Outsourced CFO Benefits

Every business needs the guidance of someone who understands finance. But not every business can afford to hire a CFO. Now, many are hiring contract CFOs, who are outsourced and work part-time, but provide all the financial expertise a company needs to thrive and succeed.

How do you know if your business needs a part-time CFO?

  • Your CEO is focused on running and growing the business and isn’t a financial expert.
  • You want to increase profitability and strengthen your financial condition but are unsure how.
  • The business is acquiring or merging with another company, or selling off a division.
  • You need to provide financial information to venture capital firms.
  • Your accounting systems and processes are out of date.
  • It’s difficult to get accurate financial statements, or if you do, no one really understands how to review them.
  • Vendors aren’t getting paid on time.

Even though you’re profitable, there’s often not enough cash for new inventory or capital investments.
If any of these statements sound familiar, it’s time to learn how outsourced CFO services can help your company.

A part-time CFO can help a troubled business avoid insolvency and bankruptcy. But nearly any business can benefit when we help in ways such as restructuring the balance sheet to free up cash and make accounts payable current, pay off substantial debt, fund major capital improvements, or fund a retirement plan.

Expert CFO Services without the Cost

Many businesses cannot afford $250,000 or more for a CFO salary. WRP CPAs outsourced CFO services give you the expertise of a dedicated CFO, but you’re only paying for part-time, contract CFO services.

You get CFO services you can trust, yet you don’t have to pay taxes or health and retirement benefits. Whether you need two hours a week or two days, we’ll do what it takes to keep your financial condition strong.

Outsourced CFO Services Summary

Although part-time, your CFO will still be an integral part of your management team.

We will tailor the CFO services to your business’ needs, but the work can include:

  • Financial analysis and planning
  • Fiscal management and cost control
  • Cash flow management
  • Business strategy and planning
  • Financial projections and reporting
  • Customer-focused needs analysis
  • Standard operating procedures
  • Turnaround and crisis management
  • Process mapping and reengineering
  • Credit and risk management
  • Revenue and margin enhancement
  • Interim CFO Services

Perhaps you just need a CFO for a limited amount of time, such as while you’re searching for a permanent employee. We can step in and provide interim CFO services to manage your finances and keep your business on track.

Whether you need CFO services for the long- or short-term, we can help increase your cash flow, profitability, financial condition, and company value.

Which Form of Business Organization is Right For You

Your choice of the type of business organization to use when starting a business is a major decision. And it’s a decision to be revisited periodically as your business develops. While professional advice is critical in making this decision, you should have a general idea of the options available.

This Financial Guide provides just such an overview.

The human mind has devised a wide variety of business entities-that is, of forms of doing business. The mind of the IRS has kept up, devising tax rules for these entities. Often, however, these rules involve taxing the owner of the entity, and not the entity itself.

There are basically two federal tax systems for businesses:

  1. Taxation of both the entity itself (on the income it earns) and the owners (on dividends or other profit participation the owners receive from the business). This system applies to the business corporation-called the “C corporation” (C-corp) for reasons we’ll see shortly-and the system of taxing first the corporation and then its owners is called the “corporate double tax.”
  2. “Pass-through” taxation. The entity (called a “flow-through” entity) is not taxed but its owners are each taxed (more or less) on their proportionate shares of the entity’s income. The leading forms of pass through entity (further explained below) are:
  • Partnerships, of various types.
  • “S corporations” (S-corps), as distinguished from C-corps.
  • Limited liability companies (LLCs).

A sole proprietorship-such as John Doe Plumbing or Marcus Welby, M.D.-is also considered a pass through entity even though no “organization” may be involved.

The first major consideration-in this case, a tax consideration-in choosing the form of doing business is whether to choose an entity (such as a C-corp) that has two levels of tax on income or a pass through entity that has only one level (directly on the owners).

Tip: Co-owners and investors in pass through entities may need to have their operating agreements require a certain level of cash distributions in profit years, so they will have funds from which to pay taxes.

Losses are directly deductible by pass through owners while C-corp losses are deducted only against profits (past or future) and don’t pass through to owners.

Tip: Business and tax planners therefore typically advise new businesses-those expected to have startup losses-to begin as pass through entities, so the owners can deduct losses currently against their other income, from investments or another business.

The major business consideration (as opposed to tax consideration) in choosing the form of business is limitation of liability, that is, to protect your assets from the claims of business creditors. State law grants limitation of liability to corporations (C and S-corps), LLCs, and partners in certain forms of partnership. Liability for corporations and LLCs is generally limited to your actual or promised investment in the business.

Types of Business Entities

C and S-Corps

The S-Corp (so named from a chapter of the tax code) is a tax device created by federal law in 1958. It is a regular corporation with regular limited liability under state law, whose owners elect pass through status for federal tax purposes. That status requires compliance with a number of often constricting rules but, with some exceptions, complying corporations escape federal corporate tax. As regular business corporations under state law, they may be taxed under state tax law as regular corporations, or in some other way. Corporations whose owners don’t choose to make the federal S-corp election-that choose to be taxed as corporations-are called C-corps (after another chapter of the tax code).

Partnerships

Ordinary partnerships, called “general partnerships,” do not have limited liability under state law.

Limited partnerships limit liability for some partners but not others. A limited partnership has both general partners (who manage the business) and limited partners (who in essence are passive investors). The liability of limited partners is generally limited to their investments. The liability of general partners is theoretically unlimited, but can be limited in practice where the general partner is an entity, such as a corporation, with limited liability. A limited partner who takes on what state law considers “too much” management participation is treated as a general partner, losing limited liability.

Both general and limited partnerships are treated as pass through entities under federal tax law, but there are some relatively minor differences in tax treatment between general and limited partners.

A still more recent development, not yet adopted everywhere, is the limited liability partnership (discussed below) which was designed for professional practices.

Other partnership forms are the giant “publicly traded partnerships” (treated as C-corps for tax purposes) and limited liability limited partnerships (adopted in only a few states) which limit the liability of general partners (where two or more) as well as of limited partners.

Limited Liability Companies (LLCs)

LLCs have become the most popular business form for new entities, and many existing entities have converted to this form. They exist in some form in every state. They embody limited liability features of corporations and pass through characteristics of partnerships and S-corps, but are more flexible than S-corps.

For business law purposes, LLC members may be either passive investors or active investor-managers. Unlike with limited partnerships, active management won’t affect limitation of liability. For federal tax purposes, LLCs are treated as partnerships (unless they elect otherwise).

Note: Since LLC rules vary from state to state, a characteristic, power or rule in the state where an LLC was created may not apply in some other state where it does business.

Note: Some states do, and some states do not, authorize LLCs with only one member.

