The Journal Summer 2011
The Journal Summer 2011
STARTING A BUSINESS: TAX TIPS
By Edward Mendlowitz, CPA, ABV, PFS, Partner
ENTITY SELECTION
The type of entity selected has a big impact on how an individual is legally protected as well as his or her tax bill. The choices are sole proprietorships, partnerships, C corporations, S corporations and limited liability companies (LLCs). In addition, combined entities can offer greater flexibility. For example groups of doctors, lawyers and other professionals can create general partnerships with the professionals’ individual LLCs or S corporations as partners.
Employer identification numbers (EIN) are “Social Security numbers” for businesses and must be obtained for all entities, except for a sole proprietorship or one-person LLC with no employees in which case the owner’s Social Security number is used. Even if not required, obtaining an EIN and using that instead of a Social Security number is better for identity security purposes. EINs can be obtained online at www.irs.gov or by completing IRS Form SS-4.
Register with tax authorities immediately after organizing the business. This includes the IRS and each state where the company will be operating or doing business. Some localities also require specific types of businesses to register or obtain licenses.
Estimated tax payments are necessary if the earnings will not be subject to withholding taxes. Individuals should become aware of the requirements if this is the situation.
Self-employment tax is payable on individual tax returns in lieu of Society Security and Medicare taxes for most business income flowing through from unincorporated entities.
TAX ELECTIONS
People starting new businesses can slash taxes on their business income using strategies that are initially determined. Once the first tax return is filed, most of the initial elections become substantially irrevocable, with changes being quite difficult. All elections need to be discussed with a tax advisor.
BASIS OF ACCOUNTING
There are two main choices. The “cash basis or method” means the business doesn’t report income until payments are received and can’t deduct expenses until paid. In contrast, the “accrual method” of accounting reports income when it is earned and permits deductions when the expense is incurred. Not all businesses are eligible for the cash basis.
INVENTORY
The inventory method needs to be determined before the first tax return is filed. Some businesses with “incidental” inventory or that are “small businesses” can possibly be on the cash basis. Otherwise, a business with inventory must be on the accrual basis.
FISCAL YEAR
Fiscal years usually are calendar years except for C corporations. For C corporations, the choice could be critical to how and when taxes are reported and paid.
SALARY POLICIES
Salary planning for stockholders working in the business is essential to minimizing Social Security and Medicare taxes for businesses operating as a C or an S corporation. Sole proprietorship, partnership and LLC owners do not receive salaries but are taxed on their share of the profits, which are then subject to Social Security and Medicare taxes.
RETIREMENT PLANS
Tax-deferred retirement plans can shelter business income. Contributions can be made up to $49,000 annually based upon the type of plan. Plan participants past their 50th birthday can contribute additional “catch-up” amounts of $5,500. Retirement plans offer some of the best opportunities for tax savings, so individuals should plan ahead to make the most of them.
MEDICAL INSURANCE
Medical insurance is deductible in full for owners who work in their business and is not subject to the overall medical expense limitation.
HIRE YOUR CHILDREN
Children under age 18 working in their parent’s sole proprietorship do not need to contribute to Social Security or Medicare taxes. As long as the payment is reasonable for what the children do, the payments would be deductible.
DEDUCTING EXPENSES
Expenses directly related to business can be deducted. Some of the types of expenses are: salaries, payroll taxes and benefits, cost of products, rent, subscriptions, internet fees, computer costs including hardware (subject to some restrictions) and software, telephone, seminars, office supplies, postage and shipping, insurance, professional fees, travel, meals, entertainment, business gifts (limited to $25 per person per year) and home office expenses (provided certain requirements are met).
START-UP COSTS
Depending upon the nature of the costs and expenses, these might be deductible or amortizable or not deductible at all. These items would have to be discussed with an accountant. There are also special rules for buying a business such as for sales tax and bulk sales that need to be checked out.
