What’s New?

Posted on July 13, 2015 by Wis Laughlin

Updates from my WealthWISe e-letter. To receive WealthWISe, Sign Up Now

Check me out when I give my talk, FREE and Open to the public, “Are You Overtaxed — Let’s Make Your Taxes Less Taxing” at Talk Shoppe, Wednesday, November 11, 9 am, University of Phoenix, 65 Germantown Court, 1ST FL, Cordova, TN 38018.

As a tax attorney, I can help you avoid new danger with independent contractors.The IRS and the Department of Labor are cracking down on the improper treatment of employees as independent contractors. They are sharing information with state governments. The IRS and DOL use multiple criteria to determine whether a person is an independent contractor or employee.  I help clients create the right relationship with the persons they hire, in writing!

Is your will still valid? For many years, the Shelby County Probate Court has accepted wills with a single set of witness signatures, on the Affidavit that proves the will. The recent Morris decision may invalidate a will with an Affidavit if the will and the affidavit are not signed separately. So if you have less than two sets of signatures I advise you to call me to get your will updated.

I am the Lawyer’s Lawyer! I will be speaking on November 3 to a Memphis Bar Association group on Business Tax Wisardry — How to pay the lowest legal taxes in your small business.

8/14/2015 From my July/August WealthWISe;  If we were to put your assets in a revocable living trust, with your spouse and children as beneficiaries, their future creditors, even divorcing spouses, would generally be blocked from reaching said assets.

8/6/2015: Avoid unnecessary trusts. If your estate is worth less than $5,000,000, ask me about clearing unnecessary and expensive trusts from your estate plan. If your wills/trusts are designed to avoid death taxes, watch out! If you survive your spouse, you will probably find yourself dealing with and paying for a trustee for rest of your life, just to get access to your former spouse’s property. To find out more, Contact me for my *FREE 1/2 Hour Offer* 

7/29/2015 Asset protection. In the July, 2015 WealthWISe I discuss how your revocable living trust protects its assets from creditors and even disgruntled spouses of family members who are beneficiaries.

7/20/2015 Divorcing. Did you know that most attorney fees for divorce are not deductible, but you can deduct the part of the lawyer’s fee that is attributable to setting alimony. Ask your attorney to break that portion out.

7/17/2015  Do it now! We are half way through the year, and if you are not following a plan to pay the lowest legal taxes, you  are not going to succeed. Many of my most successful tax saving strategies require regular actions on your part. Example: at least once a month, collect items from your home that you no longer need, list them, put them in a bag and get them to your favorite charity and keep a receipt. Of course, you must have a plan. If your “tax adviser” did not give you a plan, maybe you need to talk to me.

7/13/2015 Are you a widow or widower faced with an expensive, cumbersome trust created by your deceased spouse’s will or trust? You can’t access the trust investments freely without dealing with a trustee, and the trust may be paying the trustee. These trusts often resulted from estate tax planning under older laws, and most of the trust is unnecessary! I can  help.

In my June WealthWISe e-letter, I covered Summer 2015 tax savers, ways to put 2015 tax savings in your pocket now, how to write off Summer vacations, how to make estate planning easy, why taxes are essential in sales of a business and how to take the mysterious “net investment interest deduction.” Contact me if you would like a copy of that WealthWISe.

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Estate Planning Package

Posted on June 30, 2015 by Wis Laughlin

To begin your estate planning, upload and complete your !!RIP-RLT Information Package.

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Our Individual IncomeTax

Posted on June 22, 2015 by Wis Laughlin

Do you remember the thrill, when a great teacher helped you understand a difficult subject and you felt like you were in control? Experience that thrill again with your taxes and put some cash in your pocket! This article can only cover the tip of the iceberg. Contact me today to learn all about your own taxes and how to keep them low. IIf you have an interested group, call me for a great one hour seminar on this subject

WHAT’S NEW:   There is a group of laws that Congress has been unable to pass permanently because permanent passage would harm tax revenues.Well Congress has  finally passed them for longer periods  These rules included: the itemized deduction for state sales tax and the deduction for up to $250 of educators’ classroom supplies. Also the exclusion for up to $2 million of forgiven debt on primary homes and the ability of folks age 70½ and older to make direct payouts of up to $100,000 from IRAs to charity.  Each year, I keep watch!

High-income taxpayers

Income taxpayers are really feeling the pain of new and higher tax rates. Why? A new 39.6% rate on taxpayers who are joint filers with a taxable income of $466,950, and single filers with $415,050.

