OPEN LETTER TO CONGRESS FROM SMALL BUSINESS OWNERS

Get over yourself. We don’t care about the debt; we don’t care about taxes; we don’t care about abortion or marriage—it’s the economy stupid. Debt ceilings, taxes on millionaires—none of that matters—we need JOBS. The “job creaters” are consumers—they could be on welfare or they could be middle class—people who spend their money, not millionaires. People spending money create jobs. Tax policies don’t create jobs; taxes just pay for government. Social issues don’t create jobs; they just help people in need. Government waste is no worse than big corporation waste. Over-taxation is no worse than $8 million CEO’s or obscenely rich fund managers. We need the average person to have a good job so they spend money and our business can flourish.

NOT ONE SINGLE BILL HAS BEEN PASSED IN TWO YEARS THAT EVEN ADDRESSES JOBS. There is time for everything else—where is the legislation to create jobs? The Republicans were thrown out in 2008 because they didn’t create jobs; the Democrats were thrown out in 2010 because they didn’t create jobs—can we throw you all out in 2012?

There is not a single small business owner in the country who has said to him or herself, “I don’t think that I am going to hire and try to make more money because my taxes are too high. Or because I can’t choose what kind of light bulbs I can buy. Or because there is a Planned Parenthood Clinic in town. Or because there wasn’t a war resolution.” Get over it and get the middle class good jobs. Or good bye.

Year-end Tax Tip

For all companies reporting their taxes on a cash basis the year-end offers a obvious tax-savings opportunity—pre-pay January expenses so that they can be deducted this year instead of next year. Multiply the tax savings by pre-paying expenses that add to your bottom line—advertising, management retreat expenses, consulting, and similar services. In effect this pre-payment often gives you a 40% discount on these services allowing you to do some things that you might not otherwise have the ability to do. You pay less in taxes; you get profitable services—everyone wins except the government.

S Corp? C Corp? LLC? How should I structure my business?

There are five ways you can conduct business. You can operate as a sole proprietor, a partner, a limited partnership, a corporation or a limited liability corporation (LLC). The differences in these structures fall into two categories.

Liability. The state statutes control one’s exposure to liability. Sole Proprietors, partners and general partners in limited partnerships have unlimited personal liability. The company is sued and they can lose their personal assets. The purpose of incorporation is to limit your personal liability to the assets of the corporation. This is accomplished if you work with your attorney and aggressively respect the “corporate veil.” In other words, you must treat the corporation as a separate entity and keep proper books and records. The corporation structure does not protect you if you are sued personally. Someone who successfully sues you personally for your personal actions can attach your assets and included in those assets are the shares of stock that you own in the corporation. About fifteen years ago the states started adopting a second kind of corporation called limited liability corporations (LLC). These are corporations with the same personal liability protections however they have one significant difference—if the owner of shares in an LLC is sued, the creditor can attach his property but cannot attach his shares in an LLC. This protects the company from “backdoor liability.”  Remember that all insulation from liability through the corporate structure is predicated upon you respecting the formalities of the corporate form.  You must have you shareholders meetings, you must keep your minutes up-to-date, you cannot comingle your personal funds with your corporate funds, you must keep your state filings in order—you must treat the corporation as an entity separate from yourself and you must respect that separation.  Monetary liability can be a moot issue—major creditors often require a personal guarantee anyway and in signing that personal guarantee you lose your corporate protection against that debt.

Taxation. Taxation is a separate issue from liability. Taxation is handled by the federal government pursuant to the Internal Revenue Code (IRC). Under the IRC, if you operate as a sole proprietor, partner or general partner, the income or losses of the enterprise are your personal income. If you are a corporation (notice that an LLC is a corporation) then you can elect to file under either sub-chapter S or sub-chapter C of the IRC.[1] If you elect to file under sub-chapter S, then just like a sole proprietor the profit or losses are passed directly to you as your personal income. If you elect to file under sub-chapter C, then the corporation itself files its own tax return. There are advantages and disadvantages to both. Sub-chapter S is very beneficial when the company is losing money. The losses are passed directly to you and can offset other personal income. The disadvantages include the necessity to have a calendar year-end, the inability to take some deductions that sub-chapter C allow, and the problem with “phantom income.” If the company shows a profit, then that is your income whether or not the company disburses cash. You can end up paying income tax at the highest tax scale on money that you don’t even receive. Lazy accountants love to scare people from sub-chapter C with the argument that after the corporation pays its tax if you distribute dividends that money will be taxed again as personal income—double taxation. One must ask, “Who would be so stupid as to do that?” The fact is, the first $50,000 of income in a C corporation is taxed at 15% and most people don’t take out all of the profit from their business anyway. Of course this does require the filing of an additional tax return.

