News & Articles

Is it Time to Rebid Your Vendor Contracts?

Posted on Mon, Aug 27, 2018

While it's great to have a good rapport with your vendors, it's important to ensure the relationship remains businesslike. Vendors who know there is a threat that they could lose your contract are more likely to focus on staying competitive.

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Tags: Business, Small Business, Business Finance, Business Owner

Year-End Business Tax Planning Strategies in Light of Tax Reform

Posted on Mon, Nov 20, 2017

It's not too late! You can still take steps to significantly reduce your business's 2017 income tax bill and possibly lay the groundwork for tax savings in future years.

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Tags: Year-End Tax Planning Strategies, Tax Planning, Business

Business Borrowers: Here's What to Include in Your Loan Application

Posted on Fri, Nov 10, 2017

Whether in expansion mode or facing a short-term cash crunch, small businesses often find themselves in need of capital.

But applying for a loan is a time-consuming process that can easily become overwhelming. And there's always the nagging doubt that — despite your best efforts — the bank will decline your application.Yet with careful planning and preparation, small business owners can make the process move much faster and increase the odds of getting the loan.

Here's what lenders typically want applicants to focus on when applying:

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Tags: Business, Loan

Build a Gold Medal Staff

Posted on Wed, Nov 08, 2017

Top employees are like gold-medal athletes -- motivated, well trained people who are willing to make personal sacrifices for the team.

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Tags: Business, Employees, Key Employees

Revenue Recognition for Contracts: Changes Coming Soon

Posted on Thu, Aug 10, 2017

Revenue is the top line of your company's income statement. So it tends to receive a lot of attention from investors, lenders and other stakeholders. Why? Changes in revenue can tell whether your company is growing or declining. Moreover, changes in the composition of revenue can provide insight into your strategic plans.

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Tags: Business, IRS, Business Finance, Cash Flow Statement

Converting an Unincorporated Business into an S Corp

Posted on Fri, Jun 30, 2017

The federal self-employment (SE) tax just keeps going higher and higher. If you've reached the breaking point, there may be a way to tame the SE tax beast by converting your existing unincorporated small business into an S corporation.

Of Course, There Are Caveats

Potential audit target. The IRS is aware of the strategy of converting an unincorporated business into an S corp to save on taxes. The government is trying to audit more S corps to see if they are paying unreasonably low salaries to shareholder-employees. However, S corp audit rates are still low. The tax-saving advantage of converting is lost if the IRS successfully asserts that S corp distributions to shareholder-employees are actually disguised salary payments. If that happens, the IRS will assess unpaid FICA taxes, interest and penalties. Your tax advisor can help you build a case so that in the event of an IRS audit, you have well-documented support that salaries are not unreasonably low.

Impact on retirement contributions. When considering an S corp, keep in mind that paying a modest salary can reduce the amount you can contribute to a tax-favored retirement program (such as a profit sharing or SEP plan). However, you may be able to mitigate this concern by setting up a 401(k) or defined benefit pension plan.

Other complexities. An S corporation conversion creates some paperwork and other issues.

That is because transactions between an S corp and its shareholders, including asset and liability transfers upon incorporation, must be carefully planned to avoid adverse federal (and possibly state) income tax consequences. You also have to meet state-law corporation requirements such as conducting annual meetings and keeping minutes.

Plus, a number of tax law hurdles must be cleared for S corp status to be available. For example, shareholders must be individuals or specified types of trusts. The Social Security and Medicare tax savings must be big enough justify the extra effort of operating as an S corp.


Partnerships and Multi-Member LLCs

A business operated as a partnership or a multi-member LLC also faces high SE tax bills. Partners and LLC members are considered self-employed individuals for federal tax purposes. Therefore, they generally must pay SE tax on their shares of net SE income from the partnership or LLC.

In this scenario, the same tax strategy is available. The co-owners can consider converting an existing partnership or LLC into an S corporation. Then, they can pay themselves relatively modest, yet reasonable, salaries while paying out the remaining profits as cash distributions. The salaries will be subject to Social Security and Medicare taxes, but the cash distributions will be exempt from those taxes. The tax savings will recur year after year, as long as the business maintains or exceeds its current profits.

