Built-in Gains Tax
The Tax and Accounting office of Certified Public Accountant can assist you in choosing the right legal form for your business. Choosing the proper business entity is a complex matter, which should be handled by an accountant professional. Many C corporations who are tired of the double taxing drawback – income is taxed to the corporation as it is earned and then again to you personally wh
en it is paid out in compensation or dividends – choose to covert to an S corporation. However, in trying to avoid this double tax predicament, business owners might run into built-in gains tax.
The built-in gains tax can blindside business owners who convert from a C corporation to an S corporation. In some cases, the conversion may not even be worth the price of admission. Nevertheless, with some advance planning from a professional certified public accountant, you may be able to minimize the impact of the built-in gains tax or discover additional tax benefits through a C corporation continue with you current business structure.
A corporation may owe income tax at regular income tax rates on a net recognized built-in gain occurring within the 10 years following a conversion to S corp status. The amount of the tax is based on the difference between the fair market value of property sold or otherwise disposed of and the basis of the property at the time of the conversion. The built-in gains tax generally applies to a corporation if:
- It was a C corporation prior to the S corporation election
- The election was made after 1986
- It has a recognized built-in gain within the 10-year recognition period; and
- The net recognized built-in gain for the tax year doesn’t exceed the net unrealized built-in in gain minus the net recognized built-in gain for prior years in the recognition period (to the extent such gains were subject to tax).
The built-in gains tax is computed by applying the highest corporate tax rate to the S corp’s built-in gain for the year. Currently, the top tax rate is 35%.
Nevertheless, the situation may not be as awful as it appears. For starters, any net operating loss (NOL) carryforward in a year in which the corporation was a C corporation may be deducted against the net recognized built-in gain of the S corporation. In addition, your firm may use capital losses carried forward from prior years to offset the built-in gains tax. Finally, excess business credits carried over from prior years may reduce the tax liability on built-in gains.
If you are contemplating a switch to S corporation status, it is important to have a professional accountant evaluate your situation and provide you with an in-depth analysis. Tax law is an extremely complicated area, especially the tax rules concerning a conversion from a C corporation to an S corporation status. Take advantage of a tax expert, like Emil Estafanous, CPA and don’t pay extra tax than what the law requires. Contact the Tax and Accounting office of Certified Public Accountant, Emil Estafanous at (562) 868-6333 and he will be glad to provide you with assistance for all your accounting and tax needs.
Plan Ahead: New 1099 rules
The new health insurance legislation imposes significant new tax reporting requirements. In essence, you will have to report most annual payments for goods and services exceeding $600 — including payments to corporations — on Form 1099. Fortunately, the new 1099 rules will not be in effect until 2012. This gives you plenty of time to adjust your accounting procedures and prepare for the strike of new paperwork.
Under current law, a business must report on Form 1099 compensation (commissions, fees, etc.) paid to an individual, such as an independent contractor, if the annual amount exceeds $600. The same rule applies to interest, rent, royalties, annuities and income items paid to a single recipient.
Both the recipient and the IRS receive a copy of the 1099. It must include the annual amount of the payment, contact information about the recipient and the recipient’s Taxpayer Identification Number (TIN).
However, these reporting rules generally don’t apply to payments made to a corporation. Also, your business doesn’t have to issue 1099s when it purchases goods.
New law changes: Beginning in 2012, the new Patient Protection and Affordable Care Act of 2010 changes the current reporting rules in three ways.
1. Payments to corporations: The reporting exemption for corporations no longer applies.
2. Payments for goods: The reporting requirement is generally extended to payments for property such as merchandise, equipment, raw materials and the like.
3. Payments of gross proceeds: At this point, it’s not exactly clear what “gross proceeds” covers. The IRS is expected to issue guidance shortly.
These three new law requirements will likely affect you on both ends of the spectrum. As a payer, you may have to churn out significantly more 1099s and obtain the TINs of each recipient. As a recipient, you could be bombarded with forms and you must supply the payers with your own TIN.
Tax Specialist, Emil Estafanous, CPA can help modify your business accounting procedures to accommodate the new reporting rules. Do not wait until the last minute to implement changes. Get a head start by calling the Tax and Accounting office of Certified Public Accountant, Emil Estafanous for a consultation.
Tax incentives for employing a spouse
A common approach used by many business owners is to hire their spouse as an official employee. Hiring your spouse as an official employee can have some disadvantages; however, there are least six tax benefits you can receive from taking this approach.