Tip: Where one becomes the sole surviving LLC member in a state that doesn’t allow single member LLCs, consider quickly incorporating (to regain limited liability) and electing S-corp status (to retain pass through treatment).

 Choosing the Tax Treatment

Since 1997, the IRS has allowed business owners a previously unheard-of measure of choice as to how the entity will be federally taxed. It allows you to choose between C-corp and pass through treatment (universally called “check-the-box”).

A few choices are not allowed. If the entity is incorporated, it must be treated as a corporation (which doesn’t preclude an S-corp election if otherwise available). Publicly traded partnerships and publicly traded LLCs must be treated as C-corps.

Note: Special rules apply to foreign entities.

All other forms of partnership may be taxed either as C-corps or as pass through entities (either as partnerships or, if S-corp status is available and elected, as an S-corp.)

An LLC with two or more members may choose to be taxed as a C-corp, a partnership or an S-corp (if elected). An LLC with a single member (where this is allowed) may choose either to be taxed as a C-corp or an S-corp (if elected) or to have the entity disregarded. In this case, if the LLC is owned by an individual, the individual is taxed directly (and can deduct losses) as with a sole proprietorship.

Typically, partnerships and multimember LLCs choose to be taxed as partnerships while single member LLCs choose to have the entity disregarded. With “check-the-box,” the IRS will no longer question your right to combine limited liability with pass through treatment or, if you wish, to waive pass through treatment for an entity otherwise entitled to it (with the exceptions noted above).

Any choice has consequences. For example, if you opted last year for corporate treatment and want partnership treatment this year, you’ll be treated as liquidating the corporation, and taxed accordingly (discussed below).

Most-but not all-states that impose corporate taxes follow a taxpayer’s federal “check-the-box” choice for state tax purposes. This doesn’t necessarily mean that the tax treatment will be the same. For example, a state may accept an LLC’s election to be taxed as a partnership and still impose an entity level tax on the LLC.

An election to be taxed as a certain type of entity for federal tax purposes does not make it such an entity under state business law.

Choosing the Form 

Let us now consider which form will work best for the way you want to run your business, and capitalize on its profits or startup losses. “Compared to what?” will be a major consideration. We’ll need to compare the taxable entity (the C-corp) with pass through entities and compare each of the pass-through entity with the others. We’ll also look at tax consequences of changing from one entity to another.

A major decision of whether to use a C-corp or some form of pass-through C-corp is sometimes necessary from a business standpoint. For example, if interests in the enterprise are to be publicly traded, only the C-corp is appropriate.

Note: For some activities, states may require the corporate form (banks, for example) and S-corp rules may preclude the S-corp form.

From a tax standpoint, while C corporations present two levels of tax, the first tax (on the corporation) can be at a rate lower than the tax on the owner and the second tax (on the owner) is usually postponed until the owner receives dividends or other assets from the corporation.

Caution: Distribution of appreciated assets to the owner, or sale of such assets and distribution of the proceeds, are taxable both to the corporation and then to owners. They are no longer opportunities, as they once were, to avoid two levels of tax.

The tax on the owner may be at reduced capital gains rates. This is the case for appreciated assets distributed in corporate liquidation and, after 2002 and before 2009, it’s also usually the case for dividends distributed by ongoing corporations.

Caution: Funds can build up in the corporation at a relatively low rate until distributed. However, the eventual tax on the owner, plus the corporate tax, may eat up more of the profits than the single (pass through) tax on the owner does.

A C corp can minimize corporate tax by paying out all or almost all of its income to owners in the form of compensation and fringe benefits. Assuming these payments are deductible as business expenses, this approximates pass through treatment, since the corporation isn’t taxed on what it receives and then deducts; the owner-recipients alone are taxed on this. This arrangement works best in personal service businesses, where full business expense deduction is more likely to be allowed.

Caution: The IRS and the courts may limit deduction in other settings, finding owner compensation to be “unreasonable” and partly nondeductible where it reflects a distribution of profits from capital or from the efforts of non-owners.

To summarize, some businesses may find C corp status necessary for business purposes. But only comparatively rarely will it be a preferable tax choice for a new business.

Choosing the Pass-through Entity

If you decide on a pass-through entity, which of the several do you choose? Here is a brief discussion of the rules applicable to each.

S Corporation

Limitation of liability gives S-corps the edge-for business reasons-over general partnerships, sole proprietorships, limited partnerships (as to limited partners whose partnership activity might expose them to unlimited liability), and LLCs in states that don’t allow single member LLCs.

Caution: Limited liability comes at a cost, however, since states may impose a tax on S-corps not imposed on entities with unlimited liability.

S-corps are subject to a number of significant rules and restrictions:

  • All owners must agree to S-corp status. This means that one co-owner can exact a price or impose conditions for his or her agreement.
  • An S-corp can have only one class of stock, which means that income, losses and other tax attributes are allotted among stockholders in proportion to stock ownership.
  • The number of co-owners is limited (to 100, with qualifications, counting members of the same family as one stockholder).
  • There are limitations as to who can be co-owners (for example, a nonresident alien cannot) and as to the kind of business that can qualify for as an S-corp (for example, an insurance company cannot).

Caution: Failure to meet, or ceasing to meet, these requirements means loss of S status and conversion to C-corp status-and C-corp taxes.

These limits and restrictions will be contrasted, below, with the more liberal tax rules for partnerships and LLCs.

Note: S-corps are often preferred because they are simple to operate. However, they are not suitable for many businesses. The much wider range of options for partnerships and LLCs introduces tax planning complexity which may be more than many or most small businesses can effectively use or understand.

LLCs vs. S Corporations

LLCs and S-corps share the same business advantage-limitation of liability. S-corps are a bit better understood by the business community because LLCs are new and vary from state to state.

The tax advantages of LLCs, as compared to S-corps, are the tax advantages of partnerships. All the points below where LLCs outscore S-corps arise because LLCs can choose partnership tax status.

  • LLC can to some degree allocate tax attributes, like income or certain kinds of income, depreciation deductions, etc., disproportionately among members to suit their individual tax situations (unlike S-corps limited by the effect of the single-class-of-stock rule).
  • S-corp owners can deduct startup or operating losses up to their investment plus any debt that the S-corp owes them. LLC members can do the same but can deduct further, up to their share of the debt the LLC owes others.
  • Adding co-owners after the entity is formed is easier with LLCs. An outsider’s transfer of appreciated property for an LLC membership interest is tax-free. A comparable transfer to an S-corp is taxable unless the new co-owner-transferor (or group of transferors) owns more than 80% of the S-corp after the transfer.
  • Complex tax adjustments (“basis adjustments”) can be made by the LLC when LLC interests change hands or LLC property is distributed. These adjustments, unavailable with S-corps, can have the effect of reducing amounts taxable to certain LLC members.
  • Distribution of appreciated LLC property to LLC members is not taxable to the LLC. Comparable S-corp distributions to stockholders are taxable to the S-corp.

