Starting a business? Here’s your to-do list

There is an almost endless list of things to do when you start a new business. Here is a brief list of some of the most important ones:

*Write a business plan.

*Consider location issues.

*Decide on the legal form of entity for the business.

*Get necessary licenses.

*Register with tax authorities.

*Involve your advisors.

Business plan. Your business plan will be useful to you and to lenders. It should present who will own the business and what the legal entity will be. It should identify your qualifications to run this type of business. You should identity your market, the products or services you will sell, and how you intend to advertise to prospective customers. The business plan should spell out the funds needed for start-up and the source of those funds. The plan should contain projected financial statements for the first couple of years. It should also address any insurance requirements and possible lease agreements. The business plan should be lengthy enough to cover the necessary items but brief enough to serve as an operating guide. It should be referred to on a regular basis and adjusted as needed.

Location. Where you locate may be one of your most important decisions. If your business will be online sales, you could operate out of your garage. But if you intend for customers to visit your establishment, it must be located in suitable surroundings. Does the general area tie into your product/service line? Is access or parking an issue? Do the other businesses in the area compliment yours; do they have similar clientele?

Legal form. Under what legal form of business do you want to operate? Should you incorporate, operate as an LLC, a partnership, or sole proprietorship? It is imperative that you discuss these options with your accountant and attorney early in the business planning stage. There are very valid tax and non-tax reasons for selecting a given entity.

Licenses. Your accountant and attorney can also assist you with applying for the necessary permits and licenses. This should be done early on to avoid possible delays.

Taxes. Your accountant will see that you have the proper registration with taxing and filing authorities such as the IRS, the state agencies for tax filings, and worker’s insurance if you have employees.

Advisors. You should run your business ideas past your business advisors before you make sizable financial commitments. Who are your advisors? You will have an ongoing need for a banker, an insurance agent, an attorney, and an accountant. You will benefit by involving them early and frequently.

If you have questions about operating your business, please contact us. We are here to assist you.

David Bradsher, CPA

When can you deduct a business bad debt?

It happens to butchers, bakers, and candlestick makers. It probably happens in your business, too: A customer doesn’t pay what they owe and you end up with a bad debt. Can you take a tax deduction?

The answer depends on how you account for income on your tax return. If you included the amount due from the customer in income this year or in previous years, it’s likely you have a bad debt deduction. You can claim all or part of the worthless receivable.

What if you record income as you collect the cash? In this case, since you don’t receive the amount your customer owes you, and since you never reported it as income, there’s no deduction.

Suppose you lend money to a customer for a business reason and the loan becomes uncollectible. Is the loan considered a deductible bad debt?

As a general rule, yes, as long as your intention was to make a loan, not a gift, and you attempted to collect the debt but could not. Money you lend to employees or suppliers may also be deductible.

Though you don’t have to go to court to prove a debt is uncollectible, the deduction can only be taken in the taxable year it becomes worthless. If you overlook the deduction on that year’s return, don’t despair. For a fully worthless bad debt you have up to seven years from the due date of your original return to file an amended one.

Additional rules apply to specific situations, and certain businesses can use a special method for claiming bad debt deductions. Give us a call to discuss your options.

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David Bradsher, CPA

Gift taxes: Clearing up the confusion

There is a great deal of confusion about gifting and gift taxes. The federal gift tax law is completely apart from the income tax law. Neither party to a gift should include the gift information on their income tax return. The gift is not tax-deductible by the one giving the gift, and it is not taxable income to the one receiving the gift. But a gift tax return may need to be filed.

So, who has to file a gift tax return? The gift tax applies to the transfer of money or property from one individual (the donor) to another (the donee). If a gift tax return is due, it is filed by the donor.

Certain gifts are not taxable and do not require the filing of a gift tax return, including the following:

*Gifts in 2012 of $13,000 or less per person to any number of people are not taxable. That limit increases to $14,000 in 2013.

*A payment for another’s tuition made directly to an educational institute.

*A payment for medical treatment of another made directly to the medical facility.

*Unlimited gifts made to one’s spouse (there is a dollar limit if the spouse is not a U.S. citizen).

If you make taxable gifts, a Form 709 is due by April 15 of the following year (the same due date as your federal income tax Form 1040). But don’t panic, you probably won’t owe gift tax. In addition to the above exclusions, you have a lifetime exemption — in 2012 the exemption is $5,120,000. This exemption is scheduled to drop to $1,000,000 in 2013 unless Congress acts to change the law.

If you make gifts beyond the above exclusions, please contact us for assistance.

David Bradsher, CPA

Losses can be hard to take! What you need to know about basis

Losses can be hard to take – so if you think your S corporation will show a loss for 2013, now’s the time to plan to make sure you’ll get the full tax benefit.

