Incorporating a Closely Held Business, the Basics
April 23, 2012 | 
Author Incorporating a business can be smart move from both a legal and tax perspective. Incorporation can provide limited liability legal protection from creditors for assets outside of the corporation, and it provides the opportunity to utilize some tax strategies that can save thousands of dollars. To realize the advantages of incorporation, there are a number of things you must understand, and here are some basics.
When you form a corporation, you are creating new and separate legal person. The corporation has many of the same rights of a flesh and blood person including the right to own property, make contracts, and the enjoy the protections of the law and due process. Corporations also have obligations including the obligations of protecting its shareholders interests, obeying the law and complying with contracts, and filing tax returns and paying taxes, among others. The point is that a corporation has a real legal existence apart from its shareholders and officers. Problems can often arise when the owners treat the corporation as a extension of their own personal finances. When this happens, the advantages attained by incorporating in the first place may be lost.
To maintain this separate existence there are certain legal formalities that must be observed and best practices that should be followed. Later articles will discuss the formalities in detail. Here are some the “best practices” to follow that will help to maintain the separateness of your corporation.
- Always have a separate bank accounts for your corporation.
- If you contribute property to the corporation, make sure it is properly titled in the corporation’s name.
- Maintain a separate set of books and records for the corporation.
- Keep in mind that whenever money or property passes between you and your corporation it has tax implications and that those types of transactions may receive more scrutiny from tax auditors. Make sure you understand what you are doing and document it well.
- If you are an owner/officer of a corporation, you are, by statutory definition, an employee. This means that the corporation will generally need to pay you a reasonable salary. This of course has a cost in the form of payroll taxes, but it may be the ticket to greater tax savings otherwise so don’t be penny wise and pound foolish.
- Make sure you file corporation tax returns and any required information returns, particularly when required for transactions between shareholders and the corporation.
These are some of the basic “best practices” for managing a corporation. The next article will cover the legal formalities of incorporation.
Posted in Accounting, Best Practices, Corporate Taxes, Corporations, Individual taxes, Legal Issues, Management, Payroll, strategic planning, Tax audits, Tax Filing, Tax Reduction Strategy | 
Tags: Business taxes, Corporate Managment, Corporation best practices, Corporations, Incorporation, Payroll, Small business managment, strategic planning, Taxation | 
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Colorado Out-of-State Retailer Law Held Unconstitutional by Federal Court
The U.S. District Court for the District of Colorado ruled that the State of Colorado’s law requiring out-of-state retailers to provide the state with purchase information on its Colorado customers is a unconstitutional violation of the commerce clause.
The Colorado law (Colo. Rev. Stat. §39-21-112(3.5)) requires out of state retailers who sell $100,000 or more to Colorado customers to provide detailed information on those customers to the Colorado Department of Revenue. In addition retailers would be required to notify their customers of the customer’s responsibility to report the purchase and to pay the use tax to the state.
States have long been barred from imposing burdens on out-of state companies whose only connection with the state is selling to customers in the state through common carrier and the U.S. Mail. In the 1992 case, Quill Corp. v. North Dakota, (504 U.S. 298 (1992)), the Supreme Court barred states from requiring out-of-state companies from collecting sales and use tax from in-state customers when the company does not have a substantial business connection to the state. The Colorado District Court ruled that the Colorado law discriminates against out-of-state retailers and that it places impermissible burdens on interstate commerce.
This ruling is important because states are looking for new revenue sources to fill budget gaps created by the sluggish economy. This ruling puts the burden of enforcing state sales and use laws squarely on the state and keeps it from imposing enforcement costs on out-of-state retailers by forcing them into the role of tax collectors.