Tip: Depending on circumstances, S-corp status can be preferable to LLC status when the owners leave the business. The LLC is not taxed when appreciated property is distributed to its members, which is a standard form of business liquidation. But the members would be taxed on distributions exceeding the “basis” (broadly, the amount they invested) of their interests. S-corp owners, on the other hand, can arrange a tax-free exit, via a corporate reorganization in which they transfer their S-corp stock for stock in a corporate acquirer. (Later sale of stock in the acquirer would be taxable.)

Depending on state law, S-corps and LLCs may be taxed at the entity level in states where they do business.

LLCs vs. Partnerships

LLCs, with their limited liability for all members, have the edge on general and limited partnerships from a business standpoint. While the federal tax treatment of partners and LLC members is basically the same, there are occasional special tax rules for limited partners (especially self-employment tax rules).

Note: It is not clear whether these special tax rules extend to non-manager LLC members.

Note: LLCs are more likely than partnerships to be subject to a state tax.

LLCs vs. Proprietorships

LLCs, with their limited liability, are preferable, where available, for sole proprietors from a business standpoint. Where the sole proprietor so elects, the LLC is ignored and the proprietor is taxed directly under federal tax rules as if no separate entity existed.

Note: Some states do-and some do not-ignore the LLC entity for state tax purposes.

Professional Practice Entities 

Professional practices (such as doctors and lawyers) have a number of options as to their form of business entity.

Professional Corporations (P.C.s)

These provide limited liability for general business debts but not for the professional’s own malpractice and, in some states, no limited liability for malpractice of fellow practitioners in the firm. They may be C-corps or S-corps. Unlike many other C-corps, a P.C. C-corp can use the cash method of accounting.

LLCs

Most states allow professionals to practice in LLCs, either under a general LLC law or a special Professional Limited Liability Company law (PLLC). In either case, liability is not limited for the professional’s own malpractice but, depending on the state, may be limited for the malpractice of other firm members and for other firm debts. These LLCs share the comparative advantages (and minor disadvantages) of other LLCs.

Limited Liability Partnerships (LLPs)

LLPs are general partnerships whose general partners have limited liability. They are designed for professional practices. A partner is liable for his or her own malpractice but not for a partner’s malpractice or, depending on state law, other acts of partners. Typically they are required by state law to maintain malpractice insurance, and are obliged to pay a per-partner fee to keep their status, but are not subject to entity level tax.

Sole Proprietors and Partners

Many practitioners choose to practice as sole proprietors or partners, rather than in a limited liability entity. They reason that their main exposure to liability is to malpractice claims, and the entity won’t protect against claims for their own malpractice (or, in some states, for a partner’s malpractice). They therefore choose to rely on malpractice insurance (which practitioners in limited liability entities may have too).

Tip: Sole proprietorships and partnerships are less likely than limited liability entities to be subject to state entity level tax.

Other Pros and Cons of C-Corps 

A C-corp can be preferable to pass through entities as to fringe benefits. As employees, owner-employees of a C-corp qualify for certain employee fringe benefits. On the other hand, self-employed persons (partners, LLC members, sole proprietors, and more-than 2% stockholders in S-corps) don’t qualify.

Example: Health insurance can be wholly tax-free to C-corp owner-employees (through full deduction by the C-corp and full tax exemption for the owner-employee). However, it is only partly tax-free to the self-employed, because of their limited tax deduction for this item.

Another modest advantage of the C-corp is that they are less likely to be subject to passive loss deduction limitations. These limit the opportunity to deduct losses from activities the taxpayer doesn’t “materially participate” in, against income from investments or other businesses. Typically, limited partners have been the group most subject to passive loss limitations.

Another tax disadvantage of C-corp status is its limited ability to report for tax purposes on the cash method of accounting, which generally defers tax as compared to the accrual method.

Further Insights on S-Corps 

A qualifying S-corp, generally nontaxable, can be subjected to C-corp taxation on certain items without losing S status for other items. This happens when a C-corp converts to an S-corp and carries over appreciated property later sold at a gain. The S-corp pays a corporate tax on the gain, which is then taxed to stockholders (reduced by the corporate tax). Because S-corps are intended to be operating companies rather than holding companies, this also happens when the S-corp has “excessive” passive investment-type income (interest, dividends, and the like, in excess of 25% of gross receipts). Here the excess is subject to corporate tax and is then taxed to stockholders (minus the corporate tax).

Some see S-corps as a way to reduce employment taxes. For example, one earning $120,000 in a sole proprietorship might convert to an S-corp and take $70,000 in pay and $50,000 in dividends. Income taxes are unchanged by this but, it’s reasoned, $50,000 now received as dividends escapes employment tax (the $120,000 of self-employment earnings was subject to both retirement and Medicare tax up to $102,000 for 2008 and $97,500 for 2007 and Medicare tax above that). In abuse situations, such as where little or no wages were paid, IRS has treated the dividends as pay subject to employment taxes on the owner-employees and on the S corp employer. But in cases where substantial wages were paid, along with substantial dividends, IRS has not objected.

Changing To Another Entity 

The many advantages of LLCs, for both business and tax reasons, have encouraged many business owners to convert, or consider converting, to the LLC form. But other changes of entity may suit particular situations-for example, general partnership to LLP (for business reasons) or C-corp to S-corp (for tax reasons). For tax purposes, a change of entity via a check-the-box decision is treated for tax purposes as an actual change of the entity (whatever may happen under state business law).

Here, briefly and in broad outline, is what happens for federal tax purposes when entity status is changed (or treated as changed under-check-the-box). How these apply in your own situation must be reviewed in depth with a tax/business advisor.

  • C-corp converts to S-corp or vice versa. No tax on the conversion. Pass through treatment applies while it is an S-corp.
  • C- corp or S-corp converts to LLC, partnership or sole proprietorship. Generally, a tax on the liquidation of the corporation, with pass through treatment for the new entity (in modified form in the case of a liquidating S-corp).
  • Partnership converts to LLC or vice versa; sole proprietorship converts to single member LLC or vice versa. No tax on conversion-pass through treatment continues.
  • LLC, partnership or sole proprietorship converts to C or S-corp. Generally, no tax on conversion. Pass through treatment (in modified form) for S-corp income.

Individual Tax Planning

This financial guide provides tax saving strategies for deferring income and maximizing deductions, and includes some strategies for specific categories of individuals, such as those with high income and those who are self-employed.

