Monday, March 24, 2014

S CORPS Vs LLC: Not A Court Case But A Real Decision To Be Made

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Someone said, "The 3 C's of life were: CHOICES, CHANCES & CHANGES. One must make a choice to take a chance or one's life will never change". We are faced with choice in every thing we do, and making the right choices requires sound knowledge of the various options available to us. 

When choosing an operating entity for a company, it is very important that we thoroughly research the options available. Your business can be a sole proprietorship, a partnership with someone else, a single member LLC, a pass through entity like an S Corporation or it can be a C corporation. What I will layout in this blog today are the characteristics of an Limited Liability Company & an S Corporation; the pros & cons of choosing each entity type; & converting from one entity to another. 

What Is an LLC?: 

  • An LLC is a business structure similar to a sole-proprietorship or a general partnership. According to the IRS, 'It is designed to provide the limited liability features of a corporation and the tax efficiency and operational flexibility of a partnership. 
  • As a pass-through entity, all profits and losses pass through the business to the LLC owners (AKA 'members'). 
  • The members themselves report the profits/losses on their federal tax returns but not the LLC. Some states charge the LLC an income tax.
  • What differentiates the LLC is the limit of the liability for which a member is responsible. Typically, the member's investment in the company is that limit. 

Pros and Cons of the LLC:

  • One of the features that distinguishes the LLC from an S-Corp is its operational ease. There are far fewer forms required for registering and there are fewer start-up costs. Filing taxes is a once-a-year affair on April 15: a single-member LLC files a 1040 and Schedule C like a sole proprietor; partners in an LLC file a 1065 partnership tax return like owners in a traditional partnership. 
  • There are also fewer restrictions on profit-sharing within an LLC as members distribute profits as they see fit. Members might contribute different proportions of capital. Consequently, it's up to them to decide who has earned what percentage of the profits or losses. Moreover, LLCs are not required to have formal meetings and keep minutes.
  • LLCs are not the perfect entity for all businesses. First, an LLC has a limited life: when a member dies or undergoes bankruptcy, the LLC is dissolved. Typically, you would determine in advance the length of the LLC's duration when you file it with your state. If your future plans include taking your company public or issuing shares to your employees (essentially prolonging its life), then you would need to convert to a corporate business structure.
  • The owner of an LLC is considered to be self-employed and must pay the 15.3% self-employment tax contributions towards Medicare and social security. As such, the entire net income of the LLC is subject to this tax. 
  • The IRS also limits the 'characteristics' of your company. An LLC may only have two of the four characteristics that define corporations: 'Limited liability to the extent of assets, continuity of life, centralization of management, and free transferability of ownership interests.' Therefore, if you wish to have more than two of these characteristics, you'll need to convert to a corporate business structure.


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What is an S-Corp?:
  • An S-Corp is a corporation that has received the Subchapter S designation from the IRS. A business must first be chartered as a corporation in the state where it's headquartered then file to be considered an S-Corp. 
  • According to the IRS, S-Corporations are "considered by law to be a unique entity, separate and apart from those who own it". This allows for a limit on the financial liability for which an owner (AKA 'shareholder') is responsible. 
  • The S-Corp has the ability to have profits and losses pass through to the shareholder's personal tax return. Therefore the business is not taxed itself, only the shareholders. 
  • There is an important caveat: any shareholder who works for the company must pay him or herself "reasonable compensation". Basically, the shareholder must be paid fair market value, or the IRS might reclassify any additional corporate earnings as 'wages.' 
Pros and Cons of the S-Corp:
  • One of the best features of the S-Corp is the tax savings for you and your business. If you remember, the members of an LLC are subject to employment tax on the entire net income of the business. Conversely, only the wages of the S-Corp shareholder who is an employee are subject to employment tax. The remaining income is paid to the owner as a 'distribution' which is taxed at the same rate as the rest of the shareholder's income.
  • The benefits that shareholder/employees receive can be written off as business expenses. 
  • An S-Corp also allows the business to have an independent life separate from the shareholders. If a shareholder dies, leaves the company, or sells his or her shares the S-Corp can continue doing business relatively undisturbed. Thus by maintaining the business as a distinct corporate entity, clearer lines are defined between the shareholders and the business that improve the protection of the shareholders.
  • These could however come with a price, as a separate structure, S-Corps require scheduled director and shareholder meetings, minutes from those meetings, adoption and updates to by-laws, stock transfers and records maintenance.
  • There will be a greater number of forms required by the IRS for an S Corp. 
Combining the Benefits of an LLC with an S-Corp:
  • There is always the possibility of requesting S-Corp status for your LLC. Your tax professional can advise you on the pros and cons. 
  • A special election has to be made with the IRS to have the LLC taxed as an S-Corp using Form 2553. 
  • This must be filed before the first two months and fifteen days of the beginning of the tax year in which the election is to take effect. Some late elections are allowed by the IRS under special circumstances. 
It is important that you consult a qualified tax professional to walk you through this arduous process and to weigh in on the best choice that needs to be made. 

