Gimme More Regulations!

May 21st, 2015


http://www.dreamstime.com/stock-photography-regulations-envelopes-pile-official-notification-new-guidelines-word-regulated-as-notifications-overseeing-your-business-image43033172I can’t believe I’m saying this, especially since the federal government is issuing regulations at the rate of about 10 each day (somewhere between 2,200 and 4,500 annually), according to the National Research Service! But there’s one area in which regulations are long overdue and I would welcome them: IRS guidance on self-employment taxes for members of limited liability companies.

Here’s why:

It’s been nearly 17 years since the moratorium on the IRS’s issuing regulations expired (on June 30, 1998). In all this time, there has been very little guidance on how LLC members should figure their self-employment tax. There were, of course, regulations that were proposed in 1997, had guidance for determining whether LLC members should pay self-employment tax on all of their distributive share; these proposed regulations have never been adopted.

Here’s the problem:

General partners in partnerships pay self-employment tax on their distributive share of partnership income, without regard to the size of their ownership interest (i.e., whether they have a majority or minority interest) or whether they actively participate in the business. In contrast, limited partners in a partnership do not pay self-employment tax on their distributive share (by definition, limited partners don’t participate in the day-to-day operations of the business). So why are LLC members, whose share of LLC income is reported on the same Schedule K-1 as used for partners, treated as general partners or limited partners for self-employment tax purposes?

Last year, the IRS clearly indicated that it would issue regulations under Code Section §1402(a)(13) (look at item number 16 in the section for executive compensation, health care and other benefits, and self-employment tax in the IRS Priority Guidance 2014-2015.

That Code Section says:

“there shall be excluded the distributive share of any item of income or loss of a limited partner, as such, other than guaranteed payments described in section 707(c) to that partner for services actually rendered to or on behalf of the partnership to the extent that those payments are established to be in the nature of remuneration for those services.”

Currently, the consensus among advisors is that LLC clients who are merely “silent investors” (like limited partners) do not owe self-employment tax. If LLC members are at the other end of the spectrum in terms of participating in the LLC’s activities by managing its daily affairs, they are more like general partners and are likely subject to self-employment tax. What is tricky is providing advice for those who fall in the middle, acting as mere investors sometimes but participating in business activities at other times.

While the 2014-2015 priority guidance season hasn’t ended this year, it is nearing a close (it ends this June). Where are these promised regulations?

Penalty Relief Deadline for Small Retirement Plans Approaching

May 14th, 2015


http://www.dreamstime.com/stock-photo-sticky-note-text-deadline-image28261860Small qualified retirement plans must file annual returns in the 5500 series with the U.S. Department of Labor or face penalties unless the plans qualify for an exemption.

Plans not required to file include:

  • SEPs
  • SIMPLE IRAs
  • Other types of plans (e.g., profit-sharing or defined benefit plans) with assets of no more than $250,000 at the end of the plan year

Plans required to file but don’t may face a penalty of up to $15,000 per return. Last year, the IRS announced a program to waive penalties for eligible filers who submitted returns by June 2, 2015. This deadline is getting near, so owners with small retirement plans that failed to file returns must act quickly. The IRS reports that about 6,000 delinquent returns have been filed since last year’s announcement.

Relief program

Qualified plans for small businesses usually file either Form 5500-SF (fewer than 100 participants at the beginning of the plan year) or 5500-EZ (for one-participant plans).

Plans eligible for special relief for delinquency include:

  • One-participant plans. These are plans covering only the owner or owner and spouse, or partners or partners and their spouses (i.e., no benefits are provided for anyone else).
  • Foreign plans. These are plans maintained outside the U.S. for the benefit of nonresident aliens.

When to use the program. It is helpful for any oversight in filing. However, two situations can be responsible for such oversight:

  • Failing to file a final return for the last year of the plan, even though plan assets are under the threshold amount.
  • Failing to file a return for a plan in conjunction with ROBS (rollovers as business startups) under the mistaken belief that the plan was exempt because of having plan assets under the threshold amount. ROBS must file, regardless of the amount of plan assets, because the business, not the owner covered by the plan is the owner, so the threshold does not apply.

Procedures. Returns submitted under this program should be marked: “Delinquent return submitted under Rev. Proc. 2014-32, Eligible for Penalty Relief.” Multiple returns can be submitted. There are no fees or penalties for filing under this program.

