December 20, 2006 Webinar Choosing the Right Entity For My Business Mat Sorensen, J.D. 6 Critical Year-End Strategies S. James Park, J.D., LL.M. www.kkolawyers.com 856 South Sage Dr., Suite 2, Cedar City, Utah Telephone 435.586.9366 / Facsimile 435.586.9491 Kyler Kohler & Ostermiller, LLP 2006
Instructor Notes Disclaimer- Although the information contained in this Presentation may be extremely useful and helpful, please understand that the presentation of this information does not constitute an attorney-client relationship. Moreover, the information contained in this Presentation is for general guidance only. It is strongly recommended that each individual or entity obtain their own legal advice, particularly applied to their own set of circumstances, facts and specific situation. Kyler Kohler & Ostermiller, LLP is not responsible or liable for any advice that is taken and applied in a situation without direct consultation and representation specific to that individual s or company s needs. Kyler Kohler & Ostermiller, LLP 2006
Sole Proprietorship Sales & Operations Rentals Pros and Cons: Easy to set up but no asset protection and no tax benefits. Small Business Sole- Proprietorship NO ENTITY 100% Ordinary Income Schedule C Passive Income Schedule E
C Corporation Sales & Operations Rentals Notes: Provides asset protection, but has major drawback of double taxation. XYZ Enterprises, Inc. C- Corporation C-Corp Tax Return 1120 33% 33% 33% Issued Dividends
S Corporation Sales & Operations Rentals Notes: Works well for sales and operations. S-Corporation allows you to minimize self employment tax. Also used for short term real estate. XYZ Enterprises, Inc. S- Corporation 33% 33% 33% S-Corp Tax Return 1120S Flow Thru Dividends ( Net Income )
The S-Corporation Salary/Dividend Splitting Sole- Proprietorship Limited Liability Company S-Corporation 100k Revenue 50k Net Income Self Employment Tax 15.3% $7,500 (approx) Before regular income tax and itemized deductions 50k Expenses 100k Revenue 50k Expenses 21,750k Dividend Income No Self Employment tax on the Dividend $3,327 SAVINGS!! (approx) Before regular income tax and itemized deductions 25k Salary 3,250k Employment taxes This is sample of what one taxpayer may choose to report as payroll. Each taxpayer should analyze their individual situation for the amount of payroll that is appropriate.
Limited Liability Company Notes: ( LLC ) Protects the business owner from the businesses liabilities. Primary benefit is asset protection. Sales & Operations XYZ Enterprises, LLC Limited Liability Company 33% 33% 33% Rentals LLC Tax Return 1065 unless SMLLC Flow Thru Income
Series Liability Company ( LLC ) Notes: Sales & Operations Rentals #1 Gives you the benefit of having multiple LLC s and having separate treatment for each series within the LLC. Allows for one tax return. Rental #2 XYZ Enterprises, LLC Series Limited Liability Company Rental #3 Sub-Series #1 Flow Thru Income Sub-Series #2 LLC Tax Return 1065 unless SMLLC
Family Limited Partnerships Farm land Raw Land Rental Property Notes: Excellent asset protection entity. Allows for protection from inside and outside liability. Charging Order Family Limited Partnership Limited Partners General Partner (LLC/Corp) Shell Charging Order Firewall From Inside and Outside Liability Mom, Dad and/or Children as Limited Partners
Part II 6 Critical Year-End Strategies S. James Park, J.D., LL.M.
Tax Deductions to Consider All ordinary and necessary business expenses Medical reimbursement plan Wage continuation plan-disability insurance Group life insurance Dependent care plan Educational assistance plan Annual retreats and company picnics Capital expenses up to $100,000 Company equipment and furniture Business travel Business board meetings Educational expenses related to job Business meals and entertainment Compensation and salaries Office rents-commercial lease Office utilities-commercial Lease Office supplies Business gifts Automobile insurance Property and casualty insurance Advertising and marketing Depreciation on capital assets Office meals and meetings Taxes-property, payroll taxes Repairs and maintenance Interest on loans Parking fees Postage and shipping Telephones and cell phones Banking fees Consulting fees Seminars and trade shows Office Expenses Research and Experimentation Professional dues Public service organization dues Casualty and theft losses Employee discounts at cost Legal and accounting fees Qualified pension plans Good Records are Critical!! Not every tax deduction is a viable possibility for every business owner and must be carefully considered and substantiated before being deducted on a tax return.
Understanding the Power of Book Keeping # 1 Tax Strategy 1. Get Organized. 2. Get your Quickbooks files up to date and your checkbooks are reconciled. This will give you the opportunity to take advantage of many of the tax planning techniques discussed below. 3. Do not co-mingle your funds. 4. Do not forget your quarterly and annual filings. 5. Get ready for tax season and save yourself hundreds if not thousands.
Utilizing the S-Corporation Salary/Dividend Splitting- # 2 Tax Strategy Sole- Proprietorship Limited Liability Company S-Corporation 100k Revenue 50k Expenses 50k Net Income 100k Revenue 50k Expenses 21,750k Dividend Income 25k Salary 3,250k Employment taxes Self Employment Tax 15.3% $7,500 (approx) Before regular income tax and itemized deductions No Self Employment tax on the Dividend $3,327 SAVINGS!! (approx) Before regular income tax and itemized deductions This is sample of what one taxpayer may choose to report as payroll. Each taxpayer should analyze their individual situation for the amount of payroll that is appropriate.
