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An S corporation is a pass-through entity that is treated very much like a partnership for federal income tax purposes. As a result, all income is passed through to the shareholders and taxed at their individual tax rates. However, unlike a C corporation, an S corporation’s income is taxable to the shareholders when it is earned whether or not the corporation distributes the income. Because an S corporation has a unique tax structure that directly impacts shareholders, it is important to understand the S corporation distribution and loss limitations, as well as how and when items of income and expense are taxed, before developing an overall tax plan.

In addition, some S corporation income and expense items are subject to special rules and separate identification for tax purposes. Examples of separately stated items that could affect a shareholder’s tax liability include charitable contributions, capital gains, Sec. 179 expense deductions, foreign taxes, and net income or loss related to rental real estate activities.

These items, as well as income and losses, are passed through to the shareholder on a pro rata basis, which means that the amount passed through to each shareholder is dependent upon that shareholder’s stock ownership percentage. However, a shareholder’s portion of the losses and deductions may only be used to offset income from other sources to the extent that the total does not exceed the basis of the shareholder’s stock and the basis of any debt owed to the shareholder by the corporation. The S corporation losses and deductions are also subject to the passive-activity rules.

Other key points to consider when developing your comprehensive tax strategy include:

  • the availability of the Code Sec. 179 deduction at the corporate and shareholder level;
  • reporting requirements for the domestic production activities deduction;
  • the tax treatment of fringe benefits;
  • below-market loans between shareholders and S corporations; and
  • IRS scrutiny of distributions to shareholders who have not received compensation.

We can assist you identifying and maximizing potential tax savings no matter your entity type. Please call our office at your earliest convenience to arrange an appointment. 302.225.5000 

 

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Things to do list: Review Business Tax Strategy, Update Succession plan,...

If you own or manage your own business, you are probably busy monitoring operations and dealing with everyday problems. But there are a few things that you should make time to do every year. These are important for your long-term business and personal success.

Review your business tax strategy.

A month or so after you've filed your tax return, make an appointment with your tax advisor. Go over your return together and identify opportunities for tax savings. Question everything, starting with whether you're using the right form of business entity. Ask about recent changes in the tax code and how they might benefit your business. Make your advisor a "partner" in your business strategy.

Update succession planning for your business.

Review your succession planning annually. You should have a specific plan for each key manager position, including yourself. Be prepared for a short-term absence or a permanent vacancy. Your plan might mean promoting from within or recruiting externally. An up-to-date plan can be invaluable if you have an unexpected vacancy.

Review and update your personal estate planning.

If you're a business owner, your company is likely to be a significant part of your estate. A good estate plan is essential if you hope to pass a business on to your heirs. But your company, your personal circumstances, and the tax laws are continually changing. You should meet with your estate planner annually to make sure your plans are current.

Review your business insurance coverage.

Don't just automatically write a check to renew your insurance policies when they come due. Instead, you should sit down with your insurance agent every year. Review your business operations, focusing on any changes. Discuss types of risk that could arise. Ask about new developments in business insurance. Use your agent's expertise to identify risk areas and suggest suitable coverage.

Review your business banking relationships.

Annually, you should go over your cash balances and banking relationships with your controller or CFO. Then both of you should meet with your banker. Ask about new products or services that could help your company. Address any service concerns or problems you might have had. Look for ways to reduce idle cash, boost interest earned, and improve cash flows.

Let us and your attorney assist you with the reviews and planning necessary to your business's long-term success. Give our office a call at 302.225.5000. 

 

 

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Cash laying on Mutual Fund Investment Statement Are mutual funds part of your portfolio? As you begin your mid-summer investment review in preparation for year-end, think about how your funds can affect your federal income taxes.

Here are two things to consider.

Dividend income. The dividends you receive from mutual funds held in nonretirement accounts are included in the calculation of net investment income. When your 2015 modified adjusted gross income exceeds $250,000 ($200,000 when you're single), a portion of your net investment income will be taxed at a rate of 3.8% over and above your ordinary tax liability.

Planning tip. The tax form the mutual fund company sends you at the beginning of 2016 may classify some dividends as "qualified" – meaning they meet the requirements for a lower tax rate. However, you have to own the mutual fund shares for more than 60 days to get the lower rate on your federal return.

Capital gains. Mutual funds generally distribute short-term and long-term capital gains from in-fund sales to shareholders. Even if you reinvest the distributions in additional shares instead of opting for cash, the gain remains taxable to you.
Short-term distributions, for sales of fund investments held one year or less, are taxable at your ordinary income tax rate. The tax rate for long-term capital gains may be as high as 20%, depending on your adjusted gross income.

