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My Office is now located at: 2400 Big Timber Road, Suite 101A Elgin IL 60124 The building is on the Northwest corner of the intersection of Randall and Big Timber Roads, south of the Jane Adams Tollway (I-90). The drive entrance is off of Big Timber. Important New Tax Provisions Related to New Hires These two provisions of the 2010 HIRE ACT may be of interest to you as a business owner or to your employer. 1. If an employee is hired after February 3, 2010 who worked less than a TOTAL of 40 hours in the 60 day period prior to beginning work for the new employer and certifies as such by signed affidavit... The new employer will save the 6.2% employer social security tax on wages paid from March 18, 2010 to the end of 2010. The second quarter Federal 941 will begin to accommodate this tax credit. It will be up to the employer to provide a copy of the affidavit to your payroll service or accountant, in order to apply the credit. 2. If the above described employee is retained for 52 consecutive weeks, an additional $1,000 tax credit may be applicable on the income tax filing of the employer. _______________________________________________________________ MORE Tax Credits - Health Reform Law for small employers and taxexempt organizations that provide health insurance coverage Under the new law, a maximum tax credit of 35% of premiums paid in 2010 by eligible small businesses and 25% of premiums paid by eligible employers that are tax-exempt organizations will be available. In 2014, this maximum credit jumps to 50% of premiums paid by eligible small employers and 35% of premiums paid by eligible employers that are taxexempt organizations. The government defines an eligible small employer as one with fewer than 25 full-time equivalent employees paying wages averaging less than $50,000 per employee per The credit is based on the % paid by the employer ( if employer share is at least 50% of a single premium) and will have limitations related to the average premium for the small group market in a State (or an area within the State) will be determined by the Department of Health and Human Services (HHS) and published by the IRS. Publication of the average premium for the small group market on a State-by-State basis is expected to be posted on the IRS website by the end of April. There will be special limitations in the calculation of the credit for a tax exempt organization. FTEs will be calculated from the total hours paid for the year divided by 2080. (rounded down). Generally business owners, employed family members and seasonal employees are not included in the total hours or wages. Eligible small businesses can claim the credit as part of the It will be important to maintain accessible records of the number of hours paid and health premiums paid per employee for the year 2010. _____________________________________________________________ HOW WILL THE NEW 2009 TAX LAW STILL AFFECT Individual Taxpayers? ENERGY CREDITS - Click here for a chart of the Energy Credits available in 2009 and on Other new TAX CREDIT For 2009 and 2010, the Making Work Pay provision of the American Recovery and Reinvestment Act will provide a refundable tax credit of up to $400 for working individuals and $800 for married taxpayers filing joint returns. This tax credit will be calculated at a rate of 6.2 percent of earned income and will phase out for taxpayers with adjusted gross income in excess of $75,000, or $150,000 for married couples filing jointly. For people who receive a paycheck and are subject to withholding, the credit will typically be handled by their employers through automated withholding changes in early spring. These changes may result in an increase in take-home pay. The amount of the credit must be reported on the employee's 2009 income tax return filed in 2010. Taxpayers who do not have taxes withheld by an employer during the year can also claim the credit on their 2009 tax return. It is not necessary to submit a Form W-4 to get the automatic withholding change. However, an employee with multiple jobs or married couples whose combined incomes place them in a higher tax bracket may elect to submit a revised W-4 to ensure enough withholding is held to cover the tax for his or her combined income. Publication 919 provides additional guidance for tax withholding. ___________________________________________________________________ 2010 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes. Beginning on Jan. 1, 2010, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:
_________________________________________________________ All Charitable Gifts need
documentation ! Rules for Clothing and Household Items To be deductible, clothing and household items donated to
charity after Aug. 17, 2006, must be in good used condition or better.