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As always, read my disclaimer here. Please consult a qualified tax professional for your unique tax needs. 
More of my contact information is on my website, www.mntaxsolutionsllc.com





Sunday, March 16, 2014

The Homeowner's Guide To Deductions

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We had a quintessential jovial uncle in the family who said, "Fools build houses for wise men to live in". He may have been partly right in his own case since he ended up moving every time he bought a home. 

But for those new home owners, things may not seem so foolish when they come to the realization that they may be able to itemize deductions they couldn't before. The standard deduction is $6100 for those filing single & $12200 for those filing married joint. Having enough in itemized deductions to take you above the standard will help bring down your tax liability. 

So what are these additional deductions that lower your taxes & increase your refunds? Let's take a look! 

  • Mortgage Interest: This one is a biggie & the most common one & every knows (or should know) about it! The cap on deductibility is $1.1 million in mortgage debt!  This can include first and second mortgages. It can also include first and second homes. Interest on home equity loans are deductible as well- beware though if the home equity loan was not used to improve your home, you cannot deduct it. Points paid to bring down the rate of the loan can also be amortized over the life of the loan on your federal tax return. 
  •  Private Mortgage Insurance (PMI): It is the insurance you pay your mortgage company if you didn't put down 20%. Mind you, 2013 may be the last year you can claim PMI and it has to be on your form 1098. Please don't confuse this with hazard insurance you pay for protection against fire or loss. 
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  • Residential Energy Credits: 2013 can also be the last year to claim up to $500 in green energy credits. You can claim Insulation, energy efficient windows, doors, high efficiency air conditioners, heaters, installed in your main residence. There is an additional credit for solar energy installations in your primary residence. 
  • Property Taxes: Property taxes paid on your primary residence can also be itemized on your federal tax return. Many states also provide a credit for property taxes against your state tax in addition to the federal. Make sure you know if the state you live in allows these credits and what the amounts are.
  •  Casualty Losses: Given the harsh winter we have had in most of North America, many of us have dealt with flooded basements & other casualty losses. You can get a tax break from a loss from disaster. This loss has to be out-of-pocket, and must exceed 10% of your income & not covered and compensated by your insurance. Make sure you can prove the value of your loss. 
So folks, don't be like my uncle, use your home deductions wisely and continue to stay in & enjoy your home. 


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As always, read my disclaimer here. Please consult a qualified tax professional for your unique tax needs. 
More of my contact information is on my website, www.mntaxsolutionsllc.com

Sunday, March 9, 2014

Saving For Retirement? Wrangle a Credit Out Of It!!

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Warren Buffet, the modern day Guru of all-things-financial, the Investing Pundit of the 21st century, has said "No matter how great the talent or efforts, some things just take time. You can't produce a baby in one month by getting nine women pregnant.” There is truth in this statement for all but especially for those who are in the lower income brackets, or those starting on their career paths, saving a little over time adds up! 

 So you just got a job or you are one of those who are thinking of starting up your retirement basket, the Internal Revenue Service (IRS) has an incentive for you. It's called the "Saver's Credit". It is available to you if you contribute to a 401K or an IRA. 

The credit is worth $2000 to taxpayers filing with the "Married Filing Joint" status and worth $1000 to those filing "Single". So you can see that the amount of credit depends on your filing status. 