The Problem. The amount of the business loss you can deduct on your individual income tax return is limited to your basis in your S corporation stock and certain corporate debt. This is true even though the loss reported to you on Schedule K-1 is greater than your basis.

Here’s how it works. Typically, stock basis in an S corporation begins with the capital contribution you make to get the company started. (When you receive stock as a gift, an inheritance, or in place of compensation, your initial basis is calculated differently.)

At the end of each taxable year, your stock basis is adjusted to reflect the business’s operating results. Taxable income increases your basis, while losses reduce it.

Basis is also increased by capital you put into your company and reduced by amounts you withdraw, such as distributions.

After your stock basis reaches zero, you may be able to deduct additional losses, up to the extent of your debt basis. That’s the basis you have in loans you make to your company.

Once your stock and debt basis are both reduced to zero, losses incurred are suspended, which means you get no current tax benefit. However, you can generally take suspended losses in future years, when you again have basis.

The Solution. You can increase your basis – and your ability to take losses – by adding capital or making loans to your business.

Please call to discuss how basis affects your individual income tax return. We can guide you through the rules to optimize available breaks.

David Bradsher, CPA

Save more for your retirement

The amount you can contribute to your retirement plan increases in 2013. The 401(k) maximum salary deferral increases from the 2012 limit of $17,000 to $17,500. The catch-up limit for those 50 and older remains unchanged at $5,500. The maximum deferral for a SIMPLE increases from the 2012 limit of $11,500 to $12,000. The catch-up limit for 50 and older remains at $2,500. The 2013 maximum IRA contribution increases from the 2012 limit of $5,000 to $5,500. If you’re 50 or older, your IRA contribution limit is $6,500.

David Bradsher, CPA

Congress passes fiscal cliff act

By Paul Bonner and Alistair M. Nevius
January 1, 2013

Pulling back from the “fiscal cliff” at the 13th hour, Congress on Tuesday preserved most of the George W. Bush-era tax cuts and extended many other lapsed tax provisions.

Shortly before 2 a.m. Tuesday, the Senate passed a bill that had been heralded and, in some quarters, groused about throughout the preceding day. By a vote of 89 to 8, the chamber approved the American Taxpayer Relief Act, H.R. 8, which embodied an agreement that had been hammered out on Sunday and Monday between Vice President Joe Biden and Senate Minority Leader Sen. Mitch McConnell, R-Ky. The House of Representatives approved the bill by a vote of 257–167 late on Tuesday evening, after plans to amend the bill to include spending cuts were abandoned. The bill now goes to President Barack Obama for his signature.

“The AICPA is pleased that Congress has reached an agreement,” said Edward Karl, vice president–Tax for the AICPA. “The uncertainty of the tax law has unnecessarily impeded the long-term tax and cash flow planning for businesses and prevented taxpayers from making informed decisions. The agreement should also allow the IRS and commercial software vendors to revise or issue new tax forms and update software, and allow tax season to begin with minimal delay.”

With some modifications targeting the wealthiest Americans with higher taxes, the act permanently extends provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001, P.L. 107-16 (EGTRRA), and Jobs and Growth Tax Relief Reconciliation Act of 2003, P.L. 108-27 (JGTRRA). It also permanently takes care of Congress’s perennial job of “patching” the alternative minimum tax (AMT). It temporarily extends many other tax provisions that had lapsed at midnight on Dec. 31 and others that had expired a year earlier.

The act’s nontax features include one-year extensions of emergency unemployment insurance and agricultural programs and yet another “doc fix” postponement of automatic cuts in Medicare payments to physicians. In addition, it delays until March a broad range of automatic federal spending cuts known as sequestration that otherwise would have begun this month.

Among the tax items not addressed by the act was the temporary lower 4.2% rate for employees’ portion of the Social Security payroll tax, which was not extended and has reverted to 6.2%.

Here are the act’s main tax features:

Individual tax rates

All the individual marginal tax rates under EGTRRA and JGTRRA are retained (10%, 15%, 25%, 28%, 33%, and 35%). A new top rate of 39.6% is imposed on taxable income over $400,000 for single filers, $425,000 for head-of-household filers, and $450,000 for married taxpayers filing jointly ($225,000 for each married spouse filing separately).

Phaseout of itemized deductions and personal exemptions

The personal exemptions and itemized deductions phaseout is reinstated at a higher threshold of $250,000 for single taxpayers, $275,000 for heads of household, and $300,000 for married taxpayers filing jointly.

Capital gains and dividends

A 20% rate applies to capital gains and dividends for individuals above the top income tax bracket threshold; the 15% rate is retained for taxpayers in the middle brackets. The zero rate is retained for taxpayers in the 10% and 15% brackets.

Alternative minimum tax

The exemption amount for the AMT on individuals is permanently indexed for inflation. For 2012, the exemption amounts are $78,750 for married taxpayers filing jointly and $50,600 for single filers. Relief from AMT for nonrefundable credits is retained.