Before getting into the specifics, however, we would like to stress the importance of proper documentation. Many taxpayers forgo worthwhile tax deductions because they have neglected to keep receipts or records. Keeping adequate records is required by the IRS for employee business expenses, deductible travel and entertainment expenses, and charitable gifts and travel. But don’t do it just because the IRS says so. Neglecting to track these deductions can lead to overlooking them. You also need to maintain records regarding your income. If your receive a large tax-free amount, such as a gift or inheritance, make certain to document the item so that the IRS does not later claim that you had unreported income.

The checklist items listed below are for general information only and should be tailored to your specific situation. If you think one of them fits your tax situation, we’d be happy to discuss it with you.

Avoid or Defer Income Recognition

Deferring taxable income makes sense for two reasons. Most individuals are in a higher tax bracket in their working years than they are during retirement. Deferring income until retirement may result in paying taxes on that income at a lower rate. Additionally, through the use of tax-deferred retirement accounts you can actually invest the money you would have otherwise paid in taxes to increase the amount of your retirement fund. Deferral can also work in the short term if you expect to be in a lower bracket in the following year or if you can take advantage of lower long-term capital gains rates by holding an asset a little longer.

Tip: You can achieve the same effect of deferring income by accelerating deductions, for example, by paying a state estimated tax installment in December instead of at the following January due date.

Max Out Your 401(k) or Similar Employer Plan

Many employers offer plans where you can elect to defer a portion of your salary and contribute it to a tax-deferred retirement account. For most companies these are referred to as 401(k) plans. For many other employers, such as universities, a similar plan called a 403(b) is available. Check with your employer about the availability of such a plan and contribute as much as possible to defer income and accumulate retirement assets.

Tip: Some employers match a portion of employee contributions to such plans. If this is available, you should structure your contributions to receive the maximum employer matching contribution.

If You Have Your Own Business, Set Up and Contribute to a Retirement Plan

If you have your own business, consider setting up and contributing as much as possible to a retirement plan. These are allowed even for sideline or moonlighting businesses. Several types of plans are available which minimize the paperwork involved in establishing and administering such a plan.

Contribute to an IRA

If you have income from wages or self-employment income, you can build tax-sheltered investments by contributing to a traditional or a Roth IRA. You may also be able to contribute to a spousal IRA -even where the spouse has little or no earned income. All IRAs defer the taxation of IRA investment income and in some cases can be deductible or be withdrawn tax free.

Tip: To get the most from IRA contributions, fund the IRA as early as possible in the year. Also, pay the IRA trustee out of separate funds, not out of the amount in the IRA. Following these two rules will ensure that you get the most possible tax-deferred earnings from your money.

Defer Bonuses or Other Earned Income

If you are due a bonus at year-end, you may be able to defer receipt of these funds until January. This can defer the payment of taxes (other than the portion withheld) for another year. If you’re self employed, defer sending invoices or bills to clients or customers until after the new year begins. Here, too, you can defer some of the tax, subject to estimated tax requirements. This may even save taxes if you are in a lower tax bracket in the following year. Note, however, that the amount subject to social security or self-employment tax increases each year.

Accelerate Capital Losses and Defer Capital Gains

If you have investments on which you have an accumulated loss, it may be advantageous to sell it prior to year-end. Capital losses are deductible up to the amount of your capital gains plus $3,000. If you are planning on selling an investment on which you have an accumulated gain, it may be best to wait until after the end of the year to defer payment of the taxes for another year (subject to estimated tax requirements). For most capital assets held more than 12 months (long-term capital gains) the maximum capital gains tax is 15 percent, but is set to expire at the end of 2012. However, make sure to consider the investment potential of the asset. It may be wise to hold or sell the asset to maximize the economic gain or minimize the economic loss.

Watch Trading Activity In Your Portfolio

When your mutual fund manager sells stock at a gain, these gains pass through to you as realized taxable gains, even though you don’t withdraw them. So you may prefer a fund with low turnover, assuming satisfactory investment management. Turnover isn’t a tax consideration in tax-sheltered funds such as IRAs or 401(k)s. For growth stocks you invest in directly and hold for the long term, you pay no tax on the appreciation until you sell them. No capital gains tax is imposed on appreciation at your death.

 Use the Gift-Tax Exclusion to Shift Income

You can give away $13,000 ($26,000 if joined by a spouse) per donee in 2012 (same as 2011), per year without paying federal gift tax. You can give $13,000 to as many donees as you like. The income on these transfers will then be taxed at the donee’s tax rate, which is in many cases lower.

Note: Special rules apply to children under age 18. Also, if you directly pay the medical or educational expenses of the donee, such gifts will not be subject to gift tax.

Invest in Treasury Securities

For high-income taxpayers, who live in high-income-tax states, investing in Treasury bills, bonds, and notes can pay off in tax savings. The interest on Treasuries is exempt from state and local income tax. Also, investing in Treasury bills that mature in the next tax year results in a deferral of the tax until the next year.

Consider Tax-Exempt Municipal Bonds

Interest on state or local municipal bonds is generally exempt from federal income tax and from tax by the issuing state or locality. For that reason, interest paid on such bonds is somewhat less than that paid on commercial bonds of comparable quality. However, for individuals in higher brackets, the interest from municipal bonds will often be greater than from higher paying commercial bonds after reduction for taxes. Gain on sale of municipal bonds is taxable and loss is deductible. Tax-exempt interest is sometimes an element in computation of other tax items. Interest on loans to buy or carry tax-exempts is non-deductible.

 Give Appreciated Assets to Charity

If you’re planning to make a charitable gift, it generally makes more sense to give appreciated long-term capital assets to the charity, instead of selling the assets and giving the charity the after-tax proceeds. Donating the assets instead of the cash prevents your having to pay capital gains tax on the sale, which can result in considerable savings, depending on your tax bracket and the amount of tax that would be due on the sale. Additionally you can obtain a tax deduction for the fair market value of the property.

Tip: Many taxpayers also give depreciated assets to charity. Deduction is for fair market value; no loss deduction is allowed for depreciation in value of a personal asset. Depending on the item donated, there may be strict valuation rules and deduction limits.

Keep Track of Mileage Driven for Business, Medical or Charitable Purposes

If you drive your car for business, medical or charitable purposes, you may be entitled to a deduction for miles driven. For 2012, it’s 55.5 cents per mile for business, 23 cents for medical and moving purposes, and 14 cents for service for charitable organizations. You need to keep detailed daily records of the mileage driven for these purposes to substantiate the deduction.