However, a taxpayer may claim a deduction of more than $500 for any single
item, regardless of its condition, if the taxpayer includes a qualified
appraisal of the item with the return. Household items include furniture,
furnishings, electronics, appliances, and linens. Guidelines for Monetary Donations Beginning in 2007: To
deduct any charitable donation of money, a taxpayer must have a bank record
or a written communication from the charity showing the name of the charity
and the date and amount of the contribution. A bank record includes canceled
checks, bank or credit union statements and credit card statements. Bank or
credit union statements should show the name of the charity and the date and
amount paid. Credit card statements should show the name of the charity and
the transaction posting date. Donations of money include those made in cash or by check,
electronic funds transfer, credit card, and payroll deduction. For payroll
deductions, the taxpayer should retain a pay stub, Form W-2 wage statement or
other document furnished by the employer showing the total amount withheld
for charity, along with the pledge card showing the name of the charity. Prior law allowed taxpayers to back up their donations of money
with personal bank registers, diaries or notes made around the time of the
donation. Those types of records are no longer sufficient. The new law does not change the prior-law requirement that a
taxpayer get an acknowledgement from a charity for each deductible donation
(either money or property) of $250 or more. However, one statement containing
all of the required information may meet the requirements of both provisions. To help taxpayers plan their holiday-season and year-end
donations, the IRS offers the following additional reminders:
QUESTIO
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Entity Choice
First of
all, I tend to begin suggesting a corporate or LLC structure based upon the
vulnerability of the business to tort liability that is beyond normal
business insurance coverage for that industry. From a
tax standpoint, despite common shared thought, the regular business
deductions for a corporate entity are exactly the same as those available to
offset the gross income of the sole proprietor. Because of the
additional compliance costs related to the maintenance of the corporate
structure and the compensation of owners, it is not until the point that we
are trying to manage dollars available for owner compensation that we start
to watch for savings that exceed those costs. Examples
of the compliance costs are payroll processing, unemployment tax, payroll tax
reporting, corporate tax filing preparation, corporate annual report filling
and fees. Once the
dollars available for owners compensation exceed the amount that represents a
reasonable pay for the hours and type of work performed by the owner(s), an S
corporation may be considered for the ability to withdraw funds (dividends
distributions) that while they represent taxable profit are not
subject to social security and Medicare tax. Remembering that
retirement contributions would be calculated only on the wage and that there
is extreme IRS scrutiny of the amounts of these distributions vs.. the W2
earnings established for officers. Alternatively
in certain family situations it can be advisable to consider a corporate
structure with out the "S" election, i.e. a C Corporation, as there
are mechanisms to deduct uninsured medical, dental and vision out of
pocket pre - all tax. Either corporate structure results in
the "employer" retirement contributions for the owners being pre social
security and Medicare tax, an issue that becomes insignificant when the
earnings in comparison as a sole proprietor exceed the FICA limit.
In the
end of the analysis, the processing and tax savings related to entity
choice, can range from insignificant to more meaningful depending on the
specific income flows and administrative expertise of the business. Compliance
Comment to my
clients… In over 20 years of practicing I have worked on behalf of a
client of mine in 5 IRS audits. 3 of those 5 audits were in the last 18
months. All of these audits were small businesses. Also, I
recently had one client receive a “correspondence audit” in the
form of a letter seeking additional information. While the outcomes
were very good and there were very limited tax adjustments made, the audit
engagement did create concern, homework and additional fees for these
clients. I cannot stress enough that it is essential to retain the
transaction and other financial records for your business deductions for at
least 3 to 4 years. Records need to include bank statements, original
support for the expenses deducted and some connection of deposits to the
source such as the customer records in your accounting software or daily
register summaries. I have often proposed to
my clients – isn’t it better to be ready for an audit possibility
then live with the concern that it may happen? I never said the records
have to be pretty – BUT THEY HAVE TO EXIST!! We all want the right to
offset income with our qualified expenses, it is not an inalienable right…so
we have to meet the question half way and retain the evidence of the expense.
The IRS is concerned
about an apparent tend of worsening compliance by small businesses. IRS
enforcement activities have been increasing and additional pressure is coming
from Congress and the White House. In 2005 taxpayer audits had
increased 21% from the year before. The audits of high income Schedule C
taxpayers have risen from 1.86% to 3.65%. The IRS will be studying the
reporting compliance by the S corporation and partnership community.
There is growing recognition that a simplification of the tax code would have
a positive impact on the issue of the “tax gap”. Planning
I recently had the
pleasure of preparing a speaking engagement with a commercial banker, gal pal
of mine. We were asked to speak about
Amazing Results in Business. We know
and have seen that amazing can happen in any amount of money… it is
about one meeting one’s own measure of desired outcome, when that
outcome is the result of a balanced, controlled service standard applied
within a learning and service environment.
Mouthful? I know. We both
believe that planning is a common thread of successful small business. Planning provides a frame of reference to
energize the next year or phase of business or to recognize whether your
personal compensation is adequate in the endeavor. Some handouts we used Business Review Cycle and Business Cash Cycle. As a banker, my friend has seen business
owners miss the timing of cash in their enterprise. Managing toward shorter turns on inventory
and receivables should be a priority.
When or if a business should seek borrowed funds, respecting balance
of personal and partner resources, and the protection of information are all
extremely important small business considerations. What constitutes “Unreasonably
Low” Compensation paid to S Corporation Shareholders?