The fact is that there is no right structure for every business. You should consult both your attorney and your accountant to discuss the separate issues of liability and taxation.  The weight you put on the advice of one may override the advice of the other.  As to taxes, if you think that you are paying too much in tax then you probably are. What is important is that you have an aggressive tax plan in place and constantly review it. As to liability—keep your records straight and your funds separate.


[1] Note that in Colorado an LLC is taxed as a general partnership.

Thoughts on Taxes

Some things come to mind as I read the rhetoric about tax cuts. The mantra is that increasing taxes on people making over $250,000 will hurt small business owners and restrict job creation. For a long time that just made no sense to me but recently a light went off—these aren’t the same small business owners that I know, rather, these are millionaires who own what I consider to be rather large businesses. My experience is with owners of companies doing $500,000 to $5,000,000 in annual revenues. I look at the over 5000 small business owners that I have met with in this category and I would be willing to bet that less than 5% of them are making over $250,000. Frankly, as a percentage of your sales it is tough to make that kind of money in a small business grossing less than a million or two.

Then my mind wanders. Another cliché is that businesses don’t pay taxes, their customers do. On this I agree. Corporate taxes become another cost of doing business that has to be covered in your pricing. I would never support increased corporate taxes—in fact, despite the fact that they are significantly lower than individual tax rates, I would like to see them lowered even more—if this is money would stay in businesses and create growth. The option is to give it to the government to create growth which is a dubious proposition.

So, how do individual tax rates hurt business? Fact is they don’t. But what about these poor small business owners making over $250,000 who will see a tax increase? And what about the fact that most small businesses are S corporations and the profit merely passes through to the owner who now has to pay this tax increase on their corporate profit? Wait a minute—we are lost here. A business owner has the choice to be taxed as an S corp or as a C corp. If you are an S corp the profit is “passed through” but if you are a C corp the corporation itself pays its own taxes and at a much lower rate. The problem is people getting the money out of the company without “double taxation.”

In the United States, the years from World War II through the 70’s witnessed the greatest economic growth in the history of mankind. During this period the highest individual tax rates were at times 90%. By the time of Reagan they were still at 70%. With such huge tax burdens individuals had to leave the profit from their business in their business paying the lower corporate tax rate rather than take it out of the business and subject it to the oppressive individual tax rate. Since they left the money in their businesses the owner could only acquire wealth through the appreciation of their stock and to do this they had to reinvest that money in another plant, another product, another branch location—whatever. All of these activities created jobs and increased economic activity. Post-Reagan with the lower individual tax rates you could convert your company to an S corp and take the money out of the company without nearly as severe a penalty. Now the money, instead of going into the growth and development of the corporation (i.e. jobs) it went into a second home, a boat, vacations, and the portfolio of the owner (i.e. no jobs).

The downside of this was the development of “fringe benefits.” In the struggle to create additional compensation that was not subjected to the high personal income tax, non-taxable benefits flourished. Thus the creation of health insurance. The creation of health insurance had a positive side—with so many people able to afford high quality health care, the health care industry flourished and unprecedented advancements resulted. The unintended consequence was to create an absurd system that tied your ability to pay for that health care with your continued employment—which was not recognized as a problem until the cost of that health care became beyond the reach of individuals without work-related group health insurance dovetailed with the huge job losses in a recession. This however is a issue separate from taxation.

It seems to me that if we are serious about creating jobs and building our country’s corporations we should lower corporate taxes to next to nothing and significantly increase individual tax rates on income over $250,000! Create a disincentive for an owner to create his wealth personally outside of the business and force him to create his wealth though the expansion of his business which creates jobs and spurs the economy and thereby increases the value of the shares in his business. How about a 5% corporate tax and a 75% surtax on earnings over $250,000!

COMMENTS ARE WELCOME

The Fremont Business Operating System

Small business owners wear a number of hats. Often they are the head of sales, head of human resources, CEO, CFO, COO, janitor—the list goes on. In most instances their excellence in the technical aspects of their business shines through but often that excellence is not reflected in other areas creating a need for the use of professional assistance. Management Consultants can provide coaching, mentoring and consulting services that increase profitability and decrease stress; attorneys provide legal advice that keeps you out of legal problems; accountants keep you abreast of changes in tax law and structure your business to minimize tax risk; HR professionals keep your manuals up-to-date and in compliance with the law; insurance professionals can minimize your risk; Sales and other professionals put on training seminars to improve your skills; and IT professionals can keep your systems running and put together software packages that optimize your sales and your management. But who can afford all that? You can.