Take Advantage of Your Employer’s Benefit Plans to Get an Effective Deduction for Items Such as Medical Expenses
Medical and dental expenses are generally only deductible to the extent they exceed 7.5% of your adjusted gross income (AGI). For most individuals, particularly those with high income, this eliminates the possibility for a deduction. You can effectively get a deduction for these items if your employer offers a Flexible Spending Account, sometimes called a cafeteria plan. These plans permit you to redirect a portion of your salary to pay these types of expenses with pre-tax dollars. Another such arrangement is a Health Savings Account. Ask your employer if they provide either of these plans.

Check Out Separate Filing Status

Certain married couples may benefit from filing separately instead of jointly. Consider filing separately if you meet the following criteria:

  • One spouse has large medical expenses, miscellaneous itemized deductions, or casualty losses.
  • The spouses’ incomes are about equal.
  • Separate filing may benefit such couples because the adjusted gross income “floors” for taking the listed deductions will be computed separately. On the other hand, some tax benefits are denied to couples filing separately. In some states, filing separately can also save a significant amount of state income taxes.

If Self-Employed, Take Advantage of Special Deductions

You may be able to expense up to $500,000 in 2011 for qualified equipment purchases for use in your business immediately instead of writing it off over many years. Additionally, self-employed individuals can deduct 100% of their health insurance premiums as business expenses. You may also be able to establish a Keogh, SEP or SIMPLE plan, or a Health Savings Account, as mentioned above.

 If Self-Employed, Hire Your Child in the Business

If your child is under age 18, he or she is not subject to employment taxes from your unincorporated business (income taxes still apply). This will reduce your income for both income and employment tax purposes and shift assets to the child at the same time; however, you cannot hire your child if he or she in under the age of 8 years old.

Take Out a Home-Equity Loan

Most consumer related interest expense, such as from car loans or credit cards, is not deductible. Interest on a home-equity loan, however, can be deductible. It may be advisable to take out a home-equity loan to pay off other nondeductible obligations.

Bunch Your Itemized Deductions

Certain itemized deductions, such as medical or employment related expenses, are only deductible if they exceed a certain amount. It may be advantageous to delay payments in one year and prepay them in the next year to bunch the expenses in one year. This way you stand a better chance of getting a deduction.

Tax Planning For Small Business Owners

Tax planning is the process of looking at various tax options in order to determine when, whether, and how to conduct business and personal transactions to reduce or eliminate tax liability.

Many small business owners ignore tax planning. They don’t even think about their taxes until it’s time to meet with their accountants, but tax planning is an ongoing process and good tax advice is a valuable commodity. It is to your benefit to review your income and expenses monthly and meet with your CPA or tax advisor quarterly to analyze how you can take full advantage of the provisions, credits and deductions that are legally available to you.

Although tax avoidance planning is legal, tax evasion – the reduction of tax through deceit, subterfuge, or concealment – is not. Frequently what sets tax evasion apart from tax avoidance is the IRS’s finding that there was fraudulent intent on the part of the business owner. The following are four of the areas most commonly focused on by IRS examiners as pointing to possible fraud:

  • Failure to report substantial amounts of income such as a shareholder’s failure to report dividends or a store owner’s failure to report a portion of the daily business receipts.
  • Claims for fictitious or improper deductions on a return such as a sales representative’s substantial overstatement of travel expenses or a taxpayer’s claim of a large deduction for charitable contributions when no verification exists.
  • Accounting irregularities such as a business’s failure to keep adequate records or a discrepancy between amounts reported on a corporation’s return and amounts reported on its financial statements.
  • Improper allocation of income to a related taxpayer who is in a lower tax bracket such as where a corporation makes distributions to the controlling shareholder’s children.

Tax Planning Strategies

Countless tax planning strategies are available to small business owners. Some are aimed at the owner’s individual tax situation and some at the business itself, but regardless of how simple or how complex a tax strategy is, it will be based on structuring the strategy to accomplish one or more of these often overlapping goals:

  • Reducing the amount of taxable income
  • Lowering your tax rate
  • Controlling the time when the tax must be paid
  • Claiming any available tax credits
  • Controlling the effects of the Alternative Minimum Tax
  • Avoiding the most common tax planning mistakes

In order to plan effectively, you’ll need to estimate your personal and business income for the next few years. This is necessary because many tax planning strategies will save tax dollars at one income level, but will create a larger tax bill at other income levels. You will want to avoid having the “right” tax plan made “wrong” by erroneous income projections. Once you know what your approximate income will be, you can take the next step: estimating your tax bracket.

The effort to come up with crystal-ball estimates may be difficult and by its very nature will be inexact. On the other hand, you should already be projecting your sales revenues, income, and cash flow for general business planning purposes. The better your estimates are, the better the odds that your tax planning efforts will succeed.

Maximizing Business Entertainment Expenses

Entertainment expenses are legitimate deductions that can lower your tax bill and save you money, provided you follow certain guidelines.

In order to qualify as a deduction, business must be discussed before, during, or after the meal and the surroundings must be conducive to a business discussion. For instance, a small, quiet restaurant would be an ideal location for a business dinner. A nightclub would not. Be careful of locations that include ongoing floor shows or other distracting events that inhibit business discussions. Prime distractions are theater locations, ski trips, golf courses, sports events, and hunting trips.

The IRS allows up to a 50% deduction on entertainment expenses, but you must keep good records and the business meal must be arranged with the purpose of conducting specific business. Bon appetite!

Important Business Automobile Deductions

If you use your car for business such as visiting clients or going to business meetings away from your regular workplace you may be able to take certain deductions for the cost of operating and maintaining your vehicle. You can deduct car expenses by taking either the standard mileage rate or using actual expenses.

The mileage reimbursement rates for 2012 are 55.5 cents a mile for business, 14 cents per charitable mile and 23 cents for moving and medical miles.

If you own two cars, another way to increase deductions is to include both cars in your deductions. This works because business miles driven is determined by business use. To figure business use, divide the business miles driven by the total miles driven. This strategy can result in significant deductions.

Whichever method you decide to use to take the deduction, always be sure to keep accurate records such as a mileage log and receipts. If you need assistance figuring out which method is best for your business, don’t hesitate to contact us. Happy driving!

Increase Your Bottom Line When You Work At Home

The home office deduction is quite possibly one of the most difficult deductions ever to come around the block. Yet, there are so many tax advantages it becomes worth the navigational trouble. Here are a few common tips for home office deductions that can make tax season significantly less traumatic for those of you with a home office.

Try prominently displaying your home phone number and address on business cards, have business guests sign a guest log book when they visit your office, deduct long-distance phone charges, keep a time and work activity log, retain receipts and paid invoices. Keeping these receipts makes it so much easier to determine percentages of deductions later on in the year.

