Tag: business owner

What to Know About the Qualified Business Income Deduction

Posted by Maria T. Rollins on December 10, 2019

Does your business qualify as a pass-through for tax purposes?

If you’re an entrepreneur and you’ve heard other business owners talking about the qualified business income deduction (also called Section 199A), you’re probably asking yourself, “Should I incorporate to help save on taxes?” and “What entity should I select?”

Qualified Business Income Deduction Lots of business folks want to form an LLC because it can save you money on taxes, but there’s a caveat. The new tax law’s 20% deduction on qualified business income is subject to limitations that keep it from being just a giveaway for anyone who runs a business.

To qualify for the full deduction, your taxable income must be below $157,500, or $315,000 if you’re married and you and your spouse file jointly. If your income is below the threshold, you may take the deduction no matter what business you’re in. But if your income is higher, there are limits on who can take the break.

Some fine print about qualified businesses

What exactly is a qualified business? The IRS notes this break is for sole proprietorships, partnerships, S corporations, and some trusts and estates. C corporations are specifically excluded.
There are special rules and limits for “specified service trades or businesses.” The IRS defines these as businesses such as health, law, accounting, among others, “where the principal asset is the reputation or skill of one or more of its employees or owners.”
The deduction doesn’t lower your adjusted gross income, and you don’t have to itemize on your taxes to take it.
If you qualify, the 20% break will apply to the lesser of your qualified business income or your taxable income minus capital gains.
There’s a wage and capital limitation: it is the greater of 50% of W-2 wages or 25% of W-2 wages plus 2.5% of unadjusted basis of all qualified property. There is a 20% deduction of REIT dividends and distributions from publicly traded partnerships.
In counting qualified business income, the deductible part of self-employment tax, self-employed health insurance, and deductions for contributions to qualified retirement plans like SEPs, SIMPLEs and qualified plan deductions are included.
You have to decide how you should set up your business. As noted above, multiple entities are eligible for the pass-through treatment, but there are other implications you need to consider, such as how Social Security taxes will be paid.
Finally, don’t assume that the creation of a pass-through entity automatically creates a windfall. You’ll want to weigh how much you’ll save on taxes versus how much you’ll pay to set up an eligible entity.

How can you optimize the deduction?

Here are a few ways:

Consider operating as a PTP, or publicly traded partnership, which is not subject to the W-2 wage limit or the qualified property cap.
Consider multiplying the $157,500 per person threshold by gifting business ownership interest to children or non-grantor trusts.
For partners, consider switching from guaranteed payments, which don’t qualify, to preferred returns, which do.

This is just an introduction to a complex topic. Also, new guidance from the IRS may change some of the details, which means many provisions are not etched in stone. For example, the IRS issued in late September Revenue Procedure 2019-38, which offers a safe harbor allowing certain interests in rental real estate, including interests in mixed-use property, to be treated as a trade or business for purposes of the QBI deduction, under Section 199A.

KRS has your back on understanding pass-through entities

Be sure to get professional advice to make sure you’re making the right decisions about your pass-through entity. KRS CPAs offers unbiased financial and tax guidance to help you with this complicated subject. Contact us today for a complimentary initial consultation.

KRSCPAS.com is accessible from your mobile device and is loaded with tax guides, blogs, and other resources to help you succeed. Check it out today!

How to Get a Business Loan

Posted by Maria T. Rollins on November 5, 2019

How do you begin your search for a business loan?

Applying for a business loan
Many banks and alternative lenders are out there vying for your attention. Once you decide on a lender, what’s next?

Here are the steps to obtaining your business loan:

Step 1. Determine why you need the money.

This will drive your choice of lender and loan type. Different kinds of loans can be used to:

Cover the costs of launching a business.
Help you buy an existing business.
Purchase specialized equipment.
Provide working capital for payroll, marketing and hiring.
Resolve cash-flow problems — often needed for a seasonal business.
Help you expand your business.
Refinance an existing loan at more favorable terms.

Step 2. Calculate how much financing you can afford.

