small business
What’s a 1099-K?
Friday, February 3rd, 2012 | consulting, tax | No Comments
Have you received a 1099-K this year? This new form reports electronic financial transactions. If your business takes debit or credit card payments, then you will receive a 1099-K if you process more than $20,000 AND more than 200 transactions.
Business tax returns contain a new line to report 1099-K amounts. For this tax season though, the IRS is deferring the requirement that you report your 1099-K income on this line. Instead, report your gross receipts as you have in the past on the appropriate line of the form. Forms 1065 and 1120 contain the instruction, “For 2011, enter zero.” The IRS has issued an advisory that tells filers of Form 1040 Schedules C, E, and F to do the same.
We anticipate that this will necessitate some record-keeping changes in 2012; for example, accounting for tips charged to a credit or debit card. We are assessing potential impacts of the new reporting requirements and advising our clients.
LLC vs. corporation
Wednesday, February 1st, 2012 | consulting, tax | No Comments
We received this question from a budding entrepreneur about setting up as an LLC or a corporation:
- I am looking to set up a small business. I am debating on whether an LLC or S-Corp would be better. I am looking to decrease taxes and limit my liability. I, as the owner, will work in the business and will have a very small salary.
Thank you for contacting us with your business question. First of all, we are not attorneys, so we cannot offer you legal advice, and there are legal details to consider. Big-picture though - an LLC or corporation provides a greater degree of protection against personal loss if something bad should happen that affects your company. Taxation is a factor to consider, but it is one of many.
From a federal tax standpoint, if you are the only member (i.e., owner) of the LLC, you use the same tax form as if you were a sole proprietor - Schedule C of your personal tax return. If you have a partner, you report on a partnership return (1065) and report your share of the profits on your personal return. Either way, you pay taxes on the net income, regardless of the amount of money you take out of the company. The taxes consist of self-employment tax (Social Security and Medicare) and income tax.
Owners/partners cannot take a salary; they may take a draw against the company’s profits but that does not affect the net income they pay taxes on. In other words, the LLC does not get a deduction for money its owners take out. A corporation does get a deduction, because it pays everyone (including the owner who works in the business) as employees. An S-corporation’s net income flows through to the owners as a partnership’s does.
In Tennessee, an LLC or corporation must pay a franchise tax based on the value of its assets or net worth, and an excise tax based on its net income. One big difference - for the LLC, you back out the net income that you pay self-employment tax on. This effectively reduces the excise tax to zero for an LLC, whereas a corporation (including an S corporation) does not get this break. This often sways the decision toward the LLC, although you must “run the numbers” to determine which strategy results in the lowest tax at both the company and personal level.
There are many factors and decisions to be made when starting your business. I recommend that you contact the Tennessee Small Business Development Center. These good folks are dedicated to helping entrepreneurs cover all the bases and get started on the right foot with their new ventures. You can reach them at www.tsbdc.org and (865) 246-2663.
We’re seeing quite a few new business owners, and we welcome you. After all, every business starts out small. Where it goes from there depends on many different factors, including good financial decisions.
Employees paid as independent contractors
Friday, January 13th, 2012 | consulting, tax | No Comments
A Knoxville company was paying its workers as independent contractors. It was forced to pay back wages to its workers by the Department of Labor, who determined that they were actually employees subject to minimum wage and overtime laws. The news hit the local paper, no doubt as a warning to other businesses who may be trying similar tactics.
Unfortunately, this may be only the beginning of this company’s troubles. The DOL is likely to share this information with the IRS, the Social Security Administration, and the Tennessee Department of Labor. All of these agencies will dun the company for back payroll taxes and withholdings, charging hefty penalties in the process.
Setting up payroll, tax deposits, and quarterly reporting may be more burdensome to a company than simple annual 1099 forms, but this appears to be one case in which that decision came back to haunt the company in a terrible way. Maybe it’s not too late for them to apply for the IRS voluntary reclassification program.
Contact us if you have concerns about the status of your workers.
New 1099 trap
Tuesday, January 10th, 2012 | consulting, tax | 2 Comments
Business tax returns for 2011 contain new questions about Form 1099 that may trap you if you overlook issuing 1099s this January. The questions appear on Form 1040 Schedules C (sole proprietorships), E (rental), and F (farms). They also appear on partnership (1065) and corporate (1120 and 1120S) returns.
The questions:
- Did you make any payments in 2011 that would require you to file Form(s) 1099?
- If “Yes,” did you or will you file all required Forms 1099?