For investor there is the new3.8% tax on net investment income.Coupled with the 3.8% NIIT, the top rate on ordinary income could be as high as 43.4% this year.J. The 3.8% SURTAX applies to the lesser of (a) net investment income or (b) the excess of modified adjusted gross income over “modified adjusted gross income” where it exceeds, $250,000 for joint filers, $125,000 for married separate filers, and $200,000 for other taxpayers. Investment income includes interest, dividends, capital gains, annuities, royalties and passive rental income. See Form 8960

 The 2010 Health Care Act added the additional 0.9% Medicare tax  on wages and self[1]employment income in excess of modified AGI threshold amounts: $250,000 (joint filers), $125,000 (married separate filers), and $200,000 (single and HOH filers).

A. FILING STATUS controls tax rates, Standard Deductions and many other tax items.

B. IRA CONTRIBUTION: $5,500; $1,000 catchup contribution for age 50
C. 401K CONTRIBUTION: $18,000; $6,000 catchup contribution for age 50

D. STANDARD DEDUCTIONS in 2014 (if one is not deducting itemized deductions) are:
1. Joint filers $12,600
2. Heads of household $9,300
3. Singles $6,300
4. Marrieds filing separately $6,300
5. For the aged or the blind the additional standard deduction amount is $1,250, increased to $1,550 if the individual is also unmarried and not a surviving spouse.

E. ITEMIZED DEDUCTIONS phase out by an amount equal to 3% of the excess of AGI over “threshold amounts” below.

F. PERSONAL EXEMPTION: For each dependent, this deduction is $4,000 but it phases out, reduced by an amount equal to 2% for each $2,500 ($1,250 for married separate), or part of it, by which AGI exceeds that taxpayer’s THRESHOLD AMOUNT.

G. PERSONAL EXEMPTIONS,  ITEMIZED DEDUCTIONS PHASEOUT BEGINS & END AT:
Joint Returns, Surviving Spouses $309,900-$432,400
Heads of Households $284,050-$406,550
Unmarried Individuals (not Surviving $258,250-$380,750
Spouses or Heads of Households)
Married Filing Separate Returns $154,950-$216,200

H. TAX RATES.  law retains 2012 tax rates but added a new highest 39.6% rate. See the previous page.

I. CAPITAL GAINS and QUALIFIED DIVIDENDS: investments held 12 months and domestic corporation dividends are taxed at lower rates: 0% if you are in 10-15% regular tax brackets, 15% if in 25-35% brackets and 20% for taxpayers in 39.6% bracket.

J. AN ADDITIONAL 3.8% SURTAX applies to the lesser of (a) net investment income or (b) the excess of modified adjusted gross income over “modified adjusted gross income” exceeds, $250,000 for joint filers, $125,000 for married separate filers, and $200,000 for other taxpayers. Investment income includes interest, dividends, capital gains, annuities, royalties and passive rental income. Form 8960.

K. AN ADDITIONAL 0.9% MEDICARE TAX is imposed on individual on wages in excess of $250,000 for joint filers, $125,000 for married separate filers, and $200,000 for others.

 

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Your Investments

Posted on June 22, 2015 by Wis Laughlin

Both individuals and businesses have investments, ranging from investment securities to business furniture, equipment and real estate. The tax rules for these investments are many and complex. I help my clients maximize their wealth by taking advantage of all the rules.

EFFECT OF NEW TAXES AND RATES

2013 surprises include a new 20% capital gains rate on gains of taxpayers in the 39.6% bracket. There is a new 3.8% net investment income tax. This new tax is paid, on the lesser of (1) net investment income or (2) modified adjusted gross income (MAGI) exceeding thresholds of $250,000 (joint filers), $125,000 (married separate filers), and $200,000 (single and HOH filers). So, together, these taxes spell a top tax rate on long term investment gains as high as 23.8% in 2013.

IN GENERAL 
Investment assets not used in business operations include stocks, bonds, mutual funds and other securities. The income from these investments may include dividends and interest income. In addition, you may have gains or losses from sales of these investments. Long term gain (from securities held 12 months or more) is generally taxed at no more than 20%, as are qualilfied dividends. Keeping taxes low on investments is frequently a matter of timing. But watch out for the Medicare surtax.

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Year End Planning

Posted on June 22, 2015 by Wis Laughlin

Surprise! Did you write a big check to the IRS last year or get a big refund? Did your deductions not work as the result of the Alternative Minimum Tax (“AMT”)?

Then you need to talk to me about professional year-end planning so you can control your taxes.   With year-end planning, you can delay or reduce your overall taxes by moving income, deductions or other tax items into the right year.  The usual strategies are to delay this years income until next year or take next years deductions this year.

Tax changes planned by our new President include lower tax rates and fewer tax rates, including repeal of .9% Medicare tax and 3.8% surtax on investment income taxes. Consequently typical year end planning, which delays income into 2017 and brings 2017 deductions into 2016, will save even more taxes.

Don’t try the strategies discussed below by yourself. Only a professional tax forecast can predict wildcards affecting your tax bill, such as the Alternative Minimum Tax. With a professional tax forecast we can compare all years. 