Determine your debt service coverage ratio by looking into your finances. Take the following steps:

Use a business loan calculator to find the monthly payment on your loan before you commit.
Check out your company’s profit and loss statement. Will incoming revenue be enough to cover the monthly payment?
Determine your debt service coverage ratio or DSCR. Take your average monthly net income and divide it by your monthly loan payment. It should be above one. If it’s below, maybe a smaller loan with a better interest rate will work.

Step 3. Consider different loan products.

Consider the following options:

Bank loans — The cheapest financing option. Interest rates can be as low as 5%. There are some hurdles: You’ll need a great personal credit score, your business should be profitable and you’ll need personal or business assets to use as collateral.
SBA loans — Slightly more expensive than bank loans and easier to qualify for. Rates range from 5% to 10%.
Medium-term alternative loans — A faster online counterpart to SBA loans or bank loans. Interest rates may be as high as 20%, but you can get approval in less than two weeks.
Short-term alternative loans — Just three to 18 months to be repaid with daily or weekly repayments. Interest rates can be very high, but you’re paying for convenience and quick approval. These may be the best (or only) alternative you have if you’ve been in business for less than a year or you have a weak credit score.

Step 4. Get your loan documents in order.

This includes all your financial statements and tax documents. (Depending on your situation, you may need an audit, review or compilation.) No matter which options you choose, you’ll need paperwork to move forward.

Be aware the more difficult it is to qualify for the loan, the more paperwork is required.
Expect to be asked for your credit score, your average bank balance, how long you’ve been in business, your annual revenue, a profit and loss statement and a balance sheet, as well as personal and business tax returns.
Take into account costs, which may include application fees, origination fees, guarantee fees for SBA loans, credit check fees, prepayment fees for paying back the loan early, and late payment fees.

A final tip

This is just an introduction to a complex process. Getting a business loan is a big step, so whatever you do, be sure to get the advice of a financial professional before moving forward.

KRSCPAS.com is accessible from your mobile device and is loaded with tax guides, blogs, and other resources to help you succeed. Check it out today!

Home Office Expense Deduction for a Self-Employed Taxpayer

Posted by Sean Faust, CPA on July 17, 2019

Does your home office qualify for a tax deduction?

If you’re self-employed and work out of an office in your home and you satisfy certain strict rules, you will be entitled to favorable “home office” deductions. These deductions against your business income include the following:

Direct expenses of the home office – for example, the costs of painting or repairing the home office, depreciation deductions for furniture and fixtures used in the home office, etc.; and
Indirect expenses of maintaining the office – for example, the properly allocable share of utility costs, depreciation, insurance, etc., for your home, as well as an allocable share of mortgage interest and real estate taxes.

In addition, if this office is your “principal place of business” under the rules discussed below, the costs of traveling between it and other work locations in your business are deductible transportation expenses, rather than nondeductible commuting costs.

Tests to determine home office deductibility

You may deduct your home office expenses if you meet any of the three tests described below: (1) the principal place of business test, (2) the place for meeting patients, clients, or customers test, or (3) the separate structure test. You may also deduct the expenses of certain storage space if you qualify under the rules described further below.

Principal place of business

You’re entitled to home office deductions if you use your home office, exclusively and on a regular basis, as your principal place of business. Your home office is your principal place of business if it satisfies either a “management or administrative activities” test, or a “relative importance” test. You satisfy the management or administrative activities test if you use your home office for administrative or management activities of your business, and if you meet certain other requirements. You meet the relative importance test if your home office is the most important place where you conduct your business, in comparison with all the other locations where you conduct that business.

Home office used for meeting patients, clients, or customers

You’re entitled to home office deductions if you use this office, exclusively and on a regular basis, to meet or deal with patients, clients, or customers. The patients, clients or customers must be physically present in the office.

Separate structures

You’re entitled to deductions for a home office, used exclusively and on a regular basis for business, if it is located in a separate unattached structure on the same property as your home – for instance, an unattached garage, artist’s studio, workshop, or office building.

Space for storing inventory or product samples

If you’re in the business of selling products at retail or wholesale, and if your home is your sole fixed business location, you can deduct home expenses allocable to space that you use regularly (but not necessarily exclusively) to store inventory or product samples.

How much can you deduct?