Relief is not available if a CP 283 Notice, Penalty Charged on Your Form 5500 Return, has been issued to a plan sponsor or administrator with respect to a delinquent return.

Reasonable cause

Whether or not a delinquent return is filed under this relief program, a penalty for late filing can always be excused for reasonable cause. For example, if you want relief but miss the June 2, 2015, deadline for the special program, you can request relief because of reasonable cause.

A request for relief due to reasonable cause may be attached to the delinquent return when the return is filed or may be filed separately. The request should state the reason why the return was late and be signed by a person in authority. The request, along with the delinquent return if it has not already been submitted, should be mailed to the filing address provided in the instructions for the most current form available to taxpayers.

Conclusion

If your business maintains a qualified retirement plan, review your filing history to make sure you’re in compliance. Talk with your tax advisor for details.

Moms in the Workplace

May 7th, 2015


Rose with LaptopMother’s Day is around the corner, so I’m taking this opportunity to recognize moms who work outside of the home.

Here’s what we know:

There are lots of statistics about women-owned businesses in the U.S. (e.g., there were about 9.1 million women-owned businesses as of 2014, which is 30% of all enterprises in the country, according to a report from Womenable and American Express OPEN). But I couldn’t find any meaningful statistics about moms who own businesses in the U.S.

Statistics from the UK show that about one-third of all self-employed individuals are women and 17% are business owners, but again, no breakdown for “mums” in these categories.

Protections and assistance for working moms

Times have changed since I was just starting a family, and younger readers probably will find my recollections bizarre. Back then, you were lucky if you weren’t fired once your pregnancy became visible (e.g., teachers were forced to leave the classroom). There were no formal arrangements for maternity leave. And there was no such thing as paid maternity leave if a job was held for you. There was no short-term disability payment from state programs. And there were certainly no widespread workplace accommodations for nursing moms.

Today, federal and state laws provide protections for moms who are employees. There’s the Pregnancy Discrimination Act, the Family and Medical Leave Act, and the Americans with Disabilities Act (for impairments resulting from pregnancy). Short-term disability under state programs provides some monetary assistance during maternity leave, and some employers offer short-term disability coverage under private plans. Find more about federal protection for pregnancy from the EEOC.

There are no government protections for self-employed moms. It’s up to them to make their work-life arrangements. But being self-employed works out for many such women who, like me, have found the scheduling flexibility a key benefit, especially during child-raising years.

Resources

Happy Mother’s Day to all moms … those who are business owners, those who have paying jobs, and stay-at-home moms who receive no monetary compensation for their hard work.

Why You Need to Stay in Your State’s Good Graces

April 30th, 2015



Law book and gavelCorporations and limited liability companies (LLCs) are creatures of state law. While entity choices may have federal tax law implications, it is state law that governs matters of setting up the entity, annual filings, and consequences for failure to comply with state law requirements. Organizing within a state confers powers, rights, and privileges, such as the right to do business there.

States usually require annual filings; these can be income taxes for corporations, an annual fee for LLCs and other pass-through entities, or other filing requirements. If you don’t do what’s required (file a return, pay taxes), the entity loses privileges in the state. For example, a corporation that fails to file a return (states may not suspend privileges before there are two or more non-filings) or owes taxes (again states may specific conditions under which this inaction triggers a suspension).

A suspension of corporate privileges prevents the corporation from taking certain actions such as:

  • Bringing an action or defending itself in court.
  • Receiving an automatic extension of time to a state income tax return.
  • Filing a claim for refund.
  • Filing or maintaining an appeal with the state revenue department.

Losing state privileges can also have federal tax ramifications. Take the following cases (one involving a weight loss company and another involving a law firm), both of which incorporated in California that didn’t pay their state income taxes.

Under California law, their corporate privileges were suspended for 90 days. (The California Franchise Tax Board issued a certificate of reviver and a certificate of relief from contract voidability after the suspension period was over). As a result, the corporation couldn’t file any lawsuits during this period. It happened that the corporations wanted to contest federal taxes in Tax Court but couldn’t do it. There is a 90-day period in which to file a petition in this court, but the 90-day period lapsed during the corporations’ suspensions.

Conclusion

Make sure you stay up to date with state law requirements. If you have problems, such as the inability of your corporation to pay state income taxes owed, address the problems head on (e.g., contact your state revenue department to work out a payment plan).

In some cases, the failure of a corporation to pay its debts, which includes taxes, can result in the owner holding the bag (even though an impetus for incorporating was to gain personal liability protection).

