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.

Avoiding and Navigating IRS Audits

Whether you are trying to avoid an IRS audit, or have received a notice from the IRS, this guide contains helpful information: irsaudits2019

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

~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.

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.

The Best Age to Start Receiving Your Social Security Retirement Benefit?

“Careful planning may help you avoid the “tax torpedo” that bombards many retirees. In the current system, with the right investments, it is absolutely possible to live a comfortable lifestyle tax free in your retirement years.”~Mitzi E. Sullivan, CPA

SunsetWhen can I start receiving my benefit?

Age 62 – You can start receiving your benefit at age 62, but you’ll only receive 75% of your full social security retirement benefit, and the reduction is permanent. In addition, if you continue to work or have other provisional income, your benefit may be reduced even more and a portion may be subject to income tax.

Ages 63 to 65 – The longer you wait, the larger monthly benefit you will receive. At age 65 (for those born before 1960) for example, you’ll receive 93.3% of your full benefit permanently.

Age 66 – Age 66 (for those born before 1960) is considered full retirement age. If you wait until age 66, you’ll get 100% of your full benefit.

Ages 67 to 70 – After age 66, for every year you wait to start receiving your benefit, your benefit will increase by 8%. The 8% per year increase continues until age 70. There is no advantage to delaying past the age of 70.

Up to 85% may be subject to federal income tax.

If your provisional income exceeds $25,000 (single) or $32,000 (married filing joint), a portion of your social security retirement benefits may be taxed.

Careful planning may help you avoid the “tax torpedo” that bombards many retirees. In the current system, with the right investments, it is absolutely possible to live a comfortable lifestyle tax free in your retirement years.

Be careful with earnings if you start receiving your benefit before age 66.

From age 62 up to age 66, if you continue to work and earn more than the limit ($15,720 in 2016), your monthly benefit will be reduced. The limit is increased in the year you turn 66 (increased to $41,880 in 2016).

The benefit reduction is only temporary and may be made up with an increased benefit at full retirement age.

On a positive note…

Under the current system, your social security retirement benefit is inflation adjusted. In theory, that means that your monthly benefit will provide the same standard of living 20 years from now as it does today. Your other sources of retirement income may provide an opposite return, declining in inflation-adjusted value each year. So the longer you delay your social security retirement benefit, the better your inflation adjustment will be.

What to do? What to do?

Before I offer some general guidelines, I’ll make this disclaimer: social security retirement benefits are not guaranteed by the U.S. government. So if you are worried about the solvency of the system or future reforms, such as “means” testing, the guidelines don’t apply. Take your money and run.

If you are willing to gamble on the system, consider these general guidelines:

  1. If you have health problems and believe that your life expectancy is below average (about 77-78 years), you may want to consider receiving your benefit at age 62.
  2. If you believe that your life expectancy is more than 82 years, you may want to consider delaying your benefit until age 70.
  3. If you continue to work and earn more than the limit ($15,720 in 2016), you may want to consider delaying your benefit until your income decreases.
  4. If you are a lower-earning spouse and your higher-earning spouse will wait to begin receiving benefits at age 70, you may want to consider receiving benefits at age 62.
  5. If your provisional income is less than $25,000 (single) or $32,000 (married filing joint), you may want to consider receiving your benefit at age 62.
  6. If you have other sources of retirement income that can be utilized tax free, you may want to consider delaying your benefit up to age 70.

So what is the best age at which to start receiving your benefit?

As always, consult your CPA. Time spent planning could save you a significant amount of money. There are too many factors to consider to make a decision without an in-depth personal analysis.

~Mitzi E. Sullivan, CPA

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

Don’t Miss Your Deduction for Health Insurance, Medicare Premiums and Long-term Care

“If your business was profitable and you file a schedule C or receive a K-1, you may qualify for the self-employed health insurance deduction.”~Mitzi E. Sullivan, CPA

obamacare-this-is-going-to-hurt

With health insurance premiums and long-term care costs skyrocketing, you may need a little something to ease the pain.  The deduction for qualified health insurance, Medicare premiums and long-term care can provide significant tax savings for taxpayers who are self-employed, partners/members or more than 2% shareholders.  If your business was profitable and you file a schedule C or receive a K-1, you may qualify for the self-employed health insurance deduction.

How much can you deduct?

Generally, you may deduct the amount you paid for medical and dental insurance and qualified long-term care insurance for yourself, your spouse, and your dependents. The insurance can also cover your child who was under age 27 at the end of 2015, even if the child was not your dependent.  This includes Medicare premiums you voluntarily pay to obtain insurance in your name that is similar to qualifying private health insurance.  The deduction is limited to earnings from the business.

You can also take a deduction for premiums paid on a qualified long-term care insurance contracts and qualified long-term care services.  Your CPA can help you determine whether your deduction is limited.

What if I have income but my spouse is covered under Medicare?

This is an often overlooked deduction.  A self-employed taxpayer/partner/member/shareholder may include costs, including Medicare premiums, related to a spouse, dependent or child under the age of 27.

Qualifications, rules and limits apply.

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

See also: IRS Publication 535

~Mitzi E. Sullivan, CPA

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