The Fremont Business Operating System combines all of these services. The cornerstone of the system is a local, business management consultant. Their time is leveraged with software and memberships, with assistance from attorneys, accountants, insurance agents, IT professionals, and the staff of The Fremont Group. Through this unique process, small business owners receive a comprehensive package of services for a fixed rate per month—generally less than the cost of a single employee. And they also receive the Fremont Guarantee—if you aren’t satisfied, you don’t pay.

The Fremont Group is a non-profit organization dedicated to furthering the abilities of small-business owners. We find owners who want to change and then help them accomplish their goals. After a determination of your needs, a package of services is developed that matches those needs and The Fremont Business Operating System does the rest. The Fremont Group matches you to a local consultant and oversees the work. All services are provided by affiliated professionals who have been trained by The Fremont Group and agree to work within our Code of Ethics and up to our stringent standards. Hundreds of software programs and products have been reviewed and those selected to be included in the system are those that increase the efficiency of the consultants, and are used by The Fremont Group themselves.

If you are a business owner who wants to change—give us a call. It could be the most important call you ever make. 303 338 9300

IRS Reporting Requirements When Selling or Closing a Business

The following article is found at:  http://www.allbusiness.com/buying-exiting-businesses/selling-a-business/2975496-1.html

Corporations and other business entities can cease operations for many reasons and in a number of ways. In all cases there is far more to it than simply locking your doors. When a business is terminated, or its legal status changes, there are typical reporting requirements that must be met.

Here is a helpful guide to what to do when selling or closing a business:

Selling Your Business

When a business is bought or sold, both the buyer and seller of business assets must report to the IRS the allocation of the sales price and other business assets. IRS Form 8594 (Asset Acquisition Statement Under Section 1060) can be used to provide this information. Form 8594 should also be attached to the buyer and seller’s federal income tax return for that year.

The IRS treats each asset as being sold separately in order to determine a gain or loss. Sold assets have multiple classifications, such as capital assets, depreciable business property, real business property, or property held for sale to customers — e.g., inventory or stock in trade. The sale of capital assets results in capital gain or loss. The sale of real or depreciable business property held longer than one year also results in gain or loss. Inventory sales result in ordinary income or loss.

When sold, “partnership” and “joint venture” interests are treated as capital assets. The part of any gain or loss from unrealized receivables or inventory items will be treated as ordinary gain or loss. Corporation interests, meanwhile, are represented by stock certificates and usually result in capital gain or loss.

Because corporations generally recognize gain or loss when liquidating their assets, these gains and losses must be reported. Gain or loss is also generally recognized on a liquidating distribution of assets, as if the corporation sold the assets to the distributee at fair market value. These gains and loss, too, must be reported. In certain cases in which the distributee is a corporation in control of the distributing corporation, the distribution may not be taxable.

Closing Your Business

When closing your business you must file a final IRS Form 941 return for the last quarter in which wages are paid. If you have employees, you must file the final employment tax returns, in addition to making final federal tax deposits of these taxes. If you continue to pay wages or other compensation for quarters following the closing of your business, you must also file returns for those quarters.

The annual tax return for a partnership, corporation, S corporation, limited liability company, or trust includes check boxes near the top front page just below the entity information. For the tax year in which your business ceases to exist, check the box that indicates this tax return is a final return. If there are Schedule K-1s, repeat the same procedure on the Schedule K-1.

You will also need to file returns to report disposing of business property, reporting the exchange of like-kind property, and/or changing the form of your business. Following is a list of typical reporting actions to take when closing a business, depending on your type of business structure:

  • File final employment tax form
  • Report information from W-2s issued
  • Report capital gains or losses
  • Report partner’s/shareholder’s shares
  • Report information from 1099s issued
  • Report corporate dissolution or liquidation
  • Report business asset sales
  • Report the sale or exchange of property used in your trade or business

The American Recovery and Reinvestment Act of 2009

The American Recovery and Reinvestment Act of 2009
A Summary of Incentives and Tax-Related Provisions for Business Owners

On February 17, 2009, an economic stimulus package entitled the American Recovery and Reinvestment Act of 2009 (ARRA) was signed into law. The ARRA was birthed to jumpstart a failing U.S. economy that was marked by a floundering stock market, a hemorrhaging automotive industry and a housing market that was on a second flush down the toilet. Controversy surrounded the bill from the getgo. With President Barrack Obama as their leader, Democrats wanted a bill that would create jobs and grow the economy. Republicans contested that the bill would not grow the economy, but rather grow our government and place an enormous deficit burden on the next generation. The act was drawn up, amended and settled in record time, passing with 60 votes—the minimum needed to pass. However, this was not the bipartisan legislation Obama had whimsically hoped for, as only three Republicans voted for the legislation and seven Democrats voted against it.

