Hunkered Down, day 6

Financial triage.

Texas got a liquidity lifeline last night. Abbott announced that all Texas counties have been included in the Economic Injury Disaster Declaration, which grants access to the Economic Injury Disaster Loan (EIDL) program. The program provides long-term, low-interest loans to small businesses (3.75%) and nonprofits (2.75%) with repayment terms up to 30 years. That’s great news for our local mom-and-pops and employers who are sinking fast.

The turnaround time for the Express loan is reported to be 36 hours. I’m a little skeptical, but I’ll let you know. We are prioritizing these applications and working as quickly as we can to help all of our clients. Bear with us, the 4506-T is already down this morning, and I started at 4am. I’ll keep trying throughout the day and let you know if I get one to go through. Click here to complete the online application at the SBA website.

Proposed: The Main Street Emergency Grant Program would offer grants to small, and possibly mid-sized businesses, and nonprofits to cover payroll and fixed costs, such as rent. The grants would be made avialable “quickly” to provide liquidity and avoid layoffs. This proposal has not been finalized.

Recommendation: Defer the Texas Franchise Tax payment and filing deadline until August 15th, 2020. The delay would defer preparation fees and tax payments for taxpayers, while allowing more time for tax return preparers to help clients navigate the current crisis. Please contact Glenn Hegar at the Texas Comptroller of Public Accounts and encourage him to support this recommendation.

See also:

~Mitzi E. Sullivan, CPA

Mitzi E. Sullivan, CPA is a cloud based professional services provider specializing in cloud accounting.

Best Entity Selection for Operating in Texas

It’s a great time for many closely held businesses to revisit their entity selection.

The Tax Cuts and Jobs Act (TCJA) has added a new twist to selecting the best type of entity for doing business in Texas. The federal corporate tax rate was lowered from a maximum 35% to a flat 21%; while at the same time a new 20% deduction was allowed for individuals with Qualified Business Income (QBI). It’s a great time for many closely held businesses to revisit their entity selections.

Selecting the best entity for your business has important tax and legal ramifications. Below are some points to discuss with your CPA and attorney. Call us at (940) 539-3238 to learn more.

In general

Sole proprietorships are best suited for single owner entities that do not need liability protection, are not concerned with mitigating self-employment taxes and do not need to raise or accumulate capital. Sole proprietorships have relatively few administrative requirements and are simple and inexpensive to form. Personal assets may be seized to satisfy business obligations or debts.

Partnerships are best suited for multiple owner entities that do not need liability protection, are not concerned with mitigating self-employment taxes and do not need to raise or accumulate capital. Partnerships have relatively few administrative requirements and are simple and inexpensive to form. Partners may not be employees of the partnership. Personal assets may be seized to satisfy business obligations or debts, and partners are joint and severally liable.

Limited partnerships are best suited for multiple owner entities that do not need liability protection for general partners, are not concerned with mitigating self-employment taxes and do not need to raise or accumulate capital. Partners may not be employees of the partnership. Limited partnerships have relatively few administrative requirements. Assets of general partners may be seized to satisfy business obligations or debts, and general partners are joint and severally liable. Limited partners can not be active participants in the day-to-day operations of the business. An LLC may be created to serve as the general partner. Owners may not claim tax losses in excess of their investments.

The LLC is best suited for entities that need liability protection, are not concerned with mitigating self-employment taxes and do not need to raise or accumulate capital. The LLC has relatively few administrative requirements. Income is passed through to the members, unless the LLC elects to be taxed as a c-corporation. All members may participate in the day-to-day operations of the business and, typically, assets of members may not be seized to satisfy business obligations or debts. Ownership interests are typically not freely transferable and, in Texas, are not considered attachable property. Owners may claim tax losses in excess of their investments, such as on certain leveraged real estate investments.

The S corporation is best suited for entities that need liability protection, are concerned with mitigating self-employment taxes and do not need to raise or accumulate capital. Entities taxed as an s corp may be able to reduce self-employment taxes by paying owner-employees both salaries and distributions. Ownership interests are freely transferable and, in Texas, are considered attachable property.

C corporations are best suited for entities that desire to go public, raise capital or accumulate capital for expansion or to service debt. Ownership interests are freely transferable and, in Texas, are considered attachable property.

The information provided above is not meant to be legal or tax advise. You should consult your CPA and attorney to determine the best structure for your entity.

See also: New Tax Law. What’s Hot. What’s Not.

~Mitzi E. Sullivan, CPA

M.E. Sullivan is a cloud based professional services provider specializing in cloud accounting.

