Reasonable Compensation: Planning Ahead Can Save You Money

As the owner of an incorporated business, you’re probably aware there is a tax advantage to taking money out of the corporation as compensation (salary and bonus) rather than as dividends. The reason is simple. A corporation can deduct the compensation it pays, but not dividend payments. Thus, if funds are withdrawn as dividends, they are  taxed twice; once to the corporation and once to the recipient. Money paid out as compensation is taxed only once; to the employee in which it was received.

However, there is a limit on how much money you can take out of the corporation in this way. The law says compensation can be deducted only to the extent which is reasonable. Any unreasonable portion is nondeductible and, if paid to a shareholder, may be taxed as if it were a dividend. As a practical matter, the IRS rarely raises the issue of unreasonable compensation unless the payments are made to someone “related” to the corporation, such as a shareholder or a member of a shareholder’s family.

Fianance_Money12How much compensation is “reasonable”? There is no simple formula. The IRS attempts to determine an amount similar companies would pay for comparable services under like circumstances. Factors taken into consideration include:

  • employee’s duties;
  • amount of time required to perform those duties;
  • employee’s abilities and accomplishments;
  • complexity of the business
  • gross and net income of the business;
  • employee’s compensation history

There are a several steps you can take to make your compensation earned to be considered “reasonable”. For example, you can:

  • Use the minutes of the corporation’s board of directors to document the reasons for the amount of compensation paid
  • Keep compensation in line with what similar businesses are paying their executives
  • Avoid paying compensation in direct proportion to the stock owned by the corporation’s shareholders. This is may be perceived as a disguised dividend, and will probably be treated as such by the IRS.
  • If the business is profitable, be sure to pay at least some dividends. This avoids giving the impression that the corporation is trying to pay out all of its profits as compensation.

Planning ahead and properly documenting your reasons can avoid problems down the road.

By: Jenny Furey, CPA

Tax Breaks for Ohio Residents

Attention all Ohioans, if you are a small business owner then you are probably already familiar with Ohio’s Small Business Deduction. This deduction enacted in 2013, provides tax breaks to Ohio’s small business owners. For the 2014 tax year, this deduction allowed small business owners an exclusion from their Ohio taxable income of up to 75% on the first $250,000 of their qualified small business income. However, this calculation was subject to apportioning rules for income earned outside of the state of Ohio. For example, in 2014, if a married couple owned a small business and collectively earned $200,000 then they qualified for a deduction from their Ohio taxable income base of $150,000 ($200,000 x 75%). However, if only 80% of this income is attributable to Ohio then their deduction is reduced to $120,000 ($200,000 x 80% x 75%).

Small BusinessConversely, for the 2015 tax year, Ohio has elected to keep the original deduction, but no longer require the calculation to be limited to Ohio apportioned income. Meaning, the taxpayer in the example above will now be able to take the full $150,000— regardless of how much of the income is sourced outside of Ohio. In addition, any business income beyond the deduction will now be taxed at a graduated rate capped at 3%, which is much lower than residents have paid in the past.

The good news is this new twist in the legislation may now provide for a larger deduction! Even better, this deduction is scheduled to increase for the 2016 tax year (and onwards) to 100% of the first $250,000 of a taxpayer’s eligible small business income! This allows you to keep your money working for you.

Courtney Elgin, CPA

Tax Considerations for Self-Employed

If you’re in business for yourself, you know how challenging it can be to run your business and keep on top of your tax situation. Here’s a refresher on the tax rules you need to be aware of if you’re a self-employed sole proprietor or are thinking of becoming one.

Income Taxes

As you probably know, sole proprietors do not file a separate federal income-tax return for the business. Instead, they summarize their business income and expenses on Schedule C of their personal income-tax returns.

Be sure to keep complete records of your income and expenses. Deducting all your ordinary and necessary business expenses will help minimize your tax liability. If you have losses, these are generally deductible against your other income, subject to special rules relating to hobby losses, passive activity losses, and activities for which you were not “at risk.”

Self-employment (SE) Taxes

Any self-employed person who has net earnings of at least $400 from the business is subject to SE taxes on those earnings. SE taxes generally track the Social Security and Medicare taxes paid by employees and their employers and are partially tax deductible.

