Posts Tagged ‘business tax credits’

Are you getting the most out of your accountant?

Often, clients put their accountants in a box like this and won’t let them out.  I have experienced this.  Once a client gets it in their head that “Polito is our tax guy”, it’s really hard to shake that image.   Our profession has so much more to offer!

When I was in the publishing business, before I knew what accountants did, I was the same way.  I called my accountant for tax stuff and little else.  I failed to take advantage of his years of knowledge and experience.  That business never flourished!

Many CPA’s start their careers as auditors for national firms auditing financial statements.  That is an extremely valuable experience.  Frequently, after between 2 to 5 years, these auditors  join public companies as controllers and chief financial officers….. and,  a significant number go on to become CEO’s of large public companies.  Indeed, there is a lot more to accounting than financial statement preparation and tax compliance!

About 10 years ago, we developed a service for a number of clients who had what I  term “technician syndrome”.  These clients  knew their particular trade or business and were fairly successful at it, but knew nothing about  the financial condition of their company.  They had no idea how they were really doing.  If there was cash in the bank, things were ok.  Actually, they were in a contest with their competitors but they weren’t keeping score!  In many cases, they didn’t understand the scoring system!

With the help of  my associates, I developed a series of graphs and reports tailored to each particular business.  We find elements of the financial records that if measured, could provide tools to gauge the success of various strategies.  We call these” Key Performance Indicators” (KPI’s).  We  model the effects of slight changes in these measures.  What would happen , for example if the company could increase margins by one percent?   What it would mean to the company, its owners, its employees, and other stakeholders.  We benchmark the clients by industry and size so they can see how they are doing compared to their peers.

We meet with these clients quarterly to go through the financial statements and the special reports that we designed specifically for that client.  At first, these meetings were the only time the clients seriously looked at their financial data. The meeting  is a really important part of this service.  It takes fairly deep study and analysis to really utilize the data.  This analysis coupled with the prodding of a seasoned professional outside the business, provides a stimulating atmosphere for new ideas on how to improve the business.  The brainstorming that goes on in these meetings is extremely valuable.

How do we use the data?

Using break-even analysis, we illustrate profitability scenarios.  We work with clients to develop budgets that support their strategies and we develop financial tools to measure the effectiveness of new strategies.  We develop forecasting models which our clients can use to project income and cash flow, and finally, we do tax projections with cash analysis so that the demand on cash for any suggested tax strategy can be quantified in cash required and cash saved.

To a non-accountant, this stuff is daunting.  I am convinced that one  reason some businesses can never “break through” to that proverbial “next level” is because they fail to make full use of their financial data.  By meeting regularly, even on a quarterly basis, for the sole purpose of assessing the performance of the business, clients tend to be more engaged, execute strategies more consistently, and frankly, make a heck of a lot more money!  In the final analysis, we are helping them keep themselves accountable by orchestrating  the reading of the scorecard.

At this time of year when we “resolve”  to improve, it’s a great time to develop tools to measure business performance and get very intentional about the way we run our companies!  How’s this for a New Year’s resolution…call your accountant and ask him or her how they can help you better measure your performance.  You might be amazed at the untapped resource on your team!

Year-End Tax Planning, Part 2

I previously compiled a list of year-end tax planning strategies for individuals.

Here is a list of year-end strategies for businesses and business owners:

1.   Businesses should consider making expenditures that qualify for the business property expensing option.

Code sec. 179 expense: For tax years beginning in 2010 and 2011, the expensing limit is $500,000 and the investment ceiling limit is $2,000,000, and a limited amount of expensing may be claimed for qualified real property. However, unless Congress changes the rules, for tax year beginning 2012, the dollar limit will drop to $125,000 and $500,000 (both indexed for inflation) respectively, and expensing won’t available for qualified real property. Keep in mind, Sec. 179 deductions are limited by net income, thus, they cannot be used to create a tax loss.

Bonus depreciation: Property that does not qualify for an immediate tax write off under the Sec. 179 may qualify for bonus depreciation. Unlike the Sec. 179 deduction, there are no restrictions on the amount of qualifying property and there is no taxable income limit. The deduction is 100% of the cost for qualified property purchased and placed in service during 2011. This first year write off won’t be available next year (2012) unless Congress acts to extend it.

2.   Businesses that hire qualifying workers (such as certain veterans) before the end of 2011 can claim a credit up to 40% of the first $6,000 in wages paid to each such employee.

3.   Make qualified research expenses before the end of 2011 to claim a research credit, which won’t be available for post 2011 expenditures unless Congress extends the credit.

4.   If you are self-employed and haven’t done so yet, set up a self-employed retirement plan.

5.   If you own an interest in a partnership or S corporation, and the business incurs a loss in 2011, you may need to plan ahead to be sure you can take advantage of that loss. These rules can be complicated,  and you should consult with your tax adviser.

6. Depending on your particular situation, you may also want to consider deferring a debt-cancellation event until 2012, and disposing of a passive activity to allow you to deduct suspended losses.

Again, we recommend that you always, see a professional when considering tax planning strategies for your situation. There are very important details underlying each of these strategies which must be thoroughly understood before you employ them!

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.

Taking advantage of the Enterprise Zone Program

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.

California Enterprise Zone Credits

Are you in the zone?  California offers tax credits for businesses in certain enterprise zones.  These incentives are designed to motivate businesses to operate and hire in struggling areas of the state.  There are some enterprise zones in the cities of San Diego, Chula Vista and National City.  If you hire new employees or purchase assets, you may be eligible.  The city offers a FREE service to help you identify eligible purchases and hires and help you fill out the required forms to apply for these credits. You may even be eligible for other programs.  It’s worth the call if you are, in fact, IN THE ZONE.

The cities have websites you can visit for more information, including contact information, fact sheets and more details about the programs available.  Go to www.sandiego.gov/sdrez/ for more information.

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