The House of Representatives recently passed a Bill (HR 4213) that would raise taxes on many small business owners who are treated as a sub-chapter S corporation for tax purposes.  It is disheartening that the US House of Representatives wants to increase taxes on so many small business owners.  HR4213, is now under consideration by the US Senate.

Below is a letter that we have sent to our clients who own sub-chapter S corporations:

Dear Client,

The US House of Representatives passed a bill (HR4213) which extends many of the Bush tax cuts.  This bill has several revenue offsets; one of which could be particular damaging to many of our clients.

While HR 4213 has not yet passed the US Senate; it is expected to pass a similar but different bill.  These changes will be resolved in a Conference Committee.  President Obama is expected to sign the bill once it is passed by both the House and Senate.

HR 4213 as written in the House will increase taxes on a large number of small businesses that are treated as a sub-chapter S corporation for tax purposes.  Sub-chapter S corporations were first available in 1958.  In 2007, almost four million S corporation tax returns were filed with the IRS; of those the average entity had an average of 1.7 shareholders.  It is likely that close to 4.5 million S corporation tax returns will be filed with the IRS in 2011. 

The new law proposes increasing taxes on certain sub-chapter S corporations as of January 1^st, 2011.  Under current law owners of sub-chapter S corporations are required to pay themselves a reasonable salary.  Currently S corporation owners pay self employment taxes (social security and Medicare) on their salary only.  Additionally owners pay income tax on their salaries and on their remaining profits earned each year.

The new law would require certain S corporation owners to pay self employment taxes on all income earned from their S corporations.  This is a major change in the current law and would be a large tax increase for certain owners of S corporations.

The House version would affect the following S corporations:

(1)  It only effects S corporations that are engaged in a professional service business if the principal asset of the business is the reputation and skill of three or fewer employees.

(2)  A professional service business is defined as a trade or business, substantially all of the activities of which involve providing services in the field of health, law, lobbying, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, investment advice or management, or brokerage services. 

This law is currently very vague and if enacted will have to be more strictly defined by the IRS. 

Based on a review of our clients this law will affect between ¼ and ½ of our clients who file an S corporation tax return!  The tax increase would be relatively large for some of our clients.  That is best shown with two examples.

I will start with an example of a consulting firm that is owned by a husband and wife who each own 50% of the firm.  Let’s say that both the husband and wife work at the firm and that the main asset of the firm is the expertise of the two owners.   Let’s say the owners are paying themselves each a salary of $40,000 per year and they are each taking $30,000 per year in profits.  Currently they are each paying social security and Medicare taxes on $40,000.  If HR 4213 is enacted using the above example they will pay social security and Medicare taxes on $140,000 rather than on $80,000.  This will increase their annual self employment taxes by over $9,000 per year! 

The next example is a midwife who owns her own business.  She works for the firm and is the firm’s only employee.  Let’s say she pays herself a salary of $30,000 per year and she takes $20,000 each year in profits.  Currently she pays social security and Medicare taxes on $30,000.

If HR 4213 is enacted using the above example she will pay social security and Medicare taxes on $50,000 rather than on $30,000.  This will increase her annual self employment taxes by over $3000 per year!

We will monitor this bill as it progresses to keep you “in the loop”.  The bill will not affect anyone this year.

We believe this provision is unfair to small businesses because it will force certain small business owners to pay more in taxes than their larger competitors.

The best way to stop this bill is to contact Senator Evan Bayh and Senator Richard Luger!

 SBS CPA Group

The new health care legislation has made tremendous changes to existing laws.  Many of these changes phase in over the next five years.  

The National Federation of Independent Business (NFIB) has a timeline listing many of the provisions in the new health care legislation and their date of implementation. 

The IRS is responsible for collecting taxes from Americans.  The amount of taxes that are legally owed; yet not paid, is often referred to as the “ tax gap”.  The IRS estimates that taxpayers only pay about 84% of the tax they owe.  The IRS currently estimates that Americans paid about 514 billion dollars less in taxes in fiscal year 2008 than they should have paid. 

One of the methods the IRS plans on using to try to lower the “tax gap” is requiring more “information reporting”.   A good example of  ”information reporting”  are the W-2’s that employers are currently required to issue to all employees.  Each employer currently sends a W-2 to each employee and a copy to the Internal Revenue Service.  Since the IRS gets a copy of each W-2 they can cross check tax returns and ensure that taxpayers are reporting their salaries.     

The new health care legislation has a provision that will impose another large regulatory burden on all business owners in the United States. 

This new law will effect all payments made by businesses after 12/31/11.  All businesses will be required to issue a 1099 to all businesses and individuals they pay $600 or more in a calendar year!  This is going to be an absolute nightmare for business owners.  The IRS has not determined when these 1099’s will be due; however, the likely due date will be Feb 28th if they are paper filed and then March 31st if they are electronically filed.

We currently prepare about 200 1099’s for our clients.  With the new law we will likely have to file about 1200 1099’s the first year this plan is implemented. 

As the IRS issues further instructions we will keep you aware of those changes. 

Mike Sylvester, CPA/ABV “accredited in business valuation”

At SBS CPA Group we regularly work with several different high quality local financial planners.  Many of our clients use a financial planner and the truth of the matter is that more of our clients should use a financial planner than currently use one.

If you have a financial planner you should talk to them about whether or not you should consider converting your traditional IRA to a Roth IRA.

