Sole Proprietorship – The Most Common Business Form

Let’s begin our journey by discussing the most common business entity type, the sole proprietorship.  What is a sole proprietorship?  Why is it the most common business form?  As the most common business form, does this mean it is the best choice for you?

Simply stated, a sole proprietorship is an unincorporated business, owned by one person.

Advantages of a Sole Proprietorship

The number one advantage of this business entity type is ease of setup and termination.  Of course, each state, county, and local jurisdiction can have business requirements specific to its jurisdiction, so be sure to check your particular locale to determine exact requirements.  You may also be interested in reading my blog, Starting a New Business in the Sunshine State, for a more thorough discussion on items to consider when opening a business in the State of Florida.

One of the reasons the sole proprietorship is so easy to set up is because the IRS views the business as the individual taxpayer.  You see, for tax reporting purposes, the income and expenses of a sole proprietorship flow through the individual’s 1040 income tax return.  In this regard, think of the business name as an alias of the individual taxpayer, in the same way as someone named Elizabeth may commonly be known by her friends as Beth.  Unless the sole proprietorship has employees, it is not required to establish an Employer Identification Number (EIN), although I recommend all businesses do.  Check out my article, What is an EIN and Does Every Business Need One, for a more detailed discussion on why I believe it is a good idea to have an EIN, even if you are a sole proprietor without any employees.

So, if a sole proprietorship is relatively easy to set up, and income tax reporting is less complex than other business forms, why should one explore any further?  Why should one consider any other business form?

These are all valid questions.  To answer them, let’s take a look at the disadvantages of a sole proprietorship.

Disadvantages of a Sole Proprietorship

Sole proprietorships have limited capital (i.e. cash, assets).  Depending upon the wealth of the individual, this can create challenges in starting and growing the business.  The sole proprietorship is also subject to limited existence.  Death, insanity, or bankruptcy of the owner also terminates the business.  However, the number one disadvantage to the sole proprietorship, and the one we will spend the most time exploring, is unlimited liability.  Unlimited liability means the owner is personally liable for the business.  Consider the following as an illustration:

Let’s pretend you own a bead store.  One day, a small child comes in with her mom and is delighted by all the pretty beads.  As she meanders about the store quietly admiring the beads, she is enthralled by the various shapes, sizes and colors.  Although her mom specifically told her not to touch anything in the store, unbeknownst to you or her mom, the child cannot resist.  She accidentally spills a handful of beads not far from the entrance to the store, just before your next patron walks inside.  It has been raining cats and dogs, and the customer is in a hurry to get out of the rain.  She never notices the beads on the floor as she trips, falls, and breaks her hip.

By now, you see where this is going.  And even though your business is very small, perhaps it only just recently opened for business and has no assets to speak of, this matters not.  Because as a sole proprietor, you are personally liable.

Granted, this example was created for illustrative purposes, and I was a bit creative in painting the scene.  In all seriousness, however, it is important to take these things into consideration as you are selecting a business form.  How much risk are you willing to accept?  Are you willing to let this risk extend to your personal assets?  It is for this reason that many entrepreneurs look beyond the sole proprietorship when choosing the entity type for his/her business.

Join me next time as we continue our discussion on business entity selection and take a look at the partnership.

This article is provided for information purposes only and should not be relied upon for legal advice. Michelle would be happy to answer business entity selection questions you may have specific to your particular business needs. For more information, please contact Michelle directly.

Which Entity Type Is Right For You?

Business entity type is an important decision for new business owners.  It is also important for existing business owners to periodically readdress in order to ensure the business is optimally structured.

Several business entity types exist.  Some of the common ones are:

1. Sole Proprietorship
2. Partnership
3. Limited Liability Company (LLC)
4. C Corporation
5. S Corporation

So how do you determine the most appropriate way to structure your business? What is the best choice for you? 

The truth is there is no one perfect business structure.  Each type has its own set of pros and cons.  The best entity structure for your business depends on a variety of tax and non-tax considerations.  In order to make the best choice for your particular business needs, it is important to have a general understanding of each entity type.

Throughout the upcoming weeks, we will take a look at some of the common entity types.  What are their advantages?  What are their disadvantages?  For those of you who are just setting out on your journey to owning your own business, this series will provide you with a general understanding of each entity type and equip you with the tools necessary to ensure you make the best decision for your particular business venture.  And for others who have already set out on this great journey of entrepreneurship, may you reflect and evaluate your business through this series and let it help you decide if your business is most appropriately structured for your particular business needs.