The amount of your home office deduction is based on the amount of square footage allocated to your office space. There are two methods to choose from; Simplified Method and Regular Method.

Simplified Method

The simplified method for determining this deduction is straightforward: You receive a deduction of $5 per square foot, up to 300 square feet (the deduction can’t exceed $1,500).

Regular Method

You determine the deduction by figuring out the percentage of your home used for business. Then apply the resulting percentage to the total direct & indirect expenses discussed above.

To demonstrate, if your home is 2,000 square feet and your home office is 500 square feet, you use 25% of your home for business. You’re allowed to deduct 25% of the above-mentioned expenses against your income. The remaining 75% of qualified expenses carry over to Schedule A, if you itemize. These costs include property taxes and mortgage interest.

Someone with a larger office and higher expenses might benefit from the regular method of determining the home office deduction compared to the standard method.

We’ve got your back

At KRS, our CPAs can help you utilize the home office deduction to maximize potential tax savings. Give us a call at 201.655.7411 or email me at sfaust@krscpas.com.

Use the Increased Federal Estate and Gift Tax Exemption to Transfer Business Ownership Interests

Posted by Gerald A. Shanker on April 17, 2019

Take advantage of this window of opportunity for tax-free wealth transfer

Use the Increased Federal Estate and Gift Tax Exemption to Transfer Business Ownership Interests The Tax Cuts and Jobs Act of 2017 expanded the federal estate and gift tax exemption to $11.2 million per person, or $22.4 million for a married couple.

Under the Act, these higher limits are applicable through December 31, 2025. On January 1, 2026 the limits return to $5 million per person, adjusted for inflation.

These changes present a significant but temporary opportunity for tax-free wealth transfer, including gifts of ownership interests in the family business. Also, in certain circumstances valuation discounts may further reduce the value of the gifted business interest, which would facilitate larger gifts while remaining within the exemption amount. These gifts will also qualify for the annual exclusion, which currently stands at $14,000 per recipient and may also be split with your spouse, resulting in $28,000 per recipient annual gifts that do not reduce your lifetime exemption.

Gifting strategies

Business owners are often reluctant to gift business ownership interests because they are concerned about losing control of the business, or do not want to make gifts to minor children. There are many ways to overcome this problem. The most common solutions are to gift only non-voting shares and include restrictions on their sale or transfer, or to gift the shares to a trust of which you or your spouse are trustee.

Conventional gifting strategy is to transfer assets that are likely to appreciate in the future. That way, the asset is transferred at a low value and appreciates in the hands of the recipient. The first step in this process is to identify the assets to be transferred and determine their value. If you are considering transfer of an ownership interest in a business, it would be prudent to have that business valued by a qualified business appraiser.

We’ve got your back

Although 2025 seems like a long way off, you never know what changes may occur. Although it is unlikely that tax laws will change after the mid-term election, you never know what the tax law changes will be after the 2020 presidential election. This is great opportunity to transfer assets at little or no estate and gift tax cost. If this is interesting to you, there is no reason to delay. Contact your attorney or CPA and start the process now, before this opportunity is gone.

Capital Gains and Losses: How Do They Work?

Posted by Maria T. Rollins on April 9, 2019

Selling a capital asset results in a gain or loss and impacts your income taxes.

How do capital gains and losses work? A capital gain is a profit made when you as an individual or business sell a capital asset — investments or real estate, for instance — for a higher cost than its purchase price. A capital loss is incurred when there’s a decrease in the capital asset value compared with its purchase price. Almost everything you own and use for personal or investment purposes is a capital asset: a home, personal-use items like furnishings, and collectibles.

A capital gain may be short term (one year or less) or long term (more than a year). The capital gain must be claimed on income taxes. While capital gains are generally associated with stocks and mutual funds due to their volatility, a capital gain can occur on any security sold for a higher price than the price that was paid for it. Unrealized gains and losses, sometimes referred to as paper gains and losses, reflect an increase or decrease in an investment’s value but haven’t yet triggered a taxable event.

The profit you realize when you sell a capital asset at a profit is your gain over basis paid. Basis is often defined as the original price plus any related transaction costs; basis also may refer to capital improvements and cost of sale. Capital losses are used to offset capital gains of the same type: short-term losses are deducted against short-term gains, for example.