“Unreasonably
low” compensation paid to S corporation shareholder-employees has
become a significant issue. S corporations often attempt to eliminate or
minimize employment taxes by making a tax-free distribution to
shareholder-employees instead of paying them salary. The IRS is giving
increased audit scrutiny to this issue and will reclassify an S corporation
distribution as salary subject to employment taxes when the S corporation
pays the shareholder receiving the distribution no or an “unreasonably
low” salary. The issue of reasonable compensation is a question of fact and
highly subjective. There are a multitude of cases analyzing a wide variety of
factors in determining whether compensation is reasonable. Courts have
developed several different multi-factor tests to guide their analysis: (1)
the type and extent of services rendered, (2) the scarcity of qualified
employees, (3) the qualifications and prior earnings capacity of the
employee, (4) the contributions of the employee to the business venture, (5)
the net earnings of the employer, (6) the prevailing compensation paid to
employees with comparable jobs, and (7) the peculiar characteristics of the
employer’s business. Applying these factors to the facts of the case,
the Tax Court found that reasonable compensation was roughly halfway between
the officer’s actual compensation and the IRS’s determination of
reasonable compensation. Different courts have relied on different factors in
determining reasonable compensation.
Here are 21 factors in determining reasonable compensation. · Employee’s
qualifications and training · Time
of year the compensation was determined · Nature,
extent and scope of duties · Whether compensation was set by corporate
directors · Responsibilities
and hours involved · Correlation
between the stockholder-employees’ compensation and his stockholdings · Size
and complexity of the business · Corporate
dividend history · Results
of the employees efforts · Contingent
compensation formulas agreed on prior to the rendition of services and based
upon a free bargain between employer and employee · Prevailing
rates of comparable employees in comparable businesses · Under-compensation
in prior years · Scarcity
of other qualified employees · Compensation
paid in accordance with a plan which has been consistently followed · Ratio
of compensation to gross and net income (before salaries and federal income
tax) of the business · Prevailing
economic conditions · Salary
policy of the employer to its other employees · Whether
payments were meant as an inducement to remain with the employer · Amount
of compensation paid to employee in prior years · Examination
of the financial condition of the company after payment of compensation
Vehicles
Depreciation – there exist annual
depreciation (including section 179 expensing) ceilings for cars, light
trucks and vans. Qualifying electric cars have higher
allowances. Trucks, SUVs and vans that are rated at more than 6,000
pounds gross vehicle weight are not subject to these limits, however for
vehicles rated at no more than 14,000 pounds gross vehicle weight are limited
to $25,000 first year expensing election. Vehicles meeting certain
seating and cargo specifications are not limited in this way. Similar
limitations are expressed for leased vehicles with an “inclusion
amount”, used to reduce deductions. Health
Insurance
Over the Counter Medications
Reimbursements – While not deductible as individual itemized deductions
– medical expense, over the counter medications to alleviate personal
injury or sickness can be paid on a pre tax basis through employer sponsored
health flexible spending arrangements as well as HSA’s and HRA’s. Self Employed
Health Coverage Deduction – applies to health and long-term care.
Does not have to be in trade name of business. Limited to net income less
½ self employment tax and retirement contributions. No aggregation of
multiple businesses. A more than 2% S Corporation shareholder or partners can
qualify for the deduction if the policy is purchased by and in the name of
the corporation/partnership. Mini-medical or
limited-benefit plans are catching on in response to rising health coverage
costs. (e.g. Premiums $40 vs. $335 per month). Sometimes used for the
class of employees not otherwise eligible for fulltime benefits. These
plans can leave participants uninsured for catastrophic illnesses.
These plans maybe useful in combination with a high deductible plan. At
minimum these plans may have a benefit in providing access to preventative
healthcare. Recent Health
stats (S& S Benefits,
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Common Tax Law Restrictions on Activities of Exempt Organizations |
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Appropriate and fiscally responsible policies:
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Code of ethics and conflicts of interest statements
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Whistleblower policies
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Documentation retention policies
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ACTION STEP = Briefings from legal and tax counsel regarding
compliance tax issues
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Responsible Fund Raising
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Solicitation materials – accurate and truthful; contributions
used consistently with purpose described in solicitation
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Appropriate charitable donation acknowledgments
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Fund – raisers should not be compensated based on commission
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Comply with federal and state laws
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ACTION STEP = periodic board review of investment policy and strategy
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Review of Compensation Policy
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Board needs to hire, supervise, and evaluate CEO’s performance
(DOCUMENT!)
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CEO, board chair and treasurer should be separate individuals
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Board members should not receive compensation other than
expense reimbursement (One consideration =
In
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ACTION STEP = periodic review of compensation arrangement for officers,
directors, key employees and significant independent contractors based on
outside compensation statistical study. Board or designated board officer
approval of executive expense reports.
Ø
Board Composition and Responsibilities
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Regular meetings – minimum 3 per year
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Board membership – at least 5 members, periodically review for
effectiveness of size and structure
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ACTION STEP = comprehensive orientation and education for board
members with regular assessment of board performance
Links to Other Outlines
and Articles:
See Blackbaud's
white paper for a good article about issues of financial management
including budgets…