When meeting with new business owners we want to find out how they are handling their payroll. Sometimes even more importantly than a good accounting system we want to make sure that a strong payroll system is in place. The “I will try it on my own” mindset can be very costly and we have seen many be damaged financially by errors in payroll.

Why is payroll a service we recommend outsourcing?

                First, there are a lot of payroll filing requirements that if you are not a payroll professional can easily be overlooked. Depending on the amount of payroll, deposits to IRS and State authorities may need to be made weekly, monthly, quarterly, or yearly. With a growing business these deadlines can be difficult to keep up with. Second, payroll can be time consuming. As the business owner you want to focus on running your business, not managing payroll that can take up hours each week. Lastly and most importantly, errors can be extremely costly. Payroll taxes are treated like trust deposits in the IRS and State department’s eyes. If these are not remitted they are deemed “mishandled” and can result in large late filing or late payment penalties. One late filed form alone can cover the cost of a payroll service for the entire year. If a payroll company is preparing the forms they will cover any penalties and interest for incorrectly or late filed forms.

Who do we recommend?

Straightforward Small Business or Single Owner S Corporations

Zen Payroll

Additional Hand Holding or Complex Businesses

ADP

Flex Pay

Paychex

Sage Payroll

If you are currently handling your own payroll and would like to work with a payroll professional, let us know!

 

Have you ever thought what would happen to your business if something unforeseen happens to you?  A buy-sell agreement needs to be in place to avoid tax and financial problem in case of owner's death, bankruptcy, divorce, incapacitation, sale or retirement. 

This type of legal document is also referred to as a business continuation plan, a buyout agreement or a stock purchase agreement.

 A buy-sell agreement makes sense for any and all business entity, including partnerships, LLCs, corporations and even sole proprietorships.  How much you need a buy-sell agreement depends on how many owners there are and who else may have a financial interest  in the business.  The cost of a buy-sell agreement is minuscule compared to its benefits.  A buy-sell agreement can ward off ill feelings by family members, co-owners and spouses.  It will also keep the business stable so it's goodwill and customer base remain intact, as well as avoiding liquidity problems that often arise on these major events.

There are a couple types of agreements.  The first  is called a cross-purchase.  This guarantees  the  party to buy the shares of the person concerned.  There is also a redemption style agreement, whereas the business itself would make the purchase and bypass the individuals altogether.  A feature that is used in conjunction is a life insurance policy on each owner.  This would ensure the availability of cash if and when the occasion presents itself.  Thus, providing funding for the buy-out .   Another type is an agreement between the company and the business owners or partners whereby the owners agree to sell the owner's interest back to the company should the occasion arise.

There are all forms of flexibility.  A formula may be determined, appraisal or a set as a fixed price.  There may be installments made over time or all cash up front.  There can also be various terms for different events, such as one for disability, one for retirement  or one for death.

Although, making these decisions may be difficult, keep in mind that they are reciprocal for each.  The agreements can also be simple, but must be structured property to insure its effectiveness.

1.  401(k) – This plan is for any type of private or public company.  It is generally most appropriate for companies with 20 or more employees.  It's key advantages are a wide range of mutual fund options as well as flexibility in the plan design.  Employers may make a matching contribution or profit sharing contribution up to 25% of compensation with a maximum of $53,000 per individual.  IRS Form 5500 and special IRS testing is made to ensure the plan does not favor highly compensation employees.  Loans may be available as well as hardship withdrawals.

2.  SEP IRA – This plan is used for the self-employed individual or small business owner to include those with employees.  It is available for sole proprietors, Partnerships, S-Corporations and C-Corporations.  There are a wide range of investment choices, it is easy to set up and maintain and there are flexible annual funding requirements.  It is funded exclusively by employer contributions.  Employer contributions are limited to 25% of compensation up to a maximum of $53,000.  There are no employer tax filings and you can withdraw at any time but a 10% penalty applies if you are under 591/2. 