Capital gains and losses for businesses

A business may gain or lose money in two ways: It can make a profit on its sales activities or lose money by spending more than it brings in from sales. And, of course, it can gain or lose money based on its investments or sales of assets — items of value that the business owns.

Each type is taxed differently. Profits are taxed as ordinary income and at regular business or personal tax rates. Gains or losses on investments or the sale of assets are taxed as capital gains or losses, but it can depend on the type of business. When expensive equipment is involved, businesses have to consider depreciation, which takes into account the equipment’s declining value over its useful lifetime.

Capital gains and losses can come into play when a business writes off an asset, taking it off its balance sheet. That might be the case with accounts receivable when a debt is owed to the business but is unlikely ever to be paid.

Individual shareholders or business owners who sell their capital shares or owner’s equity in a business also incur capital gains or losses from those sales. Note the following distinction: Operating profits and losses result from the ongoing operations of the business; sometimes called net operating losses for tax purposes, they result from day-to-day operations.

We’ve got your back

Whether you’re buying or selling as an individual or as a business, be sure to keep track of your sales and discuss them with a qualified financial professional. The experts at KRS can help you determine whether you have a gain on loss and its tax implications. Contact managing partner Maria Rollins at mrollins@krscpas.com or 201.655.7411 for a complimentary initial consultation.

Why Business Succession Planning Is Important

Posted by Gerald A. Shanker on March 28, 2019

Your business represents a big part of your wealth. Here’s why you need to protect it with a succession plan.

Many years ago, I had a friend who was a financial advisor and specialized in estate planning. In encouraging people to establish or update their planning, he would tell them that not having a plan was the same as having a plan to leave extra money to the IRS, to the detriment of their intended heirs. The same goes for business succession planning. Not having a succession plan doesn’t mean that you will never retire or die, it just means that when you do there will most likely be a dispute and a judge or mediator will decide what happens to your business.

Wouldn’t it be much better if you established a plan for your business?

There are many reasons why a business succession plan is important. For many business owners, the business represents most or a significant portion of their wealth. Whether the plan is to keep the business in the family, sell to employees, or sell to an outsider, a written plan will play a big part in a smooth transition, which will preserve the value of your business.

A transition plan will also help you prepare for any unplanned circumstances, such as death, disability, or inability to work. When something bad happens, it is usually too late to execute an effective plan.

Preparing next gen leaders

If the business is being kept in the family or sold to employees, a succession plan will go a long way in preparing the management team or next generation to take over the business. This process must commence long before the transition begins to be successful.

Finally, an effective plan will help you focus on the value of your business and the steps that you can take to increase that value. Many owners are unrealistic about the value of their business, believing that value is simply a multiple of something, the amount they put into the business, or an uninformed guess. The value of a business is based on future cash flow and risk. Good cash flow and low risk translates into high value. What can you do today to increase the value of your business?

We’ve got your back

If you’re ready to plan for business succession but don’t know where to start, contact me at GShanker@krscpas.com.

Audits, Reviews and Compilations: A Summary

Posted by Maria T. Rollins on March 26, 2019

Which financial statement overview you need from your CPA depends on your business and financing needs

Audits, Reviews and Compilations: A Summary You will want to prepare your financial statements in accordance with an accounting framework that’s appropriate for your business. Most of the time, you’ll opt for a CPA to produce your financial statements. Getting an accountant’s blessing is especially useful when you are applying for more credit from a bank.

Financial statements are intended to give you current information on your business’s financial standing so you can make more informed decisions. There are three levels of overview you can choose to take — compilation, review or audit — and what you select will have a lot to do with what your objective is.

The Compilation

According to guidance from the American Institute of CPAs, a compilation is suitable for use by lenders and other outside parties who may appreciate the business’s association with a CPA. There is no assurance here, but the CPA will read the financial statements in light of the financial reporting framework being used and consider whether the financial statements appear appropriate in form and are free from obvious material misstatements.

It may be appropriate when a company is seeking only relatively minor levels of financing and may have significant collateral.

