Efficiently Getting Cash
Out of Your Business
Sarah Anderson CPA, MST
Bonnie Trochim CPA
Introductions
 EisnerAmper, LLP
 Participant
 What do you want out of class?
 What type of business do you own?
Course summary
 Cash flow basics
 Business structures
 Accounting methods
 Timing of income and expenses
 Getting cas...
Cash-in minus cash-out does not equal profit
 Important concepts:
 Cash-in minus Cash-out = Cash left-over
 Basics:
 W...
What counts as income?
 Cash-in normally = income
 There are some exceptions – examples:
 Rebates or refunds for produc...
What counts as expense?
 Cash-out normally = expenses
 There are some exceptions:
 Capital Assets
 Deposits to others
...
Cash flow vs. net income example
Description Amount
Receipts from Services 10,000
Loan from Bank 20,000
Business Insurance...
Cash flow vs. net income answer
Description Cash Flow Net Income
Receipts from Services 10,000 10,000
Loan from Bank 20,00...
Types of business structure
 Sole Proprietorship/SMLLC – Schedule “C”
 Partnership/LLC (& entities tax as partnership)
...
Types of business structure (continued)
 Sole proprietors or SMLLC – Income reported
on owner’s income tax return (Schedu...
Where does income get reported?
Wages (from Corp)
Schedule C
Income/(Loss)
S Corp / Partnership
Income/(Loss)
Accounting methods
 Selection required
 Determines the timing of income and expenses
 Chosen when you file your initial...
Accounting methods (continued)
 Two basic types :
 Cash basis
 Accrual basis
 Same method used for income and expenses...
Cash basis of accounting
 Definition:
 Income - Payment received from customers
 Expense - When paying vendor bills
 N...
Accrual basis of accounting
 Definition:
 Income - When you bill a customer.
 Expense - When you receive vendor bills.
...
Timing of income and expenses
Strategies to control tax liability for the cash basis
taxpayer
 Timing when income is reco...
Timing misconceptions
 Receipt of payment via check is income when
received not when deposited.
 Expenses are recorded w...
Timing example – cash basis
Description Cash Flow
Check received for services 12/30/10.
Deposited 1/4/11.
15,000
Business ...
Timing example – cash basis answer
Description 2010 2011
Check received for services 12/30/10.
Deposited 1/4/11.
15,000
Bu...
Timing example – planning
Description Year w/ High
Income
Year w/ Low
Income
Invoice customers / collection
calls immediat...
Getting cash out – sole proprietor
 Business is your alter ego, one and the same
 Cash can be freely taken out of and pu...
Unique to sole proprietorship
 Sole proprietor can hire his or her minor child
and not pay any payroll taxes
 Additional...
Tax consequences of owner withdrawal example
Description Amount
Receipts from Services 10,000
Loan from Bank 20,000
Busine...
Tax consequences of owner withdrawal results
Description Cash Flow Net Income
Receipts from Services 10,000 10,000
Loan fr...
Tax consequences of owner withdrawal example
Description Amount
Receipts from Services 10,000
Loan from Bank 20,000
Busine...
Tax consequences of owner withdrawal results
Description Cash Flow Net Income
Receipts from Services 10,000 10,000
Loan fr...
Distributions
 Distributions – S Corporations, partnerships
and LLCs
 Withdrawals from the business of cash or property
...
Basis
What is “basis” and why is it important?
 Your cumulative investment in the business
 Losses may be disallowed if ...
Basis (continued)
How is it computed?
 A shareholder or member’s basis is determined
as followed:
 Original investment
...
S corporation basis example year 1
Description Amount
Net Income 100,000
Capital Contributions from Owner 20,000
Distribut...
S corporation basis solution year 1
Description Amount
Net Income 100,000
Capital Contributions from Owner 20,000
Distribu...
S corporation – basis example year 2
Description Amount
Beginning Basis 70,000
Net Income 20,000
Distributions to Owner 10...
S corporation basis solution year 2
Description Amount
Beginning Basis 70,000
Net Income 20,000
Distributions to Owner (10...
Avoid distributions that may be taxable
 Losses with limits – If only this were true
 Make sure you consider the taxabil...