QuickBooks Tutorial: How to Create an Accountant’s Copy

Providing your accountant with an accountant’s copy of your QuickBooks file allows her/him to review your QuickBooks file and make changes while you continue to work in your file. Once the accountant has finished making changes, you can upload those changes into your file.

A couple of options exist for creating an accountant’s copy:

1. Save the accountant’s copy to a flash drive
2. Send the file electronically by uploading to a secure server provided by QuickBooks. This option automatically sends an e-mail notification to your accountant to download the file from the secure server.

Note: Before creating an accountant’s copy, you must be logged in as an Admin user and operating in Single-User mode.

To Save Accountant’s Copy to a Flash Drive:

1. From the menu bar, select File, Accountant’s Copy, Save File.
2. Select Accountant’s Copy and click Next.
3.  Set the Dividing Date and click Next.  (This is an important date as you will not be able to make changes to your file before the dividing date while the accountant has the accountant’s copy.  Likewise, the accountant will be unable to make changes to transactions within the accountant’s copy file after the dividing date).
4. Navigate to the location of your flash drive and click Save.

To Send Accountant’s Copy via QuickBooks Secure Server:

1. From the menu bar, select File, Accountant’s Copy, Send to Accountant.
2. Click Next to confirm you would like to create an accountant’s copy file.
3. Set the Dividing Date and click Next.  (This is an important date as you will not be able to make changes to your file before the dividing date while the accountant has the accountant’s copy.  Likewise, the accountant will be unable to make changes to transactions within the accountant’s copy file after the dividing date).
4. Enter your accountant’s e-mail address (two times for confirmation), your name, your e-mail address, and click Next.
5. Enter a password for the upload/download of the file and click Send.  (Note: this is not the password the accountant needs to open your company file.  Rather this is the password to download the file from the QuickBooks secure server.  The password must be a ‘strong’ password, meaning it must contain a minimum of 7 characters, both letters and numbers, and at least one uppercase letter.  You may also enter a message for your accountant; however, the message text is not encrypted when sent over the internet so do not include the password or any other confidential information in the message area).
6. A message will display to indicate all windows must be closed to create the accountant’s copy.  Click OK to continue.   
7. You will receive a message to indicate the file is being created.
8. You will receive a successful upload message when QuickBooks has finished uploading the file.
9. Provide the file transfer password to your accountant so she/he may retrieve the file.

Section 179 & Bonus Depreciation Expense

Throughout the past several months the nation has been abuzz with talks of the upcoming fiscal cliff whereby, absent intervention by Congress, the Bush tax cuts are set to expire on 12/31.  Two provisions slated to expire, which can have a material impact on business income tax liability, relate to Section 179 and bonus depreciation expense.

What is Section 179?

Section 179 refers to that section of the IRS code which allows business owners to recover all or part of the cost of certain qualifying property in the year the asset is placed into service as opposed to recovering the cost over multiple years in the form of depreciation expense.  Simply stated, Section 179 allows businesses to write-off all or most of the cost of qualifying asset purchases.

Generally speaking, Section 179 applies to most new and used capital equipment and also includes certain software.

Section 179 for 2012 v. 2013        

As a result of the 2010 Tax Relief Act, business owners may write-off up to $139K in Section 179 assets purchased during 2012.  This limitation is subject to a phase-out threshold of $500K, meaning the Section 179 deduction is reduced by the amount that exceeds $500K.  Let’s look at the following example:

ABC Company purchases a qualifying piece of machinery during 2012 for a total cost of $550K.  The amount ABC Company may deduct for Section 179 is $89K, calculated as $139K less the amount in excess of the threshold ($550K less $500K).

Compare this to 2013 whereby the Section 179 expense limit is reduced from $139K to $25K with a phase-out threshold reduced from $500K to $200K.

Assume from the example above ABC Company waits until 2013 to make the same $550K purchase.  In this scenario, Section 179 deduction is $0 due to the reduced limit and phase-out threshold.

What is Bonus Depreciation?

Bonus depreciation is a type of accelerated depreciation which allows a business to deduct additional ‘bonus depreciation’ on qualified assets placed in service.  Bonus depreciation was born in 2008 as a temporary measure to help the ailing economy.  In 2010, the provision was extended through 2012.  Generally speaking, bonus depreciation may only be taken on new equipment and does not include software; however it can be used to create loss situations.