The eligibility for the credit also depends on your annual income (the following are for 2013 Tax Year): 
  • Married filing separately or a single taxpayer with income up to $29,500
  • Head of household with income up to $44,250
  • Married filing jointly with income up to $59,000

This credit is further restricted by the following rules: 

  • You must be at least 18 years of age.
  • You can’t have been a full-time student in 2013.
  • You can’t be claimed as a dependent on another person’s tax return.

The retirement contribution has to be made by the end of the year, however an IRA contribution can be made before April 15th to qualify for the credit. It is claimed on Form 8880. 
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You can see the income thresholds to be eligible for this credit are phased out at lower amounts.  Maybe it is an incentive for taxpayers with lower incomes to save for their retirement, but something to be considered nonetheless. There is an Indian saying that roughly translates as "Little drops of water make pearls"! I tell my younger clients that it's never too early to start saving for retirement, one can be eligible for this credit in addition to tax savings that IRAs/ 401Ks provide. 


Bibliography: Form 8880

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As always, read my disclaimer here. Please consult a qualified tax professional for your unique tax needs. 
More of my contact information is on my website, www.mntaxsolutionsllc.com


 

Sunday, February 23, 2014

Foreign Bank Account Regulations IV: TD F 90-22.1 Is Now Form FinCen 114!

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As a reader of my blog, you probably know by now that if you have a financial interest in or signature authority over foreign financial account/ accounts, individually or the total which are $10,000 or more at any time during the calendar year, the Bank Secrecy Act requires you to report the account to the Internal Revenue Service. (More details on my post HERE)

On September 30th, 2013, the Financial Crimes Enforcement Network (FinCEN) made a very important change to the FBAR form which will effect it's filing for 2014. 

What Are The Changes

  • The FinCEN Form 114 supersedes TD F 90-22.1 as the official FBAR form. 
  • The new FinCEN Form 114 is only available online on BSA E-Filing System website
  • A paper copy of the FinCEN Form 114 will not be accepted. 
  • The system allows the filer to enter the calender reported, including past years on the online form. 
  • The online form offers an option to explain a late filing. 
  • It also lets you indicate if a filing is being made in conjunction with an IRS compliance program. 
  • If you are filing FBAR with your spouse jointly or if you wish to have a third party preparer file your FBARs on your behalf, you can use the new FinCEN Form 114a. This form is not filed with the Form 114 but maintained with the FBAR records by the filer. 
  • The taxpayer has to go on the website and can download an Adobe PDF version of the FBAR, fill out the report, sign & save a copy & then submit the FBAR on the BSA Website.  
  • Or the taxpayer can designate their EA, CPA or attorney to file on the BSA website on their behalf. 

Becoming a BSA Filer:  
  • An Enrolled Agent, CPA or Attorney can become a designated third-party filer.
  • The EA, CPA or attorney must make sure they have documented authority from the tax payers required to file to sign & submit FBARs on their behalf through the BSA E-Filing System. 
  • If such authority has been provided, the EA, CPA or attorney can file the FBARs through the single BSA account established for them.  
  • Many professional tax software programs have now incorporated the FinCEN Form 114 & enabled e-fling with the BSA Website through the software. 
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As always, read my disclaimer here. Please consult a qualified tax professional for your unique tax needs. 
More of my contact information is on my website, www.mntaxsolutionsllc.com


Saturday, February 15, 2014

To Roth or Not To Roth (an IRA)? A Classic Shakespearean Conundrum!

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Are you wondering what Hamlet, Jude Law in this example, has to do with Individual Retirement Accounts (IRA)? I have an answer for that!! Recently revisiting the Shakespeare play 'Hamlet' and listening to the opening of the soliloquy in the "Nunnery Scene", "To be, or not to be, that is the question--" etc., I wondered how many times we face the same questions albeit in not such dire straits as Hamlet! 

The question I get asked most of the time in my practice, is whether to pick a Traditional IRA or a Roth IRA! Let's quickly touch upon the basics:

Who Can Open A Traditional IRA:  According to the IRS' Pub 590, "You can open and make contributions to a traditional IRA if: 
  • You (or, if you file a joint return, your spouse) received taxable compensation during the year, and; 
  • You were not age 70½ by the end of the year.
You can have a traditional IRA whether or not you are covered by any other retirement plan. However, you may not be able to deduct all of your contributions if you or your spouse is covered by an employer retirement plan. 