Basis – impact of debt
Impact of debt/liabilities on basis
 A shareholder’s basis in a S-corporation is
increased by the ...
Shareholder, partner & member loans
S Corporations, partnership and LLCs
 May borrow monies from their company.
 These l...
Shareholder, partner & member loans
(continued)
 The IRS may reclassify the payment as a
taxable dividend or compensation...
S corporation basis example w/ debt
Description Amount
Net Income/(Loss) (60,000)
Capital Contributions from Owner 100,000...
S corporation basis solution w/ debt
Description Amount
Net Income/(Loss) (60,000)
Capital Contributions from Owner 100,00...
Partnership basis example w/ debt
Description Amount
Net Income/(Loss) (60,000)
Capital Contributions from Owner 100,000
D...
Partnership basis solution w/ debt
Description Amount
Net Income/(Loss) (60,000)
Capital Contributions from Owner 100,000
...
Basis planning opportunities
 If the business has losses
 Make the contribution before year-end
 Plan withdrawals after...
Getting cash out - S corporation
 Salary
 Shareholders that perform services.
 Can take a salary from the corporation.
...
Getting cash out - S corporation (continued)
 Distributions
 Must be pro-rata based on shareholder ownership
interest
 ...
Getting cash out – C corporation
 Salary (same as S Corporation)
 Shareholders that perform services.
 Can take a salar...
Getting cash out – C corporation (continued)
 Dividends
 Taxed at 15% (for US Corporations & certain foreign
corporation...
Getting cash out – partnership/LLC
 Guaranteed Payments
 Payments for services (a partnership’s version of
salary)
 The...
Getting cash out – partnership/LLC (continued)
 Distributions
 Do NOT need to be made pro-rata. They are
based upon part...
Other ways to get cash out
 Rents between related entities
 Fringe-benefits
 Retirement plans
Rents between related entities
 Forming a entity with rental
property/equipment/intangibles.
 The operating entity reali...
Rents between related parties
 Deductibility of rents between related parties is
cash basis
 Additional factors to consi...
Fringe benefits
 Fringe benefits such as
 health insurance
 medical reimbursement
 travel, education
 group term life...
Fringe benefits (continued)
Employer sponsored educational assistance
programs can deliver up to $5,250 in annual
tax-free...
Fringe benefits (continued)
There is a benefit for any child who is:
 Age 21 or older and a legitimate employee of
the pa...
Qualified retirement plans
 Tax advantages of qualified retirement plans
 Immediate tax deduction/defer payment
 Income...
Qualified retirement plans (continued)
 One of the best tools for tax savings
 Qualified retirement plans fall into two ...
Defined contribution plans
• Based on the amount contributed to an
employee’s individual account plus an earnings
or forfe...
Defined contribution plans (continued)
Types of plans:
 Profit sharing plan (discretionary contribution)
 Savings incent...
Defined benefit plans
 Any qualified retirement plan that is not
considered a defined-contribution plan.
 Contribution a...
Retirement plans – useful link
 http://www.retirementplans.irs.gov/
Reduce self-employment taxes
 Taxable income passed through by an S
corporation (via K-1) to its shareholder-
employee is...
Reduce self-employment taxes
SMLLC vs. S Corporation
 T owns an existing sole proprietorship. She is
considering contribu...
Results with SMLLC
 It will be treated as a sole proprietorship for tax
purposes.
 No change on reporting on tax return....
Results with S corporation
 T pays herself a “reasonable salary of $50,000.
 The corporation will make contributions of
...
Reduce self-employment taxes
Partnership vs. S Corporation
 S & B are forming a new business as 50/50 co-
owners. It can ...
Results with partnership
 Each owner’s SE income is $92,350 ($100,000
x 0.9235.
 SE tax liability for both S & B is $14,...
Results with S corporation
 S & B pay themselves a “reasonable salary of
$50,000 to each.
 The corporation will make con...
Special tax deductions
 Automobile expenses
 Home office deduction
 Self-employed health premiums
 Depreciation
 Star...
Special tax deductions (continued)
Automobile Expenses
 Deductible auto expenses for a business can
be accounted for by u...
Special tax deductions (continued)
Automobile Expenses - actual
 Percentage related to business use
 Track business mile...