A more complete summary of the ruling can be found in this Journal of Accountancy article: http://www.journalofaccountancy.com/Web/20125445.htm?action=print
Posted in Collections, Colorado Ruling, Nexus Issues, Taxation | Tags: Federal Court Ruling, nexus, out-of-state companies, sale and use taxes, Taxation | No Comments »
We Are Featured in Lewis & Clark Bank Newsletter
Mike Billups and his firm are featured in an article in the monthly newsletter of Oregon City based Lewis & Clark Bank.
You can see the article here - http://www.lewisandclarkbank.com/newsworthy/186/details/
Posted in Firm News | Tags: Accounting Services, CPA, Firm News, Mike Billups, Stephen Ashby, Tax Services, The Billups Company CPA's Inc | No Comments »
Congress Votes to Extend Payroll Tax Cut
Congress passed a bill to extend the social security payroll tax cut through the end of the year. At the end of last year the cut, which was in place in all of 2011, was temporarily extended through the end of February to buy time for the Congress which couldn’t agree on how to pay for a full year extension. This bill extends the cuts in the Social Security withholding tax by 2% to 4.2% from 6.2% through the rest of the year.
Other provisions in the bill include an extension of long-term jobless benefits and a provision to stop deep cuts in Medicare reimbursements to doctors. The tax cut and additional spending in the bill are not fully offset by additional revenue or other spending cuts. Part of the costs are offset by reduction in the retirement benefits of newly hired federal employees, but the bill is still expected to add $89 billion to the federal deficit over the next decade. There is also considerable concern about the effect of the cut on the long-term fiscal viability of the Social Security program.
Posted in Individual taxes, New Legislation, Payroll, Taxation | Tags: Payroll, tax law changes, Taxation | No Comments »
IRS Announces Relief for Delinquent Taxpayers
The Internal Revenue Service (IRS) has announced three new initiatives to help tax payers that owe back taxes. The new policies affect the filing of tax liens, installment agreements, and Offers in Compromise. Here is a summary of each.
Tax Liens. The IRS often files tax liens to establish a legal claim over a person’s property when they owe back taxes to establish priority over other creditors. Tax liens can have a significant effect on the reputation and credit of an individual or company. The IRS is adopting three new practices in the way they handle liens that may provide relief. First, they are significantly increasing the dollar threshold above which they file liens. Unfortunately, they didn’t disclose what that amount is. Prior policy, according to the Internal Revenue Manual requires that liens be filed for delinquent balances above $5,000. The second policy change regarding liens is to make it easier to get liens released once the taxes due are paid in full. Finally, the IRS will release liens on balances due of $25,000 or less if the taxpayer enters into an installment agreement.
Installment Agreements. The second big policy change is to significantly increase the maximum unpaid taxes a taxpayer can owe in order to qualify for the IRS’s streamlined installment agreement program. The amount has been increased from $25,000 to $50,000 and the time limit for repayment has been increased to 72 months from 60 months. Any unpaid balance greater than $25,000 must be set up on a direct debit agreement. This policy change only applies to individuals and sole proprietorships.
Offer in Compromise. The OIC is a set of policies and procedures that allow taxpayers to settle their taxes for less than the amount owed. The IRS has announced that it is expanding the scope of their streamline offers in compromise program by allowing taxpayers with annual income of up to $100,000 to participate and they are increasing the maximum liability from $25,000 to $50,000.
Action Recommendation. If you owe back taxes or have a tax lien you should consult with a tax advisor to see if these new policies can be used to help you settle your tax issues.
Just a little editorial comment. One wonders if the new relaxed policies have anything to do with these two recent news item. The first is that Federal employees own $3.4 billion in back taxes. (Click here for the story.) The second is that 36 members of the White House staff owe collective over $800 thousand in back taxes. (Story here.)
Posted in Collections, Individual taxes, IRS, Offer in Compromise, Tax audits, Tax Liens, Taxation | Tags: Business taxes, Collections, income taxes, individual income taxes, Installment Agreements, Internal Revenue Service, IRS, Liens, Offer in Compromise, Tax audits, Tax liens, Taxation | No Comments »
Tax News You Can Use
Here are three things you might find that are different this tax filing season as you file your individual income tax returns.