Section 179 expensing allows you to immediately deduct, rather than depreciate over time, up to $139,000, with a cap of $560,000, in 2012 worth of qualified business property that you purchase during the year. The key word is “purchase”. Equipment can be new or used and includes certain software. All home office depreciable equipment meets the qualification. Also, if you purchase more than $139,000 in equipment, you can expense the first $139,000 then depreciate the rest. In addition, a “Bonus Depreciation” of 50 percent is allowed on qualified assets (new equipment only–no used equipment and no software) placed in service during 2012.

Some deductions can be taken whether or not you qualify for the home office deduction itself. Consider meeting with a tax professional to learn more about home office deductions.

Small Business Retirement Plan Options

According to the US Small Business Administration, small businesses employ half of all private sector employees in the United States. However, a majority of small businesses do not offer their workers retirement savings benefits.

If you’re like many other small business owners in the United States, you may be considering the various retirement plan options available for your company. Employer-sponsored retirement plans have become a key component for retirement savings. They are also an increasingly important tool for attracting and retaining the high-quality employees you need to compete in today’s competitive environment.

Besides helping employees save for the future, however, instituting a retirement plan can provide you, as the employer, with benefits that enable you to make the most of your business’s assets. Such benefits include:

  • Tax-deferred growth on earnings within the plan
  • Current tax savings on individual contributions to the plan
  • Immediate tax deductions for employer contributions
  • Easy to establish and maintain
  • Low-cost benefit with a highly-perceived value by your employees

Types of Plans

Most private sector retirement plans are either defined benefit plans or defined contribution plans. Defined benefit plans are designed to provide a desired retirement benefit for each participant. This type of plan can allow for a rapid accumulation of assets over a short period of time. The required contribution is actuarially determined each year, based on factors such as age, years of employment, the desired retirement benefit, and the value of plan assets. Contributions are generally required each year and can vary widely.

A defined contribution plan, on the other hand, does not promise a specific amount of benefit at retirement. In these plans, employees or their employer (or both) contribute to employees’ individual accounts under the plan, sometimes at a set rate (such as 5 percent of salary annually). A 401(k) plan is one type of defined contribution plan. Other types of defined contribution plans include profit-sharing plans, money purchase plans, and employee stock ownership plans.

Small businesses may choose to offer a defined benefit plan or any of these defined contribution plans. Many financial institutions and pension practitioners make available both defined benefit and defined contribution “prototype” plans that have been pre approved by the IRS. When such a plan meets the requirements of the tax code it is said to be qualified and will receive four significant tax benefits.

  1. The income generated by the plan assets is not subject to income tax, because the income is earned and managed within the framework of a tax-exempt trust.
  2. An employer is entitled to a current tax deduction for contributions to the plan.
  3. The plan participants (the employees or their beneficiaries) do not have to pay income tax on the amounts contributed on their behalf until the year the funds are distributed to them by the employer.
  4. Under the right circumstances, beneficiaries of qualified plan distributors are afforded special tax treatment.

It is necessary to note that all retirement plans have important tax, business and other implications for employers and employees. Therefore, you should discuss any retirement savings plan that you consider implementing with your accountant or other financial advisor.

Here’s a brief look at some plans that can help you and your employees save.

SIMPLE: Savings Incentive Match Plans for Employees of Small Employers

A SIMPLE plan allows employees to contribute a percentage of their salary each paycheck and to have their employer match their contribution. Under SIMPLE plans, employees can set aside up to $11,500 in 2012 (and 2011) by payroll deduction. If the employee is 50 or older then they may contribute an additional $2,500. Employers can either match employee contributions dollar for dollar – up to 3 percent of an employee’s wage – or make a fixed contribution of 2 percent of pay for all eligible employees instead of a matching contribution.

SIMPLE plans are easy to set up – you fill out a short form, administrative costs are low, and much of the paperwork is done by the financial institution that handles the SIMPLE plan accounts. Employers may choose either to permit employees to select the IRA to which their contributions will be sent, or to send contributions for all employees to one financial institution. Employees are 100% vested in contributions, get to decide how and where the money will be invested, and keep their IRA accounts even when they change jobs.

SEPs: Simplified Employee Pensions

A SEP allows employers to set up a type of individual retirement account – known as a SEP-IRA – for themselves and their employees. Employers must contribute a uniform percentage of pay for each employee. Employer contributions are limited to whichever is less: 25 percent of an employee’s annual salary or $50,000 in 2012. SEPs can be started by most employers, including those that are self-employed.

SEPs have low start-up and operating costs and can be established using a single quarter-page form. Businesses are not locked into making contributions every year. You can decide how much to put into a SEP each year – offering you some flexibility when business conditions vary.

401(k) Plans

401(k) plans have become a widely accepted savings vehicle for small businesses. Today, an estimated 25 million American workers are enrolled in 401(k) plans that hold total assets of about $1 trillion.

A 401(k) Plan allows employees to contribute a portion of their own incomes toward their retirement. The employee contributions, not to exceed $16,500 in 2011 ($17,000 for 2012), reduce a participant’s pay before income taxes, so that pre-tax dollars are invested. If the employee is 50 or older then they may contribute another $5,500 in 2011 and 2012. Employers may offer to match a certain percentage of the employee’s contribution, increasing participation in the plan.

While more complex, 401(k)plans offer higher contribution limits than SIMPLE plans and IRAs, allowing employees to accumulate greater savings.

Profit-Sharing Plans

Employers also may make profit-sharing contributions to plans that are unrelated to any amounts an employee chooses to contribute. Profit-sharing Plans are well suited for businesses with uncertain or fluctuating profits. In addition to the flexibility in deciding the amounts of the contributions, a Profit-Sharing Plan can include options such as service requirements, vesting schedules and plan loans that are not available under SEPs.

Contributions may range from 0% to 25% of eligible employees’ compensation, to a maximum of $49,000 in 2011 ($50,000 for 2012) per employee. The contribution in any one year cannot exceed 25% of the total compensation of the employees participating in the plan. Contributions need not be the same percentage for all employees. Key employees may actually get as much as 25%, while others may get as little as 3%. A plan may combine these profit-sharing contributions with 401(k) contributions (and matching contributions).

Your Goals for a Retirement Plan

Business owners setup retirement plans for different reasons. Why are you considering one? Do you want to:

  • Take advantage of the tax breaks, to save more money than you’d otherwise be able to?
  • Provide competitive benefits in addition to – or in lieu of – high pay to employees?
  • Primarily save for your own retirement?

You might say “all of the above.” Small employers who want to set up retirement plans generally fall into one of two groups. The first group includes those who want to set up a retirement plan primarily because they want to create a tax-advantage savings vehicle for themselves and thus want to allocate the greatest possible part of the contribution to the owners. The second group includes those who just want a low-cost, simple retirement plan for employees.