Special tax deductions (continued)
Standard mileage method – company deducts a
standard rate for each business mile driven...
Special tax deductions (continued)
 Election to use the Standard Method
 made in the year the car is placed in service
...
Special tax deductions (continued)
Home Office Deduction
 To qualify for the deduction a portion of the
home must be used...
Special tax deductions (continued)
 If these tests are met than the taxpayer needs
to determine what percentage of the ho...
Special tax deductions (continued)
 Examples of qualifying expenses subject to allocation
are
 Real estate taxes
 Mortg...
Special tax deductions (continued)
Special tax deductions (continued)
 Sale of a residence with home office
 Attached home offices
 Do not need to allocat...
Special tax deductions (continued)
Example
 T sold his home in 2009 at a $30,000 gain.
 T used part of the home as a bus...
Special tax deductions (continued)
Self Employed Health Insurance Premiums
 SEHIP are not subject to the normal medical
e...
Special tax deductions (continued)
 Tax year 2010
 100% of SEHIP is deducted on page 1 of the
1040 with no limitation.
...
Special tax deductions (continued)
Depreciation
 Depreciation is allocation of cost, not loss of
value
 Total cost divid...
Special tax deductions (continued)
 Small Business Jobs Act of 2010 raised
maximum Section 179 expensing limit for tax
ye...
Special tax deductions (continued)
 Bonus first-year depreciation extended through
2010
 In 2010, Bonus Depreciation – 5...
Special tax deductions (continued)
Start-up expenses
 Must be capitalized unless election made
 Includes investigation, ...
Special tax deductions (continued)
Net operating loss carry-back
 Small business with deductions exceeding their
income i...
Some useful websites
 Internal Revenue Service
 www.irs.gov
 www.sbrg.irs.gov
 United States Government
 www.business...
QUESTIONS?
Thank you for coming!
Contact information
Sarah Anderson CPA, MST
EisnerAmper LLP
750 Route 202 South, Suite 500
Bridgewater, NJ 08807
908-218-5...
IRS Circular 230 disclosure: To ensure compliance with requirements
imposed by the IRS, we inform you that any U.S. federa...
EisnerAmper LLP is an independent member firm of PKF International Limited
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  • Efficiently Getting Cash Out Of Your Business

    1. 1. Efficiently Getting Cash Out of Your Business Sarah Anderson CPA, MST Bonnie Trochim CPA
    2. 2. Introductions  EisnerAmper, LLP  Participant  What do you want out of class?  What type of business do you own?
    3. 3. Course summary  Cash flow basics  Business structures  Accounting methods  Timing of income and expenses  Getting cash out by entity type / Basis  Other ways to get cash out  Self employment taxes and planning  Special tax deductions  Useful web resources
    4. 4. Cash-in minus cash-out does not equal profit  Important concepts:  Cash-in minus Cash-out = Cash left-over  Basics:  What counts as income?  What counts as expenses?  Taxability depends on:  Forms of businesses  Accounting methods
    5. 5. What counts as income?  Cash-in normally = income  There are some exceptions – examples:  Rebates or refunds for products reduce the expense  Deposits other people pay you  Sales tax collected is a liability owed to the state  Borrowed funds are liabilities  Owner’s contributions
    6. 6. What counts as expense?  Cash-out normally = expenses  There are some exceptions:  Capital Assets  Deposits to others  Partial/non-deductible expenses  Loan re-payments  Distributions to Owners
    7. 7. Cash flow vs. net income example Description Amount Receipts from Services 10,000 Loan from Bank 20,000 Business Insurance Payment 1,500 Loan Repayment 1,000 Principal 500 Interest
    8. 8. Cash flow vs. net income answer Description Cash Flow Net Income Receipts from Services 10,000 10,000 Loan from Bank 20,000 -0- Business Insurance Payment (1,500) (1,500) Loan Repayment (1,500) (500) Total 27,000 8,000
    9. 9. Types of business structure  Sole Proprietorship/SMLLC – Schedule “C”  Partnership/LLC (& entities tax as partnership)  Corporation:  C Corporation  S Corporation (C-Corp with special election)
    10. 10. Types of business structure (continued)  Sole proprietors or SMLLC – Income reported on owner’s income tax return (Schedule C)  Partnerships (and LLCs) and S-corporations - Income reported on a business return and will flow through to the owner’s individual income tax return (via K-1)  C-corporations - Income taxed on the corporate return.
