What Start-up Costs can You Deduct?

What Start-up Costs can You Deduct?

Launching a new business takes hard work — and money. Costs for market surveys, travel to line up potential distributors and suppliers, advertising, hiring employees, training, and other expenses incurred before a business is officially launched can add up to a substantial amount.

The tax law places certain limitations on tax deductions for start-up expenses.

  • No deduction is available until the business becomes active.
  • Up to $5,000 of accumulated start-up expenses may be deducted in the tax year in which the active business begins. This $5,000 limit is reduced (but not below zero) by the excess of total start-up costs over $50,000.
  • Any remaining start-up expenses may be deducted ratably over the 180-month period beginning with the month in which the active business begins.

Instead of deducting start-up costs, a business may elect to capitalize them (treat them as an asset on the balance sheet). Deductions for “organization expenses” — such as legal and accounting fees for services related to forming a corporation or partnership — are subject to similar rules.

Why You Need an Annual Business Review

Why You Need an Annual Business Review

In addition to providing for you and your family, your small business is a part of this country’s job creation engine.  Conducting an annual review of your business finances can help keep your business healthy and growing.

Management

No doubt you are pivotal to your company’s success. But at some point, it’s important to focus on bringing up the next level of management, especially if you would like to sell your business or pass it to family members in the future. While mentoring the key individuals who can effectively run the business, don’t forget about key person insurance for them. It’s designed to protect your business if you, a partner or another key employee were to die prematurely.

Plan ahead

What would happen to your business if you or one of your key employees could no longer work? Unless you’ve planned ahead, the company’s continued success, continuity of management and the future of all the families your business supports could be jeopardized. Would the absent worker’s family — which could be yours — be fairly compensated for their interest in the business if that interest needed to be sold?

A buy-sell agreement combined with key person insurance can help relieve concerns you may have. Work with your financial professional and attorney to make sure the agreement is drafted properly to address your and your business’s needs.

Risks

Do you have appropriate processes and procedures in place to handle human resources and compliance issues, such as the new health care coverage rules under the federal health reform law? When was the last time you reviewed your business’s insurance coverage with your financial professional? You may discover that your business does not have all the coverage it needs in this litigious climate. Ask about umbrella and general liability insurance.

Contractor or Employee? The Rules for Classifying Workers

Contractor or Employee? The Rules for Classifying Workers

Contractor or employee? The difference matters – a lot. Be sure you’re using the correct classifications for your staff.

Employees. Contractors. They both create and support products or provide services for your customers. They’re your company’s most valuable assets.

But the IRS looks at each very differently. And when you hire people and start dealing with their compensation, you, too, need to be very sure that you classify them correctly for income tax purposes.

You probably already know the primary difference between them. You only pay contractors or freelancers a fee for their contributions. With employees, you’re also responsible for employment taxes and often other benefits.

Control and Independence

The IRS itself states that “…there is no ‘magic’ or set number of factors that ‘makes’ the worker an employee or an independent contractor.” And you can’t use just one factor to make the determination. For example, you can’t call an individual an independent contractor simply because he or she works out of a home office instead of yours. Rather, you have to look closely at the whole relationship between your company and them. You need facts. You need to consider the “…degree of control and independence” involved, in three different categories.

Behavioral

Do you as the employer have the right to control how the individual works? There are four ways to measure here:

  • Type of instructions given. Do you tell the individual how, when, and where to work? What equipment to use? Where to buy supplies and services? What sequence to follow?
  • Degree of instruction. How detailed are the instructions?
  • Evaluation system. Is the employee evaluated on how the work is done or just the end result?
  • Training. Do you offer initial and periodic training, or is the individual responsible for his or her own?

Financial

There are several questions to consider here. Does the individual:

  • Pay for a significant percentage of the equipment used?
  • Have a lot of unreimbursed expenses?
  • Have the opportunity to make a profit or loss?
  • Feel free to work for other businesses?
  • Generally receive consistent wages for each pay period?

Type of Relationship

How would you and the individual characterize your relationship with each other? Is there a written contract? Employee benefits? Did you hire him or her expecting that the relationship would go on indefinitely? Are the individual’s contributions to the company a “key activity” of the business?

As you can see, it’s more complicated than you might think. The IRS takes this issue very seriously, and has been known to follow up with companies where at least some of the classifications were suspected to be in error.

The Form SS-8

One section of the IRS Form SS-8, which can help you with the classification of your workers

If you still can’t determine whether an individual is an employee or independent contractor after going through all the above questions, you–or someone who works for you–can complete and file an IRS Form SS-8. This is a rather lengthy document designed to help determine a worker’s employment status.

We’re always available to consult with you on various issues of tax law, and this is an important one. Though a situation may seem cut-and-dried to you, don’t be afraid to ask.