If there were one plan that was most efficient in doing all these things, there wouldn’t be so many choices. That’s why it’s so important to know what your goal is. Each type of plan has different advantages and disadvantages, and you can’t really pick the best ones unless you know what your real purpose is in offering a plan. Once you have an idea of what your motives are, you’re in a better position to weigh the alternatives and make the right pension choice.

If you do decide that you want to offer a retirement plan, you are definitely going to need some professional advice and guidance. Pension rules are complex, and the tax aspects of retirement plans can also be confusing. Make sure you confer with your accountant before deciding which plan is right for you and your employees.

7 Ways To Save Even More Income Taxes

1. Did you know you can use your previously funded IRA to fund the current year’s deductible contributions?
Well, you can. If you don’t have enough cash to make a deductible contribution to your IRA by April 15th, here is how you can still take the tax deduction for tax year 2012. To get started, all you need is an existing IRA.

Begin by having $6,000 distributed to you from your IRA. Most banks are required to hold 20% for income tax withholding, so you’ll actually receive $5,000. Once you have the $5,000, immediately deposit it back into your IRA. If you do this before April 17th, this counts as your deductible contribution for the year. The best part of this is that you have 60 days to “make up” the $6,000 withdrawal. To do this, simply deposit a $6,000 “rollback” into the same IRA account by June 14th to avoid taxes on the original $5,000 distribution made to you.

This is a type of short-term loan from your IRA to make this year’s deductible contribution before the April 17th due date; however, you can only do this once in a 12-month period. If you don’t replace the money within 60 days, you may owe income tax and a 10% withdrawal penalty if you’re under the age of 59 1/2.

Note: Not all banks realize it is required to withhold the 20% from the original $6,000 withdrawn from your IRA. Call to find out which way we can help you work with this “extra” amount. There are many options, so get informed before you miss out on the full benefits of your retirement plan.

2. Determine the “Best” Retirement Plan Option.
 As a self-employed small business owner, there are several retirement plan options available to you, but understanding which option is most advantageous to you can be confusing. The “Best” option for you may depend on whether you have employees and how much you want to save each year.

There are four basic types of plans:

  • Traditional and Roth IRAS
  • Simplified Employee Pension (SEP) Plan and Savings Incentive Match Plan for Employees (SIMPLE)
  • Self-employed 401(k)
  • Qualified and Defined Benefit Plans

We want to make sure you are getting the most out of your financial future, so contact us to determine your eligibility and to optimize the plan for you.

3. Have your landlord pay for leasehold improvements at your place of business.
Instead of paying for leasehold improvements at your place of business, you can ask your landlord to pay for them. In return, you offer to pay your landlord more in rent over the term of the lease. By financing your leasehold improvements this way, both you and your landlord can save money on taxes.

Ordinarily, you must deduct the cost of leasehold improvements made to your place of business over a 39-year period (similar to that of depreciating real estate), with one exception. Qualified leasehold improvements completed before 2008 are eligible for a special 15-year recovery period. If the year your lease term ends you move to another location, you can deduct the portion of the improvement cost you have not previously deducted. This normal scenario won’t save you tax in the earlier years of the lease. Your landlord will have to put up the initial cash for the improvements, but you will cover that over time with increased payments in your rent. Since your landlord will be paying for the improvements, you will save tax early in the lease and your landlord will benefit as well!

During the same time, your landlord will gain depreciation deductions for the cost of the leasehold improvements. When you leave, your landlord will still have the improved property to offer other future tenants. It is a great opportunity for a win-win situation giving you faster access to invested monies.

4. Save by deducting home entertainment expenses.
If you entertain at home for the purpose of business, and if a business discussion takes place during the entertainment, then the cost of entertaining at your home is a deductible expense. In general, you can deduct only 50% of your business-related entertainment expenses, but there are some exceptions. If you have any questions, please don’t hesitate to call us.

5. Deduct $25 for business gifts to associates without a receipt.
When you prepare your income tax return, don’t overlook the deductible benefit of business gifts during the holidays or at any other time of the year. Whether you are a rank-and-file employee, a self-employed individual, or even a shareholder-employee in your own corporation, you can deduct the cost of gifts made to clients and other business associates as a business expense. The law limits your maximum deduction to $25 in value for each recipient for which the gift was purchased with cash.

6. Deduct your home computer.
If you purchased a computer and use it for work-related purposes, you may be able to deduct the cost as long as you meet certain requirements: your computer must be used for convenience and as a condition of your employment, for instance if you telecommute two days a week and work in the office the other three days.

If you are self-employed, another deduction you can take advantage of even if you don’t claim the home office deduction, is the Section 179 expense election, which allows you to write off new equipment in the year it was purchased as long as it is used for business more than 50 percent of the time.

Please call us if you’re not sure whether you qualify for this deduction.

7. Have your company buy you dinner.
If you are in a partnership or a shareholder-employee in a regular C or S corporation, and you have to work overtime, your company can, on occasion, provide you with meal money for dinner. The cost of this “fringe benefit” is 100% deductible for your company under Section 132 of the Internal Revenue Code and you don’t have to pay personal income tax on the value of the meal.

Your company can pay directly for the meal or can instead, provide you with dinner money. But, in order for this to work, the amount of money you receive for your meal must be reasonable. If the IRS decides that the amount of money you received from your employer was unreasonable, the entire amount will be considered taxable personal income and will not be deductible.

We will be glad to answer your questions concerning deductible meals related to overtime and any other questions you might have about the Section 132 “de minimis” fringe benefit.

Business Travel And Entertainment Expenses

Don’t overpay your income taxes by overlooking expenses which you are entitled to deduct.

Use this Financial Guide to ensure you are handling your business travel and entertainment costs in a tax-wise manner.

Table of Contents

  • Travel Expenses
  • Entertainment Expenses
  • How Do You Prove Expenses Are “Directly Related”?
  • How Do You Meet The “Associated With” Test?
  • For Whom Can You Get The Deduction?
  • Recordkeeping And Substantiation Requirements
  • Employees “Fully Reimbursed”
  • Auto Expenses

This Financial Guide shows you how to take advantage of all of the travel and entertainment expenses you’re legally entitled to and offers guidance on which expenses are deductible and what percentage of them you can deduct. It also discusses the importance of following IRS rules for keeping records and substantiating your expenses in order to avoid an audit.

Travel Expenses

Tax law allows you to deduct two types of travel expenses related to your business, local and what the IRS calls “away from home”.

Local Transportation Costs

The cost of local business transportation includes rail fare and bus fare, as well as the costs of using and maintaining an automobile used for business purposes. For those whose main place of business is their personal residence, business trips from the home office and back are considered deductible transportation and not non-deductible commuting.