The following tax benefits may be applicable to you:
1. Retirement plan contributions deduction in the full amount. Within generous limits and if all tax law requirements have been met, contributions made on behalf of your spouse can be deducted by the company.
2. Taking a salary. If you are operating a C Corporation, any wages you pay to your spouse would have stayed with the company. Assuming your corporation is in a higher tax bracket than your personal tax bracket, you will save tax overall if your spouse draws a salary.
3. “Back to school” advantages. Education expenses acquired to improve an employee’s job skills are deductible by the company and tax-free to the employee. Therefore, your company can plan to send your spouse “back to school” on either a part-time or a full-time basis.
4. Travel expenses. In general, you cannot deduct the travel expenses attributable to your spouse if he or she accompanies you on a business trip. On the other hand, if your spouse is an authenticated company employee and is going for a valid business reason, his or her travel costs — including airfare, lodging and 50% of meal expenses — may be deducted.
5. Health insurance coverage. If you are currently paying more to cover your spouse under your company health insurance plan, hiring your spouse shifts the expense to your company. Typically, your company can deduct the full cost of the health insurance paid for your spouse, just as it can for other employees.
6. Other benefits. Similar to health insurance, your spouse is entitled to the same group-term life insurance coverage as other employees in the company. The first $50,000 of employer-paid group-term coverage is tax-free to an employee.
In addition, depending on your form of business, you may also be entitled to new tax breaks for hiring a spouse under the Hiring Incentives for Restoring Employment (HIRE) Act. Hiring your spouse may have other tax-related implications, which is why you should always consult a tax specialist. Seeking advice from a tax accountant professional, like Emil Estafanous, CPA can minimize your taxes. For additional details, please contact the Tax and Accounting office of Certified Public Accountant, Emil Estafanous at 562-868-6333 and his accounting staff will be glad to discuss the particulars of your situation and your no-cost, no-obligation Free Consultation.
Health care credit for businesses
The IRS has issued guidance to help small business owners cope with new requirements in the monumental health care legislation. (IR-2010-38)
Under the new health care law, a small business is eligible for credit for contributions used to purchase health insurance for its employees. To qualify, the business can’t have more than 25 full-time employees with average annual wages above $50,000. The contributions must be made under an arrangement requiring the employer to make nonelective contributions to health insurance offered to enrolled employees equal to at least 50% of the premium cost.
Beginning in 2010, a small business can claim a credit equal to 35% of the cost of its qualified employer contributions. In 2014, the credit increases to 50% of the contributions if the employer participates in a state-run insurance exchange.
Even better: If a small business employs 10 or fewer full-time employees with average annual wages of no more than $25,000, it can claim a 100% credit. The credit percentage phases out, but not below zero, if the employer exceeds either of these two limits.
The new guidance clarifies that this calculation doesn’t include sole proprietors, partners in a partnership, more-than-2% shareholders in an S corporation and individuals owning more than 5% of another business. Family members of these individuals are also excluded.
The new health care credit is available to eligible small businesses in 2010. If you have questions regarding the new health care credit, do not hesitate to contact our office. We can provide the assistance you need and determine whether you qualify.
Take Action
Do-It-Yourself Promotion
Stay in the same spot these days, and pay raises are almost nonexistent.
Your best defense? Position yourself for a higher paying job. Your tool for a promotion? A well-planned strategy, says Bob Nelson, author of “1001 Ways to Take Initiative at work.”
In lean times, fattening your paycheck takes more ingenuity. Be proactive and carve out opporunities with these tips.
• Take a hard look at your job. Ask yourself why it was created.Focus on the job’s essential needs.
“Consistently address those needs and go beyond them,” Nelson said.
Rank according to how they affect the company’s bottom line and long-term goals. Focus on the
high-priority tasks and do them better than anyone else could.
Look for role models. Who are the stars in your organization? “Study them, learn what makes them tick” and follow their examples, Nelson said.
• Develop a long-range view. Decide where you want to be in a year, three years and five years. Map out a plan for getting from here to there.
• Strut your stuff. Volunteer for assignments and key spots on teams or committees whether or not
they’re related to your department.
Redefine your jobs boundaries and “gradually increase the scope of tasks assigned to you, “Nelson said.
“What tasks could you take over for your manager? Suggest projects that could improve your job and help you learn in the process. Volunteer to be the liaison to other departments to help solve joint problems or to improve communication between departments.”
The hidden benefit? Gaining entree into ttre firm’s greener pastures.
• Solve problems. “Start in your own area and expand outward. Look for ways to save money, improve service or streamline processes,” Nelson said.