Estate and gift tax

The estate and gift tax exclusion amount is retained at $5 million indexed for inflation ($5.12 million in 2012), but the top tax rate increases from 35% to 40% effective Jan. 1, 2013. The estate tax “portability” election, under which, if an election is made, the surviving spouse’s exemption amount is increased by the deceased spouse’s unused exemption amount, was made permanent by the act.

Permanent extensions

Various temporary tax provisions enacted as part of EGTRRA were made permanent. These include:

  • Marriage penalty relief (i.e., the increased size of the 15% rate bracket (Sec. 1(f)(8)) and increased standard deduction for married taxpayers filing jointly (Sec. 63(c)(2));
  • The liberalized child and dependent care credit rules (allowing the credit to be calculated based on up to $3,000 of expenses for one dependent or up to $6,000 for more than one) (Sec. 21);
  • The exclusion for National Health Services Corps and Armed Forces Health Professions Scholarships (Sec. 117(c)(2));
  • The exclusion for employer-provided educational assistance (Sec. 127);
  • The enhanced rules for student loan deductions introduced by EGTRRA (Sec. 221);
  • The higher contribution amount and other EGTRRA changes to Coverdell education savings accounts (Sec. 530);
  • The employer-provided child care credit (Sec. 45F);
  • Special treatment of tax-exempt bonds for education facilities (Sec 142(a)(13));
  • Repeal of the collapsible corporation rules (Sec. 341);
  • Special rates for accumulated earnings tax and personal holding company tax (Secs. 531 and 541); and
  • Modified tax treatment for electing Alaska Native Settlement Trusts (Sec. 646).


Individual credits expired at the end of 2012

The American opportunity tax credit for qualified tuition and other expenses of higher education was extended through 2018. Other credits and items from the American Recovery and Reinvestment Act of 2009, P.L. 111-5, that were extended for the same five-year period include enhanced provisions of the child tax credit under Sec. 24(d) and the earned income tax credit under Sec. 32(b). In addition, the bill permanently extends a rule excluding from taxable income refunds from certain federal and federally assisted programs (Sec. 6409).

Individual provisions expired at the end of 2011

The act also extended through 2013 a number of temporary individual tax provisions, most of which expired at the end of 2011:

  • Deduction for certain expenses of elementary and secondary school teachers (Sec. 62);
  • Exclusion from gross income of discharge of qualified principal residence indebtedness (Sec. 108);
  • Parity for exclusion from income for employer-provided mass transit and parking benefits (Sec. 132(f));
  • Mortgage insurance premiums treated as qualified residence interest (Sec. 163(h));
  • Deduction of state and local general sales taxes (Sec. 164(b));
  • Special rule for contributions of capital gain real property made for conservation purposes (Sec. 170(b));
  • Above-the-line deduction for qualified tuition and related expenses (Sec. 222); and
  • Tax-free distributions from individual retirement plans for charitable purposes (Sec. 408(d)).


Business tax extenders

The act also extended many business tax credits and other provisions. Notably, it extended through 2013 and modified the Sec. 41 credit for increasing research and development activities, which expired at the end of 2011. The credit is modified to allow partial inclusion in qualified research expenses and gross receipts those of an acquired trade or business or major portion of one. The increased expensing amounts under Sec. 179 are extended through 2013. The availability of an additional 50% first-year bonus depreciation (Sec. 168(k)) was also extended for one year by the act. It now generally applies to property placed in service before Jan. 1, 2014 (Jan. 1, 2015, for certain property with longer production periods).

Other business provisions extended through 2013, and in some cases modified, are:

  • Temporary minimum low-income tax credit rate for non-federally subsidized new buildings (Sec. 42);
  • Housing allowance exclusion for determining area median gross income for qualified residential rental project exempt facility bonds (Section 3005 of the Housing Assistance Tax Act of 2008);
  • Indian employment tax credit (Sec. 45A);
  • New markets tax credit (Sec. 45D);
  • Railroad track maintenance credit (Sec. 45G);
  • Mine rescue team training credit (Sec. 45N);
  • Employer wage credit for employees who are active duty members of the uniformed services (Sec. 45P);
  • Work opportunity tax credit (Sec. 51);
  • Qualified zone academy bonds (Sec. 54E);
  • Fifteen-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements (Sec. 168(e));
  • Accelerated depreciation for business property on an Indian reservation (Sec. 168(j));
  • Enhanced charitable deduction for contributions of food inventory (Sec. 170(e));
  • Election to expense mine safety equipment (Sec. 179E);
  • Special expensing rules for certain film and television productions (Sec. 181);
  • Deduction allowable with respect to income attributable to domestic production activities in Puerto Rico (Sec. 199(d));
  • Modification of tax treatment of certain payments to controlling exempt organizations (Sec. 512(b));
  • Treatment of certain dividends of regulated investment companies (Sec. 871(k));
  • Regulated investment company qualified investment entity treatment under the Foreign Investment in Real Property Act (Sec. 897(h));
  • Extension of subpart F exception for active financing income (Sec. 953(e));
  • Lookthrough treatment of payments between related controlled foreign corporations under foreign personal holding company rules (Sec. 954);
  • Temporary exclusion of 100% of gain on certain small business stock (Sec. 1202);
  • Basis adjustment to stock of S corporations making charitable contributions of property (Sec. 1367);
  • Reduction in S corporation recognition period for built-in gains tax (Sec. 1374(d));
  • Empowerment Zone tax incentives (Sec. 1391);
  • Tax-exempt financing for New York Liberty Zone (Sec. 1400L);
  • Temporary increase in limit on cover-over of rum excise taxes to Puerto Rico and the Virgin Islands (Sec. 7652(f)); and
  • American Samoa economic development credit (Section 119 of the Tax Relief and Health Care Act of 2006, P.L. 109-432, as modified).