Additional information is provided by the Texas Secretary of State and copied below:

  • Sole proprietorship: The most common and the simplest form of business is the sole proprietorship. In a sole proprietorship, a single individual engages in a business activity without necessity of formal organization. If the business is conducted under an assumed name (a name other than the surname of the individual), then an assumed name certificate (commonly referred to as a DBA) should be filed with the office of the county clerk in the county where a business premise is maintained. If no business premise is maintained, then an assumed name certificate should be filed in all counties where business is conducted under the assumed name.
  • General partnership: A general partnership is created when two or more persons associate to carry on a business for profit. A partnership generally operates in accordance with a partnership agreement, but there is no requirement that the agreement be in writing and no state-filing requirement. If the business of the partnership is conducted under an assumed name (a name that does not include the surname of all of the partners), then an assumed name certificate (commonly referred to as a DBA) should be filed with the office of the county clerk in the county where a business premise is maintained. If no business premise is maintained, then an assumed name certificate should be filed in all counties where business is conducted under the assumed name.
  • Corporation: A Texas corporation is created by filing a certificate of formation with the Texas Secretary of State. The Secretary of State provides a form that meets minimum state law requirements. Online filing of a certificate of formation is provided through SOSDirect.A corporation is a legal person with the characteristics of limited liability, centralization of management, perpetual duration, and ease of transferability of ownership interests. The owners of a corporation are called “shareholders.” The persons who manage the business and affairs of a corporation are called “directors.” However, state corporate law does provide for shareholders to enter into shareholders’ agreements to eliminate the directors and provide for shareholder management. Choosing the best management structure for your corporation is a decision you make with the advice of an attorney. The Secretary of State cannot assist you.

    An “S” corporation is not a matter of state corporate law but rather a federal tax election. A for-profit corporation elects to be taxed as an “S” corporation by filing an election with the Internal Revenue Service. Please contact the IRS or competent tax counsel regarding the decision to be taxed as an “S” corporation and the requirements for filing the election. This is not a matter with which the Secretary of State may assist.

  • Limited Liability Company: A Texas limited liability company is created by filing a certificate of formation with the Texas Secretary of State. The Secretary of State provides a form that meets minimum state law requirements. Online filing of a certificate of formation is provided through SOSDirect.The limited liability company (LLC) is not a partnership or a corporation but rather is a distinct type of entity that has the powers of both a corporation and a partnership. Depending on how the LLC is structured, it may be likened to a general partnership with limited liability, or to a limited partnership where all the owners are free to participate in management and all have limited liability, or to an “S” corporation without the ownership and tax restrictions imposed by the Internal Revenue Code. Unlike the partnership, where the key element is the individual, the essence of the limited liability company is the entity, requiring for its creation more formal requirements. 1 William D. Bagley & Phillip P. Whynott, The Limited Liability Company, §2.10, (2d ed. 2d rev. James Publishing, 1995).

    The owners of an LLC are called “members.” A member can be an individual, partnership, corporation, trust, and any other legal or commercial entity. Generally, the liability of the members is limited to their investment and they may enjoy the pass-through tax treatment afforded to partners in a partnership. As a result of federal tax classification rules, an LLC can achieve both structural flexibility and favorable tax treatment. Nevertheless, persons contemplating forming an LLC are well advised to consult competent legal counsel.

    A limited liability company can be managed by managers or by its members. The management structure must be stated in the certificate of formation. Management structure is a determination that is made by the LLC and its members. The Secretary of State cannot give advice about management structure.

  • Limited Partnership: A Texas limited partnership is a partnership formed by two or more persons and having one or more general partners and one or more limited partners. The limited partnership operates in accordance with a partnership agreement, written or oral, of the partners as to the affairs of the limited partnership and the conduct of its business. While the partnership agreement is not filed for public record, the limited partnership must file a certificate of formation with the Texas Secretary of State. The Secretary of State provides a form that meets minimum state law requirements. Online filing of the certificate of formation is provided through SOSDirect.
  • Limited Liability Partnership: In order to limit the liability of its general partners, a general or limited partnership may opt to register as a limited liability partnership. The Secretary of State provides a form for registration as a limited liability partnership. Online filing of the registration is provided through SOSDirect.

Penalty and Interest Relief Available from the Texas Comptroller for a Limited Time

Amnesty temporarily available.Texas Clearance Letter

Texas taxpayers, now is the perfect time to get caught up on past due reports without incurring penalties or interest. From May 1, 2018 to June 29, 2018, Texas taxpayers may qualify for amnesty from penalties and interest on past due state and local tax reports.

All state and local taxes and fees the Comptroller’s office administers, such as franchise and sales taxes, are eligible, with the exception of Public Utility Commission gross receipts assessments.