If both you and your spouse both have compensation and are under age 70½, each of you can open an IRA. You cannot both participate in the same IRA. If you file a joint return, only one of you needs to have compensation.

Who Can Open A Roth IRA:  A Roth IRA is an IRA is subject to the same rules that apply to a traditional IRA except as explained below:
  • You cannot deduct contributions to a Roth IRA.
  • If you satisfy the requirements, qualified distributions are tax-free.
  • You can make contributions to your Roth IRA after you reach age 70 ½.
  • You can leave amounts in your Roth IRA as long as you live.
  • The account or annuity must be designated as a Roth IRA when it is set up.
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Differences Between The Two: So what can be deduced from the above information? 

The tax breaks for the Traditional IRA are immediately seen in the year of deposit. Also, the earnings on the contributions are not taxed until withdrawals are made from the account. 

Say for example, you made $50,000 during the year, and you put the maximum $5,500 of it in an IRA for 2013. You will be taxed on $44,500. And the $5,500 grows tax-free till withdrawal ad only at that point it will be taxed at your tax rate. If the funds are withdrawn before you turn 59 and 1/2, you will pay income-tax AND 10% penalty on the earnings accrued. Penalties may be waived only in certain circumstances. 

The tax breaks for the Roth IRA are not seen immediately in the year of deposit since contributing into it is not tax deductible. However the earnings in the account do grow tax deferred. 

In the above example, for making a Roth IRA contribution, the taxpayer would still pay taxes on the entire $50,000. The big difference to remember between the two, are the words TAX EXEMPT. In other words, a Roth IRA offers tax exempt rather than tax deferred savings. 

Both the types accumulate savings without paying taxes on the earnings, the Traditional ultimately sticks you with tax for those (plus the contributions) when withdrawn. The Roth does not. As long as the Roth rules are followed, you never pay taxes on the gains. Also, the Roth contributions are phased out at higher amounts than for Traditional. 

On the Roth, you can withdraw your initial contributions free of taxes at any time without penalty. You can also pull out both earnings plus contributions penalty free if pulled out under certain circumstances. However, do keep in mind that profits withdrawn before retirement age, and before the money has been in the Roth for at least 5 tax years will be taxed. You'll also incur a 10% penalty when the earnings are withdrawn before age 59 1/2. 

Traditional IRAs can be converted into Roth IRAs. Please contact a tax professional to advise you in this regard. 

Bibliography: Publication 590

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As always, read my disclaimer here. Please consult a qualified tax professional for your unique tax needs. 
More of my contact information is on my website, www.mntaxsolutionsllc.com







Saturday, February 8, 2014

Chaffing At the Bit? Hold Your Horses..Don't File Too Early!!

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"Tax Season is Here", "Tax Season is Here"...slogans everywhere, big box companies advertising for you to come in the door, other software companies selling DIY tax software (by the way I do NOT recommend that-see why here)..oh wait! even the IRS says it's "Free File" has been open since early January!! So what should the poor common man do? 

First, let's all take a deep breath, here procrastination for a month or so may be the key to avoid a mess on your hands later! Besides procrastination, what other reasons could there be to wait to file your taxes? 

Corrected forms and Amendments:  Hello!! Who hasn't received a corrected form in the mail after they have send their return on it's way? Many investment companies do not have information from partnerships till late in the season, so if some of your money is invested in limited partnerships, your brokerage firm or investment company will send you supplemental forms later. If you have filed with incorrect information, you will have to file an "amended tax return". Some other times employers/ universities/ mortgage companies do make mistakes as well. If you have filed early, got a refund and have spent it, will you have the money to send to the IRS with an amended return if you now have to pay?

Software Updates:   Software companies have to wait for a go ahead from the Internal Revenue Service before they can release final updated forms. They may have early release forms in place & updates to the software will change calculations. (Take this from someone who has been there! ) If your tax return involves some of these complex forms, waiting for IRS approvals is a great idea. 