    11. 11. Where does income get reported? Wages (from Corp) Schedule C Income/(Loss) S Corp / Partnership Income/(Loss)
    12. 12. Accounting methods  Selection required  Determines the timing of income and expenses  Chosen when you file your initial income tax return  Requires IRS approval to change your method
    13. 13. Accounting methods (continued)  Two basic types :  Cash basis  Accrual basis  Same method used for income and expenses  Business with inventory require accrual. (Exceptions)  Gross receipts amounts can prohibit using the cash method
    14. 14. Cash basis of accounting  Definition:  Income - Payment received from customers  Expense - When paying vendor bills  NO AR, AP or Accruals.
    15. 15. Accrual basis of accounting  Definition:  Income - When you bill a customer.  Expense - When you receive vendor bills.  Accounting records include AR, AP and Accruals.
    16. 16. Timing of income and expenses Strategies to control tax liability for the cash basis taxpayer  Timing when income is recognized  Timing when deductible expenses are paid  Deferring your income taxes to increase your cash flow
    17. 17. Timing misconceptions  Receipt of payment via check is income when received not when deposited.  Expenses are recorded when mailed not when checks are cut and put in your drawer.  Credit cards are the exception
    18. 18. Timing example – cash basis Description Cash Flow Check received for services 12/30/10. Deposited 1/4/11. 15,000 Business insurance check cut and mailed 12/29/10. Cleared 1/5/11. 2,000 Mailed invoice to client 12/30/10. Check not received until 1/15/11. 5,000 Utility bill received 12/28/10. Payment made 1/3/11. 500
    19. 19. Timing example – cash basis answer Description 2010 2011 Check received for services 12/30/10. Deposited 1/4/11. 15,000 Business insurance check cut and mailed 12/29/10. Cleared 1/5/11. (2,000) Mailed invoice to client 12/30/10. Check not received until 1/15/11. 5,000 Utility bill received 12/28/10. Payment made 1/3/11. (500) Net Income Impact 13,000 4,500
    20. 20. Timing example – planning Description Year w/ High Income Year w/ Low Income Invoice customers / collection calls immediately X Delay invoicing customers X Pre-pay bills X Delay payment of bills X
    21. 21. Getting cash out – sole proprietor  Business is your alter ego, one and the same  Cash can be freely taken out of and put into the business.  Owner does NOT take a salary.  There are no loans to and from the company with the owner  Distributions are never taxable.  **Need to keep a separate bank account**  Don’t forget estimated tax payments
    22. 22. Unique to sole proprietorship  Sole proprietor can hire his or her minor child and not pay any payroll taxes  Additionally, the earned income of the minor child under 18 is not subject to federal income tax if the child earns less than his standard deduction ($5,700 for 2010)  A child may qualify to contribute $5,000 to a deductible IRA or nondeductible Roth for 2010  Deductible by business if:  Child actually performs the work  Payments are actually made
    23. 23. Tax consequences of owner withdrawal example Description Amount Receipts from Services 10,000 Loan from Bank 20,000 Business Insurance Payment 1,500 Loan Repayment 1,000 Principal 500 Interest Withdrawal by Owner 7,000
    24. 24. Tax consequences of owner withdrawal results Description Cash Flow Net Income Receipts from Services 10,000 10,000 Loan from Bank 20,000 -0- Business Insurance Payment (1,500) (1,500) Loan Repayment (1,500) (500) Withdrawal by Owner (7,000) -0- Total 20,000 8,000
    25. 25. Tax consequences of owner withdrawal example Description Amount Receipts from Services 10,000 Loan from Bank 20,000 Business Insurance Payment 1,500 Loan Repayment 1,000 Principal 500 Interest Withdrawal by Owner 27,000
    26. 26. Tax consequences of owner withdrawal results Description Cash Flow Net Income Receipts from Services 10,000 10,000 Loan from Bank 20,000 -0- Business Insurance Payment (1,500) (1,500) Loan Repayment (1,500) (500) Withdrawal by Owner (27,000) -0- Total -0- 8,000
    27. 27. Distributions  Distributions – S Corporations, partnerships and LLCs  Withdrawals from the business of cash or property  Generally are non-taxable since shareholders, partners & members are taxed on income when it is earned or received  Taxable in certain situations
    28. 28. Basis What is “basis” and why is it important?  Your cumulative investment in the business  Losses may be disallowed if you do not have sufficient “basis” in the S Corporation, partnership or LLC  Distributions may become taxable  Determination of the gain or loss on the sale of your business ownership interest
    29. 29. Basis (continued) How is it computed?  A shareholder or member’s basis is determined as followed:  Original investment  +- Contributions/Distributions  +- Net income/ Loss  +- Debt/Liabilities  Can never be less than zero
    30. 30. S corporation basis example year 1 Description Amount Net Income 100,000 Capital Contributions from Owner 20,000 Distributions to Owner 50,000
    31. 31. S corporation basis solution year 1 Description Amount Net Income 100,000 Capital Contributions from Owner 20,000 Distributions to Owner (50,000) Basis at Year-end 70,000 Note: Taxable income is $100,000.