Tax Deadline. The tax deadline, which has long been on April 15 of each year, will be on April 17 this year. There are two reason for this. First, the 15th is on a Sunday and when the deadline is on a weekend the IRS usually gives you until the following Monday to file. This year, there is some sort of holiday in the District of Columbia celebrated on the following Monday. This is treated as a federal holiday by the IRS, so the whole country gets an extra couple days to file this year.
Reporting Investment Gains and Losses. If you are an investor, more data is being required this year on tax returns to report investment gains and losses. For example, you will need to report whether basis information on security sales was derived from the statements you received from your broker or from other source. Reporting of individual transactions is also getting more detailed and they are reported on a new Form 8949. What this means is that your tax preparer may be asking for more information than usual this year.
Electronic Filing. Almost all tax prep firms are now required to e-file the tax returns they prepare. IRS allows individual taxpayers to paper file if they wish, but you should let your preparer know you want to do so because paper filing is now the exception. My advice is to go with e-filing.
Posted in Individual taxes, Tax Filing, Tax law changes, Taxation | Tags: income taxes, individual income taxes, tax deadline, tax filings, Taxation | No Comments »
Year End Tax Tips
Here are five things you may be able to do before year-end to cut your tax bill.
- Evaluate investment portfolios before year-end and offset any taxable gains you may have by selling investments which have paper losses. If you want to keep the investments, wait 31 days or more and buy them back to avoid the wash-sale rules. If you are uneasy about market fluctuations, consider immediately buying stocks of a similar company in the same industry as a replacement investment. For that you do not have to wait the 31 days.
- Make contributions to your Health Savings account. Individuals may contribute $3,050 for individual coverage and up to $6,150 for family coverage in 2011. The HSA must be set up prior to December 1, 2011 in order to get a full deduction. If you already have one, consider making a contribution before year-end.
- Make charitable deductions, and pay medical expenses, state income taxes, property taxes, and other deductible expenses before year-end. If cash is problem, payment can be made in the current year with credit cards or charge cards and they are deductible when it is charged to the card rather than when the card is paid off. Before you accelerate payment of medical expenses, make sure that your total medical expenses will exceed 7.5% of your expected adjusted gross income or there will not be a benefit.
- Consider prepaying higher education expenses in 2011 in order to take advantage of the above-the-line deduction for qualified higher education expenses that is set to expire at year-end. To be deductible the expenses must relate to academic periods beginning in 2011 or the first three months of 2012.
- Take the Required Minimum Distributions (RMD) if you are age 70 1/2 and have IRA’s or 401(k) or other employer sponsored retirement plans. The penalty for failing to take the distribution can be 50% on the amount that was required to be distributed. If you turned 70 1/2 in 2011, you may defer the RMD to 2012, but you will have to take a double distribution next year.
Posted in Individual taxes, Retirement, tax credits, Tax law changes, Tax Reduction Strategy, Taxation | Tags: income taxes, individual income taxes, individual retirement acccounts, New Legislation, Oregon individual income taxes, Retirement, tax law changes, tax planning, Tax Reduction, Taxation | No Comments »
2011 Expiring Tax Deductions and Credits
There is a long list of tax provisions set to expire at the end of the year. Here are five of them.
- The temporary 2% cut in the employee’s share of the social security tax is set to expire. The Senate is current debating proposals to extend and increase the payroll tax cut to 3.1%, but the change is stalled as Democrats and Republicans bicker over the approach to be used to pay for it.
- There are a couple of energy savings incentive set to expire. The first is the Nonbusiness Energy Property Credit which provides a non-refundable credit of 10% of qualified energy efficient improvements such as insulation, windows, and roofs, plus set amounts for other energy property such as fans, furnaces, water heaters, heat pumps, and air conditioners. Energy expenditures must be incurred or paid for by the end of the year to qualify for the credit. No credit after year-end.