3.  Simple IRA – This plan is for businesses with 100 or fewer employees as well as self-employed individuals.  It is available for sole proprietors, Partnerships, S-Corporations and C-Corporations.  The key advantages are a wide range of investment choices, salary deferral plan with less administration, and electronic funding with customized contribution allocation for each participant.  Can be funded by employee deferrals and employer contributions.  Up to $12,500 in salary deferrals and $15,500 for participants 50 and over. The employer may contribute up to 3% of compensation which can be reduced to 1% in any of the two out of five years or contribute 2% of each employee's compensation up to $5,000.  There are no employer tax filings; annual employee notifications of employers contributions must generally be made by November 1st.  May withdraw at any time, but a 10% penalty may apply if taken before the age of 59 1/2.  If the withdrawal is taken within the first two years of participation in the plan, that penalty increases to 25%.

5.  Investment  Only – This plan is for small businesses or self-employed individuals with an established retirement plan who want to significantly expand their range of investment options.  Only plan trustees can request distributions from the account.  The plan that is chosen determines the limits, who can contribute, and administrative responsibilities.

Note: Figures are for 2015 tax year.

Whether you own business assets or a rental home, you have likely heard about depreciation. Depreciation occurs due to the general wear and tear of an asset over the passage of time. The IRS requires that you to take a "depreciation" expense on assets placed into service each year. This expense will offset income just as any other business expense would.

The important thing you should know about depreciation is that if you sell the property or asset for a gain, you are required to calculate the gain but also allocate the portion of the gain attributable to any depreciation recapture.

Depreciation recapture is the procedure for collecting income tax on a gain realized by a taxpayer when the taxpayer disposes of an asset that had previously provided an offset to ordinary income for the taxpayer through the depreciation expense. Because the depreciation expense was ordinary, the tax code requires that the gains be reported as ordinary to the extent of prior depreciation.

Occasionally, clients will ask if they can avoid this by simply not taking the depreciation expense each year. The answer is no. Depreciation must be taken if you are able to take it. When you sell the property, the calculation is using "depreciation allowed or allowable". You will end up being taxed on depreciation recapture even if you did not take it (due to choice or mistake).  

Let's apply this to an example: You have owned the property and have been renting it out for the past few years. It's original cost was $100,000 (ignoring land value). You have depreciated $20,000. It's basis is $100,000 – $20,000 = $80,000. You sold it for $200,000. What is the gain and what portion of that is depreciation recapture?

The gain would be $200,000 (sales price) less the basis of $80,000 = $120,000. Of this $120,000 gain, the first $20,000 is allocated to depreciation recapture and taxed at ordinary income tax rates. The remaining $100,000 would be taxed at capital gain rates.

This matters when you are selling property at a gain and could hit you hard from a tax standpoint if you are not prepared. In scenarios where you think you will be impacted by depreciation recapture, consult with your tax professional to be sure you are prepared.

                A common question we get from business owners is “what else can I deduct?” Most of our clients are on the cash basis, meaning the net of income received and expenses paid in any given year is the amount that is reported on the tax return. Since cash drives taxable income there is often a rush at year end to spend as much as possible. This is especially true in a great financial year for the business. However, in certain instances just because expenses are paid before year end does not mean that they are deductible.

 Items like insurance, dues, and service contracts may be paid in the last month of the year but provide benefit that extends into the following year. If these items do not meet what is called the “12 month rule” they are required to be capitalized as a prepaid expense and deducted over the expense’s “useful life”. The general rules to be deductible are the following:

You can deduct an expense if the “useful life” (time of benefit) does not exceed the earlier of:

(i)                  12 months after the first date the benefit starts

(ii)                The end of the taxable year following the taxable year when the payment was made

Examples:

(a)    Yearly business dues are paid in June 2015 for the period July 1, 2015 to June 30, 2016. Those would be deductible in full in 2015 since the benefits ends within 12 months of when it was paid.

(b)   IT service contract for two years is paid January 2015 for the term January 1, 2015 to December 31, 2016. Only one year’s worth of service would be deductible in 2015 and the rest would be capitalized and expensed in 2016.

Keep these rules in mind when rushing for purchases closer to year end. While they can be useful tax strategies, if the above rules are not followed then a large cash outlay could occur without tax benefit until future years. As always, consult your tax professional when making large purchases that could affect cash flow to make sure you are maximizing the tax benefit.

It has been the tradition for companies to reward "key" employees and top management with stock options to align their interest with those of the company .  Nowadays, companies are realizing that all employees are "key" employees and the number of people holding stock options has increased dramatically. More and more employers are awarding stock options to employees as part of their compensation programs.  By purchasing stock in a company (exercising your options), you are becoming a partial owner in that company. If the company thrives and the value of its stock increases, you benefit.