    32. 32. S corporation – basis example year 2 Description Amount Beginning Basis 70,000 Net Income 20,000 Distributions to Owner 100,000
    33. 33. S corporation basis solution year 2 Description Amount Beginning Basis 70,000 Net Income 20,000 Distributions to Owner (100,000) Basis at Year-end Pre Gain (10,000) Distributions in Excess of Basis – Capital Gain 10,000 Basis at Year-end -0- Note: Taxable ordinary income is $20,000 and taxable capital gain income is 10,000.
    34. 34. Avoid distributions that may be taxable  Losses with limits – If only this were true  Make sure you consider the taxability of distributions from the business before the funds are withdrawn from the business
    35. 35. Basis – impact of debt Impact of debt/liabilities on basis  A shareholder’s basis in a S-corporation is increased by the amount of monies the shareholder directly loaned to the corporation.  A partner or member’s basis in a partnership of LLC is increased for the amount of partnership or LLC’s loans it personally guarantees or is “at risk” for.
    36. 36. Shareholder, partner & member loans S Corporations, partnership and LLCs  May borrow monies from their company.  These loans should be properly documented and should include the following:  Written promissory note  Bear a AFR interest rate  Have specific repayment terms or a schedule
    37. 37. Shareholder, partner & member loans (continued)  The IRS may reclassify the payment as a taxable dividend or compensation if it determines the arrangement is not a bona fide loan  Even with proper paperwork in place, if the payment has characteristics of compensation or a dividend payment, the IRS can re characterize it as a distribution to the shareholder (making it non-deductible)
    38. 38. S corporation basis example w/ debt Description Amount Net Income/(Loss) (60,000) Capital Contributions from Owner 100,000 Distributions to Owner 50,000 Loan to Corporation from Shareholder 15,000 Shareholder guaranteed bank debt 40,000
    39. 39. S corporation basis solution w/ debt Description Amount Net Income/(Loss) (60,000) Capital Contributions from Owner 100,000 Distributions to Owner (50,000) Loan to Corporation from Shareholder 15,000 Basis at Year-end 5,000 Note: The debt guarantee does NOT give the shareholder basis.
    40. 40. Partnership basis example w/ debt Description Amount Net Income/(Loss) (60,000) Capital Contributions from Owner 100,000 Distributions to Owner 50,000 Loan to Corporation from Shareholder 15,000 Shareholder guaranteed bank debt 40,000
    41. 41. Partnership basis solution w/ debt Description Amount Net Income/(Loss) (60,000) Capital Contributions from Owner 100,000 Distributions to Owner (50,000) Loan to Corporation from Partner 15,000 Partner guaranteed bank debt 40,000 Basis at Year-end 45,000
    42. 42. Basis planning opportunities  If the business has losses  Make the contribution before year-end  Plan withdrawals after year-end  If a partnership or LLC will be borrowing soon, consider having them obtain the new loan before year-end.