YEAR END PLANNING FOR INDIVIDUALS

IN GENERAL

RECENT TAX CHANGES add a 39.6% tax rate for joint filers with income exceeding $466,950 and singles with income exceeding $415,050

INVESTMENTS

  • Avoid selling investments held less than 12 months so you can qualify for long-term capital gain rates, 20% or less. But be careful of the 3.8% surcharge.
  • Go for “Qualified dividends” likewise taxed at 20% maximum.
  • A 3.8% surtax applies to net investment income of singles with modified adjusted gross incomes above $200,000 and couples with over $250,000. Investment  income includes interest, dividends, capital gains, annuities, royalties and passive rental income.

TIP: Incur investment expenses to offset investment income.

  • Try to match capital losses and capital gains. If you have carryover losses from previous years or expect capital gains or losses this year, generate offsetting capital gains or losses.
  • You may use capital losses in excess of gains this year against up to $3,000 of other income, and  carry over excess losses.
  • Watch out for the “wash sale rule, under which you cannot take a loss from a sale if you then purchase identical securities within 30 days before or after the sale.

TRAPS:
Some strategies may boomerang. Why? Many tax benefits phase out as adjusted gross income rises. Tax brackets change each year. To make year end planning decisions, you must understand the effects of phase outs, tax brackets and changes in the law for both years. The best way to plan is to get a professional tax forecast for this and next year showing what will happen with the plan.

HOW TO DELAY INCOME
Contribution to your retirement plan.Reduce current income by making the maximum contributions to retirement vehicles, such as 401(k) plans and IRAs.

IRA plan contributions:
A regular IRAs must be set up and contributions made by your tax return filing date. The same true for Roth IRAs. The contribution deduction is $5,500 ($6,500 if over age 50).

For a single filer who participates in an employer’s retirement plan the deduction phases-out between $61,000 and $71,000 of modified AGI for single persons (and heads of households). For taxpayers filing married filing jointly who participates in an employer’s retirement plan the deduction phases-out between between $98,000 and $118,000 of modified AGI.  It gets more complicated if only one joint filer actively participates.Above these ranges, no deduction is allowed.INVESTMENTS

Match gains and losses.
If you have investments that have lost value, sell some losers and winners before year-end and offset the losses against the gains.  As much as $3,000 may be used to offset other income. Unused losses carry over to next year.

Wash-sale trap:  the wash-sale rule denies a deduction for a loss if you purchase identical securities up to 30 days before or after the sale.. However, you’re OK if you sell one mutual fund and buy another with similar investment goals.

Donate appreciated stock the correct way: If you have owned the shares for over a year, you can deduct the full value without paying tax on the appreciation.
Beware of mutual funds.  If the fund pays a dividend this year after you buy it, you owe tax on the distribution this year.
TIP: To avoid this, buy into the fund after the record date for the dividend. Your fund can tell you how much of a dividend you can expect.
0% CAPITAL GAIN(!), dividend tax. If you are in the 10% or 15% regular income tax brackets, consider taking long term capital gains, which will be taxed at 0%. See the Tax Summary.

ACCELERATE DEDUCTIONS
Pay next years deductions in this year.

ITEMIZED DEDUCTIONS
Prepay next years expenses this year, such as medical expenses, taxes, charitable or employee expenses. Have state income taxes withheld, so you can deduct them this year on your federal return. For example, if you pay for elective medical or dental procedures this year, it may allow you to deduct medical expenses that exceed the 7½/10%-of-adjusted-gross-income threshold.

State tax.
Pay estimated state tax payments in late December and deduct it this year. Buy a car and add the sales tax to the table amount.
Make your January mortgage payment this year and deduct it this year.

Charitable Contributions

Donations planned for next year can be paid this year, but you must hand over money or mail checks by year end. Give appreciated stock to a favorite charity. You get t deduct the current value of the stock but don’t pay taxes on the gain.
Scour closets, attics and storage areas for clothing, household items, toys, books, and software to give to your favorite charity. You can save several thousand dollars in taxes this way.

Gifts From Senior IRA To Charities: Seniors age 70½ and older give better. Each year they can transfer up to $100,000 from their IRAs directly to charity. It satisfies your required minimum distribution but is not added to your taxable income, so they don’t trigger phase-out’s of your itemized deductions or personal exemptions or trigger a Medicare premium surcharge. One of my clients, John, a retired banker, and his wife each make $10,000 gifts like this monthly during the year. Your broker should have forms for making such gifts.

THE  STANDARD DEDUCTION GAME
If your itemized deductions are closed to the standard deduction, prepay some of next years this year and next year when your itemized deducts fall short, take the standard deduction: Joint  — $12,400
Singles — $6,300 and Head of household — $9,100

YEAR END PLANNING FOR YOUR BUSINESS

With year-end planning, a business can increase its operating capital by saving or deferring taxes. The first step is to obtain a professional tax forecast, so you can estimate each year’s tax characteristics, such as net operating losses, tax bracket. the AMT.

