Tax Planning Strategies. Sponsored by Watkins Meegan and Success in the City

Transcription

1 Tax Planning Strategies Sponsored by Watkins Meegan and Success in the City

2 Goals Introduction Identify at Least One Tax Saver Raise Awareness Have Some Fun Compliance is Important, Too! Please Silence Your Cell Phones Questions, Please Let Us Know How We Did Proprietary & Confidential 2

3 Introduction Plan to Pay More Taxes in 2011 and Beyond 2009 Rates for High Income Taxpayers: Singles > $171,550 and < $357,500: 33% Singles Over $357,500: 35% Capital Gains Taxed At 15% Proposed for Singles Over $200,000: 36% Proposed for Singles Over $375,700: 39.6% Capital Gains Taxed at 20% Proprietary & Confidential 3

4 Start With Type of Entity and Accounting Method Accounting Method Choice is Influenced By Business Type and Entity Type: Types of Entities: Sole Proprietor-taxed at individual level Partnership-taxed at partner level LLC-mostly taxed at member (partner) level C corporation-taxed at corporate level S corporation-taxed at stockholder level Proprietary & Confidential 4

5 Tax Planning Process What is it and why bother? Projects tax liability for the current year or for current and subsequent years Can be done for what if scenarios for specific transaction Steps: gather info, project tax, & implement recommendations Minimum goals: Penalty protection and no surprises in April Other goals: lowest possible tax or.. Coordinate with other financial planning efforts Consider both the business entity and individual owner(s) for closely held businesses Proprietary & Confidential 5

6 Tax Planning Process When and how? Start at time your prior year return is prepared. If estimated tax payments are necessary, these should be given to you with your return or extensions. Monitor throughout the year as some people and businesses need quarterly projections while others need safe vouchers. Do full tax projections from October through December while there is still time to implement tax-saving ideas. If a specific transaction is being proposed (sale of a business, stock sale, large bonus, large charitable contribution), call your tax accountants for projections of how the transaction will affect your taxes as soon as possible. Proprietary & Confidential 6

7 Tax Planning Process Coordination is Key Correlation of year-end tax planning with indirect rates Associate tax strategies with financial statement issues Identify whether reasonable compensation is an issue Consider not deferring income on the premise that tax rates will increase IF S Corp loss, do the shareholders have basis to deduct the loss Draw on lines of credit or use credit cards to pay bills to secure deductions for cash basis entity Section 179 fixed asset limits Remember contribution limits and bonus payments for C Corps Consider deferring billings to avoid collection by year end for cash-basis taxpayers Prepay state tax by year end if it won t trigger Alternative Minimum Tax Review 529 plan contributions and retirement contributions If any capital gains, offset with realized losses Proprietary & Confidential 7

8 American Recovery and Reinvestment Act of 2009 Provisions Expanded asset expensing (Section 179) of up to $250K Extended 50% 1 st Year Bonus Depreciation Election S corporation shortened Built In Gains Tax Recognition Period to 7 years for 2009 and 2010 elections Reduced estimated tax safe harbor to 90% of prior year if AGI less than $500K and > 50% of gross income from a small business Extended and expanded residential energy credits Various tax credits for electric drive vehicles COBRA continuation coverage premium subsidy for involuntarily terminated employees (65%) Credit for first-time homebuyers extended and expanded Proprietary & Confidential 8

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10 Cash Basis Accounting Only pay tax on revenues collected during the year minus deductible expenses paid. Don t pay tax on your accounts receivable and prepaid expenses deductible. Users are generally limited to partnerships, LLC s and S corporations in service industries, as well as C Corporations in service industries with up to $5M in revenues. Generally can t be used by businesses involved in retail, wholesale, or manufacture of goods, construction contractors and other non-service types of business. Popular with taxpayers- not so much with IRS and Congress. A growing business can defer taxes for many years using this method. Double edged sword-when business is flat or contracting, taxes deferred in past come due. Proprietary & Confidential 10