For 2016, the SE tax rates are:

  • Social Security – 12.4% of the first $118,500 of net SE earnings
  • Medicare – 2.9% on all net SE earnings, plus an additional 0.9% on earnings in excess of $250,000 for joint returns, $125,000 for married taxpayers filing separately, and $200,000 in all other cases

Quarterly Estimated Tax Payments

Your net SE income will be taxable whether or not you withdraw cash from your business account. Moreover, you may be subject to penalties if you fail to make appropriate quarterly estimated tax payments.

Home Office Deduction

If you work out of your home, you may be able to deduct a portion of the costs incurred to maintain your home. You also may be able to deduct commuting expenses incurred to travel from your home office to another work location.

Health Insurance Costs

When tax law requirements are met, you may deduct your health insurance premiums as a trade or business expense, including premiums paid for your spouse, dependents, and children under the age of 27.

Retirement Plan

If you don’t already have a tax-favored retirement plan, you may want to consider establishing one. Contributions to the plan would be tax deductible, within certain tax law limits. Types of retirement plans available to sole proprietors include solo 401(k) and simplified employee pension (SEP) plans.

New FAFSA Rules For Financial Aid

Colleges and universities seem to be sending out acceptance letters earlier and earlier each year. Students are often accepted but have no idea how much financial aid for which they may qualify. The Free Application for Federal Student Aid, or FAFSA is available for completion on January 1 of each year and helps determine a student’s eligibility for financial aid. A portion of the FAFSA requires information from the just-ended year’s income tax returns for both the student and his/her parents. Often times, the information needed to prepare tax returns does not arrive until much later in the tax season, thus resulting in the tax returns being filed much closer to April 15. Students completing the FAFSA early on are asked to use estimated amounts, and then at a later date file reports with the corrected amounts. As a result, those students who wait to file their FAFSA forms may find themselves losing out on valuable financial aid dollars to students who filed much earlier.

However, this ritual will change this fall due to changes in the FAFSA rules effective for the 2017-2018 school year. The FAFSA website will open three months earlier—in October of 2016. More importantly, students will report income from an earlier tax year i.e. the 2017-2018 application will request tax data from 2015. The FAFSA online site has an IRS Data Retrieval Tool, which can pull the income tax data directly from the IRS into the FAFSA form.

Due to the changes, the 2015 income tax information will impact financial aid calculations for two years, both the 2016-2017 and the 2017-2018 FAFSA applications. For a summary of key dates during the transition check out the Department of Education’s website.

The changes are designed to allow students to complete the application and apply in a timely manner, and encourage colleges to provide information on financial aid at an earlier date.

By: George Monger, CPA

Job-Related Education Expense Deductions

Are you planning on taking a job-related class? If you are, you may be able to deduct your education expenses.

Basic Rules

Education expenses are deductible if the education:

  • Maintains or improves skills required in your business or employment, or
  • Meets the express requirements of either your employer or the law as a condition of retaining your salary, status, or employment.

CalculatorHowever, the rules can be tricky to apply. Educational costs will not be deductible if they are incurred to enter a field (as opposed to staying in one) or if they qualify you for a new trade or business. Therefore, an aspiring doctor may not deduct the costs of medical school, but he or she could potentially deduct the cost of courses necessary to maintain his or her medical skills.

In a recent case, an attorney who was admitted to practice law in Germany sought to deduct law school expenses he had incurred to enable him to practice in New York. The taxpayer argued that the expenses allowed him to maintain his general skills as a lawyer. The Tax Court disagreed, however, reasoning that the education qualified him to satisfy the New York entrance requirements and therefore enter a new trade or business.

Itemized Deduction

Education expenses must be claimed as a miscellaneous itemized deduction. They are deductible only to the extent that they – along with your other miscellaneous expenses – exceed 2% of your adjusted gross income.

Other Alternatives

Instead of taking this deduction, you may want to see if you’re eligible to claim a tax credit for a portion of qualified tuition and related expenses. The American Opportunity credit is limited to undergraduate courses, but the Lifetime Learning credit may be claimed for most post-high-school education at eligible education institutions.

