Getting a Hug

This has never happened to me before but last week I met with two different clients that I had not seen in a few months.  I held my hand out to shake theirs and both clients gave me a hug.  Those who know me well also know that I am not a publicly affectionate person.  But I must say that both of these hugs made me feel very nice.  It was almost as though they were acknowledging the service that I provide.  I really enjoy working with my small business clients and consider building relationships as important as the work itself.  It is very rewarding when I can see the passion that my clients have for their business and know that my services are helping them to succeed. 

Bad news for firms that reimburse workers tax free for health insurance

Employers could owe a $100 per day penalty according to the IRS. 

The IRS just issued guidance on the tax treatment of employers who give tax-free money to their employees to help pay for insurance purchased through health insurance exchanges like the Mass. Health Connector.  These employers will be in violation of the Affordable Care Act (ACA) and subject to tax penalties that could be as much as $100 a day or $36,500 a year, per employee. This ruling effectively prevents employers from shifting costs to the government by “dumping” employees into the new health exchanges rather than providing workers with health coverage, as mandated by the ACA.

This new ruling eliminates many arrangements that employers have made in the past with workers to reimburse them for health insurance premiums and out-of-pocket costs. According to the IRS, when an employer reimburses employees for premiums, the arrangement, known as an employer payment plan, is subjected to taxes.

Right now, the IRS has not indicated how strict it will be in levying the penalty.  If the premium reimbursement is done on an after-tax basis, that arrangement generally is not subject to the excise tax. 

The federal government has already postponed until 2015 enforcement of the employer mandate, which requires employers with 50 or more full-time employees to provide insurance for full-time employees until 2015. Failure to comply carries a penalty of up to $3,000 per employee. The $100-a-day tax is separate from that fee, and will be assessed on employers who fail to provide plans that meet ACA standards.

How to open new doors by closing your office

I am not looking to shed a rent payment.  I am hoping to never have one.

How to open new doors by closing your office

Reasonable Compensation

I know...you've heard this from me before. But it is such an important issue that I am going to keep reminding you.

The IRS repeatedly warns that S corp. owners must pay themselves “reasonable compensation”. Despite warnings, S corporation owners often neglect to put themselves on payroll…that is a regular payroll checks with tax payments for withholdings, filing W-2s, etc. Instead, many owners take out cash as a draw or distribution.

The IRS is on to this, is looking for it and you could be at-risk for an audit. The IRS will attempt to re-characterize all those draws as wages and subject them to all applicable payroll taxes. This re-characterization triggers back taxes, penalties and interest and have bankrupted other small businesses and owners.

So, you should pay yourself “reasonable compensation”. If you are unclear what that means, please call me. Together we can go through the steps needed to prevent an unwanted and painful IRS audit.

Bank loans to small business

Banks are often the accompanist to this common S corporation blunder: Banks often will loan money directly to your S corporation to buy equipment, building, etc. As odd as it sounds, have the bank loan you the money to you personally and then you loan the money to the S corp.  In order to take any losses of the S corporation, you must have at least that much basis (see e-mail sent last week) in your S corporation. But you only get basis from money you’ve personally invested in or personally loaned to the corporation. Bank loans made directly to the S corporation do not count. This S corporation tax mistake gets made all the time. S corporation owners have loans made to the S corporation but then can’t take any deductions because there is no basis! To add insult to injury, the S corporation loan may be personally guaranteed or dual titled (loan made to both S corporation and person) and still no deduction. If you have any questions about borrowing money from or lending money to your small business, please give me a call.

Basis and Distributions

I am often asked "What is basis"? Think of basis like a checking account. Investing in your business increase basis just like a bank deposit. A draw from your business decreases basis just like a bank withdrawal. Profits add to basis and losses decrease basis (similar to how interest earnings increase a bank balance and bank fees subtract from it). Just like a bank account, more basis cannot go out than comes in—basis can never go below zero.

So, if you are thinking about taking a distribution from your S-Corp. (or LLC taxed as an S-Corp.), please call me. We should calculate your basis first to make sure that a distribution will not create any unwanted tax problems. Remember…zero basis equals no tax free distribution!

S-Corp. distributions

 

You should know that your ability to use any losses that pass through from an S corporation to you personally depends on your basis in the S corporation's stock and debt. Basis is also important for other purposes such as determining the amount of gain or loss you recognize if you sell the stock. Your basis in the corporation is adjusted to reflect various events such as distributions from the corporation, contributions you make to the corporation, and the corporation's income or loss.

Calculating the S corporation shareholder’s basis correctly is important because it measures the amount the shareholder can withdraw or receive from the S corporation as a distribution without realizing income or gain.

Often, the task of tracking basis is neglected because, when a profitable company makes only minimal distributions, the number simply doesn’t matter—until a major change happens, such as a change in the shareholder’s ownership or the end of the company’s life.

If the company has losses, they are allowed as a deduction on the shareholder or partner’s tax returns to the extent the individual has basis. Without basis, those losses are suspended/carried over to offset future income or basis. If basis is unknown or incorrect, a shareholder might incorrectly deduct losses he or she is not entitled to deduct.

A constant struggle between CPAs and their clients lies in distributions—or “over-distributions”, to be more accurate. When a shareholder or partner takes all the basis out (and then some), the excess is a taxable capital gain—often an unwelcome surprise to shareholders accustomed to receiving distributions tax-free. Distributions are an important and common reason for good basis calculations and good basis discussions with clients ahead of time.

If you have taken distributions in 2012 (or a planning to) it’s imperative that you have enough basis in your S-Corp. so that they are not re-characterized as taxable capital gains. I will be happy to sit down and review your basis and go over other S-corporation planning techniques.

Please give me a call to set up an appointment.