Have a plan to follow through. “Suggestions can sound like complaints if there’s no plan for their implementations.”
‘Think through the costs and benefits” of each idea , and involve key people who can help bring it about, Nelson advised.
“What allies and opponents do you have for achieving the goal? Could you make use any favors to gain others’ support? If your idea makes sense, why hasn’t it been done before? Think through the questions and objections your proposal is likely to receive. Develop a sound response for each,” he said.
• Beat rivals by managing time. At the end of the day, prioritize the next day’s tasks. Arive a half hour early so you can tackle key jobs uninterrupted.
“Focus on doing the work that you’re uniquely qualified to do. If possible, delegate the rest to coworkers,” Nelson said.
• Boost your marketability. “Are you delivering more value to your employer than you were three to six months ago? If so, what is the evidence?” Nelson asked.
Ask the tough questions:” What have I learned on the job in the last three to six months? What can I learn in the next six months that will boost my value and pave the way for a promotion or a better job?”
Take action on a plan to acquire those skills.
Author: Cord Cooper
2010 Best of Norwalk Award
Press Release (Article Source)
Emil Estafanous, CPA Receives 2010 Best of Norwalk Award
U.S. Commerce Association’s Award Plaque Honors the Achievement
NEW YORK, NY, May 18, 2010 — For the second consecutive year, Emil Estafanous, CPA has been selected for the 2010 Best of Norwalk Award in the Tax & Accounting Services category by the U.S. Commerce Association (USCA).
The USCA “Best of Local Business” Award Program recognizes outstanding local businesses throughout the country. Each year, the USCA identifies companies that they believe have achieved exceptional marketing success in their local community and business category. These are local companies that enhance the positive image of small business through service to their customers and community.
Nationwide, only 1 in 70 (1.4%) 2010 Award recipients qualified as two-time Award Winners. Various sources of information were gathered and analyzed to choose the winners in each category. The 2010 USCA Award Program focuses on quality, not quantity. Winners are determined based on the information gathered both internally by the USCA and data provided by third parties.
About U.S. Commerce Association (USCA)
U.S. Commerce Association (USCA) is a New York City based organization funded by local businesses operating in towns, large and small, across America. The purpose of USCA is to promote local business through public relations, marketing and advertising.
The USCA was established to recognize the best of local businesses in their community. Our organization works exclusively with local business owners, trade groups, professional associations, chambers of commerce and other business advertising and marketing groups. Our mission is to be an advocate for small and medium size businesses and business entrepreneurs across America.
Press Release (Article Source)
SOURCE: U.S. Commerce Association
CONTACT:
U.S. Commerce Association
Email: PublicRelations@us-ca.org
URL: http://www.us-ca.org
Solo 401(K) Retirement Plans
Do you run your small business as a one-person operation? You might consider setting up a solo 401(k) plan. This type of qualified retirement plan provides an edge over comparable plans.
With the usual type of defined contribution plan chosen by small business owners — such as a Simplified Employee Pension (SEP) — the employer’s deductible contribution for 2010 is capped at the lesser of 25% of compensation or $49,000 ($54,500 if you’re age 50 or over). Note: The maximum compensation that may be taken into account for these purposes is $245,000 for 2010. (These figures are adjusted annually for inflation.) But that’s as far as it goes.
In contrast, if you’re an employee participating in a traditional 401(k) plan, you can make an elective deferral to the plan within annual limits and the employer may match part of your contribution. Usually, it will add an amount equal to a single-digit percentage of your compensation.
Now see what happens when you “go solo.” For 2010, you can defer up to $16,500 of compensation to your 401(k) account, plus you can make an extra catch-up contribution of $5,500 if you’re age 50 or older — the same as with elective deferrals to a traditional 401(k).
Of course, the limits on deductible employer contributions still apply, but here’s the kicker: Thanks to a recent tax-law change, elective deferrals to a solo 401(k) don’t count toward the 25% cap. So you can combine an employer contribution with an employee deferral for even greater savings.
If your business isn’t incorporated, the 25%-of-compensation cap on employer contributions is reduced to 20% because of the way contributions are calculated for self-employed individuals. But that still leaves you plenty of room to maneuver. And remember that you can boost your contributions once you reach age 50.
We can help you determine if a solo 401(k) plan meets your needs. You may be able to save thousands more for retirement with a solo 401(k) plan, so don’t hesitate to call our office with any questions or concerns.