Understanding Vehicle Expenses # 3 Tax Strategy Auto Mileage versus Actual *Always keep mileage records if there is personal use Mileage Actual - Own Actual - Lease - Fuel, repairs, maintenance, etc.. - Depreciation - Be aware of Depreciation limits * unless 6000lb+ vehicle then deduct up to $25,000 Business 2006-44.5 cents Medical/Moving 2006 18 cents Charitable 2006 14 cents - Business % of Interest on Auto Loan -Business % of Interest on Auto Loan -Same - Lease Payments - Be aware of Lease add back schedule - Mileage limits & residual value? -Amortize down payment
Understanding Vehicle Expenses # 3 Continued 1. SUV Law: Trucks and Vans (including SUVs and Minivans on a truck chassis) with a gross vehicle weight greater than 6,000 lbs and with a cargo load shorter than six feet, and passenger cans that seat less than 10 behind the driver, are limited to $25,000 in depreciation in the year of purchase, the rest to be taken over five years. 2. The full cost of a pick-up truck with a cargo bed of at least six feet and large equipment like a tractor can still be fully expenses up to $108,000.
Understanding Acceleration or Deferral of Income/Expenses Tax Strategy #4 Generally, you should defer income if at all possible. But in certain instances it may pay to accelerate income, for example: Too many deductions: If your itemized deductions exceed your taxable income, you should accelerate as much income as possible to fully utilize them. Change in income level: Anticipated changes in employment or gains from the sale of assets, etc. next year that could bump you into a higher bracket, making the tax on the accelerated income lower this year. Change in filing status: An upcoming marriage or divorce that will put you in a higher tax bracket may warrant the acceleration of income this year.
Understanding Acceleration or Deferral of Income/Expenses Here are a couple examples of how to do it: Year end bonus: Negotiate with your employer the timing of the bones. Collect receivables: The timing of your collection may be critical. Payment of expenses: Prepay or defer. Timing, timing, timing. Incentive Stock Options: Exercise the option and dispose of the stock (it has to make sense). IRA or Plan Withdrawals: In the event that you are over 59 ½, you might consider making withdrawals. Installment Notes: The sale you made in a previous year can be undone if you need the income this year rather than in the future. (Early pay-off; Use the note as collateral for a loan; or Sell the note to a third party) Any of these will trigger the otherwise deferred gain. Dividends: Timing, timing, timing.
Paying spouse or children in advantageous ways Tax Strategy #5 Director fee No SE Tax OPTION 1 S-Corp or C-Corp Service or management Fee OPTION 3 Family Sole Prop or SMLLC Employee 15.3% FICA OPTION 2 Retirement Plan or Health Reimbursement Plan Family LLC Pay Children- NO FICA Standard Deduction $5,150 2006 for earned income Must be owned 100% by Mom and/or Dad Over age 18 Under age 18 529 College Savings Plan
Utilizing Cost Segregation and Depreciation Tax Strategy #6 Assumption- $260,000 residential rental purchased in 2005, with a Land value of $65,000 (25%), $20,000 in 5-year property, and $24,000 in 15-year property. Remaining $151,000- Building. Taxpayer 30% tax bracket (25% Federal 5% State) Without Cost Segregation Depreciation Expense- $6,795 With Cost Segregation Depreciation Expense- $31,662 * Assuming 25% Federal Rate and 5% State. Depreciation Expense w/ 179 -$49,262 *Potential Tax Savings - $12,740 Beware of Depreciation Recapture at Ordinary Rates!
Utilizing Medical Expenses Tax Strategy #7 Itemized Deductions - Insurance always deductible on 1040 - Everything else limited to 7.5% AGI Health Savings Account (HSA) - Must maintain high deductible insurance policy - Must utilize 3 rd party admin - Fixed payments, balances carry forward. - $2,700 Individual - $5,450 Family THE HEALTHY Health Reimbursement Arrangement (HRA) - No insurance requirement - Self-administered - No limits - Reimbursement procedure HIGH EXPENSES
The Process Scenario #1 S-Corp Service or management Fee Family Sole Prop or SMLLC Employee 15.3% FICA Family LLC Pick up Spouse as Employee and adopt an HRA plan for he/she and their dependents. * Be careful if you have other employees than family For consolidated group rules and fringe benefits
The Process Scenario #2 No longer Salary/Dividend Split Lease employee instead. S-Corp Employee Leasing Fee C-Corp Employee 15.3% FICA Family LLC Pick up Self as Employee and adopt an HRA plan for he/she and their dependents. * Be careful if you have other employees than family For consolidated group rules and fringe benefits
Understanding Qualified Plans and Retirement Planning Tax Strategy #8 Participation in a Qualified Retirement Plan adds flexibility to your tax planning. A contribution to a deductible retirement plan reduces your adjusted gross income (AGI) by the amount of the contribution (with specific limits). As a result, deductible retirement plan contributions will reduce your current income tax.
Understanding Qualified Plans and Retirement Planning Contribution / Deduction IRA (Traditional/Roth): $4,000 - $5,000 if you are over 50 years old. SIMPLE Plan: $10,000 - $12,500 401(k), 403(b), 457 Plans: $15,000 with 25% match up to $44,000 SEP: Maximum $44,000 or 25% of compensation Other Defined Benefit Plans: From $ 50,000 to $300,000 Phase out limitations/minimum Payroll amounts Single AGI Phase out: 50k 60k Roth 95k 110k Married AGI Phase out: 70k 80k Roth 150k 160k Equal to Salary amount, not to exceed $10,000 or $12,500 Catch up provision of $5,000 Equal to Salary amount, not to exceed $44,000 Salary Calculations will be specific to each plan using the participant s age and salary
Understanding Qualified Plans and Retirement Planning Deadlines Existing IRA (Traditional/Roth) contributions: 4/15/2006 Traditional to Roth conversions: 12/31/2006 Employee contributions to a 401(k): 12/31/2006 Employer contributions: By tax filing deadline, including extensions Note: In order for a self-employed individual or an employee to make a contribution in 2006 or take the accompanying deduction, the Plan must be adopted (or created) by 12/31/2006.