Best advice: always respond to any notice you receive from your state.

Quick Invoicing Increases Payment Odds

April 23rd, 2015


InvoiceUnless you get paid at the point of sale (POS), you have to bill for your goods or services and wait for payment. It’s my belief that sound invoicing policies result in receiving payments faster, although I don’t have any statistics to back this up. In fact, it’s hard to find any relevant and recent statistics on invoicing in general.

Here’s what I found and what I suggest for improving your chances of being paid in full and on time.

Statistics on waiting for payment

The NFIB conducted a poll in 2001 and had these interesting responses:

  • 37% of small businesses get paid at the time of sale, delivery, or job completion. This means that nearly two thirds must invoice for payment.
  • 53% request payment in “net 30 days” while 17% say “due on receipt.”
  • 29 days is the average time it takes for customers to pay up; 11% pay up in 46 days.

D&B reported that in 2012 about half of companies pay on time, but 6.3% of U.S. companies had late payments of over 90 days. The report was not limited to small businesses and covered only B2B invoicing. The report also broke down payment practices by business size (micro, small, medium, and large) and industry (e.g., construction, retail, services).

A Dynavistics infographic shows that 26% of invoices 3 months old are uncollectible, 70% of invoices 6 months old are uncollectible, and the rate rises to 90% for invoices at least 9 months old.

One statistic that has stuck in my mind for years is that as many as 2% of customers have no intention of ever paying the bill (How to Collect Debts and Still Keep Your Customers, AMACOM, 1999). So invoicing may be a lost cause for a small percentage of sales (I’ve been stiffed only twice … once from a customer who simply refused to pay despite having no complaints about the services and another customer that went bankrupt before paying my invoice.)

So you know the facts. What can you do to make sure you’re paid what you’re owed (if you can’t get paid at POS)?

Invoice promptly

Good business practices suggest that you create and send invoices as close to the sale as possible. This can now be done on the fly using apps or cloud-based solutions tied to accounting programs. For example, FreshBooks lets you create invoices in minutes, including automatic calculation of sales tax if applicable. You can do this at a customer/client location through the cloud, which may enable you to collect payment on the spot.

  • Don’t wait until the end of the month to send out all invoices for work completed during this period.
  • Don’t send invoices by snail mail (which delays the customer’s receipt and has the possibility of nondelivery); send invoices electronically.

For service jobs, arrange for payment upon completion of a phase of the work so you’re not waiting for a single payment at the end of a project. Establish pay points (e.g., completion of a certain task, a portion per month).

Conclusion

Whether or not customers/clients paid by check, credit card, PayPal, or other electronic transfer, you may need to supply an invoice. Make sure your invoicing capacity is swift, professional looking, and complete. While this may not guarantee payment, it certainly helps. Collection practices, dropping slow-paying customers, and charging interest are topics for another time.

The Weather: Impact on Your Business

April 16th, 2015


http://www.dreamstime.com/stock-photography-tablet-pc-showing-weather-forecast-screen-cup-coffe-workplace-coffee-wooden-work-table-close-up-image39842832Your location has a tremendous impact on the viability of certain businesses and conditions you experience. Regardless of where you fall on climate-change politics, weather-related trends and events cannot be ignored. They present challenges for some; opportunities for others.

Lessons from California

In response to a severe drought, on April 1, 2015, Gov. Brown imposed extensive water-use restrictions in California. The restrictions aim to cut residential and business water use by 25% over nine months. The restrictions apply to lawns, landscaping, golf courses, cemeteries, and campuses, and include a lawn replacement program (substituting drought-tolerant landscaping). So far, restrictions do not extend to agricultural use of water.

What does this mean? Small landscaping companies will lose business focused on mowing and maintenance. To survive, such companies will need to adapt by offering lawn replacement services.

Isn’t this always the way for small businesses? Didn’t anvil companies and blacksmiths have to adapt after the introduction of the automobile?

Lessons from the Midwest

On April 9, 2015, tornadoes devastated parts of the Midwest, wiping out towns in Illinois and leaving destruction across a good section of the country. With homes, businesses, and civic buildings destroyed, there is much rebuilding to be done.

Hardware stores, contractors, and just about every type of tradesman have work for the foreseeable future once insurance settlements and FEMA make payments available. Contractors from other parts of the country who are idle and willing to move (at least temporarily) may find opportunity here, but check for state/local licensing requirements.