The Review

The next level is a review. According to the AICPA, the review is designed to provide lenders and other outside parties with a basic level of assurance on the accuracy of financial statements. The CPA performs analytical procedures, inquiries and other procedures to obtain limited assurance on the financial statements to provide a user with a level of comfort on their accuracy.

A review might be the right move for companies seeking larger levels of financing and have more complex credit needs.

The Audit

The highest level of assurance is an audit. The CPA performs procedures to obtain “reasonable assurance” (defined as a high but not absolute level of assurance) about whether the financial statements are free from material misstatement, according to the AICPA. The CPA is required to obtain an understanding of your business’s internal control and to assess fraud risk. Your CPA is also required to corroborate the amounts and disclosures included in your financial statements by obtaining audit evidence through inquiry, physical inspection, observation, third-party confirmations, examination, analytical procedures and other procedures.

An audit is an annual requirement for publicly held companies and may be advisable for other companies seeking high levels of finance and opening themselves to outside investors.

Required Frequency

How often will you want your CPA to peruse your finances? Overviews can be done in any frequency that is useful to you and your business — monthly, quarterly or annually. Some folks say that your financial statements are more than snapshots of your business but can be seen as resources to tell you where your risks and opportunities are. Financial statements can help you identify and solve potential problems before they compromise the health of your business.

We’ve got your back

Rather than guessing at audit, reviews and compilations, why not let the experts at KRS CPAs help? Learn more about our accounting and assurance services, then contact managing partner Maria Rollins at mrollins@krscpas.com or 201.655.7411 for a complimentary initial consultation.

Put Your Children on Your Payroll and Reduce Taxes

Posted by Sean Faust, CPA on February 28, 2019

One tax reduction strategy that most business owners do not take advantage of is putting their children on payroll.

This can help reduce the overall family tax bill and transfer assets to children without introducing gift tax implications.

As a business owner, you can deduct wages paid to children, while the child can offset those wages with their own standard deduction. In addition to the standard deduction, you could setup pre-tax retirement accounts that would allow taxpayers to deduct more, while the child saves for retirement.

For partnerships and disregarded entities, if your child is under 18, the company does not have to pay employment taxes such as Social Security, Medicare and Workers’ Compensation Insurance. You can also avoid Unemployment taxes until the child turns 21. But for S-Corps and C-Corps, Social Security and Medicare taxes are paid regardless of age. These payroll taxes amount to 15.3% of wages earned, your share and child’s share.

Potential tax savings

With that in mind, let’s review a sample of potential tax savings. Starting in 2019, the standard deduction is $12,000 for single filers. The maximum contribution to a traditional IRA is $6,000 (if modified adjusted gross income is less than $64,000 for single filers in 2019). Additionally, taxpayers can draft a 401(k) plan that includes no age limitations, which will allow younger children to contribute $19,000 of pre-tax dollars to their 401(k). The example below illustrates the potential tax savings if the taxpayer’s entity is an S-Corporation.

Save taxes by putting your children on your payroll If the entity is an LLC instead of an S-Corp, and your child is under 18, add back the payroll taxes of $5,585 to get your tax saving potential.

One other benefit you could produce is a safe harbor 401(k) plan or profit sharing/matching system that could increase your child’s retirement account and provides a deduction for your business. This strategy has plenty of scenarios to take into consideration which provide an opportunity to save even more money in taxes.

There are some rules you need to be aware of when using this strategy:

Keeping detailed employment records, including timely tracking of weekly hours and wages that correspond to services provided
Issuing paychecks as you would a normal employee (e.g., bi-weekly)
Documenting that the services are legitimate and considered ordinary and necessary for the business
Ensuring the services provided do not include typical household chores

If your child is not treated like any other employee in a similar position, the IRS could potentially deem their wages as not ordinary and necessary, and disallow them as a deductible expense.

We’ve got your back

At KRS, our CPAs can help you strategize setting your children up on payroll to maximize potential tax savings. Give us a call at 201.655.7411 or email me at sfaust@krscpas.com.

Now Is the Time for Business Succession Planning

Posted by Gerald A. Shanker on January 3, 2019

According to several national surveys of closely held business owners, approximately three in five do not have any business succession plan in place.