Defer income

The most obvious way to remove income from this year is to defer income:

  • Defer billing;
  • Delay a sale of assets.
  • Professionals can delay their year-end billings. Or speed them up if they expect to be in a higher tax bracket next year.
  • Installment sales delay income.

Prepay deductions

Another way to delay taxes is to accelerate next year’s deductions into this year.  For example:

  • Aggressively deduct items;
  • Prepay a reasonable amount of expenses;
  • Buy equipment before year end;
  • Pay bonuses (accrual basis corporations should ask tax advisors before paying related parties) if you’re on the accrual basis,

In bad years, reverse tactics. If this year is a down year, you may want to

  • Shift income into this year, or any year, in which our tax rate is lower.   For example, ship and bill as much, and as early, as possible.
  • Likewise, you may want to elect a longer depreciation period.

TRAPS: The following moves require professional guidance:

  • All tax planning must consider the alternative minimum tax.
  • Heavy last quarter purchases of depreciable assets.
  • Deducting refundable deposits.
  • Prepaying items more than 6 months beyond the taxable year, such as insurance and subscriptions,
  • Accrual method taxpayers attempts to deduct costs of property, services or rental of property before same is provided or used.
  • Accrual basis corporation’s prepayments to related parties.
  • What type of retirement plan to use: Keough plans, Simple IRAs, SEP IRAs, 401(k) s. They have different deadlines for setup and for making contributions. Generally, employer plans and Keogh plans must be established by Dec. 31 to get a deduction for the year.

ESTATE AND GIFT PLANNING
A Roth pay in is a great gift. You can give $5,500 or what the child earned, whichever is less. But keep in mind that the gift does count toward the $14,000/$28,000 annual gift tax exclusion. The best use of gifts is to remove assets from your taxable estate. This year, you can give up to $14,000, ($28,000 if your spouse agrees), to anyone without owing gift tax.

Consider using §529 plans to help your children or grandchildren with their education costs. Remember, too, that payouts for tuition, fees and books aren’t subject to income tax. Cloverdell education savings accounts are another way to go. Payouts for tuition, fees and books are tax free. Direct tuition payments made on behalf of a relative also pay off taxwise, because they don’t count against the $14,000 gift tax exemptions.
Hire your child or grandchild to work over Xmas.  A Roth can grow into a nice nest egg, especially if you keep making payins each year.

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Types of Contracts

Posted on June 22, 2015 by Wis Laughlin

AGREEMENTS

A substantial part of my practice is designing and negotiating contracts. While the General Counsel of a national software company, I negotiated contracts with over 50 Fortune 500 companies, including IBM, Unisys and the Federal Reserve Bank. It was my job to make sure that important terms were spelled out, to assure that the parties maintained a cordial relationship. A poorly drafted provision can result in endless bickering and damage to your business. I have held this philosophy for over 30 years of practice. So I have learned to discover each party’s needs and draft a document that gives each party what it needs, producing a win-win contract. The bottom line is more profits for both parties.

Don’t you deserve this quality of representation? Let me negotiate your important contracts, so that you get what you want. There are literally thousands of legal documents. Which do you need?

SALES, SERVICE,VENDOR, CUSTOMER, INDEPENDENT CONTRACTOR, EMPLOYMENT, LEASES, &LICENSING

BUSINESS ENTITIES: CORPORATIONS, LL’S, PARTNERSHIPS, CHARTERS, BYLAWS, OPERATING  AGREEMENTS, PARTNERSHIP AGREEMENTS, FRANCHISE

ESTATE: WILLS, TRUSTS,  NOTES,  CONSULTING,  RELEASES,  BILL OF SALE

FOCUS: BUY SELL AGREEMENTS

One important contract for a business with more than one owner is the buy sell agreement. A BSA can restrict the sale of an owner’s interest, require a terminated owner to offer his interest back to the business or other owners, provide who will buy your business if you die and specify the price. For example, the BSA may require the business to buy your interest upon your death, so your spouse receives cash while another owner ends up with the business. Life insurance can be purchased to provide the cash needed to make the purchase. If a business uses key man life insurance to pay for its redemption of stock, the alternative minimum tax (AMT) is a risk.

FOCUS: BUSINESS SALE AGREEMENT

Another form of contract I often work with is the business sales agreement. These agreements can be amazingly complex. Before entering into such an agreement, both parties must first discover all important facts, including several years of financial statements and tax returns. It is also necessary to inspect the premises and assets, as well as to talk to third parties doing business with the target. Lawyers and accountants should review all information, especially key contracts, financial statements and tax returns.