How to Evaluate the Option

If you're a self-employed individual — meaning a sole proprietor, partner, or LLC member — you have to pay the SE tax on your net SE income. The SE tax has two parts:

1. The 12.4% Social Security tax. Social Security tax is due on net SE income up to a certain amount. Unfortunately, the ceiling goes up every year because of inflation adjustments. For 2017, the Social Security tax ceiling is $127,200 (up from $118,500 for 2016).

2. The 2.9% or 3.8% Medicare tax. The Medicare part of the tax is due on an unlimited amount of net SE income. In other words, there's no ceiling.

So until your net SE income exceeds the Social Security tax ceiling of $127,200 in 2017 (up from $118,500 for 2016), you owe the SE tax at the painfully high rate of 15.3% consisting of 12.4% Social Security plus 2.9% Medicare.

After the ceiling is exceeded, the Social Security tax portion drops away, and the SE tax rate falls to 2.9% to cover the Medicare tax. However, the Medicare tax jumps to 3.8% once your self-employment income exceeds the applicable threshold ($200,000 for unmarried individuals or $250,000 for married couples filing jointly).

Note: The tax results are the same if you operate your business as a single-member LLC, which is treated as a sole proprietorship for federal tax purposes.

While the SE tax is painful now, it's could get worse in the future.

So it may be time to consider an S corporation conversion. Reason: The SE tax doesn't apply to earnings from an S corporation business.

However, the FICA tax applies to salary compensation paid to an S corp shareholder-employee. In 2017, the FICA tax rate is 15.3% on salary up to the $127,200 Social Security tax ceiling. Salary above the Social Security tax ceiling is subject to a 2.9% or 3.8% FICA tax rate to cover the Medicare tax.

The employee share of the FICA tax is withheld from an S corporation shareholder-employee's salary; the other portion is paid by the corporation directly to the U.S. Treasury.

The Tax Savings

The FICA tax is only due on an S corporation shareholder-employee's salary. So when the company pays only a portion of its profits to the owner, or owners, in the form of a reasonable salary, with the remaining portion paid out in the form of cash distributions, only the salary portion is hit with Social Security and Medicare taxes (in the form of the FICA tax). The profits paid out as cash distributions are exempt from the FICA tax (and exempt from the SE tax too).

Key Point

These tax-saving results are not a one-time phenomenon. You can collect similar Social Security and Medicare tax savings, or better, in future years if the business maintains or exceeds its current level of profitability.

Converting an unincorporated small business into an S corporation is not a great idea in all situations but it works for some businesses. Consult with your EHTC Tax Advisor for more information.

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Tags: Business, LLC, Taxes, Sole Propietorship, S Corporation

Investigate Zoning Laws Before Committing to a Location

Posted on Fri, Mar 10, 2017

Location, location, location. You know how important it is for your business. So when choosing a location, you probably research foot traffic, car traffic and the occupancy rates of the neighboring buildings. But if you don't research zoning laws, all your good business judgment could go to waste.

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Tags: Business, Listed Property

Form 1099 Filing Alert

Posted on Tue, Nov 15, 2016

The IRS has been focusing on taxpayer compliance when it comes to reporting taxable income on Form
1099 and Congress has been increasing the penalties for non-compliant taxpayers. New this year,
penalties can range from $100 to $500 per 1099 return if filing with the Internal Revenue Service is
not completed by the compressed deadline of January 31, 2017.

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Tags: Tax, Business, IRS, Business Owner, Form 1099

Get Ready Businesses: Some Filing Due Dates are Changing

Posted on Mon, Nov 14, 2016

Thanks to recent legislation, the due dates have been changed for some information returns and related statements and for some business tax returns. Here's what you need to know.

Two Laws Are Responsible for the Changes

1. The Protecting Americans from Tax Hikes (PATH) Act. Enacted on December 18, 2015, the PATH Act extended or made permanent a number of "tax extenders" (provisions with expiration dates that had been routinely extended by Congress on a one- or two-year basis). It also contained a number of other provisions, including the changed due dates for W-2s and some 1099s.

2. The Surface Transportation and Veterans Health Care Choice Improvement Act of 2015. This new law was primarily designed as a three-month stopgap extension of the Highway Trust Fund and related measures. But it includes a number of important tax provisions, including the revised due dates for partnership and corporation tax returns. President Obama signed it into law on July 31, 2015.