Ten Things You May Not Know About an LLC

Ten Things You May Not Know About an LLC

You probably know of several businesses whose formal names end with the acronym LLC. And you probably also know that LLC stands for limited liability company. Here are ten things you may not know.

  1. An LLC generally protects its owners from personal liability for business obligations in much the same way a corporation does, but an LLC is not a corporate entity.*
  2. Like a corporation, an LLC can do business in multiple states, although an LLC must be organized in a specific state.
  3. The owners of an LLC are called “members.” There is no limit on the number of members an LLC can have, and members don’t necessarily have to be individuals. Members’ management roles are typically spelled out in an operating agreement.
  4. Upon formation of an LLC, the members contribute cash, property, or services to the LLC in exchange for LLC shares or units.
  5. An LLC may borrow money in its own name and is responsible for repayment of the debt.
  6. An LLC is usually treated as a partnership for federal income-tax purposes. (The remaining four points assume partnership treatment.)
  7. Like partners, LLC members are not considered employees of the company. However, an LLC can have non-member employees.
  8. LLC members are taxed directly on company income. The LLC itself doesn’t pay federal income taxes.
  9. If an LLC has a loss, its members generally can deduct their share of the loss on their own tax returns.
  10. For tax purposes, an LLC’s income and losses are divided among its members according to the terms of their agreement. Tax allocations must correspond to economic allocations of profit and loss.

 

An LLC is but one structure you might consider using for a business venture. We can help you determine which type of arrangement will best meet your objectives.

Whether you need individual or business tax advice, give us a call. We’ve got the answers you’re looking for, so don’t wait. Call us today.

* Each state has its own laws governing LLCs. Consult with an attorney before establishing an LLC.

Determining a Succession Plan for Your Business – Before You Need It

Determining a Succession Plan for Your Business – Before You Need It

You’ve devoted time and money and poured heart and soul into building a successful family business. But do you have a succession plan? If not, you should. Without a plan for transferring your business to the next generation, anything could happen.

Deciding on Your New Role

Start by deciding how much or how little you want to be involved in the business after the transfer is complete. Are you picturing a clean break? Or a period of shared responsibilities and gradual transfer? This is an important decision because it will likely influence other decisions, particularly financial ones.

Choosing a Successor

This can get tricky, especially if there are several family members who may have an interest in — or expectation of — taking over the business. If there’s one clear candidate, that makes it easier. But don’t just assume someone (e.g., your oldest son) is the right successor. Do what’s best for the business. The best choice may be a grandchild, a niece, or even a relative paired with a trusted employee.

Estate planning is an important sidebar to a family business succession plan. There may be children who have no interest in being involved in running the business and are happy to let their siblings take over. However, they probably expect equal treatment when it comes to inheritances. If this is a likely scenario, make sure everyone communicates as clearly as possible and develop a plan you think is fair.

Grooming a Successor

Spend time grooming your successor, even if it’s a son or daughter who knows the business. He or she should understand how every part of the business operates. Before your successor starts representing your business publicly, make sure he or she meets your business contacts (clients, vendors, financial partners, etc.).

Figuring Out the Money

You probably don’t want to give your business away, even to your own offspring. Figure out how much you’re going to need to finance your next venture (retirement, a new business, etc.), and come up with an arrangement that meets your needs.
Take charge of your financial future. Give us a call, today, to find out how we can assist you and your business.

Four Ways to Control Business Costs

Four Ways to Control Business Costs

Increasing your profits requires selling more and/or spending less. While building up your sales may require an extended effort, business costs are often very ripe for a quick trimming. Here are some possibilities.

Supplies and Other Purchases

Usually in any business, relatively few items represent a very large share of all outlays. The first step in cutting expenses is, therefore, to identify your highest costs. You may be able to trim many of these costs by making sure you always bid out significant purchases or by more actively seeking less expensive alternatives.

For many companies, inventory carrying costs are a very significant expense. Focusing on matching your inventory quantities more closely to your short-term needs could result in significant savings.

Telecommunications and Other Services

The ongoing services you buy may also offer the potential for cost savings. Revisit your choice of telecommunications vendor and your usage.

Look carefully at your costs for financial services. If you borrow or maintain a line of credit, always compare the rates from more than one financing source before you commit. Make sure you are not paying higher-than-necessary fees for your company’s checking and deposit services.

Cash Management

To control cash outlays, take advantage of discounts for early payment whenever possible. And look to delay payments for as long as you can without giving up discounts.

On the receiving side, deposit all receipts daily. And always actively pursue collection of any invoices that are past due. To help control your working capital needs and, therefore, your credit costs, try to match any new liabilities to your anticipated cash flow.

Fixed Expenses

One other category worth examining is fixed expenses that are long-term commitments. While you usually can’t change these quickly, be aware of when a window for change will open and prepare well in advance by considering lower cost alternatives.

To learn more ways to control your business costs give us a call today. Our trained staff of professionals are always available to answer any questions you may have.

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