Affordable Care Act Compliance Part II: The Employer

  • 50-99 employees – Employers did not need to offer health care coverage until this year, 2016.
  • More than 100 employees – Employers were only required to offer coverage to 70% of employees and their dependents) starting in 2015. Starting in 2016, employers have to offer coverage to 95% of their employees to avoid a penalty.
  • The Internal Revenue Code §6056 requires an applicable large employer (ALE) (50 or more employees hired in any calendar year) to file and furnish information relating to the health insurance that it offers (or does not offer) to its full-time employees and their dependents. This information is provided to assist the IRS with administering the ACA Employer Mandate (generally requires ALEs to offer coverage to their full-time employees and their dependents or be subject to a potential penalty). This information also assists the IRS with administering the premium tax credit provided to individuals who enroll in coverage through the Marketplace (Exchange).

These notifications are reported on forms 1095-B and 1095-C. A form 1094 is the transmittal form for each of these notifications. Form 1095-B is for small or large employers that offer a self-funded plan (and for insurance companies). Form 1095-C is for Applicable Large Employers ALEs (50 or more employees) to report their health care plan that meets minimum value and affordability standards or face a penalty for each employee receiving subsidized coverage through the Marketplace (Exchange).

Fortunately, the IRS issued extensions to employers who must file either form 1095-B or 1095-C. The deadline to submit to the IRS and distribute these forms to covered individuals was extended until March 31, 2016. The deadline for this form is May 31, 2016 (if filing in paper) or June 30, 2016 if filing electronically. An extension is automatically granted for 30 days if the employer files an extension with the IRS before the deadline, either in paper or electronically.

If you required additional information or have questions about how the ACA may affect your business, please give your William Vaughan Company representative a call.

Affordable Care Act Compliance Forms Part I: The Individual

The Affordable Care Act (ACA) continues to raise compliance concerns for many businesses and individuals alike. The IRS recently introduced new tax forms for individuals, employers and health insurance providers to determine if shared responsibility payments are necessary. Such payments are penalty fee for those who failed to obtained health insurance as instructed by ACA legislation. If you do not have health insurance, or were subject to a cap in your coverage, you may have to individual responsibility payments.

Form 1095-A
This form should be provided to the individual who is participating in the health care marketplace (often called Exchanges). They will from from the insurance company providing coverage. The 1095-A form is a health insurance marketplace statement and should be used to complete your income tax filing. It may also be used to claim premium tax credits or adjust any payments which may be due.

Form 1095-B
This form will be sent to covered individuals and dependents by the insurance company providing coverage through an employer-sponsored plan. In the case of an employer partially or self-funded plan, this form must also be sent to the employees of the employer. Form 1095-B is used to verify your compliance with minimum essential coverage (MEC).

Form 1095-C
This form is used by employers with more than 50 full-time employees or full-time equivalent to prove coverage was offer to you by your employer in 2015. The form will outline the coverage offered by your employer and whether or not you chose to participate. This form can also be used to complete your tax return.
If you receive any of the above forms and have questions or concerns about the content or methods for filing your tax return, please call your William Vaughan Company representative.

 

There Is An App For That …..

By now, you are probably tired of hearing about New Year’s resolutions. However, with tax season just around the corner, have you given any thought to how you might organize your tax records? This topic may be a specific interest to those with business related expenses. You may already have the typical shoe box storage which eventually becomes so full it is difficult to contain your files. With advanced technology and the growing capabilities of smartphones, here are some helpful apps which may ease the collection process.

Expensify – Acknowledged by the tech community as the best app for expense reporting, Expensify takes the time, paper, and headaches out of your expense reports! The app allows you to scan receipts, create reports, and sync with your band and credit cards. Plus, it is easily integrated with QuickBooks, SalesForce, Excel, etc.

Shoeboxed.com – Shoeboxed is an award winning app which has been featured in Forbes, The New York Times, The Wall Street Journal, The Today Show, and hundreds of other publications. This amazing app serves as smeans to track receipts, mileage and even business cards. Simply snap a picture and the app will extract the vendor, total amount, payment method, date etc. You can also instantly create expense reports and file by the most common tax categories.