When?

Eligible reports must be filed before June 29, 2018.

Qualifications, rules and limits apply.

Consult your CPA to determine the qualifications, rules and limits that apply.

~Mitzi E. Sullivan, CPA

M.E. Sullivan is a cloud based professional services provider specializing in cloud accounting.

New Tax Law. What’s Hot. What’s Not.

What you need to know about the new tax law.

Hold on for the ride, folks. It’s getting interesting. The most significant tax reform in more than 30 years is likely to be signed into law within the next couple of weeks. So before you cozy up to the fire to enjoy your holiday, here are a few things to consider:

For 2017:

  1. Prepay your 2018 property taxes, buy your vehicles, boats, etc. by December 31, 2017. The bill caps the SALT deduction at $10,000. Gasp! This won’t help much if you are an AMT victim, but if not, enjoy!
  2. Give your 2018 charitable contributions by December 31, 2017. A significant majority of filers will not itemize in 2018, since the standard deduction is doubled.

For 2018:

Get your adult kids off the dole. The new bill eliminates the personal exemption ($4,050 per dependent) but almost doubles the standard deduction. Non-child dependents will only get you a $500 temporary credit on your return. If they file on their own, they get a $12,000 standard deduction and a 10% tax bracket up to $9,525. And you get a cleaner house.

The good:

Thisishuge

  • The corporate tax rate plummets, yes plummets, to 21%!  What?  It can’t be…but it is. Wait. There’s more.
  • Pass-through owners get a 20% income deduction. This. Makes. Me. Cry. Where have you been all my life? Tragically, phase-outs and caps kick in at $157,000 for individuals and $315,000 for married couples. #productivitypenalty #thereisahackforthat #passiveownershipisattractive
  • The bill doubles the amount of money exempt from estate tax to $10.98M for individuals and $21.96M for married couples. Sweet!
  • It allows a $500 credit for non-child dependents, including elderly parents. Yes, please!
  • It doubles the child tax credit to $2,000 for children under 17 and raises the income threshold to $200,000 for individuals and $400,000 for married couples. “This is huge!”, as President Trump would say. #nowthatmykidsaregrown
  • The health insurance mandate is repealed.

The bad:

  • The bill eliminates the itemized deduction for the interest on home equity loans and caps the amount of acquisition mortgage debt at $750,000 (or $375,000 for MFS).
  • Deductions for moving expenses and most miscellaneous itemized expenses are eliminated.
  • Starting in 2019, you will no longer be able to deduct alimony payments if they are required by a divorce agreement entered into after 12/31/18. Recipients of nondeductible payments won’t have to include them in taxable income. Bad news for the payor, a sweet ride for the payee.

The ugly:

  • Without a PAYGO waiver, the bill will trigger a significant cut to Medicare.
  • The Act leaves intact the 3.8% net investment income tax and the 0.9% additional Medicare tax. Seriously?
    both enacted by Obamacare.
  • Chained CPI will be used to measure inflation. Eeek! Here today, gone tomorrow. Oh well. At least we have today. Carpe diem!

Qualifications, rules and limits apply.

As with all deductions, consult your CPA to determine the qualifications, rules and limits that apply.

See also:

~Mitzi E. Sullivan, CPA

M.E. Sullivan is a cloud based professional services provider specializing in cloud accounting.

Self-employment Tax Snafoos

“If you are relying on your tiered entities to shelter you from SECA, you may be in for some sticker shock.” ~Mitzi Sullivan, CPA

limited partner self-employment tax
Limited partner with self-employed income?

Since 1977, limited partners have reported distributive income as passive investment income not subject to self-employment tax.  But the times they are a changin’.  With the increased popularity of LLPs and LLCs, the IRS is looking more closely at the facts and circumstances, and less at the legal structures, of taxpayer and entity relationships.

There have been rumblings of clarification of the tax treatment of limited partner and LLC member income for SECA purposes, but Congress has made little progress.  The IRS continues to decide the treatment of distributive income on a case-by-case basis, with no concrete guidance.   The courts have consistently upheld that a passive activity under IRC Section 469 is not necessarily a passive activity under IRC Section 1402(a)(13).

If you are relying on your tiered entities to shelter you from SECA, you may be in for some sticker shock.  My advice?  Don’t rely on your K-1 to determine whether or not your income is subject to self-employment tax or ACA’s new investment tax .  Discuss your entity relationships with your CPA to determine the proper reporting.

See also:

Federal Register / Vol. 62, No. 8 / Monday, January 13, 1997 / Proposed Rules