OTHER ISSUES TO BE CONSIDERED
When forming a business, there are a myriad of issues that need to be considered. These include, but are not limited by, the following:
- Bookkeeping and accounting system
- Establishing a system of internal controls
- Hiring, payroll reporting, employment regulations, worker’s compensation and disability insurance
- Health insurance
- Special rules apply if there are foreign investors or if the business will operate outside the United States
- Business plan and financial projections
- Cash flow and planning
- Market and demographic studies
- Location and leases
- Website
- Trademarks and branding
- Equipment and machinery
- Business insurance
- Equity financing
- Obtaining credit and bank borrowing
- Business and partnership buy/sell agreements
For additional information on starting a business, please contact your local WS+B advisor.
TAX INCENTIVES TO INVEST, UPGRADE AND GO GREEN
By Rebecca Machinga, CPA, Partner; Practice Leader, Real Estate Services Group
TAX BENEFITS FOR GREEN TECHNOLOGY
The greatest motivation for companies to pursue environmentally-friendly practices is corporate image, for both customers and shareholders. Tax incentives follow in importance and motivation. Business energy credits for solar property, qualified fuel cell property and micro turbine property are extended through 2016. Small wind property credits are available for property used in a trade or business, or for the production of income that uses a qualifying small wind turbine to generate electricity of not more than 100 kilowatts. The energy efficient commercial buildings deduction, known as Internal Revenue Code Section 179D, is extended through 2013 and allows a deduction for the cost of “energy efficient commercial building property” placed in service, including qualifying energy reducing lighting, HVAC and building envelope investments. The tax deductions are available based on square footage of up to a maximum of $1.80 per square foot.
TAX BENEFITS RELATED TO SOLAR PROJECTS
The Solar Tax Credit was designed to benefit businesses that utilize alternative sources of energy. The credit is 30% of the cost of qualifying energy property which uses solar energy that: (a) generates electricity for heaters, cooling systems or provides hot water; (b) illuminates structures using fiber optics distributed by sunlight; or (c) relates to small wind energy creation. What tax incentives does 2011 provide? In lieu of the 30% tax credit, a grant equal to 30% of qualified solar projects is available. This benefit originally expired in 2010, but was extended for 2011. Under the 2010 Tax Relief Act, the extension of these benefits will provide additional motivation for investment in solar energy projects. Solar project equipment will also qualify for 100% bonus depreciation, allowing businesses to deduct 100% of the capital expenditures qualifying as tangible personal property. Certain property is eligible for this benefit through 2012; however, the 100% bonus depreciation is reduced to 50% in 2012 and disappears in 2013.
TAX BENEFITS FOR QUALIFIED RETAIL AND RESTAURANT PROPERTY
In an attempt to stimulate the economy, the 2010 Tax Act allows businesses to expense 100% of the cost of qualified property through bonus depreciation in the year the property is placed in service and is in effect through 2012. Eligible property generally includes MACRS (Modified Accelerated Cost Recovery System) property that has a recovery period of 20 years or less, qualified leasehold improvements and certain computer software. The 2010 Tax Act treats qualified restaurant and retail property as 15-year property through 2011. However, the Internal Revenue Code states that this type of property may not be treated as eligible for bonus depreciation. However, if it is classified as “dual character” property under the qualified leasehold improvement property class, the restaurant and retail property may qualify for bonus depreciation. Qualified leasehold improvement property includes interior improvements to a non-residential building provided the improvement is made pursuant to a lease. It also includes property that is classified as Section 1250 property or in instances where the lessee exclusively occupies the space, and the improvements are placed in service for more than three years after the date the building was first placed in service. Certain costs do not qualify, such as elevators, escalators, enlargements and structural common areas. Although history shows Congressional intent to allow “dual purpose” property to qualify for bonus, the IRS could assert that, “absent Congressional action,” bonus depreciation is not allowed for qualified restaurant property or retail improvement property. Proper planning and analysis are imperative in this area.
Communication is the foundation of every relationship, both personally and professionally. One of WS+B’s great strengths is that we continuously strive to be as accessible to our clients as possible. We recognize the importance of face-to-face time, but this can be challenging for a company that has clients locally, coast-to-coast and on the other side of the globe. In an attempt to enhance relationships, our firm has recently enlisted IOCOM for their video conferencing software product, Visimeet.