    43. 43. Getting cash out - S corporation  Salary  Shareholders that perform services.  Can take a salary from the corporation.  Salary is a deduction for the corporation and is ordinary income for the shareholder.  The wages are subject to the normal payroll taxes.  Compensation from the corporation – it must be reasonable • The character & financial condition of the corporation • The role of the shareholder-employee • The corporations compensation policy/history • Comparison to similar companies • Independent investor view.
    44. 44. Getting cash out - S corporation (continued)  Distributions  Must be pro-rata based on shareholder ownership interest  Can trigger capital gain income to shareholder if there isn’t sufficient basis.
    45. 45. Getting cash out – C corporation  Salary (same as S Corporation)  Shareholders that perform services.  Can take a salary from the corporation.  Salary is a deduction for the corporation and is ordinary income for the shareholder.  The wages are subject to the normal payroll taxes.  Compensation from the corporation – it must be reasonable  The character & financial condition of the corporation  The role of the shareholder-employee  The corporations compensation policy/history  Comparison to similar companies  Independent investor view.
    46. 46. Getting cash out – C corporation (continued)  Dividends  Taxed at 15% (for US Corporations & certain foreign corporations)  Double taxed income  No distributions like S corporation and Partnerships
    47. 47. Getting cash out – partnership/LLC  Guaranteed Payments  Payments for services (a partnership’s version of salary)  The partnership gets a deduction for the total guaranteed payments.  The payments are specifically allocated as income to the partner or member to which it was paid.  Subject to self-employment taxes  Reported on K-1, not W-2
    48. 48. Getting cash out – partnership/LLC (continued)  Distributions  Do NOT need to be made pro-rata. They are based upon partnership agreement  Can trigger capital gain income to partner/member if there isn’t sufficient basis.  In certain situations distributing property from a partnership may be beneficial though the basis in the property distributed will never be higher than the basis in the partnership
    49. 49. Other ways to get cash out  Rents between related entities  Fringe-benefits  Retirement plans
    50. 50. Rents between related entities  Forming a entity with rental property/equipment/intangibles.  The operating entity realizes tax deduction for the rent paid, and owner avoids the payroll tax liability  The owner reports the rental income and expenses on personal income tax return  Liability shield for operating entity.  Isolates a valuable asset
    51. 51. Rents between related parties  Deductibility of rents between related parties is cash basis  Additional factors to consider:  Rents should be reasonable – document the commercial practices of rents paid for similar properties in the area at the time the lease is entered into  Lease should be in writing  Rents should be paid on time
    52. 52. Fringe benefits  Fringe benefits such as  health insurance  medical reimbursement  travel, education  group term life insurance  Costs that would otherwise be non-deductible personal expenses can be converted into tax deductions
    53. 53. Fringe benefits (continued) Employer sponsored educational assistance programs can deliver up to $5,250 in annual tax-free reimbursements to each eligible employee  Can benefit S or C corporation, partnership, sole proprietorship or LLC  The education need not be job related  Graduate-level courses qualify  Program must be set up under a written plan of the employer for the exclusive benefit of employees (Sec. 127(b)(1))
    54. 54. Fringe benefits (continued) There is a benefit for any child who is:  Age 21 or older and a legitimate employee of the parent’s business;  Not a more-than-5% owner of the business in his own right; and  Not a dependent of the parent (business owner)
    55. 55. Qualified retirement plans  Tax advantages of qualified retirement plans  Immediate tax deduction/defer payment  Income earned within the plan fund is tax deferred  Employees incur no tax liability until amounts are distributed  Qualified distributions can be rolled over tax free
    56. 56. Qualified retirement plans (continued)  One of the best tools for tax savings  Qualified retirement plans fall into two basic categories  Defined-contribution plans  Defined benefit plans
    57. 57. Defined contribution plans • Based on the amount contributed to an employee’s individual account plus an earnings or forfeitures of other employees that are allocated to that account. • Plan contributions are determined by a formula and not by actuarial requirements
    58. 58. Defined contribution plans (continued) Types of plans:  Profit sharing plan (discretionary contribution)  Savings incentive match plans for employees (SIMPLE)  401(k) / Solo 401(k)  Simplified Employee Pensions (SEPs)  Individual Retirement Arrangements (IRAs)
    59. 59. Defined benefit plans  Any qualified retirement plan that is not considered a defined-contribution plan.  Contribution actuarially computed.  Useful for business owners in their 50s who are looking to retire over the next 10 to 15 years but have not saved much towards retirement  Guarantees the business owner a specific retirement plan based on age, years of service and pay
    60. 60. Retirement plans – useful link  http://www.retirementplans.irs.gov/
    61. 61. Reduce self-employment taxes  Taxable income passed through by an S corporation (via K-1) to its shareholder- employee is not self-employment income for SE tax purposes  This has led to the tax planning idea of minimizing SE taxes by characterizing a small portion of S corporation income as salary, and a large portion as distributions.  IRS can recharacterize the distributions as “disguised wages” subject to SE tax
    62. 62. Reduce self-employment taxes SMLLC vs. S Corporation  T owns an existing sole proprietorship. She is considering contributing the business to a newly formed SMLLC or S corporation.  Taxable income is expected to be $100,000.  T expects to contribute $10,000 to a SEP.  T expects to pay $5,000 for medical insurance premiums.  T is the only employee.  T will have sufficient basis in S corporation stock and take a $35,000 distribution.