If the business to be purchased is a corporation, the buyer may buy stock or assets. The seller generally wants to sell stock because the sale results in capital gain to the seller. The buyer will want to buy assets so the buyer will have new assets to depreciate at the purchases price. It takes 15 years for a buyer to write off goodwill. These are only a few of the tax issues.

An experienced tax attorney has an advantage in working out a mutually beneficial deal.

One of the biggest questions in business purchase is the price. There are at least three major evaluation methods for business not publicly traded:

  1. Comparing sales of similar businesses
  2. Value of the assets less its liabilities
  3. The capitalization method forecasts the business’s earnings and sets the price so that those earnings represent a good rate of return on that price

Appraisers often mix methods and then adjust the value based on highly subjective factors.

 

 

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Tax WISardry with Rental Properties

Posted on June 22, 2015 by Wis Laughlin

Real estate rental properties can be a satisfying way to build retirement income and a fine tax shelter. However, if you are a landlord or are thinking about being one, watch out for tax traps. For example:

RENTAL PROPERTY TRAPS:

  • Your deductions can be delayed.
  • When you sell a property, you can pay taxes on “phantom gain”  even though you receive little cash.
  • In some cases you may pay more than fifty cents in taxes on a dollar of income.

So what do you do? Get advice from a former IRS attorney — me! I can show you how to get the most value out of your rental properties. I advise everyone from newbies to real estate gurus with millions of dollars in real estate. Get a taste of my thinking here. Make a free, half hour appointment to find out more.

DEDUCTING OPERATING COSTS

Let’s talk about taxes! The IRS Schedule E is where you report income and deductions for a rental property. You can deduct all “ordinary and necessary expenses.” For maximum tax savings you must recognize and record all deductions.

Typical deductions are listed on the Schedule E and include: ♦ advertising, ♦ local auto travel, ♦ cleaning and maintenance, ♦ commissions, ♦ premises and mortgage insurance ♦ mortgage interest, ♦ legal and professional fees, ♦ management fees, ♦repairs, ♦ supplies, ♦ real estate taxes,  ♦ insurance, ♦legal and professional fees, ♦ management fees, ♦ amortization of points and loan closing costs.

Less obvious deductions include ♦Airbnb fees, ♦ state and local government occupancy taxes, ♦ sales taxes, ♦ pest control, ♦ cable, ♦ depreciation of the building and contents, ♦ business education and travel to get it, ♦ cost of running your management office, including a ♦ home office, ♦ equipment, ♦ postage etc.

I can guide you to many other deductions depending on the particular property, such as association fees, security monitoring, and transportation costs. I use checklists of rental deductions, to make sure that nothing is missed.

My advice: Beware of large repair deductions. These are a favorite target of IRS Auditors because large repairs often constitute capital expenditures.

CAPITAL EXPENDITURES AND BASIS

Capital expenditures are costs of assets with a useful life of more than one year, such as the building, a new roof or air conditioning unit.

The basis of your rental property includes certain closing costs, plus the cost of improvements. The “adjusted basis” of the property is basis reduced by prior depreciation deductions. Basis is used for calculating the depreciation deduction and gain or loss on the sale of an asset.

THE DEPRECIATION DEDUCTION

The depreciation deduction is pro rata deduction of the basis of an asset over its useful life. Added to your operating costs, depreciation allows you to deduct more than you spend each year. For example, the IRS specifies a 27.5 year useful life for residential rental property, so you can deduct 3.636% per year. Nonresidential property has a 39 year life – 2.564% per year. Land is not depreciated.

Some “components” of your property, such as appliances, may qualify for much higher depreciation than a building.

GAIN OR LOSS

If you sell a property, you will have taxable gain if its selling price exceeds its adjusted basis. If you hold a property for 12 months or more, the gain on the sale is long-term capital gain (LTCG), which qualifies for a much lower tax rate. High income taxpayers may pay an additional 3.8% tax on such gain.

“Phantom gain.” occurs where a property’s adjusted basis has been decreased by depreciation or where you refinanced and took out cash.

Loss of capital gain trap: A property held primarily for sale does not qualify for capital gain treatment. So a real estate flipper, who is in the business of buying and selling properties, may not qualify.

Special rules must be strictly followed for the sale to qualify as a “like kind exchange rules.” Get professional advice to qualify.

DEALER TRAP: A property held primarily for sale does not qualify for long-term capital gain treatment. So a real estate dealer, who is in the business of buying and selling properties, may not qualify. Flippers get caught by this trap

“Phantom gain” is a taxable gain that occurs even though you have no equity because the property’s adjusted basis was decreased by depreciation or where you previously refinanced and took out cash.

RENTAL/PERSONAL PROPERTY

What about property you use personally and rent, such as a vacation home? This situation is complicated. You must divide all deductions between personal and rental use. The IRS and the courts disagree on how. Furthermore, in a year when you use the property for more than the greater of 14 days or 10 percent of rental use, there are even more restrictions.