If you do not have a financial planner at this time you should consider contacting a financial planner and discussing this issue with them!  Reimbold and Anderson is one of the financial planning firms that we regularly deal with.  They provided the below article and would be happy to meet with you and discuss whether or not you should consider a Roth IRA conversion in 2010.  You can visit their website directly to learn more about their services and their company.  The article discussing a Roth IRA conversion in 2010 is presented in purple below:     

IRA conversions for (almost) everyone!   Beginning in 2010, if you own a traditional IRA, you’ll be able to convert it to a Roth IRA.  The income limits and marital status requirements that previously applied to Roth conversions were repealed by the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA).   In addition, if you convert a traditional IRA to a Roth IRA in 2010, you’ll be able to report half the income on your 2011 tax return and half on your 2012 return. Or, if it’s to your benefit, you can instead elect to include the entire amount in income on your 2010 return. It’s up to you.  If you inherit a traditional IRA from your spouse, and you elect to treat that IRA as your own, you’ll also be able to convert   IRA to a Roth IRA in 2010, regardless of your income or marital status.  Nonspouse beneficiaries, however, still can’t convert an inherited traditional IRA to a Roth.  Note that the income limits for contributing to a Roth IRA haven’t changed for 2010. If your income is high enough, your ability to make regular contributions to a Roth IRA in 2010 may be limited, or even eliminated. The ability to convert a traditional IRA to a Roth without income limits, however, provides a potential workaround–you can make your annual contribution to a traditional IRA, and then immediately convert that traditional IRA to a Roth.  You’ll have to aggregate all your traditional IRAs when calculating the tax effect of the conversion, so speak with a financial professional first to make sure this strategy works for you.

Employer plan conversions for everyone!  Beginning in 2008, employees and beneficiaries were permitted for the first time to essentially “convert” employer plan distributions by rolling the funds over to a Roth IRA. This was allowed, however, only if the payee satisfied the income and marital status limits that applied to traditional IRA conversions. The elimination of those restrictions by TIPRA, described above, also applies to distributions from employer plans–so beginning in 2010, anyone who receives an eligible distribution of non-Roth funds from an employer plan can roll those funds over to a Roth IRA, regardless of income or marital status. This applies even to nonspouse beneficiaries–but only if the transfer to the IRA is done in a direct rollover.

The preceding article was ‘Prepared by Forefield, Inc, Copyright 2009.’

The rules governing the conversion process are complicated and I highly recommend that you discuss the conversion process with a knowledgeable financial planner.

 Mike Sylvester, CPA/ABV “accredited in business valuation”

You can read the IRS announcement for yourself!

The new IRS mileage rates for 2010 are:

1. 50 cents per business mile
2. 16.5 cents for miles driven when moving (in certain cases) or medical miles
3. 14 cents for charitable miles

Mike Sylvester, CPA/ABV “accredited in business valuation”

Tax planning is important to small business owners and December is your last chance to plan for your 2009 taxes.

Small business owners should meet with their accountant throughout the year in order to ensure that they are ready to file their 2009 taxes.  There are often actions that small business owners can take in December that will effect their 2009 tax burden.  Examples include purchasing new equipment, taking advantage of recent tax law changes, etc.

Every business owner should have a strong relationship with their accountant and should work with their accountant throughout the year!

Mike Sylvester, CPA/ABV “accredited in business valuation”

The American Recovery and Investment Act of 2009 is a massive bill that makes a lot of changes to the tax code.

As a tax preparer in northeast Indiana I had several clients this year who were on unemployment for at least part of 2008.  Many of them did not realize that they had to pay both Indiana and Federal income taxes on any compensation they received from the unemployment fund.  In fact most of my clients who collected a significant amount of unemployment taxes ended up owing a significant amount of income taxes to Indiana and the IRS.

One of the many changes made by the American Recovery and Investment Act of 2009 is that it exempts the first $2,400 of unemployment compensation from taxable income. 

Please keep this in mind if you are collecting unemployment compensation in 2009!

Mike Sylvester, CPA/ABV “accredited in business valuation”

The best way to get your tax refund quickly is to electronically file your tax return.  We electronically file all of our individual tax returns.

If your tax return is electronically accepted by the IRS before 11 AM on Thursday; the IRS will directly deposit your tax return on the following Friday.  If you instead get a paper check mailed to you that check will be posted-dated one week later than it would have been direct deposited.

Last year the Indiana Department of Revenue tended to process their taxpayer refunds slightly fast than the Federal refunds were processed.

The key to getting your tax refund quickly is to get your return filed as quickly as possible and to have your refund directly deposited into your bank account!

Mike Sylvester, CPA/ABV “accredited in business valuation” 

Our firm e-files the vast majority of tax returns that we file. 

Those people who get Federal tax refunds get those refunds one week faster by e-filing their tax return.

Please follow this link to see when you will get your Federal tax refund based on the date you e-file your tax return! 

Mike Sylvester, CPA

A common strategy for minimizing gift taxes on estates that are larger then the Federal Gift Tax Exclusion (Currently two million dollars) is for the person with the estate to gift some of the estate to their heirs before the person(s) dies.

This year you (And your spouse if your are married) can gift up to $12,000 to a person without incurring Federal Gift taxes.

So lets say you own an estate that is worth 3 million dollars.  This estate could include real estate, a business, cash or cash equivalents, farm land, stocks, bonds, mutual funds, etc.  Lets say you are married and have two children who are not married.  You and your spouse could decide to give each of your children $12,000 without incurring and Federal Gift Taxes.

Real Estate prices and stock prices are currently extremely low.  Gifts are valued on the date of transfer.  So you may want to consider gifting property that is depressed in value.

Mike Sylvester 

Tomorrow is October 15th, 2008.

The tax returns of individual taxpayers who “extended” their tax returns are due tomorrow.  They must be postdated as of October 15th!

Mike Sylvester, CPA/ABV “accredited in business valuation”