Conclusion

Looking back at severe storms this past winter, business travel became a nightmare for many. Some found that videoconferencing or phone communication could substitute for in-person meetings.

Going forward, what are your plans in response to severe weather? Do you have plans to make any changes in travel for the future? Have you reviewed your insurance coverage to address concerns about potential hazards?

Mother Nature can’t be controlled, so it’s up to you to adapt your business accordingly.

Pet Peeves about Online Postings

April 9th, 2015


If you’re reading this, you know that I write a lot of online content on tax, financial, and legal matters. My posts can be found regularly on my website as well as on several other sites, including SBA.gov, SmallBizTrends, AmericanExpress OPEN, and Investopedia.

I do most of the research for my writing online, and I want to gripe about some of the problems I run into. I’m doing this because I suspect I’m not the only one with complaints, and I hope to inspire others who write for online sites to shape up or drop out.

http://www.dreamstime.com/royalty-free-stock-photos-sign-word-inaccurate-turned-accurate-two-pieces-white-paper-image49756518Incorrect info

Nobody is perfect and anyone can make a mistake (goodness knows I’ve had my share of errata over my long career). But I have found a lot of misinformation online that I suspect is not just a careless slip up from some from purported “experts” on a particular subject. The recent Rolling Stone scandal is one kind of mistake (characterize it as shoddy journalism or outright fraud?). Poor writing and erroneous conclusions are other problems.

Solution: Fact-checking information and an editorial review are helpful to weed out blatant errors.

Undated info

Many posts have no date to indicate when they were written. This can lead me and other readers to incorrect information because things change. For me (writing about taxes), many numbers change annually, so older articles often refer to outdated limitations and thresholds.

Solution: Duh … add a date so the reader has context for the information.

Uncited info

When a topic is hot, I’ve seen a fact or statistic mentioned in numerous places. (It’s almost like the old telephone game where the information gets repeated and repeated, and sometimes is transformed in the process.) Unfortunately, far too few specify where the information came from. In one case (that I don’t want to elaborate on), I recall a statistic repeated every time the topic was covered by a different media outlet, yet the original source of that statistic was questionable. Without a link to the source of information, it’s difficult for me and other readers to know whether information can be trusted.

Solution: Hotlink information to its source.

Conclusion

I am continually offered articles by “experts” for posting on my site. However, I have maintained a policy of only posting my own content on my website, in part because of concerns about editorial control over outside submissions. I don’t have the time or staff to editorially check submissions.

My advice to readers: employ some skepticism about anything you read and, when relying on information, verify it through other sources. And if you find a mistake in anything I write, please bring it to my attention so I can post a correction.

Key to Business Success: Personal Health of the Owner

April 2nd, 2015


A Man Brainstorming about Health Concepts

A blog I read a few years ago said: “You are your business’ most important asset,” and I couldn’t agree more.

When an owner is out because of illness, especially a lengthy one, the business can suffer. So, with spring in the air, now is a good time to focus your attention on yourself, on your health.

Here are some strategies to use now:

  1. Assess your health. Where do you stand now? Do you need to lose some weight? To you need to begin or change an exercise program? If you don’t know the status of your health, consider scheduling a visit to your primary care doctor and see. Make the time to get a handle on your health.
  2. Plan a summer vacation. Now’s the time to be thinking of getting away for R&R. The importance of taking vacations from a health perspective has been well documented. For example, one study found that an annual vacation cuts the risk of a heart attack by 50%. A Psychology Today article notes that vacations help to break the “stress cycle.” Whether you plan a two-week vacation or just a long-weekend getaway, the earlier you plan, the easier it will be on your business.
  3. Kick a bad habit. It’s all too easy to fall into bad practices in our personal lives, especially when we’re so busy at work and just try to cope. Some may drink a little too much; others may stay up too late and fail to get enough sleep. Be honest about your bad habit and resolve to make changes. If necessary, get professional help.
  4. Encourage your staff to focus on their health. While you’re thinking about yourself, share your health strategies with your staff. However, do NOT do anything that could cause embarrassment (e.g., don’t tell an employee that she needs to lose weight) or trigger any lawsuits (e.g., discussing a disability is in violation of the Americans with Disabilities Act).

Resources for improving your heath:

How to Figure Your Estimated Taxes

March 26th, 2015


http://www.dreamstime.com/royalty-free-stock-photography-hand-writing-time-taxes-hands-marker-face-clock-image36872907If you’re self-employed, there’s no tax withholding from your business earnings you can use to meet your tax obligation. Instead, you pay estimated taxes in four installments.