TIP: Sometimes, vacation homes provide more tax benefits if you treat them as second homes, rather than rental properties

PASSIVE LOSS RULES

Congress enacted the Passive Activity Loss rules (PAL) to fight tax shelters, and the PAL rules automatically apply to most rental activities.  You must suspend these losses until there is offsetting income from PAL’s or you sell the property producing the loss. However, a taxpayer may immediately deduct up to $25,000 of PAL from rental activities in which he actively participates. Active participation means performing significant, bona fide management functions. Using a property manager does not automatically disqualify you.

The $25,000 limit on allowed losses is reduced by 50¢ for every dollar by which modified adjusted gross income exceeds $100,000. So at $150,000 in MAGI you deduct nothing. Married taxpayers filing separate returns may not use the $25,000 allowance unless they live apart during the entire taxable year.

REAL ESTATE PROS

If you spend most of your working time in the real estate business,  rental real estate losses are exempt from the passive loss rules. However, to be a real estate pro, a person must spend a majority of work hours and more than 750 hours per year in real estate activities. Mortgage brokerage and loan origination services aren’t real property businesses for this purpose. (Hickam, TC Summ. Op. 2017-66).

Tax Reform Benefits

“Qualifying trades or businesses” (not “C corporations”) such as partnerships, S corporations, or sole proprietorships can deduct up to 20% of profits from their taxable income. However, certain limitations phase in after a single taxpayer’s taxable income exceeds $227,500 or a joint filer’s exceeds $415,000. The operation of a rental property is not automatically a qualifying trade or business, but it should qualify if it involves regular, continuous and substantial activities that have the objective of making a profit. But watch out! f the operation of a rental property involves significant services and substantial costs, it is likely to be a trade or business.

Wis’ Tax Mastery© program generates a personal tax plan for each client that focuses on that client’s best tax strategies,to give the lowest legal taxes.

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What Type of Business Should You Form?

Posted on June 22, 2015 by Wis Laughlin

 

When you first come to me, one of the first things I check is whether you have an efficient form of business.What are some forms of business?

  1. A sole proprietorship is a one person business. It is the least expensive business form.
  2. A partnership is two or more people who own and operate a business for profit. A partner is subject to unlimited personal liability for partnership debts and is liable for the negligence of another partner or a partnership employee if in the usual course of business.
  3. A corporation is a legal business entity authorized by statute. It can be owned by one or more persons, who are not liable for its debts and other obligations. A corporation must follow numerous formalities. It is taxed separately from its owner(s) unless it is an S corporation.
  4. A limited liability company is a hybrid legal business entity authorized by statute. It offers limited liability, but with more flexibility than other entities.

Which form of business should you have?  Your decision should be made with the advice of an experienced lawyer.  A lawyer like me can advise you about liability protection, the most important factor in choosing your form of business.  Cost and formalities must also be considered.

The most expensive form of business is a corporation, followed by an S corporation.  A corporation, S corporation, partnership or LLC require separate tax and financial accounting and reporting to the state.  If you are a one-person business, it is rarely effective to be a corporation or LLC because you will usually remain liable for personal injuries or contracts of your business.

LIMITED LIABILITY COMPANIES

When I advise a client to form a business entity these days, it is often a limited liability company (LLC).  An LLC offers the flexibility of a partnership with the limited liability of a corporation.  See Is an LLC for You?

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Business Tax Tips

Posted on June 20, 2015 by Wis Laughlin

Take control of your tax bill! Learn how to set up transactions for the lowest legal taxes. Wis combines tax, business and estate planning to achieve your goals. He may be the last professional you will ever need:

  • Expert tax return preparation
  • A written plan using Wis’ custom Tax Mastery© on how to pay the lowest legal taxes
  • A monthly WealthWISe e-letter and personal mentoring on how to control taxes in the future.
  • Confidence to face the IRS.
  • Wis can tell you what the IRS does not.

THE SYSTEM

The system begins with examining your latest tax return, free of charge, to see if I can help you. I provide tools to help you get together your information. I use Proseries professional tax preparation software. I use the Tax Mastery©, an Excel model, driven by Visual Basic, that helps me find tax savings in client tax returns and provide each client with personal written advice on ways to legally lower taxes.

TAX FORMS

Business tax returns include:

  • One person businesses Schedule C
  • Corporations Form 1120
  • S corporation Form 1120 S
  • Partnerships & LLC’s Form 1065

TAX RECORDS

Most of the tax benefits lost in IRS audits are lost because of poor records. The IRS and the Courts are getting tougher on what proof you need, so don’t lose a deduction that you deserve because you can’t prove it. At the same time, don’t waste time on records you don’t need. Different businesses need different records and we can tell you what.