    63. 63. Results with SMLLC  It will be treated as a sole proprietorship for tax purposes.  No change on reporting on tax return.  T’s SE income is $92,350 ($100,000 x 0.9235).  SE tax liability is $14,130 (15.3% of $92,350).
    64. 64. Results with S corporation  T pays herself a “reasonable salary of $50,000.  The corporation will make contributions of $10,000 to the company retirement plan.  The corporation will pay medical insurance premiums of $5,000.  FICA taxes are due only on the salary of $50,000.  The medical premiums are taxable, but not subject to FICA tax.  FICA tax liability is $7,650 (15.3% of $50,000).
    65. 65. Reduce self-employment taxes Partnership vs. S Corporation  S & B are forming a new business as 50/50 co- owners. It can be operated as either an partnership or S corporation.  Taxable income is expected to be $200,000.  Retirement contributions will be $10,000 for both S & B.  Medical insurance premiums will be $5,000 for both S & B.  S & B will have sufficient basis in S corporation stock and take a $35,000 distribution each.
    66. 66. Results with partnership  Each owner’s SE income is $92,350 ($100,000 x 0.9235.  SE tax liability for both S & B is $14,130 (15.3% of $92,350).
    67. 67. Results with S corporation  S & B pay themselves a “reasonable salary of $50,000 to each.  The corporation will make contributions of $10,000 to the company retirement plan for each owner.  The corporation will pay medical insurance premiums of $5,000 for each owner.  FICA taxes are due only on the salary of $50,000.  The medical premiums are taxable, but not subject to FICA tax.  FICA tax liability is $7,650 (15.3% of $50,000).
    68. 68. Special tax deductions  Automobile expenses  Home office deduction  Self-employed health premiums  Depreciation  Start-up expenses
    69. 69. Special tax deductions (continued) Automobile Expenses  Deductible auto expenses for a business can be accounted for by using one of two methods:  Standard mileage method  Actual expense method  Taxpayers that qualify for both methods may choose the most beneficial method.
    70. 70. Special tax deductions (continued) Automobile Expenses - actual  Percentage related to business use  Track business miles/total miles  Keep complete and accurate mileage records   Deduction disallowed if unable to produce contemporaneous records
    71. 71. Special tax deductions (continued) Standard mileage method – company deducts a standard rate for each business mile driven  50 cents per mile for 2010  Additional expenses allowed for deduction that are not included in the standard mileage rate include  Business parking fees and tolls  Local transportation such as bus, cab, train
    72. 72. Special tax deductions (continued)  Election to use the Standard Method  made in the year the car is placed in service  In a later year, you can switch to the actual method  Straight-line depreciation required  Leased vehicles  elections to use standard mileage method must be used for the entire lease period.
    73. 73. Special tax deductions (continued) Home Office Deduction  To qualify for the deduction a portion of the home must be used EXCLUSIVELY on a regular basis as:  The principal place of any business  A place of business that is used by clients or customers in meeting or dealing with the taxpayer in the normal course of business.
    74. 74. Special tax deductions (continued)  If these tests are met than the taxpayer needs to determine what percentage of the home is used for business.  Take the square footage of the business use section over the total square footage of the home.  Multiply this percentage by the qualifying indirect expenses to come up with the home office deduction.