The Congressional Budget Office estimates the act’s total cost at $787 billion over the 2009-2019 period, with $212 billion allocated to tax relief, $308 billion for appropriations and $267 billion assigned to direct spending. The ARRA provides tax-related provisions and relief for individuals and families; energy incentives; economic recovery zone tools; bonds for local governments; municipalities and schools; and tax provisions related to health coverage improvements. Woven within the convoluted text of the legislation’s 185,947 words, the ARRA also has several incentives and tax-related benefits for business owners.

Special Allowance for Certain Property Acquired During 2009

Capital expenditures are depreciated over time according to a depreciation schedule, which effectively allows businesses to recover the cost of the expenditure over time. In 2008, businesses were allowed to accelerate the recovery faster with an immediate 50 percent write off of the cost of the depreciable property acquired in 2008. With the new legislation, Congress has extended the additional 50 percent first-year depreciation deduction allowed for one year, generally for property acquired through 2009 (through 2010 for certain longer-lived and transportation property). Examples of eligible depreciable property are equipment, tractors, wind turbines, solar panels, computers, etc., that are purchased during 2009.

Alternatively, corporations may increase their research credit or alternative minimum tax (AMT) credit limitation by the bonus depreciation amount with respect to certain property placed in service in 2009 (2010 in the case of certain longer-lived and transportation property). Under new law, a taxpayer that has made an election to increase the research credit or minimum tax credit limitation for eligible qualified property for its first taxable year ending after March 31, 2008, may choose not to make this election for qualified extension property.

The extension of the additional first-year depreciation deduction is generally effective for property placed in service after December 31, 2008. The extension of the election to accelerate AMT and research credits in lieu of bonus depreciation is effective for taxable years ending after December 31, 2008.

Temporary Increase in Limitations on Expensing of Certain Depreciable Business Assets

To help small businesses quickly recover the cost of certain capital expenses, small business taxpayers may elect to write off the cost of these expenses in the year of acquisition in lieu of recovering these costs over time through depreciation. A taxpayer with a sufficiently small amount of annual investment may elect to deduct otherwise depreciable costs under Internal Revenue Code (IRC) Section 179. The existing law would limit this amount to $125,000 (indexed for inflation) of capital expenditures subject to a phase-out once capital expenditures exceed $500,000 (indexed for inflation). In 2008, Congress temporarily increased the amount to $250,000 and increased the phase-out threshold to $800,000. The new law extends the 2008 provision for 2009 and beyond, and this proposal is estimated to cost $41 million over 10 years.

Five-Year Carryback of Operating Losses of Small Businesses

A net operating loss (NOL) is extremely beneficial to companies by allowing their losses from previous years to be carried forward to future years to offset taxable income in those years. NOLs can generally be carried back two years and carried over 20 years to offset taxable income in those years. Different carryover periods apply with respect to NOLs arising in certain circumstances. Losses that are carried back may generally only be used to offset 90 percent of a taxpayer’s alternative minimum tax liability.

For 2008 and 2009 losses, the bill will extend the maximum carryback period to eligible small businesses for net operating losses from two years to five years and will allow net operating loss carrybacks to be used to offset 100 percent of the taxpayer’s alternative minimum tax liability. An eligible small business is generally one that has average annual gross receipts for the three-taxable- year period ending with the year prior to the year of the NOL of $15 million or less. This benefit would be denied to companies that received money from the Temporary Asset Relief Program (TARP), but were otherwise qualified for the provision as well. This proposal is estimated to cost $15 billion over 10 years.

Decreased Required Estimated Tax Payments in 2009 for Certain Small Businesses

The IRC specifies the amount of quarterly estimated tax payments that must be made in order to avoid underpayment penalties. This amount is determined by the reference to the required annual payment. The required annual payment is generally the lesser of 90 percent of the tax shown on the return or 100 percent of the tax shown on the return for the prior taxable year (110 percent if the adjusted gross income for the preceding year exceeded $150,000).

Estimated tax payments required in 2009 are reduced for certain individuals with adjusted gross income of less than $500,000 in the prior year, more than 50 percent of which was from a small trade or business. The new law provides that the required annual payment of a qualified individual for taxable years beginning in 2009 is not greater than 90 percent of the tax liability shown on the tax return for the preceding taxable year. A “small trade or business” is one that employed no more than 500 persons, on average, during the calendar year ending in or with the preceding taxable year.