For 2012, businesses are able to take 50% additional bonus depreciation on qualified assets placed in service; however, this provision is set to expire after 2012.

Conclusion

As you can see, these two changes could have a material impact on your business income tax liability.  So if you have recently been thinking about making an asset purchase for your business, now is a great time to consult with your accountant to determine whether you can benefit from the Section 179 and bonus depreciation expense deductions by making that purchase before the New Year rings in.

This article is provided for general information purposes only and should not be relied upon for legal or financial advice. For more details, please contact Michelle directly.

IRS CIRCULAR 230 DISCLOSURE: Pursuant to requirements imposed by the Internal Revenue Service, any tax advice contained in this communication (including any attachments) is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code or promoting, marketing or recommending to another person any tax-related matter. Please contact Michelle directly to discuss your specific business needs.

Starting a New Business in the Sunshine State

You’ve decided to start your own business in the State of Florida.  You are very excited as you have the ultimate product/service, know your target market, and are confident in your sales abilities.  However, you are also a bit anxious as you aren’t so confident in your savvies when it comes to the administrative, bookkeeping, and tax side of the house.

Well, no cause for worry, mate.  Many first-time entrepreneurs feel this way. With a little bit of help, you will be moving right along.   Here are a few tips to get you started:

How Is Your Business Organized?  Are you planning to conduct business as a sole proprietor or a corporation (C Corp or S Corp)?  Perhaps you are considering a partnership or limited liability company (LLC).  Each business entity type has its own advantages so it is best to consult with a qualified professional to help you choose the entity that’s right for you.

If you decide to become organized as a LLC, partnership, or corporation, you must register with the Florida Secretary of State.  Registration may be completed online or via mail.  For more information, visit the Florida Department of State Division of Corporations website at www.sunbiz.org.

What is the name of your new company?   Most businesses are required to obtain a fictitious name license.  This process also involves advertising the business name to be registered at least one time in the newspaper in the county where the principle place of business will be located.  At the time of this writing, the cost of registering a fictitious name in Florida is $50.  More information may be found on the Florida Department of State Division of Corporations website, https://efile.sunbiz.org/ficinfo.html.

Where will you conduct business?  Will you have a storefront or office space in town, or does your business model include a more rural locale?  Verify the property is properly zoned to conduct your business.  The city and/or county may also require you to obtain a business certificate.  Check with your local taxing authority or visit www.dor.myflorida.com to find out more.

Is your profession regulated? Many professions are regulated within the State of Florida and require additional licensing.  A few examples are Cosmetologists, Electricians, Home Inspectors, Accountants, Real Estate Agents, etc. Visit www.myfloridalicense.com/dbpr/services.html to obtain a comprehensive list of regulated professions within the State of Florida.

Do you need a Federal Employer Identification Number?  Generally, all businesses (except sole proprietors with no employees) are required to obtain a FEI (EIN).  Refer to my blog post “What is an EIN and Do All Businesses Need One?” https://mayscpa.wordpress.com/2012/10/10/ein/ for a more in-depth discussion of EINs.

Will you hire employees?  If you hire employees, this subjects the business to payroll tax withholding and reporting. You may also be subject to federal and state unemployment taxes.  The IRS addresses withholding requirements in Publication 15, Employer’s Tax Guide, and Publication 15-A, Employer’s Supplemental Tax Guide.  Visit http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Employment-Taxes-2 to learn more.

Employers in the State of Florida are also subject to new hire reporting.  Visit https://newhire.state.fl.us/fl-newhire/ to find out more.

How many employees will you have?  Generally, companies with more than 3 employees are subject to worker’s compensation insurance.  Requirements may vary according to industry.  For more information on worker’s compensation requirements, visit the Florida Division of Worker’s Compensation at http://www.myfloridacfo.com/wc/employer/index.html.

Other Considerations

Many goods and services are subject to sales tax reporting.  Contact the Florida Department of Revenue to find out if your business is subject to sales and use tax reporting.  http://dor.myflorida.com/dor/

All counties in Florida tax personal property and business equipment.  Contact your county property tax appraiser to learn more about the personal property tax.

Various business types are subject to certain additional licenses, permits, and registrations.  As a business owner, it is your responsibility to comply with all requirements.

In the words of the wise Benjamin Franklin,
“an ounce of prevention is worth a pound of cure.”

