dollars in state income tax credits. 

San Diego’s Enterprise Zone is concentrated south of Interstate 8, stretching from Downtown and east, including the majority of the South Bay and border regions as well. Companies located “in the zone” can obtain state income tax credits for each new employee they hire who meets one of thirteen qualifying criteria. Among these criteria include; former military, those hired off unemployment, residents of the local communities and those laid off from their previous place of employment. For each employee that meets one of these qualifying criteria, companies can receive up to $38,000 in credits over a five year period. 

For qualified equipment purchased, namely manufacturing equipment or computer based equipment; companies can convert California sales tax paid on such expenditures into an income tax credit. 

All California income tax credits obtained can be carried forward indefinitely and used against any tax liabilities resulting from Enterprise Zone income. For pass-through entities such as S-Corporations and LLCs, the income tax credits flow directly to the shareholders of the company and can be applied against personal income taxes resulting from W2, K-1 and rental or other passive income sources generated within the Enterprise Zone. 

One of the best parts about this program is companies who have not yet participated can identify and claim credits retro-actively on amended tax returns for up to four years against taxes they have paid to the State. Refunds will be issued and any remaining credits can be carried forward for future use.

 In short, if you aren’t taking advantage of the Enterprise Zone Program, you are passing up “free” money.

In March I mentioned that both houses in Congress were working on a repeal of the new 1099 reporting requirements that came out of The Patient Protection and Affordable Care Act and the Small Business Jobs Act.  It appears we are now only a signature away from this repeal becoming a reality!  At this point, I can’t imagine the President not signing the legislation (H.R. 4).  This legislation repeals BOTH the reporting requirements for rental property owners as well as the provisions for payments made to corporations for payments of goods and other property.  Basically, things will go back the way we’ve been doing it for years. 

Hallelujah!!! 

(Now for the full repeal of The Patient Protection and Affordable Care Act… hey, a girl can dream, can’t she?)

For 2010 only, medical insurance premiums paid by self-employed individuals, including partners with self-employment income, can be deducted from self-employment income to reduce social security and Medicare taxes.

This creates a significant benefit for those with self-employment income of $106,800 or less. When self-employment income exceeds $106,800, the additional Medicare tax gradually consumes the savings.

There is another development in this area that is not new, but is turning out to be an implementation nightmare.

In 2008, IRS changed the rules under which partners in partnerships and S corporation shareholders could take the self-employed medical insurance deduction. This change was implemented because audits were revealing that frequently the deduction was taken twice; once at the entity level and again at the individual level.

We will use an example of a $10,000 medical insurance premium to illustrate this issue. Here’s what was happening:

This is a bit too complex to cover in a blog post so we provide a complete discussion on our website under “Articles of Interest”.

Greater than 2% S corporation shareholders must be diligent to make sure that the corporation’s payroll properly reflects this medical insurance on the W-2. Read the article on our website for a thorough discussion with examples.

When in doubt, always confer with your professional tax preparer or CPA.

Links:

Articles of Interest: http://www.politoeppich.com/article_pdfs/9-Partnership%20and%20S%20Corporation%20Health%20Insurance%20Premiums%20LH.pdf 

Tax preparer: www.politoeppich.com

We briefly discussed some of the new burdensome 1099 requirements that came out of the Small Business Jobs Act one of our December blogs; IRS requires 1099’s….  We haven’t yet discussed the extremely burdensome 1099 requirements that came out of “The Patient Protection and Affordable Care Act” (affectionately known as “Obamacare”).  Expanded 1099 reporting requirements include all payments for both goods and services aggregating $600 or more in a calendar year, including those made to corporations.  Effectively this means virtually all business transactions must be reported to the federal government.    Government analysts estimate that this reporting will flush out taxpayers who do not report, or under report their income.  To many of us who have studied this proposal, the compliance cost to businesses and the taxpayer cost to fund the bureaucracy that must process all this data seems more costly than the perceived unreported tax revenue. 

Relief may be coming.  Thanks to some heavy pressure by the AICPA and many state CPA societies, the House Ways and Means Committee approved a bill earlier this month to repeal these expanded 1099 requirements.  It has been sent to the house for a full vote.  The Senate has a similar bill, but it doesn’t appear to be as comprehensive.  Of course, it wouldn’t come without a cost.  The House bill includes measures to make up for the perceived revenue loss.   The Journal of Accountancy’s article has more information.

In the mean time, the 1099 requirements for rental property owners is still effect.  Read the article for full details and continue to prepare yourself until it is actually repealed.  Keep your fingers crossed for full repeal!