Earlier Due Dates for Forms 1099-MISC and W-2

When a business pays non-employee compensation aggregating to $600 or more to a single payee in a tax year, the business must file a Form 1099-MISC to report the payments to the IRS. Similarly, employers must report wages paid to employees on Forms W-2. Copies of these forms (called payee statements) must also be supplied to payment recipients. 

Before a law passed last year, Forms 1099-MISC and W-2 were required to be filed with the IRS and the Social Security Administration (SSA) by the last day of February or by March 31 if filed electronically. (See "Two Laws Are Responsible for the Changes" at right.) Now, the due dates have been accelerated.

Starting with returns for the 2016 calendar year (which must be filed in early 2017), the due date for IRS and SSA filings is advanced to January 31 of the following year. The March 31 due date for electronic filings is no longer available. So the deadline for filing 2016 Forms 1099-MISC and W-2 with the IRS and the SSA is January 31, 2017.

Note: For filing 2016 Forms 1099-MISC and W-2 with the IRS and the SSA, one 30-day extension is allowed. To obtain an extension, you must file Form 8809, "Application for Extension of Time to File Information Returns," by no later than January 31.

The deadline to supply payee statements to recipients remains January 31 with no extensions allowed.

Reason for the New W-2 and 1099 Deadline

The goal of the new earlier deadline is to:

  • Give the IRS more time to spot errors on tax returns.
  • Make it easier for the tax agency to verify the legitimacy of returns and properly issue refunds to taxpayers eligible to receive them.

Reducing tax refund fraud has been a priority of the federal government in recent years.

Later Due Dates for 2016 Corporate Federal Income Tax Returns

For many years, C corporation federal income tax returns on Form 1120 were due two and a half months after the end of the corporation's taxable year (March 15, adjusted for weekends and holidays, for a calendar-year corporation). Form 1120 could be automatically extended for six months (through September 15, adjusted for weekends and holidays, for a calendar-year corporation).

However, a law passed last year established new due dates for Form 1120. For tax years beginning after December 31, 2015, the due date is generally moved back one month to three and a half months after the close of the corporation's tax year (to April 15, adjusted for weekends and holidays, for a calendar-year corporation).

Automatic five-month extensions are allowed (to September 15, adjusted for weekends and holidays, for a calendar-year corporation). You must file Form 7004, "Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns," to obtain an automatic extension.

The Form 1120S due date for S corporations is unchanged.

Note: Under a special transition rule for C corporations with fiscal years ending on June 30, the due date change won't kick in until tax years beginning after 2025. Until then, the traditional due date of September 15 (adjusted for weekends and holidays) for these corporations will continue to apply, with automatic seven-month extensions allowed.

Earlier Due Dates for 2016 Partnership and LLC Returns

For many years, partnership federal income tax returns on Form 1065 have been due three and a half months after the end of the partnership tax year. So for a calendar-year partnership, the filing deadline was April 15 of the following year (adjusted for weekends and holidays).

The Form 1065 due dates have also now been changed. For partnership tax years beginning after December 31, 2015, the Form 1065 due date is accelerated by one month, to two and a half months after the close of the partnership's tax year (March 15 for calendar-year partnerships). The same deadline applies to limited liability companies (LLCs) that are treated as partnerships for federal tax purposes.

Automatic six-month extensions are allowed (to September 15, adjusted for weekends and holidays, for a calendar-year partnership or LLC). File Form 7004 to obtain an automatic extension.

Need Help with Compliance?

If you have questions about the new filing deadlines for tax returns or information returns, or you want to file an extension, contact your EHTC Tax Advisor.

 

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Tags: Tax, Business, IRS, IRS Filing, Small Business

Year-End Tax Strategies for Small Businesses

Posted on Fri, Nov 11, 2016
It's not too late to take steps to significantly reduce your 2016 business income tax bill and lay the groundwork for tax savings in future years. Here's a summary of some of the most effective year-end tax-saving moves for small businesses under the existing Internal Revenue Code. After President Obama hands over the baton to his successor and new members of Congress are sworn into office in January, the tax laws could change. But here's what we know now.

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Tags: Year-End Tax Planning Strategies, Business, Year-End, Year-End Planning, Small Business, Business Owner