Take time to ensure your business is set up properly and in compliance with all city, county, state, federal reporting requirements and regulations.  Ensuring compliance today will save you time and money in the long run.

This article is provided for information purposes only and should not be relied upon for legal or financial advice.  Michelle would be happy to answer questions you may have pertaining to your particular business needs. For more information, please contact Michelle directly.

IRS CIRCULAR 230 DISCLOSURE: Pursuant to requirements imposed by the Internal Revenue Service, any information contained within this communication (including any attachments) is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code or promoting, marketing or recommending to another person any tax-related matter. Please contact Michelle directly to discuss your specific tax needs.

9 Tips for Deducting Charitable Contributions

As we draw closer to year-end, many taxpayers begin thinking about tax saving strategies.  Charitable giving is a great way to reduce income tax liability.

Consider the following nine tips to help ensure your charitable giving pays off when filing your income tax return.

(1)   In order to claim a tax deduction, the charitable contribution must be to a qualified organization.  The IRS has a new online tool to search for organizations which are eligible to receive deductible charitable contributions.  Visit http://irs.gov/Charities-&-Non-Profits/Exempt-Organizations-Select-Check  to learn more.

(2)   You may not deduct the value of any benefits received from making charitable contributions to qualified organizations.  As an example:

You pay $100 for a ticket to a church fundraising dinner.  All proceeds go to the youth department to raise money for the annual youth mission trip to Haiti.  The fair value of the dinner is $25.  How much can you deduct as charitable contribution deduction on your income tax return?

Answer:  You may deduct $75 charitable contribution as this represents the value that exceeds the fair market value of the benefit you received.

(3)   Stock and other non-cash donations are typically valued at fair market value.  Fair market value is the price at which property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all relevant facts.

(4)   Clothing and household items must generally be in good used condition or better to be deductible.  Special rules apply to vehicle donations.

(5)   Regardless of the amount, when deducting cash or other monetary gifts, you must retain one of the following:

1. Bank record,
2. Payroll deduction record, or
3. Written communication from the organization containing the name of the organization, the date and amount of the contribution.

(6)   When making donations via text message, a telephone bill meets IRS recordkeeping requirements provided it shows the name of the receiving organization, the date of the contribution and the amount given.

(7)   When deducting cash or property contributions greater than or equal to $250, you must retain one of the following:

1. Bank record,
2. Payroll deduction record, or
3. Written acknowledgment from the qualified organization which shows amount of cash and description of property contributed, and whether any goods or services were provided in exchange for the gift.

(8)   When filing your income taxes, you should file Form 1040 and itemize the charitable contribution deduction on Schedule A.

(9)   You must also complete IRS Form 8283, Noncash Charitable Contributions, when total noncash contributions for the year exceed $500.  Complete Form 8283, Section A, when claiming deduction for noncash property contributions less than $5,000 (i.e. Goodwill donations).  Complete Form 8283, Section B, when claiming deduction for noncash property contributions greater than $5,000 (i.e. donating $7,500 artwork to a qualified institution).  Donations which exceed $5,000 also typically require appraisal by a qualified appraiser.

The IRS published an informative You Tube video regarding Charitable Contributions and Fair Market Value.  http://www.youtube.com/watch?v=ob4-W5cbV0Y.   More about Charitable Contributions may also be found in IRS Publication 526.

Isn’t it great to help out those less fortunate while simultaneously saving on income taxes!

This article is provided for information purposes only and should not be relied upon for legal or financial advice. Michelle would be happy to consult with you regarding tax saving strategies particular to your specific facts and circumstances. For more details, please contact Michelle directly.

IRS CIRCULAR 230 DISCLOSURE: Pursuant to requirements imposed by the Internal Revenue Service, any tax advice contained in this communication (including any attachments) is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code or promoting, marketing or recommending to another person any tax-related matter. Please contact Michelle directly to discuss your specific tax needs.

What is an EIN and Do All Businesses Need One?

EIN is short for Employer Identification Number. Sometimes it is referred to as an FEI (Federal Employer ID), or a TIN (Taxpayer Identification Number). EINs are issued by the Internal Revenue Service for the purpose of tax administration.

The IRS provides guidance regarding the EIN in the Employer’s Tax Guide (Publication 15).  Each year Pub 15 is updated based upon changes in tax law.

If you plan to start your own business and will have employees, you will need to obtain an EIN.   Even if your company is set up as a sole proprietorship and you do not have any employees, I highly encourage you to think about obtaining an EIN as it prevents using your social security number in your business, thereby reducing the risk of identity theft.