    75. 75. Special tax deductions (continued)  Examples of qualifying expenses subject to allocation are  Real estate taxes  Mortgage interest  Rent  Utilities  Repairs & maintenance  Depreciation, etc.  Direct expenses are 100% deductible
    76. 76. Special tax deductions (continued)
    77. 77. Special tax deductions (continued)  Sale of a residence with home office  Attached home offices  Do not need to allocate the gain on sale  “Recapture” of depreciation allowed or allowable on the home office after May 6, 1997  Designed to prevent a double benefit  Detached home offices  Allocate gain and treat as two separate properties
    78. 78. Special tax deductions (continued) Example  T sold his home in 2009 at a $30,000 gain.  T used part of the home as a business office in 2008 and claimed $500 depreciation.  Because the business office was part of his home (not separate) T does not have to allocate gain. T also does not have to report any gain on Form 4797. However, T must recognize the $500 of the gain as unrecaptured 1250 gain. He reports his gain, exclusion, and taxable gain of $500 on Schedule D.
    79. 79. Special tax deductions (continued) Self Employed Health Insurance Premiums  SEHIP are not subject to the normal medical expense limitations – However, watch income limitations  ‘S’ Shareholders and partners are considered self employed for this purpose
    80. 80. Special tax deductions (continued)  Tax year 2010  100% of SEHIP is deducted on page 1 of the 1040 with no limitation.  The Small Business Jobs Bill allows self- employed individuals to take the health insurance deduction into account in calculating net earnings from self-employment
    81. 81. Special tax deductions (continued) Depreciation  Depreciation is allocation of cost, not loss of value  Total cost divided by estimated useful life equals yearly depreciation  Non-cash expense  Depreciation creates difference between cash flow and profit/loss statement
    82. 82. Special tax deductions (continued)  Small Business Jobs Act of 2010 raised maximum Section 179 expensing limit for tax years beginning in 2010 and 2011 to $500,000 (formerly $250,000)  Maximum expensing amounts (beginning of phase-out amount) s raised $2,000,000 (from $800,000)  Needs to be placed in service  Can be new or used property  Includes qualified real property expensing (qualified leasehold improvement, restaurant property and retail improvement property)
    83. 83. Special tax deductions (continued)  Bonus first-year depreciation extended through 2010  In 2010, Bonus Depreciation – 50% of cost after any Section 179 Depreciation. Available for new property only. Extended under Small Business Tax Relief  Portion after 179 and Bonus, subject to regular depreciation
    84. 84. Special tax deductions (continued) Start-up expenses  Must be capitalized unless election made  Includes investigation, acquisition, or establishment of a trade or business  Immediate write-off of certain amounts incurred  The Small Business Jobs Act increases the Section 195 deduction for trade or business startup expenses from $5,000 to $10,000 for tax years beginning 2010 & 2011  The start of the limitation on the deduction is increased from $50,000 to $60,000
    85. 85. Special tax deductions (continued) Net operating loss carry-back  Small business with deductions exceeding their income in 2008 and 2009 can use a new net operating loss tax provision to get a refund of taxes paid over the past five years instead of the usual two  Examine your earlier returns to see if you had income that could be offset by a loss carry back. This could result in a tax refund to you
    86. 86. Some useful websites  Internal Revenue Service  www.irs.gov  www.sbrg.irs.gov  United States Government  www.business.gov  New Jersey  http://www.state.nj.us/treasury/taxation/  http://www.state.nj.us/nj/business/
    87. 87. QUESTIONS? Thank you for coming!
    88. 88. Contact information Sarah Anderson CPA, MST EisnerAmper LLP 750 Route 202 South, Suite 500 Bridgewater, NJ 08807 908-218-5002 ext 2235 sarah.anderson@eisneramper.com Bonnie Trochim CPA EisnerAmper LLP 750 Route 202 South, Suite 500 Bridgewater, NJ 08807 908-218-5002 ext 2327 bonnie.trochim@eisneramper.com
    89. 89. IRS Circular 230 disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this document is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matter(s) addressed herein.
    90. 90. EisnerAmper LLP is an independent member firm of PKF International Limited

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