At KRS, we specialize in advising owners of family and closely held businesses and our observations are consistent with the survey results. Now is the time for business succession planning

I am working with Joe, the owner of a profitable $75 million company, and we have been talking about succession planning for several years. Joe is in his mid-sixties, in good health, and has no plan to retire in the foreseeable future. Are you surprised that Joe has no succession plan for his business? Like many business owners, Joe can’t get his arms around the fact that having a plan doesn’t make retirement mandatory; it only protects the business (which is Joe’s most valuable asset) if he does. Although we frequently discuss the importance of succession planning, Joe doesn’t seem to want to face the tough decisions involved.

Employee and customer concerns

Joe’s employees have been concerned about succession plans for quite a while. When I met with him recently, Joe shared the fact that several of his major customers have also asked about his plans for the company. Joe said that the customers don’t want to see the plan and don’t care about the financial arrangements, but they just want to know that the company will continue if something happens to Joe. They want to know who will run the company if Joe can’t. This is understandable, especially since the company is a major supplier for several customers. The customers don’t want to risk interruption in product supply and they may reduce this risk by diversifying purchases among several suppliers if they don’t get answers, resulting in decreased revenue and profitability for Joe’s company.

Plan succession before it’s too late

Joe is the sole owner of his company, but succession planning is equally important in multiple owner companies. In all cases, it is best to execute a plan while everyone is healthy and getting along. When a triggering event occurs, it is usually too late. If you are a business owner, review your succession plan today, and if you don’t have a plan, contact your attorney and CPA to start working on one.

Time to Send Out Those 1099-Misc Forms

Posted by Kelley DaCunha on December 28, 2018

With tax season right around the corner, it’s time to start thinking about closing your books out for the year and preparing all your tax documents.

One of the required tax documents you may need to send out is the 1099-Misc. While this can be a tedious task, especially if you haven’t kept good records on your independent contractors, it is necessary to avoid penalties by the IRS. To help simplify things, here are the basics:

As a general rule, you must issue a Form 1099-Misc to each person to whom you have paid at least $600 in rents, services (included parts and materials), prizes and awards, or other income payments. You don’t need to issue 1099-Misc for payments made for personal purposes. You are required to issue 1099-Misc to report payments you made in the course of your trade or business. You’ll send this form to any individual, partnership, Limited Liability Company, Limited Partnership, or estate.

Some 1099 exceptions

There is a lengthy list of exceptions, but the most common one is payments to corporation. All payments made to a corporation do not typically require a 1099-Misc. This means that if you make payments to a company that is incorporated or to an LLC that elects to be treated as a C-Corporation or S-Corporation, then this would not be reported on a 1099-Misc. Unfortunately, this exception doesn’t apply to payments you made to an attorney.

Another exception is payments to vendors using a credit card or through a third-party payment network. You are not required to send a 1099-Misc for amounts paid electronically. Instead, the credit card companies and payment companies will handle any required reporting. Those electronic payment providers are required under certain circumstances to send out a different version of the 1099-Misc, called the 1099-K, instead.

Get those W-9s from vendors

To make the 1099 process easier, it is best practice for business owners to request a Form W-9 from any vendor you expect to pay more than $600 before you pay them. Form W-9 will give you the vendor’s mailing information, Tax ID number, and also require the vendor to indicate if it is a corporation or not. Having a completed W-9 will give you all the information to complete the 1099-Misc and save you a lot of headaches during tax season.

For the current year’s payments, businesses must send 1099-MISC to the recipients by January 31 of the following year. Businesses also must send copies of each 1099-MISC sent to recipients to the IRS. The deadline to the IRS is January 31. This deadline applies to Form 1099-MISC when reporting non-employee compensation payment in Box 7. Otherwise, paper filings must be filed with the IRS by February 28 and electronic filing by March 31. Also depending on the state law, businesses may also have to file the 1099s with the state.

We have your back

Rather than guessing at the IRS rules and requirements, why not let the KRS CPAs tax experts help? We will help you organize Form 1099 MISC recipient data and prepare all the necessary forms for you to submit. Contact Kelley DaCunha at kdacunha@krscpas.com to get started.