You might also have a capital gain or loss when you sell shares of a mutual fund. That's true even if you "exchange" one fund for another and receive no proceeds.

Planning tip. You have options for calculating the cost of mutual fund shares you sell during the year. Remember to include reinvested distributions in your basis.

Please call our office for more information. We're happy to help you manage your investments with an eye toward tax savings.

 

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family in an airport, tax vacationDon't ignore your opportunity to save on taxes just because it's summertime. Here are some summertime tips to keep your tax plans going.

If you are a sole proprietor with children, you might consider putting them on the payroll during the summer months. Wages paid to your children under age 18 are not subject to social security and Medicare taxes. What's more, their earnings are not subject to federal unemployment tax until they turn 21.

If employing your children is not an option, you might still be able to score a deduction by sending them to summer camp. Day camp expenses for kids under 13 can provide a tax credit of up to 35%. Just remember, overnight camps do not qualify, and child-care must be necessary to allow the parents to work.

Summer is also a common time for home selling and moving, so be on the lookout for deductions related to these activities. Carefully file away all home sale or purchase papers for next year's tax filing. If your move is job-related, there is the potential for additional deductions if you meet the 50 miles or more test.

Perhaps your sights are set instead on some leisure travel. Tacking on a few fun days before or after a business trip might be a tax (and cost) efficient way to pay for a vacation – if you follow all the rules. Travel that is primarily for charitable work might also qualify you for a tax deduction.

And finally, no matter what your summer plans are, this is always a good time for a general tax check-up to ensure your withholdings and estimated tax payments are on target. For assistance with any of these issues, contact our office at 302.225.5000.

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Kathi Lindsay Jennings, CPAKathi Silicato, CPA Silicato and Lindsay Jennings recently attended the American Institute of CPAs Employee Benefit Plan conference.  During a time of unprecedented change in the world of Employee Benefit Plans (EBP), the three-day conference held in National Harbor, MD, provided an opportunity to hear directly from oversight agencies.

Among the seminar topics presented at this year’s meeting were:

  • DOL Audit Quality Study
  • Planning and Risk Assessment
  • Health Care Reform
  • Health and Welfare Plans
  • Auditing Defined Contribution and
  • Defined Benefit Plans
  • Alternative IRS Corrections
  • Fraud Cases
  • ESOPs
  • Retirement Readiness

“Attending this conference provides an opportunity to exchange knowledge and expertise with other professionals,” says Kathi.  “It is part of Gunnip’s commitment to adhering to the highest quality standards.”  As a member of the AICPA’s Employee Benefit Plan Audit Quality Center, Gunnip voluntarily agrees to the Center's membership requirements, including performing annual internal inspection procedures.

 

 

Red Self-Employeed banner

Owning your own business can be very rewarding, both personally and financially. Being the sole decision-maker for this important undertaking can also be overwhelming. Business owners have many choices to make, and these decisions involve tax consequences that are not always foreseen. We can help you minimize your overall tax burden by identifying and maximizing business deductions, providing guidance on substantiation of expenses, and exploring tax planning alternatives that are uniquely available to the self-employed.

Some frequently overlooked business expenses that you may be able to deduct include moving expenses, costs of travel away from home, entertainment expenses, and expenses related to a home office. Code Sec. 179 expense allowances on the purchase of new equipment can provide a significant deduction. In addition, there are multiple benefits when you employ your spouse, child, or other family member in the business.

There are some risks involved in adopting tax positions related to operating a business as an independent contractor. For example, the distinction between employee and independent contractor is an issue the IRS subjects to special scrutiny. As a self-employed individual, you must comply with these rules for yourself or for any workers that you hire. If you are an employer, you must withhold income and employment taxes from an employee’s income. However, if your workers are independent contractors, you are only required to report payments of $600 or more on a Form 1099-MISC, Miscellaneous Income. Failing to make the right classification, however, could result in additional taxes, interest and penalties.

The IRS offers an amnesty program called the Voluntary Classification Settlement Program (VCSP) to encourage employers to reclassify their workers as employees for employment tax purposes for future tax periods. Under the VCSP, employers are allowed to prospectively treat the workers as employees at a cost that is 10 percent of what is normally owed in a worker misclassification situation.

Complex rules and calculations are involved in many of the planning opportunities that are available to you. We will be happy to review your overall tax scenario in order to maximize your tax savings. Please contact our office at 302.225.5000 your earliest convenience to make an appointment.

 

 

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Estate Planning Worksheet in Wilmington Delaware Estate planning is not just a task for the wealthy. Even though federal tax implications kick in only if your estate exceeds $5,430,000, there are other issues that make estate planning important for most individuals.