Obtaining an EIN is easy, and best of all, it is free.  Apply online to receive an EIN in a matter of minutes:

(1)  Visit http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Apply-for-an-Employer-Identification-Number-(EIN)-Online.

(2) Near the bottom of the webpage, click on APPLY ONLINE NOW.

(3) Next click

(4) Follow the prompts to obtain an EIN.

One may also apply for an employer identification number via telephone (800) 829-4933.

This article is provided for information purposes only and should not be relied upon for legal or financial advice. Michelle would be happy to answer questions you may have pertaining to your particular business needs. For more information, please contact Michelle directly.

 

Employee v. Independent Contractor

The subject of employee v. independent contractor has received increased scrutiny recently as the Department of Labor and Internal Revenue Service, along with various state and local agencies, team up to identify and penalize businesses who misclassify employees.  This joint focus reflects an agenda to recoup decreasing governmental revenues resulting from a stagnant economy.

Last month the Department of Labor issued a press release which included the following:

“Misclassification generates substantial losses to the U.S. Treasury and the Social Security and Medicare funds, as well as to state unemployment insurance and workers’ compensation funds.  Misclassification also creates a competitive disadvantage for employers who comply with the law.”

A copy of the press release may be viewed here.

Why is it important to ensure your business properly classifies employees and independent contractors?

You, as the business owner, are responsible for withholding and paying employee-related taxes.  On the other hand, the independent contractor is responsible for maintainig his/her own records and paying own income and self-employment taxes.

Under Internal Revenue Code (IRC) § 3509,

When an employer erroneously treats an employee as a non-employee and does not withhold federal employment taxes, the employer is liable under IRC §3102 and IRC §3403 for the employee’s share of FICA tax and the employee’s income tax withholding. This is true even if the employer does not withhold the tax from the worker.

IF form 1099 was timely filed,

Income tax withholding is computed at the rate of 1.5% with no abatement available under IRC §3402(d).  The employer’s liability for FICA is computed at the rate of 20% of the employee’s share, plus the entire employer’s share.

IF form 1099 was not filed,

The income tax withholding rate becomes 3% with no abatement available under IRC 3402(d).  The FICA tax liability is the employer’s share plus 40% of the employee’s share.

Failure to file and failure to pay penalties may also apply.

Specific facts and circumstances regarding your business will impact considerations in properly classifying workers.  Always consult with a professional before making decisions that could impact your business.

This article is provided for information purposes only and should not be relied upon for legal or financial advice. Michelle would be happy to discuss how employee vs. independent contractor issues could impact your business. For more details, please contact Michelle directly.

IRS CIRCULAR 230 DISCLOSURE: Pursuant to requirements imposed by the Internal Revenue Service, any tax advice contained in this communication (including any attachments) is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code or promoting, marketing or recommending to another person any tax-related matter. Please contact Michelle directly to discuss your specific business needs.

IRS Phishing Schemes

Phishing is a scam typically carried out by unsolicited email and/or websites that pose as legitimate sites and lure unsuspecting victims to provide personal and financial information.

A recent increase has been seen in IRS phishing e-mails.  These phishing scams often advise unsuspecting recipients they have a refund due, are under investigation, have been assessed a late-file penalty, a federal tax deposit or payment has been rejected, or may even refer to a non-existent tax form.

Please do not fall prey to these schemes.  Do not click on any links, open attachments, or reply to the sender for this or any other unsolicited e-mail concerning your tax account.

Rest assured the IRS does not initiate contact with taxpayers via e-mail or social media tools to request personal or financial information.  Furthermore, neither credit card or PIN numbers are required to inquire about the status of a tax return.

Suspicious e-mails may be reported to phishing@irs.gov.  The IRS will use information, URLs and links contained within phishing e-mails reported to trace hosting websites and alert authorities to shut down fraudulent sites.

More information regarding IRS phishing schemes may be found on the IRS’s website, http://www.irs.gov/uac/Report-Phishing.

This article is provided for information purposes only and should not be relied upon for legal or financial advice. For more details, please contact Michelle directly.

IRS CIRCULAR 230 DISCLOSURE: Pursuant to requirements imposed by the Internal Revenue Service, any tax advice contained in this communication (including any attachments) is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code or promoting, marketing or recommending to another person any tax-related matter. Please contact Michelle directly to discuss your specific business needs.