Tax aspects of health care law
The new health care law includes sweeping changes for both employers and individuals. Following is a brief summary of several key tax-related provisions.
Coverage for individuals: After 2013, any individual not eligible for Medicare or Medicaid must obtain minimum essential coverage or pay a nondeductible penalty based on a flat dollar amount or a percentage of household income. The new law also provides coverage subsidies to qualified lower-income individuals through premium assistance tax credits and reduced cost-sharing.
Employer requirements: Beginning in 2014, an employer failing to offer minimum essential coverage in any month for an eligible full-time employee will be liable for an additional tax. The tax equals 1/12th of $2,000 times the number of all full-time employees. This penalty applies to employers with 50 or more workers, but the first 30 workers are subtracted from the calculation.
Small businesses: Beginning in 2010, a qualified small business may use a special tax credit to offset employer-provided coverage. A “small business” is generally one with no more than 25 employees and average annual wages of less than $50,000 per employee. A bigger credit is available to employers with no more than 10 employees and average annual wages of less than $25,000.
Medicare taxes: Beginning in 2013, an additional 0.9% Medicare tax is imposed on wages of unmarried individuals with earned income above $200,000 and $250,000 for married joint filers; and an additional 3.8% Medicare tax applies to “net investment income” received by unmarried individuals with a modified adjusted gross income (MAGI) above $200,000 and $250,000 for joint filers.
Tax on health insurance plans: Beginning in 2118, insurers will have to pay a 40% excise tax if the annual premiums for a health insurance plan exceed $10,200 for individual coverage and $27,500 for family coverage.
Medical deductions: Under current law, an individual may deduct only qualified medical expenses in excess of 7.5% of adjusted gross income (AGI). Beginning in 2013, the new law generally raises this “floor” to 10% of your AGI.
However, an individual (and spouse) who is age 65 or older is temporarily exempt from this increase for tax years beginning after 2012 and before 2017.
Flexible spending accounts: The new law caps the annual amount of health care FSA contributions at $2,500, beginning in 2013 (indexed for inflation after 2013).
Adoption credit: The new law makes the adoption credit refundable, retroactively raises the dollar limit on the credit for 2010 from $12,170 to $13,170 and enhances the credit for adopting special needs children.
Information reporting: Beginning in 2012, a business must file information returns for annual payments of $600 or more to any corporate or noncorporate recipient (other than tax-exempt entities).
Of course, this is only a general overview of several important tax provisions in the massive health care legislation. The new health care law will have far-reaching effects for individuals and business owners. To find out exactly how the new law affects you, your family and your business, call us and we will be glad to provide you with an analysis of your situation.
Dependent Health Coverage
Tax-Free Employer-Provided Health Coverage Now Available for Children under Age 27
As a result of changes made by the recently enacted Affordable Care Act, health coverage provided for an employee’s children under 27 years of age is now generally tax-free to the employee, effective March 30, 2010.
The Internal Revenue Service announced today that these changes immediately allow employers with cafeteria plans –– plans that allow employees to choose from a menu of tax-free benefit options and cash or taxable benefits –– to permit employees to begin making pre-tax contributions to pay for this expanded benefit.
“These changes give employers a unique opportunity to offer a worthwhile benefit to their employees,” IRS Commissioner Doug Shulman said. “We want to make it as easy as possible for employers to quickly implement this change and extend health coverage on a tax-favored basis to older children of their employees.”
This expanded health care tax benefit applies to various workplace and retiree health plans. It also applies to self-employed individuals who qualify for the self-employed health insurance deduction on their federal income tax return.
Employees who have children who will not have reached age 27 by the end of the year are eligible for the new tax benefit from March 30, 2010, forward, if the children are already covered under the employer’s plan or are added to the employer’s plan at any time. For this purpose, a child includes a son, daughter, stepchild, adopted child or eligible foster child. This new age 27 standard replaces the lower age limits that applied under prior tax law, as well as the requirement that a child generally qualify as a dependent for tax purposes.
The notice says that employers with cafeteria plans may permit employees to immediately make pre-tax salary reduction contributions to provide coverage for children under age 27, even if the cafeteria plan has not yet been amended to cover these individuals. Plan sponsors then have until the end of 2010 to amend their cafeteria plan language to incorporate this change.
In addition to changing the tax rules as described above, the Affordable Care Act also requires plans that provide dependent coverage of children to continue to make the coverage available for an adult child until the child turns age 26. The extended coverage must be provided not later than plan years beginning on or after Sept. 23, 2010. The favorable tax treatment described applies to that extended coverage.