Like the rest of the tax form, you must answer the questions truthfully under penalty of perjury (read the signature area). So take the time now to determine if you must issue any 1099s and get the process started. The deadline for issuing 1099s is January 31. More info from IRS.gov here.
These tax return questions are part of a larger IRS effort to crack down on the issue of employees vs. independent contractors, which they say costs the government billions of dollars in uncollected taxes. We’ve developed a white paper that helps you learn how to protect your company from this latest compliance push. Just click the email address or fill in the contact form and mention that you would like to receive the white paper, and we’ll send it to you without delay.
2012 standard mileage rates
Thursday, December 22nd, 2011 | tax | No Comments
The IRS has announced standard mileage rates for 2012. Beginning on Jan. 1, 2012, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:
- 55.5 cents per mile for business miles driven
- 23 cents per mile driven for medical or moving purposes
- 14 cents per mile driven in service of charitable organizations
Good records are important to preserving your deduction. The IRS requires that you log your miles when you elect to use the standard mileage rate. The log must include the name, location, and reason for the trip. For business miles, your trips from home to your first work location and from your last work location to home are nondeductible commuting miles. The business portion of parking fees and tolls is deductible in addition to the standard mileage rate. Remember to record your odometer reading as the calendar rolls over to the new year.
Because of the specific record-keeping requirements, the IRS has been targeting the mileage deduction for audit. So it makes good sense to keep your mileage log up to date to preserve this often significant deduction.
For business, you may choose to deduct actual expenses instead. These may include gasoline, oil, tires, repairs, insurance, depreciation, parking fees, tolls, licenses, and garage rent. If you also use the vehicle for personal purposes, you still must track your mileage to determine the business portion of these expenses.
Your log may take any form, as long as you can save it and make a copy in case the IRS asks for it. Formats range from sales call sheets on which you enter mileage, to the small booklets you keep in your vehicle’s glove box and fill in each day. There are even smartphone and tablet apps to help you track your mileage and document your standard mileage rate tax deduction.
6 Year-end tax reduction tips
Wednesday, December 21st, 2011 | tax | No Comments
Use these six tax reduction tips to reduce your 2011 tax bill, but act before December 31, 2011.
- Make charitable contributions by December 31. Keep a canceled check, a bank statement, credit card statement or a written statement from the charity, showing the name of the charity and the date and amount of the contribution for all cash donations. Donations charged to a credit card by Dec. 31 are deductible for 2011, even if the bill isn’t paid until 2012. If you donate clothing or household items, they must be in good used condition or better to be deductible.
- Install energy-efficient home improvements such as insulation, new windows and water heaters to your main home for a tax credit of up to $500. The work must be finished by December 31.
- Adjust your investment portfolio and consider selling gaining and losing investments. Capital losses offset capital gains. Up to $3,000 of any excess capital loss per year offsets other income, and any leftover loss may be carried forward to reduce future tax bills.
- Contribute the maximum to retirement accounts such as 401(k) and similar workplace retirement programs by December 31 to reduce taxable income. You have until April 17, 2012, to set up a new IRA or add money to an existing IRA and still have it count for 2011. Generally, you can contribute up to $5,000 to a traditional or Roth IRA, and up to $6,000 if age 50 or over.
- Make a Qualified Charitable Distribution from your IRA to a qualified charity if you are age 70 1/2 or over. The maximum annual exclusion from gross income for QCDs is $100,000. It is available even if you do not itemize deductions.
- Take the Small Business Health Care Tax Credit if you are a small employer who pays at least half of your employee health insurance premiums. This calculation is tricky, so consult your tax professional for assistance.
Remember to save receipts and records related to your taxes so that you can make sure your return is accurate and you can get the maximum tax reduction available to you.
Do industry trends indicate recession?
Friday, December 9th, 2011 | consulting | No Comments
Industry trends indicate recession, according to Bloomberg economist Richard Yamarone in his Knoxville Chamber presentation. He showed us several key economic indicators he uses to forecast future economic trends to explain why he is pessimistic about the U.S. economy in 2012. While many economists see positive trends, he sees risks that he believes business owners should be watching. He calls the European debt crisis the wild card that could turn the economy either way.
Recently, we posted about the first part of the presentation, in which Mr. Yamarone analyzed several macroeconomic indicators. He continued his talk with looks at specific industries that closely track the larger economy.
- The trends of real GDP and railcar loads of waste are correlated; after a steady uptrend, both indicators are turning flat, indicating economic deceleration.