Bonus depreciation: 2010 Tax relief Act extended bonus depreciation through December 31, 2012. The Act also increases 50% bonus depreciation to 100% for qualified assets (must be new property) acquired and placed in service after September 8, 2010, and before January 1, 2012. Unlike Code Sec. 179 expense, it is not limited to use by smaller business or capped at a certain dollar level.

 Code Sec. 179 expense: Congress has repeatedly increased the dollar and investment limits under Code Sec. 179 to encourage business spending. The 2010 Small Business Jobs Act increased the Code Sec. 179 deduction  limits to $500,000 for businesses with total asset purchases of $2 million or less for tax years beginning in 2010 and 2011. The 2010 Tax relief act sets the maximum Sec. 179 expense for 2012 at $125,000 for companies purchasing up to $500,000 in eligible assets. Both amounts are indexed for inflation. For tax years beginning after 2012, the Act resets Sec. 179 expense amounts at $25,000 with a $200,000 total acquisition limitation, and the reset amounts are not adjusted for inflation.

 Other important issues relating to bonus depreciation and Code Section 179 deduction:

Section 179 deductions are limited by net income, thus, it cannot be used to create a tax loss.  Used equipment qualifies for Section 179, but is not eligible for bonus depreciation.  Bonus depreciation can be used to create a tax loss.  Section 179 and bonus depreciation can be used in tandem when circumstances permit.

To see more examples of qualified property eligible for bonus depreciation, see my blog from October in the Archives which discusses qualified leasehold improvement, restaurant and retail properties

Small tax exempt organizations, other than churches and church-related organizations, are required to file an annual notice (990-N or e-postcard) with the IRS when annual revenues are $50,000 or less (was $25,000 prior to 2010 tax years). However, there are a few exceptions:

1. Supporting organizations of any size are required to file Form 990 or Form 990-EZ (Supporting organizations are charities that carry out their exempt purposes by supporting other exempt organizations, like university endowment funds)
2. Private foundations must file Form 990-PF
3. The IRS considers the annual gross receipts of an organization to be MORE than $50,000 if-
   1. The organization has been in existence for one year or less and the gross receipts, including amounts pledged by donors, are over $75,000 during the first year.
   2. The organization has been in existence for more than one year, but less than three years, and the organization’s average annual gross receipts for its first two taxable years is over $60,000
   3. The organization has been in existence for three or more years and the organization’s gross receipts for the immediately preceding three taxable years, including the taxable year in which the return is filed, is $50,000 or more.

Once a nonprofit has existed for two years, and is not a supporting organization or private foundation, you will always have to check the last test.  Just because one year the gross receipts dropped below $50,000 doesn’t automatically mean you can file a Form 990-N postcard.

You can file the Form 990-N electronically by going to http://epostcard.form990.org/.  As always, check with your tax preparer to determine the proper tax filings for your organization.

We are very excited to have our first guest blog post.  Stephen Friedman with Regents Bank presented to our firm a few months ago about the changes in the banking environment.  Hopefully this is the first of many guest blog posts to come. If you are interested in contributing to our blog, you can e-mail Mary at mmm@politoeppich.com for more information. Thank you!

Stephen Friedman, SVP, Regents Bank

http://www.linkedin.com/pub/stephen-friedman/11/742/55a

A recent report by TowerGroup indicated that in 3Q10 for the first time in four years, the supply of commercial and industrial loans (C&I loans), measured by a loosening of bank credit standards, and the demand for business loans by all sizes of companies, is back in equilibrium.  While I don’t know if I fully buy into those statistics, the pendulum is definitely swinging back to normalcy in the commercial lending arena.

On the bank side of the equation, the past two years of negative growth can only last so long.  After wrestling with regulatory issues and troubled loans during the recession, bank shareholders and boards now expect growth from their management teams.  Banks currently have too much cash invested in Treasury Bills earning .25%, instead of in loans earning 6.0%.  Commercial loan balances at San Diego banks will drop organically just from loan repayments by approximately $2 billion over the next year.  Therefore local banks have to book at least this much in new credit extensions just to stay even.

On the company side of the ledger, every month that takes surviving business owners further away from the eye of the financial storm, 9/08 – 6/10, the more credit worthy these companies are and the more prepared they are to re-invest again in their business for growth rather than funding losses.   However, regulators are encouraging banks to wait to see at least one year’s worth of profitability and positive cash flow before considering an extension of credit.   Accordingly, businesses should consider preparing trailing twelve month financial statements, so that they can potentially access bank credit sooner than if they wait until they achieve satisfactory fiscal year end results.  Businesses can further improve their chances of qualifying for credit by improving the quality of their financial reporting, to help banks get a clearer picture of their financial position.