Ten years ago laptops were thought to be an extravagant item, which only a few could justify; now they are common. Video conferencing has the same potential to change the way business is conducted throughout the world.
For 12 years, IOCOM had been involved in offering video conferencing around the world. They were repeatedly questioned about ways to reduce the cost to consumers. Initially, video conferencing meant purchasing servers, monitors, speakers, microphones, licenses and service contracts. Room system set-ups could easily cost six figures, which limited the number of companies that could justify the cost. In addition, with technology advancing at such a rapid rate, this investment would be obsolete far too quickly.
Although IOCOM was successful with this technology, they were interested in satisfying a larger audience. They developed Visimeet software as a service (SAAS). This service allows the user to lease the licenses from a server that is housed and managed with IOCOM. Trial software can easily be downloaded onto any internet-enabled device at no cost to the user. The user can purchase a USB web camera and audio device for improved performance at a local electronic store or online retailer.
With an insignificant initial out-of-pocket cost, the trial license allows the user to experience Visimeet’s capabilities, including scheduling and moderating meetings, desktop sharing, file sharing, recording and viewing recorded meetings, as well as dial-in capabilities (for those that do not have access to a computer and will be joining the meeting with audio only). Once the user has had an opportunity to test these product features during the 30-day trial period, they can decide which Visimeet option meets his or her needs. It can remain a convenient method of communicating one-on-one with no monthly fee, or equipment can be added to create a system that allows a true telepresence. Video conferencing rooms can be customized to user specifications, but often include one or more large monitors, multiple pan/tilt/zoom cameras, echo cancelling speakers, multiple wireless microphones, a Dell Dual multi-core workstation, a wireless keyboard and mouse. These larger systems are ideal for group meetings, educational sessions and conferences with the option to join multiple rooms from across the country. Since Visimeet allows meetings to be recorded, those that are unable to attend still have the capability to view the meeting at their convenience.
Although the promise of an improving economy is tangible, most are mindful of the cost of doing business and are looking for ways to reduce overhead. Visimeet reduces the need to be outside of the office. Travel not only means loss of productivity during travel time, but also incurred costs for gas mileage, airfare, meals, lodging costs, etc.—not to mention billable hours that clients and employers would like to avoid.
Ten years ago laptops were thought to be an extravagant item, which only a few could justify; now they are common. Video conferencing has the same potential to change the way business is conducted throughout the world. At WS+B, we have already experienced the advantages of “Visimeeting” with our partners, staff and clients. Our hope is that others will embrace this new technology and enjoy a look into the future of communications. We believe that it offers another opportunity to enhance our relationship with our clients, no matter how many miles separate us. We look forward to “seeing” you!
UNIQUE SELF INSURANCE SOLUTION WITH TAX ADVANTAGES
By Greg Sandler, Vice President Employee Benefits, Meeker Sharkey Associates
Historically, small and midsized employers have been risk-adverse to self insuring their group health insurance program. The belief had been that if a catastrophic claim was to occur, the group was not large enough to absorb this potential hit. However, healthcare reform legislation passed in March 2010 has placed increased pressure on the health insurers and employers to be more collaborative and proactive to control health insurance costs —and self-insurance has become a very viable option.
Some insurers have reacted to this pressure by developing unique self-insurance programs which are gaining in popularity for small and midsized employers. Employers that are currently fully insured are considering self-funding as an alternative due to increasing frustration over not receiving health insurance renewals in a timely manner and not receiving their groups’ detailed claims experience from the insurers.
One unique option that is becoming increasingly popular for employers and that comes with tax advantages is a product called Level Funding. Level Funding is designed to allow employers to benefit from positive claims years while being protected from catastrophic claims. Employers continue to offer plans similar to what they offer now, but what changes is how the program is funded. Depending on the size of the company, the employer will be required to answer a series of underwriting questions to assess the overall health of the group. Additionally, the groups’ previous claims experience will be considered. Once this information is submitted to the insurer, a set monthly premium amount will be determined.