TAX BASICS

To beat the tax system you must know the rules. What can you deduct? To be deductible an expense must be “ordinary and necessary” for your business. Thousands of court decisions have tried to define “ordinary and necessary.” Basically, “ordinary” means expected in your business, and “necessary” means appropriate and helpful to your business. For example, you may not deduct personal expenses because they are not necessary to your business and you may not deduct extravagant expenses because they are not necessary.

Equipment & Furniture – Even if ordinary and necessary, an asset with a useful life of more than one year, like buildings, furniture and equipment, is normally depreciated (deducted ratably over its useful life). In 2014 taxpayers were allowed bonus depreciation — 50 percent of the cost of new property (not real estate) in the year placed in service. See “Sunset” below.

Section 179 deductions. A business could deduct up to $500,000 of the cost of de-preciable assets (other than buildings) placed in service in 2014. This limit was reduced when dollars spent on such assets exceed $2,000,000. The section 179 deduction cannot exceed business income. Certain restaurant and retail space improvements may qualify for similar treatment on up to $250,000.

Sunset: large Section 179 amounts, bonus de-preciation ended at the end of 2014. Congress may extend these. Wis is watching these.

Employees. As an employer you must withhold various taxes from your employee’s wages and deposit them to a specified bank on time or face stiff penalties. See IRS Circular E for rules.

Self employment tax.-A person who is in business alone, in a limited liability company or partnership must pay the self-employment tax plus regular taxes on earned income. Combined income and self-employment taxes can exceed 50%. S corporations are another matter.

Estimated tax payments. If you are not an employee, you are supposed to make quarterly payments of estimated taxes. Wis advises keeping estimated tax payments low, to avoid giving the Government the use of your money interest free. If you pay too little, you may pay a penalty, but at a low rate.

TAX SAVERS

Your business is a great tax shelter, and here are some tips on how to use it:

More Deductions. Wis shows you how to find business deductions in your personal as well as business checks & charge statements.

Reduce self-employment taxes. If a deduction could be business or personal, treat it as business, to reduce the self-employment tax. For example, at least a portion of tax preparation costs are business.

Depreciate or not. We can show you when to depreciate and when to use the section 179 deduction.

Health insurance premiums. You can deduct these. What about Medicare premiums?

Vehicles: Save more. Compare deducting actual expenses and depreciation with deducting the standard mileage rate – 56.5 cents in 2013.

Big Vehicles, Big Savings. With over 6,000 gross vehicle weight, these are not subject to the dollar limits on depreciation that apply to most vehicles.

Meals & Entertainment. Half is better than nothing.

Travel. Too many possibilities to discuss here. Take advantage of deductions on expenses of overnight business travel: fares, lodging, car rental, meals, tips, internet, and dry cleaning. Take your spouse as an assistant.

Tip: “Per diem” rules allow you to deduct as travel expenses a specified amount per day for lodging, meals and incidental without receipts.

LLC member’s or Partner’s costs. A member/partner can decrease yourself employment tax with unreimbursed business expenses.

Business seminars. Deduct cost plus travel. Home office. Don’t go home without it.

Hire the kids. Deduct over $6,000 in wages paid your child. Yet they pay no taxes.

Telephones. Deduct a second line.

Retirement Plans. Dynamite! Deduct contributions to retirement plans, where it grows tax free. Different plans have different creation and contribution dates. Come in and find out which suits you.
There are hundreds of other deductions. Wis shows you how to find business deductions in your personal as well as business records. Here are a few:

There are hundreds of deductions, I show you how to find business deductions in your personal as well as business records. Here are a few:

  • Internet service
  • Cell phones
  • Professional dues
  • Bank charges
  • Professional fees
  • Business related subscriptions
  • Pager

Meet with me for a free half hour review of your taxes, to see how much you can save if I prepare and plan your taxes.

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Business Purchases & Sales

Posted on June 19, 2015 by Wis Laughlin

BUYING AND SELLING BUSINESSES

One of my favorite areas in law and taxation is “M&A’s” (merger and acquisitions). In plain English, I am talking about buying or selling businesses. The reason I like M&A’s is that they are challenging, yet allow me a lot of opportunities to help my client.

Business brokers and form contracts are no substitute for professional advice from your accountant and lawyer. A tax attorney can add value to the transaction that no other professional can, by identifying tax savings and drafting a contract that benefits both parties. Let’s talk about how to do this.

GET THE FACTS!

The buyer and seller sometimes make the mistake of starting to negotiate before they know all the facts, which might reveal some attractive alternatives. For example, a cash-short seller might offer a much better price to an all cash purchaser. The buyer and seller should uncover all important facts about the target business that is for sale. The buyer should inspect the business premises and assets and talk to persons doing business with the target. He should review key contracts between the target and third parties. Buyer and seller should examine each others’ financial statements and tax returns for several years.  Each party’s lawyers and accountants should review all information, especially key contracts, financial statements and tax returns. This information often uncovers dangers and opportunities for each party.