 

There are two types of stock options.

 Nonqualified Stock Options (NSOs) are the more traditional options, however, they  do not meet IRS requirements that allow for special tax treatment.  NSO's exercised by employees are subject to FICA and FUTA taxes as well as Federal and State withholding just a cash wages would be.  The employee is taxed when  the stock options are exercised.  The tax is on the difference between the fair market value when you exercise the stock options and the grant price.

 Incentive Stock Options (ISOs) are allowed special tax treatment from IRS. You do not have to pay regular income taxes at the time you exercise, but you must hold your shares at least one year from the date of exercise and two years from the grant date in order to receive special tax treatment.  If you wait and sell your options after the waiting period, you will be subject to capital gains tax on the difference between the sales price and the grant price.  However, if you sell prior to the specified waiting period, you will be required to pay income taxes on the difference between fair market value at exercise and the grant price. 

 

When you own stock in a company, you're an investor. Thus, the more you know about how the stock market works, the better you will understand how your investment portfolio performs.

If you believe your company will experience long-term success , you might think twice about exercising your options immediately. If the company you hold stock in is likely to have success in the short term, that's when it is advisable to exercise those options as quickly as possible. After purchasing stock, employees sometimes must hold on to their shares for up to several years before selling it for a profit.

As with all investments, there are risks.  If the company fails or its stocks are devalued, then all investors could lose the money they put into them.  Employees may also have taken stock options instead of a higher salary, and in that case would lose the money they could have made in their paychecks.

It has been the tradition for companies to reward "key" employees and top management with stock options to align their interest with those of the company .  Nowadays, companies are realizing that all employees are "key" employees and the number of people holding stock options has increased dramatically. More and more employers are awarding stock options to employees as part of their compensation programs.  By purchasing stock in a company (exercising your options), you are becoming a partial owner in that company. If the company thrives and the value of its stock increases, you benefit.

 

There are two types of stock options.

 Nonqualified Stock Options (NSOs) are the more traditional options, however, they  do not meet IRS requirements that allow for special tax treatment.  NSO's exercised by employees are subject to FICA and FUTA taxes as well as Federal and State withholding just a cash wages would be.  The employee is taxed when  the stock options are exercised.  The tax is on the difference between the fair market value when you exercise the stock options and the grant price.

 Incentive Stock Options (ISOs) are allowed special tax treatment from IRS. You do not have to pay regular income taxes at the time you exercise, but you must hold your shares at least one year from the date of exercise and two years from the grant date in order to receive special tax treatment.  If you wait and sell your options after the waiting period, you will be subject to capital gains tax on the difference between the sales price and the grant price.  However, if you sell prior to the specified waiting period, you will be required to pay income taxes on the difference between fair market value at exercise and the grant price. 

 

When you own stock in a company, you're an investor. Thus, the more you know about how the stock market works, the better you will understand how your investment portfolio performs.

If you believe your company will experience long-term success , you might think twice about exercising your options immediately. If the company you hold stock in is likely to have success in the short term, that's when it is advisable to exercise those options as quickly as possible. After purchasing stock, employees sometimes must hold on to their shares for up to several years before selling it for a profit.

As with all investments, there are risks.  If the company fails or its stocks are devalued, then all investors could lose the money they put into them.  Employees may also have taken stock options instead of a higher salary, and in that case would lose the money they could have made in their paychecks.

As a general rule, rental real estate losses are deductible up to $25,000 in a property that you “materially participate” (the rules for this will be covered in a future blog) in without having to have other passive income to offset them. Where taxpayers run into an issue is when income is too high. Once income exceeds $100,000 the ability to deduct rentals losses starts to be phased out. This phase out is complete at $150,000 of income and no losses are allowed to be deducted. These losses are suspended, carried forward, and can only be deducted when:

(1)    There is other passive income to offset them

(2)    Income dips below $150,000 in future years

(3)    The property is sold

This results in clients in their working years who earn over $150,000 having to carry tax losses from rental properties that they cannot use for years to come. Unfortunately, many do not know about this income limitation and buy rental real estate hoping for a tax shelter for their ordinary income. The only way around this limitation is for real estate professionals. The real estate professional exception does not limit losses to $25,000 and the income limitations do not apply. The incentive to take advantage of this exception is huge!