11 Meals, Entertainment & Gifts General rule - meals and entertainment are only deductible 50% 100% deductible Company picnic or holiday party Office snacks or meals provided to employees Provided on business site for convenience of employer Meals billed to clients and separately stated on invoice Promotional activities for the general public Use separate ledger account = tell your CPA De minimis tax rule of $25 client gifts Proprietary & Confidential 11

12 Automobile Basics Actual costs - ownership Employee tracks actual expenses Includes depreciation deductions Depreciation deductions limited Actual costs - leasing Employee tracks actual expenses Lease agreements are tricky Proprietary & Confidential 12

13 1986 Pontiac Acadian Scooter Proprietary & Confidential 13

14 Automobiles: Standard Mileage Rates Employee accounts for actual mileage Claims standard mileage rate - $0.55 per mile currently Advantages Very simple Creates contemporaneous support Less exposure on IRS audit of your return Disadvantages Entitled to more in lease or purchase of new car Proprietary & Confidential 14

15 Automobiles: Buy vs. Lease When to buy Availability of cash Intend to drive many miles Keep car for long term Option to switch to standard rate Lease agreements are tricky Proprietary & Confidential 15

16 Automobiles: Buy vs. Lease When to lease Lower monthly payments / little money down Off balance sheet financing New cars / trade-in every 3 years / loans Cost of interest included in lease payments No worries about disposing of old car Proprietary & Confidential 16

17 Fixed Assets Expensing Elections May expense up to $250,000 a year Machinery, equipment, furniture or other qualifying property Limited to taxable income and for larger businesses Consider timing of purchases Interaction with bonus depreciation Proprietary & Confidential 17

18 R&D Credits IRS definition is broad Includes direct labor as well as IR&D OK for fixed price contracts Does not apply to cost reimbursement type contracts Generally 6.5 percent of research expenditures, but limitations apply Proprietary & Confidential 18

19 Long Arm of (State) Tax Law If you re doing business in states other than your home state, then you could have nexus in those states and be liable for state income taxes. Nexus is generally determined by one or more of the following factors: Revenues from transaction conducted in a given state Payroll/compensation paid to persons working within a given state Personal or real property owned or rented within a given state If you have nexus in a state, you normally a tax return filing requirement in that state and also may have an income tax payment requirement Find out if you have nexus in a state when you first consider doing business there Could be liable for other state and local taxes such as business licenses, gross receipts taxes, sales and use taxes, and personal property taxes. Proprietary & Confidential 19

20 Independent Contractors Versus Employees Employer reasons for hiring independent contractors instead of employees No employer payroll taxes No withholding taxes on independent contractor No benefits No worker s comp Can hire piecemeal Limited reporting requirement (1099 usually filed only with IRS). Proprietary & Confidential 20

21 Independent Contractors Versus Employees IRS reasons for preferring employees over independent contractors Payroll tax revenue remitted by fewer business units Income taxes withheld at the source (employee) and remitted each pay period by the employer Track down one source of revenue versus many Weekly or semi monthly cash flow for the government versus quarterly or annual Easier enforcement of compliance for employees-irs matches W-2 s and they re done Proprietary & Confidential 21

22 Independent Contractors versus Employees Groups of factors considered by IRS Behavioral factors Financial Factors Relationship Factors Proprietary & Confidential 22

23 IRS Early Warning Systems New and improved IRS techniques to help them Schedule M-3 - highlights book to tax differences FIN 48 - income tax uncertainties XBRL - stay tuned! Proprietary & Confidential 23

24 Government Contractors Unbilled Receivables IRS rule for accrual taxpayers - all events test Financial statement report Income when earned Several examples of unbilled receivables Fee retention Estimated award fee Cost rate variance Milestone payments IRS Technical Advice Memorandum (TAM) has taken a different position If it is billable, it is taxable Proprietary & Confidential 24

25 Taxes in a Nutshell The income tax has made more liars out of the American people than golf has. Will Rogers Proprietary & Confidential 25

26 Conclusion Project your taxes Identify business changes now Stay aware of tax law revisions Know your entity type and which methods and strategies will best serve you Work with your CPA to maximize tax savings Proprietary & Confidential 26

27 Questions? Comments? Phil Philips Ric Nelson Proprietary & Confidential 27