- The second energy related change is the credit allowed for placing a “plug-in” electric vehicle in service. This allows a credit of 10% of the cost of any qualified plug-in electric vehicle put into service by December 31, 2011.
- Number four is the Work Opportunity Credit which was intended to reduce the cost to employers of hiring workers in designated targeted groups. This credit will not be available for any amounts paid to workers who begin work after year-end.
- The last expiring tax provision, in this list, is the above-the-line deduction of $250 available to K through 12 teachers for expenses they pay for classroom and teaching supplies. After December 31, 2011 the above the line deduction will no longer be available, but teachers may continue to deduct these expenses as miscellaneous itemized deductions subject to the 2% of adjusted gross income limit.
Action Items.
If you plan to make energy savings improvements to your residence, buy an electric vehicle, buy classroom supplies, ( if you are a teacher), or hire someone for your business, in the near future, there may be some tax benefit to doing so before December 31, 2011.
Posted in Corporate Taxes, Individual taxes, Payroll, tax credits, Tax Deadline, Tax law changes, Tax Reduction Strategy, Taxation | Tags: Business taxes, income taxes, individual income taxes, New Legislation, Payroll, tax credits, tax law changes, tax planning, Tax Reduction, Taxation | No Comments »
Billups Company Manager Webinar Speaker
Billups CPA’s accounting and audit manager, Stephen Ashby, spoke in an webinar on worker classification issues on December 1, 2011. The Strafford webinar entitled, “Heightened IRS Scrutiny on Worker Misclassification and Tax Compliance” covered various employee versus independent contractor issues including emerging issues such as the recently announced IRS Voluntary Worker Classification Settlement program. Ashby’s presentation was an overview of the classification issue and covered the major tests used by the IRS, other Federal agencies, and states to classify workers.
A copy of the webinar is available for purchase from Strafford Publishing here.
Posted in 1099, Independent Contractors, Payroll, Tax audits, Taxation | Tags: Business taxes, Internal Revenue Service, IRS, Payroll, Tax audits, Taxation, US Department of Labor | No Comments »
Form 1099 Reporting
One of the important year-end tax reporting tasks is preparing and filing Form 1099-MISC for certain payments made to others by your business. There is always confusion about what payments must be reported, so here is a quick guide on 1099-MISC reporting.
The first thing to remember is that only payments made in the course of a trade or business are reportable. This means that personal payments that are not connected with a trade or business are not reportable.
You must report total payments for each person to whom you have made the following types of payments.
- At least $10 in royalties or broker payments in lieu of dividends or tax exempt income.
- Total payments of $600 or more for rents, services, prizes and awards, other income, medical and health care payments, crop insurance proceeds, or cash payments for fish purchased from anyone engaged in the trade or business of catching fish.
- Any fishing boat proceeds.
- Gross payments of $600 or more paid to an attorney (even if incorporated).
The following payments do not have to be reported even if they are in connection with a trade or business.
- Any payments to corporations unless the payments are for medical or health care payments, fish purchases, attorney fees, payments in lieu of dividends, or payments by a federal executive agency for services.
- Any payments for merchandise, telegrams, telephone, freight, storage, or similar items.
- Payments of rent to a real estate agents.
- Payments, such as wages, reportable on other forms such as Form W-2.
- Payments to tax exempt organizations or foreign and domestic governments at all levels.
Now is a good time to start collecting information on payees that you will have to report on. You can request that the payees complete Form W-9 to provide the information you need. The best time to do this is at the start of the business relationship.
Properly completing and filing 1099-MISC is important because the Internal Revenue Code provides penalties for failure to do so, and failing to report payments to an independent contractor on Form 1099 can disqualify you for the IRS’s worker classification settlement program.
Posted in 1099, Tax audits, Taxation | Tags: Form 1099, Independent Contractors, Tax audits, tax filings, tax planning, Taxation | No Comments »