december 20, 2006 webinar “choosing the right entity for my business” mat sorensen, j.d. “6...
TRANSCRIPT
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.com856 South Sage Dr., Suite 2, Cedar City, Utah
Telephone 435.586.9366 / Facsimile 435.586.9491
© Kyler Kohler & Ostermiller, LLP 2006
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.
Instructor Notes
© Kyler Kohler & Ostermiller, LLP 2006
Sales &Operations
SmallBusiness
Sole- Proprietorship
NO ENTITY
100%
Rentals
SoleProprietorship
Ordinary IncomeSchedule C
Passive IncomeSchedule E
Pros and Cons:
Easy to set up but no asset protectionand no tax benefits.
Sales &Operations
XYZ Enterprises, Inc.
C- Corporation
Rentals
“C”Corporation
Issued Dividends
C-CorpTax Return
1120
Notes:
Provides asset protection, but has major drawback of double taxation.
33% 33% 33%
Sales &Operations
XYZ Enterprises, Inc.
S- Corporation
Rentals
“S”Corporation
Flow Thru Dividends (“Net Income”)
S-CorpTax Return
1120S
Notes:
Works well for sales and operations.S-Corporation allows you to minimize self employment tax. Also used for shortterm real estate.
33% 33% 33%
The S-CorporationSalary/Dividend Splitting
Sole-Proprietorship
Limited LiabilityCompany S-Corporation
100kRevenue
50kExpenses
50kNet Income
Self Employment Tax 15.3%
$7,500 (approx)
Before regular income taxand itemized deductions
100kRevenue
50kExpenses
21,750kDividend Income
No Self Employment tax on the Dividend
$3,327 SAVINGS!! (approx)
Before regular income taxand itemized deductions
25kSalary
3,250kEmployment 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.
Sales &Operations
XYZ Enterprises, LLC
LimitedLiability Company
RentalsLimited
Liability Company(“LLC”)
Flow Thru Income
LLCTax Return
1065unless
SMLLC
Notes:
Protects the business owner from the businesses liabilities. Primary benefit is asset protection.
33% 33% 33%
Sales &Operations
XYZ Enterprises, LLC
“Series” LimitedLiability Company
Rentals #1
“Series”Liability Company
(“LLC”)
LLCTax Return
1065unless
SMLLC
Notes:
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 #2Rental #3
Sub-Series#1
Sub-Series#2
Flow Thru Income
Family Limited Partnerships
Farm landRaw Land
Mom, Dad and/or Childrenas Limited Partners
Charging OrderCharging Order
Firewall From “Inside” and “Outside” Liability
Notes:
Excellent asset protection entity. Allows for protection from inside and outside liability.
Family Limited
Partnership
General Partner
(LLC/Corp)Shell
Limited Partners
Rental Property
Part II“6 Critical Year-End Strategies”
S. James Park, J.D., LL.M.
Tax Deductions to Consider
•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.
Property and casualty insuranceAdvertising and marketingDepreciation on capital assetsOffice meals and meetingsTaxes-property, payroll taxesRepairs and maintenanceInterest on loansParking feesPostage and shipping Telephones and cell phonesBanking feesConsulting feesSeminars and trade showsOffice ExpensesResearch and ExperimentationProfessional duesPublic service organization duesCasualty and theft lossesEmployee discounts at costLegal and accounting feesQualified pension plans
All ordinary and necessary business expensesMedical reimbursement planWage continuation plan-disability insuranceGroup life insuranceDependent care plan Educational assistance plan Annual retreats and company picnicsCapital expenses up to $100,000Company equipment and furnitureBusiness travel Business board meetingsEducational expenses related to jobBusiness meals and entertainmentCompensation and salariesOffice rents-commercial leaseOffice utilities-commercial LeaseOffice suppliesBusiness giftsAutomobile insurance
Good Records are Critical!!
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.
Understanding the Power ofBook Keeping
# 1 Tax Strategy
Utilizing the S-CorporationSalary/Dividend Splitting- # 2 Tax Strategy
Sole-Proprietorship
Limited LiabilityCompany S-Corporation
100kRevenue
50kExpenses
50kNet Income
Self Employment Tax 15.3%
$7,500 (approx)
Before regular income taxand itemized deductions
100kRevenue
50kExpenses
21,750kDividend Income
No Self Employment tax on the Dividend
$3,327 SAVINGS!! (approx)
Before regular income taxand itemized deductions
25kSalary
3,250kEmployment 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.
Understanding Vehicle Expenses # 3 Tax Strategy
Business2006 - 44.5 cents
Medical/Moving2006 – 18 cents
Charitable2006 – 14 cents
- Fuel, repairs, maintenance, etc..- Depreciation- Be aware of Depreciation limits * unless 6000lb+ vehicle then deduct up to $25,000
Mileage Actual - Own Actual - Lease
- Same- Lease Payments- Be aware of Lease add back schedule- Mileage limits & residual value?-Amortize down payment
-Business % of Interest on Auto Loan
- Business % of Interest on Auto Loan
Auto – Mileage versus Actual *Always keep mileage records if there is personal use
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/ExpensesTax 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/ExpensesHere 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…
S-Corp or C-Corp
Director feeNo SE Tax
Employee15.3% FICA
FamilySole Prop
or SMLLC
Pay Children-NO FICA
Standard Deduction$5,150 – 2006
for earned income
Service or management
Fee
FamilyLLC
Over age 18 Under age 18Must be owned 100%
by Mom and/or Dad
Retirement Plan orHealth Reimbursement Plan
OPTION 1
OPTION 2
OPTION 3
Tax Strategy #5
529College Savings Plan
Utilizing Cost Segregation and Depreciation
With CostSegregation
Without Cost Segregation
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)
Beware of Depreciation Recapture at Ordinary Rates!
Depreciation Expense- $31,662
*Potential Tax Savings - $12,740
Depreciation Expense w/ §179 -$49,262
Depreciation Expense- $6,795
* Assuming 25% Federal Rate and 5% State.
Tax Strategy #6
Utilizing Medical Expenses Tax Strategy #7
- Insurance always deductible on 1040
ItemizedDeductions
Health SavingsAccount (HSA)
Health Reimbursement
Arrangement (HRA)
- Everything else limited to 7.5% AGI
- Must maintain high deductible insurance policy
- Must utilize 3rd party admin
- Fixed payments, balances carry forward.
- $2,700 Individual- $5,450 Family
- No insurance requirement
- Self-administered
- No limits
- Reimbursement procedure
THE HEALTHY HIGH EXPENSES
The Process – Scenario #1
S-Corp
Employee15.3% FICA
FamilySole Prop
or SMLLC
Pick up Spouse asEmployee and adopt
an HRA plan for he/sheand their dependents.
Service or management
Fee
FamilyLLC
* Be careful if you have other employees than familyFor ‘consolidated group’ rules and fringe benefits
The Process – Scenario #2
S-Corp
Employee15.3% FICA
C-Corp
Pick up Self asEmployee and adopt
an HRA plan for he/sheand their dependents.
EmployeeLeasing
Fee
FamilyLLC
* Be careful if you have other employees than familyFor ‘consolidated group’ rules and fringe benefits
No longerSalary/Dividend Split
Lease employee instead.
Understanding Qualified Plans and Retirement
PlanningTax 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
PlanningContribution / 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
PlanningDeadlines
• 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.