Barbara’s Blog

If you have a qualified retirement plan for your business, determine whether your plan is meeting your objectives and complying with the law. If you don’t yet have a plan, consider adopting one now.

Is your current plan the best one for you?

There are several types of retirement plans that a small business can use; the one to choose depends on your personal situation.

Factors to consider in plan selection (or in changing from an existing plan to a new one) include:

1. Profitability of the business (how much can you afford to put into the plan each year).
2. Number of employees (which affects the cost of company contributions and whether to use a plan that places the contribution on owners entirely or primarily on your staff).
3. The number of years to your retirement (how anxious you are to sock away as much as you can for your own retirement).

Review your plan options in IRS Publication 560, Retirement Plans for Small Business. Talk things over with your tax/financial advisor or consult with a retirement plan expert for guidance in choosing a better plan and terminating your existing one.

Are your investment choices satisfactory?

The stock market remains volatile and interest rates are at historic lows, which may make your returns look anemic. In view of these factors, do your plan’s investment choices continue to meet your needs? Work with a financial advisor to realign your plan portfolio.

Is your plan in compliance with tax laws?

Tax laws on retirement plans have changed over the past several years, particularly since the Pension Protection Act of 2006. Are you up to date? Use a checklist for your particular type of plan (e.g., SEPs, 401(k)s) to see whether you’re in compliance.

If you discover problems (e.g., you’re not covering all of the employees you should), you may be able to correct the problems with little or no penalties or other IRS charges using the Employee Plans Compliance Resolution System (EPCRS). Talk to your tax advisor about this option if needed.

You can stay up-to-date on future changes and other retirement plan developments by subscribing to Retirement News for Employers. This free quarterly newsletter reports on plan law changes, new forms, and other plan-related items you’ll want to know about.

Each year, the federal government celebrates small business. There are awards, speeches, seminars, and luncheons for the men and women who risk it all to innovate, employ, and serve the U.S. economy. This year’s Small Business Week — May 20-26 — is more of the same.

I think it’s great that we recognize the achievements of select businesses and honor them. However, it seems a little off base for the federal government to be participating in the celebration. More small businesses could be starting and growing were it not for some of the policies of the federal government.

A report from the Small Business & Entrepreneurship Council found that small business isn’t happy with Washington. The survey found an intense dissatisfaction with the overall direction of federal policies and what they meant to the economy, with 61% of small business owners saying they not satisfied with economic policies from Washington.

The National Federation of Independent Business (NFIB) found that taxes continues to be a top problem for small businesses because of uncertainty and looming hikes as well as the regulatory burden imposed by compliance. Key findings:

• It costs around 206% more (an estimated $74 per hour) for small businesses to comply with the federal income taxes than for larger companies.

• If changes in tax law are not made before the end of this year, the nearly $500 billion in new taxes will fall disproportionately on small businesses.

• Many of the most popular tax breaks for small business have expired or are about to expire.

• Family-owned businesses are threatened by the prospect of a rising estate tax, which is set to jump from 35% this year to 55% next year.

Getting back to the dream of owning one’s own business? Entrepreneurs want to innovate, hire, and thrive. To do this, they need a climate of certainty about the rules within which they operate. Taxes have to be fixed for the foreseeable future. Regulations have to be eased. Lending policy has to stabilize. Right now, we’re living the nightmare.

What can small business owners do? Congress should not wait until a lame duck session to address tax and other matters. Small business needs certainty now. Make your voice heard.

Earlier this week, the House passed the Mobile Workforce State Income Tax Simplification Act of 2011 (H.R. 1864). This bill would bar states from imposing taxes on workers until they have actually worked at least 30 days within their borders. If it passes the Senate, this measure would go a long way in helping simplify the regulatory burden of withholding taxes for mobile workers and reporting them to states outside of where a business is based.

Currently, in the 41 states in which there is an income tax on wages, the rules for withholding are not uniform. This creates confusion and complexity for small businesses that have a mobile workforce.

For a good discussion of this complexity, read an article from the Journal of Accountancy (you don’t have to be a CPA to understand it).

The measure, which just passed the House in a bi-partisan effort, would create a national standard by limiting withholding to the state or locality of the employee’s residence as well as to the state or locality in which the employee is physically present performing duties for more than 30 days.

A coalition of more than 495 businesses and organizations support the bill. And so do I! Urge your senators to do so now.

The U.S. Post Office had announced that it would close about 3,700 of its rural locations starting the week of May 13. Now it has backed off from this action, for now. Instead, it has said it will make other cuts, such as reducing hours in its offices and offering early retirement to postmasters — starting in September 2014. The move is designed to help the fiscally-troubled agency continue to operate as usual (albeit with these changes). In the meantime, Congress is considering various moves to bailout the agency that has growing financial problems due to escalating obligations to retirees and slowing use of first-class mail.

Would you be impacted by cutbacks?

Many businesses have switched to e-mail for sending correspondence (e.g., invoices, letters, contracts, etc.). Others use private delivery services (e.g., UPS and FedEx) for shipping some packages expeditiously. For these businesses, shorter hours, fewer days of delivery, and other cutbacks by the USPS will hardly be noticed.

However, other small businesses continue to use various postal services. They may, for convenience, have post office boxes to receive mail and packages. They continue to use direct mail services for reaching out to customers and prospects.

Into which category does your business fall? Would you be seriously or even mildly impacted by cutbacks by the post office, or would you not be affected at all?

Do you support a federal bailout?

It would be nice if the federal government helped small businesses that were on the ropes; it hasn’t done this. I question whether it makes sense to spend precious taxpayer dollars on a business whose model is antiquated; increased use of e-mail isn’t likely to diminish and the declining revenues from stamp sales will surely continue. Why prop up a buggy whip business? Anyway, that’s my opinion.

If your business is incorporated, you can take a salary for the work that you do. Obviously, your company’s revenues are a big part of the decision on how much you can afford to take out of its coffers as compensation. Taxes are another important factor.

C or S?

Which type of corporation you run affects the decision on compensation. As a general rule (and by no means your guiding factor):

• C corporations want to optimize compensation to an owner to create as large a tax deduction as possible.
• S corporations want to minimize compensation to keep employment taxes low. Owners will pay income tax one way or the other (as their share of profits or as compensation).

IRS looking over your shoulder

The IRS is well aware of the general rules for C and S corporations. Thus, it seeks to disallow a C corporation’s deduction for any compensation that is not considered to be “reasonable” under the facts and circumstances of the situation.

By the same token, it is on the hunt for S corporations and their shareholders who try to avoid employment taxes by underpaying compensation. One recent court decision is a case in point. A CPA was the sole owner, shareholder, director, and employee of his S corporation. He had a contract with his corporation to provide exclusive services and took a salary of $24,000 each year (for the years in question). He also had dividends distributed to him of $203,651 and $175,470 in these years. The IRS recharacterized the dividends as compensation and imposed FICA taxes on them. A district court, affirmed by an appellate court, said that the economic realities of the situation — the earnings of the corporation based on the owner-employee’s services — should control the amount of compensation. (The IRS’ expert witness was used to determine what was appropriate compensation in this situation.) Thus, paying a minimum salary may not be sufficient to avoid an IRS challenge if the minimum amount is not reasonable under the circumstances.

Work with a tax advisor

Compensation to owner-employees typically is fixed in the annual meeting for the corporation and memorialized in the corporate minutes. It is a good idea to discuss the compensation matter with a tax advisor before holding the annual meeting and setting compensation for the coming year.