Doxo.com – Doxo is a virtual filing cabinet, excellent for anyone trying to go paperless with household documents. The app syncs with your personal accounts including banking, mortgage lenders, insurance providers, etc so you can manage your bill payments for a wide variety of services. If the account is not electronic to start, you can scan the information and make it digital. In addition, you are able to scan items like warranty information, your passport and medical records so you are able to access all your information in one location.

Mileage Log+ – Hands down, this app is one of the most feature packed and easy to use mileage trackers available. Not only will it track mileage for medical, charitable and business purposes, but it automatically logs your miles with the current IRS standard mileage rates.

IDonatedIt – The first ever app available to tack and value all of your non-cash charitable donations.

Before you commit to using one of the many apps available, make sure to spend some time researching reviews to ensure you get the features most important to you as the consumer. Some apps may require a one-time or monthly fee. Putting your smartphone to work may be the best decision for your business needs. If you are using your personal phone for business purposes, you may be able to receive a business deduction for the dollar amount utilized for business purposes!

By: Tara West, CPA, CMA, CGMA, Manager

Tax Implications of Being A Rideshare Driver

You may have booked a ride on your smartphone using Uber, Lyft or another rideshare or private driver service. These services allow passengers to experience something more than what a traditional taxi cab may offer. For many, the attraction of such employment is the flexibility and ability to be your own boss. As a result, many of these drivers are supplementing their income to cover housing, education, etc. What are the tax effects for these self-employed drivers? Here are some important points to consider:

You are now the proud owner of your own business. You can make your own hours and work for yourself. However, you will need to remember the income you earn is subject to self-employment and may be taxed at a 15.3% self-employment rate.

In addition, you will receive a Form 1099 in January. This form will depict the income earned while driving. This income will be reported on your Schedule C of your federal income tax return. Please note, it does not have any federal, state, or local taxes withheld. You may lessen the amount of taxes owed on April 15th by paying quarterly estimated tax payments. Or, if you have another job where you receive a W-2, you can have that employer increase your withholdings to help cover the taxes to be owed related to your Form 1099.

In addition, remember to keep good records related to your business expenses. When you make purchases for gas, car washes, etc. you should keep your receipts to document these business deductions. In addition, it is important to keep a record of the miles driven while conducting your business.

When taking on any business venture which allows you to be your own boss, it makes way for additional complexities on your tax return. It is important to anticipate your tax liability and keep good documentation to allow for smooth accounting of these business ventures.

Kristin Metzger, CPA

New Ohio City Due Dates for 2016

The Ohio municipal tax legislation is effective January 1, 2016. It requires updating local income tax ordinances to comply with the new Ohio Revised Code 718 . This will result in a number of provisions becoming uniform across the state. Most of the changes become effective with the 2016 tax year for tax returns filed in 2017. However, there are some changes that will take effect now. One of these changes is the city estimated tax due dates. Previously, the due dates for the city estimated payments had been set by each municipality. As of January 1, 2016 they are all the same, which might make it a little less confusing when paying estimates to more than one city. The due dates for all quarterly city estimated tax payments will be April 15, June 15, September 15, and December 15.

You are required to make quarterly payments of estimated tax if the estimated tax payable will exceed $200 for the year. To make sure you are safe from penalties you will want to pay 90 percent of the current year tax liability or 100 percent of the prior year tax liability. You will not have to worry about paying estimated taxes to a city if you did not live in that city on January 1st of the taxable year.

Another change that will take effect January 1, 2016 are the due dates for the city withholding tax payments. If you are paying quarterly, the due dates are April 15, July 15, October 15, and January 15. If you are making monthly payments, they will be due 15 days after month end. You will have to file monthly if your prior year annual total withholding for the city exceeds $2,399.00 or if any month of prior quarter withholding for the city exceeds $200.00. The reconciliations for the withholdings are due the last day of February and must include the W-2 information for each of the employees working in the city, and local data naming other cities for which tax was withheld.

If you are used to paying your city estimated tax payments on different dates make sure you update your records to ensure you are filing on a timely basis.

By: Brittany Jennings, Staff Accountant