By an employer being in a self-funded program, they have the ability to truly affect their claims utilization more so than when fully insured. When a group is fully insured, the employer does have the comfort of being part of a larger pool of companies, but there is not much that the employer can do to financially benefit from their own wellness activities or health initiatives. Due to healthcare reform, the increased pressure placed on the insurers has created an environment where the insurance carriers are now playing a larger role in helping companies to reduce their claims with disease management and wellness services. When combining these health programs with a self-funded plan, companies can benefit immediately from positive claims years.
How it works is that every month the employer will pay the same pre-set amount. Then at the end of the year, the company can realize significant savings when the insurer trues upon whether the actual claims experience was better than what was projected.
For employers who are accustomed to being fully insured, this product allows the employer to continue to pay a pre-set monthly premium. But unlike being fully insured, there is an opportunity for savings when claims run well. If, however, the claims experience is worse than what was projected, nothing additional is owed, which allows the company to budget the program in advance.
This type of self insured program is helping clients to bend their trendline. For instance, some small companies who are self-funded are able to keep costs consistent year over year without changing employee’s deductibles or costs for insurance coverage. CFOs are now more effective in budgeting for health insurance premiums, and the employer is not subject to state health insurance premium taxes which are generally two to three percent of the premium’s dollar value.
Full transparency in claims reporting is available throughout the year, which allows the company to constantly assess the program, including at the time of the policy renewal. At that time the employer can decide to remain in the program or go back to a fully insured program if they wish. This Level Funding product is an example of one of the new self-funded plan alternatives available in the market.
For more information on how to structure a self-insured health insurance plan, please feel free to contact:
Greg Sandler, Vice President Employee Benefits
Meeker Sharkey Associates
[email protected] • 908.272.3330 x26
[featured-content title=”WS+B Ranks High in 2011 “Best Places to Work” List”]
For the seventh consecutive year, WS+B was selected as one of NJBIZ’s “Best Places to Work in New Jersey.” In 2010, the Firm ranked #16 in the Large Company category; this year, WS+B moved up to #8. And of the 11 accounting firms appearing on the list between both categories, WS+B ranked third overall.
“We are thrilled with this year’s results,” says Bill Hagaman, WS+B’s Managing Partner and CEO. “We know and appreciate that it is our loyal, hardworking and dedicated staff who are the cornerstone of our Firm’s success. I can’t help but feel this is an indicator reflecting all of the positive efforts that have been made this past year to help boost morale and truly make WithumSmith+Brown a great place to work. We receive many suggestions from our staff and we have been listening…and will keep on listening as we strive for better rankings in surveys such as this one, reflecting satisfied employees.”
Companies from across the state entered the two-part process to determine the 70 Best Places to Work in New Jersey. The first part consisted of evaluating each nominated company’s workplace policies, practices, philosophy, systems and demographics. This phase was worth approximately 25% of the total evaluation. The second part consisted of an employee survey to measure the employee experience. This phase was worth approximately 75% of the total evaluation. The combined scores determined the top companies and the final ranking.
WS+B Receives 2011 Corporate Philanthropy Award
WS+B was the recipient of the Philadelphia Business Journal’s 2011 Corporate Philanthropy Award as a Top Volunteer Donor in the medium size business category, recognizing our firm for the number of volunteer hours dedicated to the not-for-profit community in the Greater Philadelphia area. The awards program recognizes the top Philadelphia-area businesses who donated the most through cash contributions, in-kind contributions and volunteer hours. The charitable giving of the 75 corporate donors who were recognized collectively represent $47 million in cash gifts, $93 million in donated in-kind gifts of products and services and 255,000+ volunteer hours.[/featured-content]
The Journal is published by WithumSmith+Brown, PC, Certified Public Accountants and Consultants, for clients and friends of the firm. The information contained in this publication is for informational purposes and should not be acted upon without professional advice. Please contact any one of our offices with your inquiries.