Energy tax extenders

The act also extends through 2013, and in some cases modifies, a number of energy credits and provisions that expired at the end of 2011:

  • Credit for energy-efficient existing homes (Sec. 25C);
  • Credit for alternative fuel vehicle refueling property (Sec. 30C);
  • Credit for two- or three-wheeled plug-in electric vehicles (Sec. 30D);
  • Cellulosic biofuel producer credit (Sec. 40(b), as modified);
  • Incentives for biodiesel and renewable diesel (Sec. 40A);
  • Production credit for Indian coal facilities placed in service before 2009 (Sec. 45(e)) (extended to an eight-year period);
  • Credits with respect to facilities producing energy from certain renewable resources (Sec. 45(d), as modified);
  • Credit for energy-efficient new homes (Sec. 45L);
  • Credit for energy-efficient appliances (Sec. 45M);
  • Special allowance for cellulosic biofuel plant property (Sec. 168(l), as modified);
  • Special rule for sales or dispositions to implement Federal Energy
  • Regulatory Commission or state electric restructuring policy for qualified electric utilities (Sec. 451); and
  • Alternative fuels excise tax credits (Sec. 6426).


Foreign provisions

The IRS’s authority under Sec. 1445(e)(1) to apply a withholding tax to gains on the disposition of U.S. real property interests by partnerships, trusts, or estates that are passed through to partners or beneficiaries that are foreign persons is made permanent, and the amount is increased to 20%.

New taxes

In addition to the various provisions discussed above, some new taxes also took effect Jan. 1 as a result of 2010’s health care reform legislation.

Additional hospital insurance tax on high-income taxpayers. The employee portion of the hospital insurance tax part of FICA, normally 1.45% of covered wages, is increased by 0.9% on wages that exceed a threshold amount. The additional tax is imposed on the combined wages of both the taxpayer and the taxpayer’s spouse, in the case of a joint return. The threshold amount is $250,000 in the case of a joint return or surviving spouse, $125,000 in the case of a married individual filing a separate return, and $200,000 in any other case.

For self-employed taxpayers, the same additional hospital insurance tax applies to the hospital insurance portion of SECA tax on self-employment income in excess of the threshold amount.

Medicare tax on investment income. Starting Jan. 1, Sec. 1411 imposes a tax on individuals equal to 3.8% of the lesser of the individual’s net investment income for the year or the amount the individual’s modified adjusted gross income (AGI) exceeds a threshold amount. For estates and trusts, the tax equals 3.8% of the lesser of undistributed net investment income or AGI over the dollar amount at which the highest trust and estate tax bracket begins.

For married individuals filing a joint return and surviving spouses, the threshold amount is $250,000; for married taxpayers filing separately, it is $125,000; and for other individuals it is $200,000.

Net investment income means investment income reduced by deductions properly allocable to that income. Investment income includes income from interest, dividends, annuities, royalties, and rents, and net gain from disposition of property, other than such income derived in the ordinary course of a trade or business. However, income from a trade or business that is a passive activity and from a trade or business of trading in financial instruments or commodities is included in investment income.

Medical care itemized deduction threshold. The threshold for the itemized deduction for unreimbursed medical expenses has increased from 7.5% of AGI to 10% of AGI for regular income tax purposes. This is effective for all individuals, except, in the years 2013–2016, if either the taxpayer or the taxpayer’s spouse has turned 65 before the end of the tax year, the increased threshold does not apply and the threshold remains at 7.5% of AGI.

Flexible spending arrangement. Effective for cafeteria plan years beginning after Dec. 31, 2012, the maximum amount of salary reduction contributions that an employee may elect to have made to a flexible spending arrangement for any plan year is $2,500.

 

David Bradsher, CPA