Living in a coastal community with a large opportunity for both short-term and long-term rental real estate properties we get a lot of questions regarding the real estate professional designation. What a lot of individuals do not realize is that having a real estate license is not enough to classify you as a real estate professional for purposes of deducting rental losses. To make sure this exception is only used by real estate professionals there are two tests that must be satisfied:

(1)    Individuals must spend more than 50% of their time dedicated to work on real estate activities than non-real estate activities. This proves that the majority of your living is earned in the real estate business.

(2)    Individuals must spend more than 750 hours on real estate services during the tax year. This rule eliminates some retirees from qualifying by doing real estate activities on a part time basis.

Of course time spent on “real estate activities” does not have to be limited to rentals. It can include property management, leasing, constructions, development, etc.

                The rules for this qualification are complex and we recommend consulting a tax professional if you want to qualify for this exception.

We breathed a sigh of relief when the Tax Prevention Act of 2014 was enacted which retroactively extended for 2014 many tax breaks that businesses and individuals benefit from. For most of the year the conversation with clients had to include “we hope the tax breaks will be extended, but we cannot guarantee it”. Among the over 50 tax provisions that expired as of December 31, 2013 and had not been renewed the two that affected our business clients the most were:

·         Reduction of Section 179 expense limit from $500,000 to $25,000

·         Elimination of 50% bonus depreciation

When President Obama signed the Act on December 19, 2014 many of our clients were rushing to make capital purchases before year end. We encourage our clients to plan and have a budget for their year. For Congress to consistently wait so late in the year to make important tax decisions can be damaging to businesses that need to plan for taxes and make capital investments to grow their business. As we look to 2015, we are facing yet another year of uncertain tax legislation.

In years of tax uncertainty we suggest both business and individual clients use the basic strategy of deferring income and accelerating deductions when possible. This would assume that you expect the tax laws to be more favorable in the following year. For individuals, this can mean taking a look at your investment portfolio to offset any capital gains for the year with losses, pay property taxes before yearend, donate noncash charitable contributions like appreciated stock, or increase retirement plan contributions.

For businesses, on a cash basis this can mean delaying invoicing customers until the beginning of the year or paying bills promptly as they come in instead of taking advantage of the typical 30 day pay window. While these strategies will help the tax bill, it may produce a temporary cash flow issue.  There are several funding options available for businesses when cash flow is needed:

–          Selling Assets – They can sell an asset, receive the cash, and not pay any gains on the sale in a Like Kind Exchange if replacement property is identified within 45 days of the sale and purchased within 180 days.

–          Credit Cards – While these can be dangerous if used in excess and provide limited funding, they can provide a window to pay when needed.

–          Working Capital Loans – With higher lending limits than credit cards these can be utilized for larger capital investments when the money is needed quickly. Kabbage is an online provider of these loans and more information on them can be found here: https://www.kabbage.com/how-it-works/

Keep in mind that the above are short-term solutions when cash flow is needed to make yearend strategic moves for your business. The hope is that we will get to a place of tax stability where we can maximize our value at planning for both business and individuals!

I have had numerous people over my career ask me what I thought the most common mistake business owners, particularly start-ups make. The list is short and simple:

1. Not setting up the business properly. This would be from a legal standpoint.

2. Not setting up your accounting systems properly. Whether you use QuickBooks or some other method, be sure that you are organized and using the software properly.

2. Not filing payroll reports/sales and use tax Reports/other misc forms (at all or filing incorrectly). We all know that we need to file a tax return, but you need to be aware of ALL the other forms that your business must file. Here are a few: payroll reports, sales and use tax, business property tax listing, annual report, etc.

What do these all have in common? If you do any one of these three incorrectly, it could cost you much more to correct the problem in the long run. The ONE thing that I urge small business owners to do is seek professional help. You should look at it as an investment. Will it cost you money? YES! Is it worth it? Absolutely.

My recommendation is for the business owners to build a team. You will be in a much better position with a skilled team verses trying to  do it all alone. We are here to either help you and/or to give you referrals if it is something we do not do (i.e. attorney, bookkeeper, payroll provider, bankers, etc).