Do You Usually Owe On Your Tax Return? If you do usually owe on your taxes, waiting to file will be a great idea. You can make sure you have all your papers, you know all the possible deductions available to lower what you owe, and have researched it well. 

To make that determination, to file early or late, look at all the pros & cons that relate to your filing situation & consult with a tax professional. 

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As always, read my disclaimer here. Please consult a qualified tax professional for your unique tax needs. 
More of my contact information is on my website, www.mntaxsolutionsllc.com


Friday, January 31, 2014

Do You Have An "ID"entity?---Protect It From Theft!!


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Was it Oscar Wilde who said, "Most people are other people. Their thoughts are someone else's opinions, their lives a mimicry, their passions a quotation"? Poor Oscar lived during those simple times, when identities actually represented a person's personality & all of it's unique traits. 

The world has come a long, long way since, your identity is now associated with everything you touch, from something as simple as your email account or other social media to your Social Security Number, bank accounts, credit cards etc. As we enter the maze of the digital world, we have to beware of the dragon that is the identity thief! 

I had a close encounter with identity theft when a client's e-file was rejected with a unique error code. On calling the Internal Revenue service (IRS) to investigate, we found that the reason for the reject was the return had already been filed under the same Social Security Number, we were told by the helpful agent that we now had an e-file reject with the "kiss of death" on our hands!! 

How do we deal with this modern day problem that has far reaching consequences?: 
Many innocent people are victimized and it may take years for matters to be resolved. Suffice it to say the age old idiom, "Better Safe Than Sorry" applies here. 

Here are some Tips from the Internal Revenue Service to protect you from being a victim of Identity Theft:
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  • Don't carry your Social Security card or any documents with your SSN or Individual Taxpayer ID Number (ITIN) on it: First rule of thumb, you do not need to carry your SSN/ ITIN card on a regular basis. Please leave it in a safe place, preferably a safe deposit box.  
  • Don't give a business your SSN or ITIN just because they ask: Do not give this information needlessly. Always pause to think if it is required for the business to have your SSN. 
  • Protect your Financial Information: Always shred your personal papers before you toss them out. Investing in a small shredder is a very good idea. Big box office supply stores have a service where they can shred your paper for a fee. 
  • Check your Credit Report every 12 months: Checking your credit report ensures you know of any unusual activity which has not been authorized by you. A good idea especially if you have a college student at home who has an authorized credit card, or if you are just back from a vacation out of the country. 
  • Secure personal information at home: Keep all your financial information, passports, social security cards, extra credit cards in a secure place at home. Investing in a safe deposit box that is also fire-safe is a good thing. Or renting a safe deposit box in a bank is a great idea & the cost of which is tax deductible if you itemize. 
  • Protect your personal computers: Use fire-walls; anti-virus software for your computers; apply update security patches & change internet passwords often. If you have a wireless router at home, make sure you have installed a safe network and you need a password to log in to your network. This is quite simple to set up or usually the router support staff can walk you through it.  
  • Don't give personal information over the phone unless you initiated contact or you are absolutely sure you know who you are dealing with. 

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If you believe you are a victim of identity theft: 

If you are not currently affected by this but you think you are at a risk either due to a stolen purse or lost papers; questionable credit card activity or credit report, contact the IRS Identity Protection SU at 800-908-4490. 

Be alert to possible ID Theft if you receive a notice from the IRS or learn from your tax professional that:

  • More than one tax return was filed on your behalf.
  • You have a balance due, refund offset or collection actions taken against you for a year in which you did not file tax returns.
  • IRS records indicate that you received more wages than you actually earned or 
  • Your state or federal benefits changed due to an income change reported on your behalf.
  • Fill out the IRS Identity Theft Affidavit Form 14039. Follow directions on the form that relate to your specific circumstances. 

Additional Steps with Agencies outside IRS: 

  1. Create Identity Theft Report with the Federal Trade Commission here.
  2. File a report with the local police.
  3. Contact the fraud departments of the 3 major credit bureaus: Equifax (www.equifax.com); Experian (www.experian.com); TransUnion (www.transunion.com)  
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As always, read my disclaimer here. Please consult a qualified tax professional for your unique tax needs. 
More of my contact information is on my website, www.mntaxsolutionsllc.com