Businesses are required to issue 1099s to unincorporated vendors who provide services to the company. Please see our blog for more information on 1099 filing requirements.
The installment method of accounting for sales of property allows taxpayers to report realized gains as payments are received versus in the year of sale. The installment method can be used by certain taxpayers under specific circumstances. The rules can be rather complex, but if allowable, the installment method can significantly postpone the payment of taxes. If you sell a property this year to a credit worthy buyer, and you don't need all of the sales proceeds immediately, consider an installment sale. Otherwise, the smart course of action is to collect your sales price up-front and pay the income taxes currently. If you are considering an installment sale, contact us to determine if the method is available for your transaction.
The IRS could consider your business loss to be a "hobby loss". A hobby loss results from an activity that is not profit motivated. If the IRS prevails, your business deductions for the year will be limited to your business
income reducing your loss to zero. Further, the IRS could go back to previous years and reduce similar losses.
Therefore, be sure to conduct this activity as a reasonable business person (i.e. document your investigation into the profitability of the activity, have a business plan, keep good records, etc.). Normally, if a business is not profitable within a few years, a reasonable person would discontinue the activity. Generally, the IRS presumes a profit motive exists, if the business shows a profit in 3 out of 5 years (some specific industries have different timelines). However, the profit shown must be significant in relation to the loss period (i.e. reporting losses for 2 years equal $10,000 and profits for 3 years of $300 will probably not satisfy the profit motive test). In addition, we have noted during audits that the IRS looks to see if there is any enjoyable aspect to the business. If the business involves horses, racing, making jewelry or some other craft, they are more likely to question a loss.
In preparing your tax return we noted there are a lot of personal transactions that are flowing through the company checking account or company credit cards. There are many reasons why this is not a good business practice:
1) It makes for more complicated bookkeeping since personal transactions are not deductible and need to be accounted for as such.
It appears you don't have a line-of-credit set up for your business. Consider setting one up NOW.
- It's best to have reserve funds available, BEFORE emergency funds are needed, for such purposes as major customer loss, equipment breakdown, etc.
- It's a good way to establish flexible credit and improve a banking relationship.
- This is a better source of borrowing than some other sources, such as credit cards.
Note: A line-of-credit is credit available when you need it. The balance of money you actually borrow can remain at zero or you can borrow and repay the line and the line remains open. When setting up your line-of-credit, get as large of a line of credit as possible.
Even though you may maintain the business office in your home, you CANNOT rent the office to your Company. However, you CAN enter into an agreement with your Company to reimburse you for your office expenses including utilities, repairs, and even depreciation. We suggest you submit a request for reimbursement to your Company at least quarterly and have the Company pay the request as it would any third party bill. While qualifying for the home office deduction allows you to depreciate part of your home, this could have negative consequences when the residence is sold. Any depreciation claimed after May 6, 1997 must be recaptured at a maximum rate of 25%.
Consider paying your child justifiable compensation for work performed in your business sufficient to utilize your child's standard deduction and/or lower 10% tax bracket. The Tax Court has allowed deductions for amounts paid to children as young as 7 years old for tasks such as cleanup chores, message taking and filing. Of course, the amount paid must be reasonable relative to the work done. Also, you should keep records of hours worked, but the records do not have to be complex. The payments should be made by check. For younger children not yet in college, consider paying your child a justifiable wage so that he/she has earned income in order to set up a Section 529 Plan. The entire compensation amount can be contributed to the plan. The contributions will grow tax free and can be withdrawn tax free for college. When all is said and done, this is a way of deducting amounts you are saving for your child's college education and at the same time using a tax-free method of earning income on the amounts saved.
If you are considering buying or selling a business, contact us for advice and assistance in structuring the transaction. It is very important to contact us BEFORE finalizing the contract so that we can help minimize your taxes and maximize your deductions. The purchase/sale contract will have an allocation of the price and this allocation can have significant tax consequences if not structured appropriately. Further, purchasing an existing business with employees or even just a portion of the business, could greatly affect your state unemployment tax rate and therefore should be a consideration in your purchase.