- The construction industry is operating at 1996 levels and not growing in the residential sector, although commercial construction is seeing slight improvement.
- Home prices are flat, and may remain depressed for years.
- FedEx package shipments are negative compared to the previous year, indicating a similar trend for GDP.
Mr. Yamarone told us that people tend to mentally allocate their money for different uses, either consciously or subconsciously. The following trends indicate that people are allocating less funds to non-essential spending because real disposable personal income is not growing. In most households, the women hold the purse strings, so they decide how the money gets spent. Here are some of Mr. Yamarone’s favorite indicators for predicting turning points in the economy:
- The “misery” index (consumer price index plus unemployment) is at a higher level now than at the worst period of the financial crisis in 2008.
- Dining out: year-to-year growth is starting to turn down.
- Spending on jewelry and watches is weak and volatile; likewise for cosmetics.
- If the wife feels comfortable about the family’s finances, she will buy that outfit she has been eyeing. Growth in spending on women’s clothing has fallen to recessionary levels.
- Similarly, people gamble more when they feel they have more money to “play” with. Growth in casino gambling has been near zero for some time.
In addition to key economic indicators, Mr. Yamarone reads about 2,000 annual reports and other such documents over the course of a year. Using this information, he forms and tweaks his outlook for the future of the economy. We can tap into his insight as we make strategic decisions about the future of our own businesses.
Worker classification crackdown coming
Wednesday, October 26th, 2011 | consulting, litigation, tax | 2 Comments
The IRS recently announced a voluntary worker classification program that provides amnesty from back payroll taxes and penalties for companies who reclassify their independent contractors into employees. While there may be advantages on the federal tax side of this issue, you must consider other factors before deciding on a course of action. Worker classification has been a tricky, murky issue for many years. We will explore several aspects of this issue in future posts, including:
- Deciding whether your workers truly are independent contractors or employees;
- Protection from reclassification under Internal Revenue Code Section 530 or other precedents;
- Consequences at the state level of voluntary disclosure to the IRS;
- Related legal issues such as worker response to reclassification (e.g., retroactive reclassification to apply labor laws and collect overtime pay);
- Potential consequences from other government agencies such as the Department of Labor.
As we have seen before, a voluntary disclosure program is a harbinger of increased enforcement action in this long-contested area of business law. This makes it more important than ever for you to seek consultation from a knowledgeable professional. It is not an overstatement to say that this issue could bring your company to its knees. Unfortunately, we have seen it happen to smart, well-meaning business owners. Contact us today for a detailed analysis of your company’s exposure to the coming worker classification crackdown.
Tort reform in effect in TN
Wednesday, October 5th, 2011 | consulting, litigation | No Comments
Tennessee’s tort reform law went into effect on October 1, 2011. It places caps on non-economic damages and punitive damages except in certain egregious cases.
Governor Haslam and legislative sponsors tout the increased predictability that the new law will bring to businesses aiming to quantify risk. They say it brings Tennessee on par with other Southeastern states, which will enhance recruitment of businesses to the state.
We anticipate that it will help existing businesses too, as insurers adjust their risk analysis for the new environment. That may bring liability insurance rates down, which would be a welcome relief to small business owners. Consult your insurer and let him or her know you are watching how their company responds to the reforms now in place.
This law follows the 2008 medical tort reform law that sponsors say has reduced non-meritorious claims by 50%.
Insurance is a useful tool to help you protect your business and personal assets from catastrophe. Our firm chooses not to sell insurance, investments, or other financial products. This frees us to give you unbiased insight into the use of insurance and other financial tools for the betterment of your company and family.
Another government email scam!
Thursday, September 1st, 2011 | consulting | No Comments
Our firm’s junk email filter caught another government email scam. This one appears to come from the FDIC, the federal bank watchdog, with the subject “FDIC: about your business accounts”. It hints that your bank (which it does not name) is being taken over, and provides a link for more info on how your accounts will be affected. I did not click the link (and you shouldn’t either). I suspect that the linked site asks for your banking information.
You can be sure that the FDIC (or any other government agency) will not ask in an email for your personal information. We cannot think of any circumstance under which the government would initiate electronic communication with you without your prior permission.
Always be alert to possible scams from the government or any other unexpected source. If you’re not sure about the verity of an email, you are welcome to call us and ask about it. If you are not sure about the identity of the sender, do not click a link in an email.
Protecting your business from such dangers is just one of the many ways we help you keep your company on track to greater success.