Incentives to Hire Unemployed Veterans and Disconnected Youth

Existing law provides a work opportunity tax credit for employers hiring individuals from one or more of nine targeted groups. The credit is equal to 40 percent of the first $6,000 of wages paid to these types of employees. The ARRA created two more target groups: unemployed veterans and disconnected youth. Unemployed veterans and disconnected youth who begin work in 2009 or 2010 are treated as a targeted group for purposes of the work opportunity credit.

An individual would qualify as an unemployed veteran if he or she was discharged or released from active duty from the Armed Forces during 2008, 2009 or 2010 and received unemployment compensation for more than four weeks during the year before being hired. An individual qualifies as a disconnected youth if he or she is between the ages of 16 and 25 and has not been regularly employed or attended school in the past six months. This proposal is estimated to cost $208 million over 10 years.

Temporary Rules for Qualified Small Business Stock

Qualified small business stock has generally allowed individuals to exclude 50 percent of the gain from the sale of the qualifying small business stock acquired at original issue and held for more than five years. A qualified small business is a C corporation, the gross assets of which at all times do not exceed $50 million (without regard to liabilities). The corporation must be an “active business” rather than simply an investment company.

The ARRA increases the percentage exclusion for qualified small business stock sold by an individual from 50 percent (60 percent for certain empowerment zone businesses) to 75 percent. As a result of the increased exclusion, gain from the sale of qualified small business stock to which the provision applies is taxed at effective rates of seven percent under the regular tax and 12.88 percent under the AMT.

Temporary Reduction in Recognition Period for Built-In Gains Tax for Company Changing from C Corporation to S Corporation Status

The recognition period during which S corporations may be liable for the built-in gains tax (commonly known as the BIG tax) has been 10 years. This means that S corporations must pay a 35 percent tax on certain built-in gains that arose prior to the conversion of the C corporation to an S corporation, and which are recognized by the S corporation during the first 10 taxable years that the S election is in effect. The built-in gains tax also applies to gains with respect to net recognized built-in gain attributable to property received by an S corporation from a C corporation in a carryover basis transaction. The amount of the built-in gains tax is treated as a loss taken into account by the shareholders in computing their individual income tax.

The new bill reduced this recognition period from 10 years to seven years, effective for any taxable year beginning in 2009 and 2010. Thus, with respect to gain that arose prior to the conversion of a C corporation to an S corporation, no tax will be imposed after the seventh taxable year the S corporation election is in effect. In the case of built-in gain attributable to an asset received by an S corporation from a C corporation in a carryover basis transaction, no tax will be imposed if the gain is recognized after the date that is seven years following the date on which the asset was acquired.

Temporary Expansion of Availability of Industrial Development Bonds for Facilities Manufacturing Intangible Property

Qualified small issue bonds (commonly referred to as “industrial development bonds” or “small issue IDBs”) are tax-exempt bonds issued by state and local governments to finance private business manufacturing facilities (including certain directly related and ancillary facilities), or the acquisition of land and equipment by certain farmers. For purposes of these bond provisions, a manufacturing facility is any facility that is used in the manufacturing or production of tangible personal property.

New law expands the definition of “manufacturing facility” for bonds issued after February 17, 2009, and before 2011. For these bonds, a manufacturing facility is any facility that is used in the manufacturing, creation or production of tangible property or intangible property. In addition, facilities that are functionally related and subordinate to the manufacturing facility need only be located on the same site as the manufacturing facility to be eligible for bond funding.

Credit for Investment in Advanced Energy Facilities

In general, an income tax credit is allowed for the production of electricity from qualified energy resources at qualified facilities. Qualified energy resources comprise wind, closed-loop biomass, open-loop biomass, geothermal energy, solar energy, small irrigation power, municipal solid waste, qualified hydropower production and marine and hydrokinetic renewable. Qualified facilities are, generally, facilities that generate electricity using qualified energy resources.

The ARRA provides for an enhanced 30 percent credit in taxable years beginning in 2009 and 2010 for research expenditures incurred in the fields of fuel cells, battery technology, renewable energy, energy conservation technology, efficient transmission and distribution of electricity and carbon capture and sequestration. This proposal is estimated to cost $18 million over 10 years.

Conclusion

Although the president signed the act on February 17, 2009, some provisions in the new law are effective on different dates and many end on different dates. These legislative benefits are available to millions of small business owners. Now is the time to take advantage of these great tax breaks and incentives while they last. However, many business owners will not know how to take advantage of all benefits available to them; therefore, it is highly recommended that you seek professional tax and legal advice to ensure proper utilization of the benefits provided by the American Recovery and Reinvestment Act.