THE OFFER

Don’t agree to anything without legal advice. It’s easier to make a deal than to change it. If the deal looks good after talking with your lawyer and accountant, have your lawyer draft a proposed sales contract. Sign it to show it to the other party to show that you mean business! This offer will quickly bring out any disagreement and start the negotiations. If the other party signs you have a deal!

VALUING THE BUSINESS

A most important term in your contract, of course, is the price. To find the price of the target business, each party must decide its value. There are at least three major valuation methods for businesses not publicly traded:  The first is the comparable sales method, which values a business by comparing sales of similar businesses. A second method, the asset valuation method, assumes the business’s value equals the value of its assets less its liabilities. A third method, the capitalization method, forecasts the business’s earnings and sets the price so that those earnings represent a good rate of return on that price. Appraisers often use a mixture of methods. For example, a business with profits of $100,000 would be worth $500,000 to a buyer who desires a 20% return. This value is said to be determined by a 5X earnings multiplier.

A CORPORATION SELLING STOCK VERSUS ASSETS

If the target is a corporation and the seller sells its stock, the seller’s gain, if any, will be long term capital gain, which has tax benefits. On the other hand, if the seller has a loss, it is a capital loss, fully deductible against capital gains, but the seller may deduct only $3,000 per year against ordinary income (the balance carries over to the next year).

A corporation that sells its assets must allocate the purchase price among the assets and will have taxable gain equal to the price of each asset, less its basis. Basis means cost with certain adjustments, such as a reduction for prior depreciation. If depreciation deductions have reduced the basis below the asset’s selling price, the seller has paper gain. Furthermore, f the corporation distributes the proceeds to shareholders, they will have taxable gain equal to the proceeds less their basis in the stock, so the gain will be taxed twice.

The buyer often benefits by buying assets instead of stock. For example, the buyer may begin depreciation anew, using the purchase price of each asset. In contrast, if you buy a corporation with fully depreciated assets, the price you paid for the stock does not entitle the corporation to additional depreciation.

There are nontax reasons for a buyer to buy assets, rather than stock. The buyer of assets may select only desirable assets and need not assume any of the business’s liabilities or contracts. The buyer of a corporation’s stock gets the corporation’s liabilities along with everything else.

On the other hand, there are some reasons for the buyer to buy stock. The buyer gets a corporation without the cost of incorporating. The buyer may not be able to individually obtain contracts as favorable as those of the corporation. The corporation’s existing tax situation may be desirable.

If the parties agree on an asset purchase, the tax law requires use of the residual allocation method. This method forces the buyer and seller to allocate the business’s purchase price among tangible assets according to their fair market values. A seller will want to assign less purchase price to assets with potential gain. However, the buyer will want a high purchase price on assets that qualify for depreciation, to increase the depreciation deduction. After allocating the business’s purchase price among tangible assets, buyer and seller must assign all unallocated price to goodwill and intangible assets covered by section 197 of the Internal Revenue Code.

The tax laws require the buyer to deduct certain intangible assets over a fifteen year period including goodwill, covenants not to compete, franchise rights and others. Goodwill is the tendency of customers to do business with your company rather than its competitors. The seller’s sale of goodwill results in capital gain.

HOW TO PAY

There are many ways to pay for a business purchase. The simplest and safest for the seller is cash. The buyer may borrow the money from the bank. An alternative is for the buyer to pay the price over time in installments with interest. In that case the seller can use the installment method under which the seller is taxed in proportion to payments received each year.

Another alternative is an earn-out, under which the buyer pays a down payment and bases the remainder of the price on business profits. This method is safe for the buyer, and yet it offers the seller a potentially higher purchase price if the business performs well. Tax wise, an earn-out is treated like an installment sale.

TIPS & TRAPS

My role in an acquisition is to identify possible dangers and opportunities in the deal and draft a clear, effective purchase contract. There are many more considerations  here than I can cover in this article. To list a few:

When buying a corporation or LLC, real or potential liabilities to third parties, such as taxes owed are real dangers.

A seller’s agreement not to compete with the purchased business is legal only if it is reasonable in its time and geographic area. The seller is taxed when paid.

Most contracts call for warranties from both parties as to key facts. Personal warranties may be called for. Some contracts give the buyer the right to offset amounts against his payments to the seller if warranties are broken.

Notes and escrow agreements should be used to protect the seller until paid in full.

There are environmental liabilities are extremely dangerous..

An acquired corporation has limited use of prior net operating losses. A below market interest rate on an installment agreement may cause the IRS to treat the transaction as if imaginary interest is paid.. A corporation’s acquisition of another corporation may be tax free and may preserve tax benefits of the acquired corporation depending on how accomplished.

S corporations, partnerships, and limited liability companies present additional issues.

CONCLUSION

This article is far from complete. Don’t try to buy or sell a business without good legal, tax and accounting advice.

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