Start your estate planning by meeting with an attorney and your accountant. They can instruct you in the essentials of estate tax law and the requirements for establishing an estate plan. A key part of estate planning is compiling the documents that will accomplish your goals.

A basic estate plan should include the following documents:

  • Your will, which should name the guardian you choose for your minor children and an executor (personal representative) to carry out your instructions.
  • A listing of your assets. Include your home and other properties, pension and retirement accounts (401(k) & IRAs), investments (noting the cost basis), automobiles, jewelry, and any other assets.
  • Life insurance information such as your insurer, your policy number, the amount of insurance, and the location of your policies.
  • Financial and business records, including real estate deeds, tax returns and related support papers, your social security number, investment statements, and stock and bond certificates.
  • Funeral instructions, including your burial wishes and people to be notified upon your death.
  • Medical information and a list of your doctors.
  • Durable power of attorney, designating the individual(s) you select to act on your behalf if you're incapacitated.
  • Health care proxy naming the individual(s) you want to make health care decisions for you if you aren't capable.

Keep your original documents in a fireproof safe or with your attorney. Put your list of documents and the copies in a binder at home and tell your executor where the documents are located. If you would like assistance with your estate planning, please contact our office.

 

 

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FASB has issued an Exposure Draft of three Accounting Standards Updates.   The proposed changes are intended to simplify disclosures for employee benefit plan financial statements.  The most significant impact of the Exposure Draft would reduce complexity of employee benefit plan financial statements as follows:

  • Fully Benefit-Responsive Investment Contracts (EITF-15C-I) – the proposed update would allow investment contracts to be measured and presented at contract value versus fair value.
  • Plan Investment Disclosures (EITF-15C-II) – the proposed update would eliminate the current GAAP requirement for reporting investments that are 5% or more of net assets available for benefits and the net appreciation or depreciation by type for participant and nonparticipant-directed investments.  Net appreciation or depreciation would still be presented in the aggregate.

A full copy of the proposed changes can be found at www.fasb.org

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FASB released a Proposed Accounting Standards Update (ASU) for Not-for-Profit Entities.  The proposed update is intended to improve not-for-profit financial statements and the note disclosures to those statements.   The ASU is available at www.fasb.org. (Look under Latest News for 04/22/15, Click on the Exposure Document)  

Some of the more significant changes include:

1.Changing net asset classifications from three classes to two classes.  The two classes of net assets would either be those with donor restrictions or those without.

2.Presenting the cash flow statement on the direct method of reporting.

3.Changing the classification of certain items on the statement of cash flows

The effective date of any changes will be determined by FASB after considering stakeholder’s feedback.  Stakeholders are invited to comment on the proposed ASU until August 20, 2015.   

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Achieving a Better Life Experience ActThe "tax extenders" legislation that became law in December included the "Achieving a Better Life Experience Act" (also called the ABLE Act). This law provides for tax-exempt accounts that can help you or a family member with disabilities pay for qualified expenses related to the disability. These "ABLE accounts" are exempt from income tax although contributions to an account are not deductible on your federal income tax return. ABLE accounts are generally not means tested and some can provide limited bankruptcy protection.

You or a family member are eligible to open an ABLE account if:

1. You're entitled to social security disability benefits due to blindness or other disability, and that blindness or disability occurred before age 26; or

2. You file a disability certification with the IRS for the tax year.

Annual contributions to an ABLE account are limited to the amount of the annual gift tax exclusion ($14,000 for 2015). Distributions are tax-free as long as they are less than your qualified disability expenses for the year. The list of qualified disability expenses includes housing, education, employment training/support, health prevention/wellness services, financial management, legal fees, and funeral expenses. Other expenses are also approved under the regulations.

Distributions exceeding qualified disability expenses are included in taxable income and are generally subject to a 10% penalty tax. Distributions can be rolled over to another ABLE account for another qualified beneficiary and beneficiaries can be changed between family members. Funds in the account can earn interest or dividends and are not subject to federal income tax as long as distributions are used for qualified disability expenses. ABLE accounts do not have a "use it or lose it" feature and funds can carry over to future years.

The balance remaining in the account after the beneficiary passes away can be used to reimburse state Medicaid payments made on behalf of the beneficiary after the account was established. The remainder goes to the deceased's estate or to another qualified designated beneficiary. After-death distributions that are not used for qualified disability purposes are subject to income taxes, but not the 10% penalty.

If you are thinking many of these rules sound familiar, you're correct. ABLE accounts are modeled on 529 college savings accounts and can be as powerful and beneficial. Give us a call so we can help you make the most of this new opportunity.

 

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