There are two main challenges with respect to estimated taxes:

  1. Figuring out how much to pay (so you don’t overpay and have to wait for a refund or underpay which can result in penalties); and
  2. Having enough cash available to make your installments.

Here are some strategies to help you address these challenges.

Rely on what you paid last year

Past is prologue for estimated taxes because relying on the past can (1) give you a good idea of how much to pay and (2) avoid estimated tax underpayments even if you fall short. Under one safe harbor from estimated tax penalties, as long as your estimated taxes for this year are at least 100% of your prior year tax liability (or 110% if your adjusted gross income in the prior year was at least $150,000, or $75,000 if married filing separately), there’s no underpayment penalty.

In order to use this penalty safe harbor, you need to know what your tax liability for last year actually is. This can be troublesome if your income fluctuates and you obtain a filing extension for your income tax return.  For example, your first estimated tax payment for 2015 is due April 15, 2015, but if you have a filing extension for 2014 income tax return, you won’t know the final tax bill for 2014 on which to figure estimated taxes under this penalty safe harbor.

Project your bill for this year

A better way to make more accurate estimated tax payments (so you won’t overpay and have to wait for a tax refund or underpay so you have to come up with more cash at tax time) is to figure what you think you’ll actually owe this year. This can be done with the help of your tax advisor or using an IRS worksheet. Your estimate doesn’t have to be perfect; under a second safe harbor, as long as your estimate is 90% of the final tax bill, there won’t be any estimated tax penalty.

Set money aside for payments

One of the biggest challenges for many self-employed individuals is having the cash on hand to pay the estimated tax installment on time. This cash flow concern can be remedied by disciplined savings.

But how much do you need to save in light of the uneven time periods for the four estimated tax installments (April 15, June 15, September 15, and January 15 of next year)? A handy free tool that you can use to figure how much you need to save weekly so you’ll have your targeted payment on the installment due date is DynaTax’s calculator. Of course, it’s up to you to implement a savings plan for your targeted payment.

Conclusion

Estimated taxes are a fact of life for self-employed individuals. There may be alternatives for certain people (e.g., those with a working spouse who can use his/her withholding to cover the couple’s tax bill; sideliners who can use withholding from a job). But most self-employed individuals should plan for estimated taxes. Work with a tax advisor to get a handle on this tax responsibility.


Partnerships and LLCs: A Tax Perspective

March 19th, 2015


© <a href="http://www.dreamstime.com/rawpixelimages_info#res2965056">Rawpixelimages</a> | <a href="http://www.dreamstime.com/#res2965056">Dreamstime.com</a> - <a href="http://www.dreamstime.com/stock-photo-group-multiethnic-various-occupations-people-image46071866#res2965056">Group Of Multiethnic Various Occupations People Photo</a>

As in the case of sole proprietorships, the tax statistics on partnerships (including limited liability companies that file tax returns as partnerships) reflect an improving economy.

For 2012 (the most recent year for statistics), there were 3,388,561 million partnerships (3.1% more than in 2011), representing more than 25.3 million partners (up from 23.3 the year before).

Here is some more interesting tax-related information about these filers:

  • Limited liability companies (LLCs) in the U.S. accounted for the majority (65.3%) of all partnership returns. This is the 11th consecutive year that LLCs dominated the number of partnership returns filed. They reported the most profits (33.4% of all returns) and the largest share of partners (42.5%).
  • Limited partnerships represented only 12% of all partnerships, but were extremely profitable.
  • Total receipts (revenue) for filers increased by 9.4% from the previous year to $6.6 trillion. Profitability was also up, increasing by 33.9%.

Which industries use partnerships/LLCs?

From tax statistics, real estate and rental and leasing were by far the most significant sector, accounting for 49.1% of all returns filed. Other significant sectors were in finance and insurance; health care (laboratories, outpatient centers, social assistance); arts, entertainment, and recreation; accommodation and food services; repair and maintenance; and personal/laundry services.

Which industries are most profitable?

While real estate is the most numerous type of partnership, the finance and insurance sector had the largest share of total net income (43.1%), as well as the greatest amount of total assets (55.2%).

Final thoughts

IRS statistics support what we all know: that the improving economy helps to make businesses more profitable and creates a climate that’s conducive to new businesses. Hopefully, this trend continues.