If you plan to sell your business in the foreseeable future, begin preparing for a business appraisal as soon as possible, ideally, three years before the sale. Some suggestions to increase the appraised value of your business are:
- Reduce unnecessary costs - Instead of aiming to reduce your taxes, focus on maximizing profits. Trim expenses like luxury cars, travel with only a partial business purpose, costly entertainment, business memberships, etc. Reduce nonessential employees, even family members, who are unlikely to remain with the company after the sale.
- Clean up your books - Write off excess inventory or fixed assets that are no longer used. Write off uncollectible receivables. Review your financial statements to make sure they are not too detailed or cumbersome. See if accounts can be consolidated to provide a snapshot of your business rather than a history.
- Consider an employment contract with the new owners - Offer to remain with the company for a period after the sale to maintain relationships with key customers.
- Get an appraisal early - Get an appraisal well before you intend to sell the business. This will allow you to better understand what factors influence the valuation. Then you can address the areas that will most affect the ultimate selling price. When you decide to market the business, the appraisal can be updated.
Often, one of the biggest assets a business has to sell is its good name. Your business bears your name and in the event you decide to sell your business, this could decrease the value of the business by placing too much emphasis on your personal attributes versus the overall reputation of the business. Consider changing the business name to a name more readily marketable. While the change may take some adjustment in the near term, if you sell your business in the future, it may reward you greatly.
Transfer pricing is the terminology used to describe controlled transactions between two or more organizations. Controlled means any kind of control regardless of whether the control is direct or indirect or legally enforceable. When two or more organizations are in any way controlled by the same interests, transactions between them are subject to transfer pricing rules to clearly reflect income and expenses for each organization and prevent tax evasion. Transfer pricing rules require that organizations price goods and services as if the transactions were between unrelated parties in an arm's length transaction. Companies are often tempted to aggressively price products and services when there is an economic benefit, such as a lower tax rate, in one country over another. However, since transfer pricing rules are present in each country, the methodology for pricing goods and services can be challenged on either side of the transaction. There is not a requirement that US entities report their transfer pricing methodology when filing their annual income tax return. However, there is a requirement that entities be able to justify their methodology and pricing, if audited. If you have questions regarding transfer pricing or would like to discuss this and the required documentation required for your pricing model, please contact our office.
We have noted many small businesses spend too much time on matters that could best be performed by outside parties or eliminated through better planning. Often skilled staff, including owners and managers, spend excessive amounts of time handling administrative tasks rather than growing and managing their business. Simple changes can leave more time available to increase income, productivity and efficiency. Hiring the appropriate staff or outsourcing administrative tasks, such as bookkeeping, sales tax and payroll services can be one mechanism of reducing the non-essential duties of management. Planning a business day can reduce wasted time as well, by eliminating things such as unnecessary driving time between jobs. We suggest you look at how you and your employees spend their time to make sure the focus is on the tasks that are suited to their position and expertise.
If you receive more than $10,000 in "cash" in 1 transaction (or 2 or more related transactions) from a customer, it must be reported to the IRS on Form 8300, or you may be fined and/or criminally prosecuted. The form is required to be filed within 15 days of the receipt of the cash. If you receive cash payments, contact us for further information and assistance with filing this form.
Every Company should consider what would happen in the event of a disaster. The event may not approach the level of the September 11th attack, Hurricane Katrina or Superstorm Sandy, but it could be a fire, tornado, death of a key employee, etc. In such situations, a well thought out action plan can help your Company react quickly to restore your operations. The plan should address the actions that would need to be taken to have your business operating within a few days. We suggest you prepare a written plan and provide copies to several key people.
Each business should have a written record retention policy/schedule stating the length of time specific types of documents will be maintained by the business. The amount of time you keep documentation should be based on relevant statutes and recommendations based on court cases. An often overlooked "document" that should be addressed in any record retention policy is email. This policy should address both emails sent and received. Consider reviewing your policy, particularly as it relates to emails and discuss with your attorney if you have any questions.
Every company should have a regular schedule for backing up its data. Companies should analyze what files need to be backed up on a regular basis and should consider not only their professional information and client files, but also correspondence, email and accounting data. You should also test the different files you are backing up to ensure that the files are being backed up in a usable format and can be restored and used if needed. The backup should be stored offsite and it is recommended that periodically you keep an archive of your data. Backups can be stored on CDs, thumb drives, external hard drives and online. Whatever mechanism you choose, make sure your data is stored securely and is readily accessible if needed.