Note: Please see the special section below for the most effective ways of deducting auto expenses.

You generally cannot deduct lodging and meals unless you stay away overnight. Meals may be partially deductible as an entertainment expense, as discussed below.

Away From-Home Travel Expenses

You can deduct one-half of the cost of meals (50%) and all of the expenses of lodging incurred while traveling away from home. The IRS also allows you to deduct 100% of your transportation expenses–as long as business is the primary reason for your trip.

To be deductible, travel expenses must be “ordinary and necessary”, although “necessary” is liberally defined as “helpful and appropriate”, not “indispensable”. Deduction is also denied for that part of any travel expense that is “lavish or extravagant”, though this rule does not bar deducting the cost of first class travel, or deluxe accommodations or (subject to percentage limitations below) deluxe meals.

What does “away from home” mean?
To deduct the costs of lodging and meals (and incidentals-see below) you must generally stay somewhere overnight. In other words, away from your regular place of business longer than an ordinary day’s work and you need to sleep or rest to meet the demands of your work while away from home. Otherwise, your costs are considered local transportation costs, and the costs of lodging and meals are not deductible.

Where is your “home” for tax purposes?
The general view is that your “home” for travel expense purposes is your place of business or your post of duty. It is not where your family lives. (Some courts say it’s the general area of your residence).

Example: George’s family lives in Boston and George works in Washington, DC. George spends the weekends in Boston and the weekdays in Washington, where he stays in a hotel and eats out. For tax purposes, George’s “home” is in Washington, not Boston, therefore, he cannot deduct any of the following expenses: cost of traveling back and forth between Washington and Boston, cost of eating out in Washington, cost of staying in a hotel in Washington, or any costs incurred traveling between his hotel in Washington and his job in Washington (the latter are considered non-deductible commuting costs).

There are some rules in the tax law concerning where a taxpayer’s “home” is for purposes of deducting travel expenses that are less clear such as when a taxpayer works at a temporary site or works in two different places.

We’ll cover these rules briefly in these two examples:

Example #1: Joe, who lives in Connecticut, works eight months out of the year in Connecticut (from which he usually earns about $50,000) and four months out of the year in Florida (from which he usually earns about $15,000). Joe’s “tax home” for travel expense purposes is Connecticut. Therefore, the costs of traveling to and from the “lesser” place of employment (Florida), as well as meals and lodging costs incurred while working in Florida, are deductible.

Example #2: Susan works and lives in New York. Occasionally, she must travel to Maryland on temporary assignments, where she spends up to a week at a time. Assuming Susan’s employer does not reimburse her for travel expenses, she can deduct the costs of meals and lodging while she’s in Maryland, as well as the costs of traveling to and from Maryland. This holds true because her work assignments in Maryland are considered temporary, since they will end within a foreseeable time. If an assignment is considered indefinite, that is, expected to last for more than a year, under the tax law, travel, meal, and lodging costs are not deductible.

Here’s a list of some deductible away-from-home travel expenses:

  • Meals (limited to 50%) and lodging while traveling or once you get to your away-from-home business destination.
  • The cost of having your clothes cleaned and pressed away from home.
  • Costs for telephone, fax or modem usage.
  • Costs for secretarial services away-from-home.
  • The costs of transportation between job sites or to and from hotels and terminals.
  • Airfare, bus fare, rail fare, and charges related to shipping baggage or taking it with you.
  • The cost of bringing or sending samples or displays, and of renting sample display rooms.
  • The costs of keeping and operating a car, including garaging costs.
  • The cost of keeping and operating an airplane, including hangar costs.
  • Transportation costs between “temporary” job sites and hotels and restaurants.
  • Incidentals, including computer rentals, stenographers’ fees.
  • Tips related to the above.

However, many away-from-home travel expenses are not deductible or are restricted in some way.

These include:

  • Commuting expenses. The costs of traveling between your home and your job are not deductible.
  • Travel as a form of education. Trips that are educational in a general way, or improve knowledge of a certain field but are not part of a taxpayer’s job, are not deductible.
  • Costs of looking for a first job. If you are looking for a new job in your current field, you can deduct the travel expenses. Otherwise, you may not deduct them.
  • Seeking a new location. Travel costs (and other costs) incurred while you are looking for a new place for your business, or for a new business, must be capitalized and cannot be deducted currently.
  • Luxury water travel: If you travel using an ocean liner, a cruise ship, or some other type of “luxury” water transportation, the amount you can deduct is subject to a per-day limit.
  • Seeking foreign customers: The costs of traveling abroad to find foreign markets for existing products are not deductible.

Tip: Starting in 2008, travel (and other) costs incurred in unsuccessfully trying to acquire a specific business are currently deductible.

Entertainment Expenses

There are limits and restrictions on deducting meal and entertainment expenses. Most are deductible at 50%, there are a few exceptions. Meals and entertainment must be “ordinary and necessary” and not “lavish or extravagant” and directly related to or associated with your business. They must also be substantiated. (We’ll cover this below.) For employees who are “fully reimbursed” (see below), the limits are imposed on the employer, not the employee.

Your home is considered a place conducive to business. As such, entertaining at home may be deductible providing there was business intent and business was discussed. The amount of time that business was discussed does not matter. Likewise, if you hold a small party (less than 12 people) at your home and discuss business with your guests it may be deductible as well.

Reasonable costs for food and refreshments for year-end parties for employees, as well as sales seminars and presentations held at your home are 100% deductible.

If you rent a skybox or other private luxury box for more than one event, say for the season, at the same sports arena, you generally cannot deduct more than the price of a non-luxury box seat ticket. Count each game or other performance as one event. ). Deduction for those seats is then subject to the 50% entertainment expense limit.

If expenses for food and beverages are separately stated, you can deduct these expenses in addition to the amounts allowable for the skybox, subject to the requirements and limits that apply. The amounts separately stated for food and beverages must be reasonable.

Deductions are disallowed for depreciation and upkeep of “entertainment facilities”-yachts, hunting lodges, fishing camps, swimming pools, and tennis courts. Costs of entertainment provided at such facilities are deductible subject to entertainment expense limitations.

Dues paid to country clubs or to social or golf and athletic clubs are not deductible. Dues that you pay to professional and civic organizations are deductible as long as your membership has a business purpose. Such organizations include business leagues, trade associations, chambers of commerce, boards of trade, and real estate boards.

Tip: To avoid problems qualifying for a deduction for dues paid to professional or civic organizations, document the business reasons for the membership-the contacts you make and any income generated from the membership.

Entertainment costs, taxes, tips, cover charges, room rentals, maids and waiters are all subject to the 50% limit on entertainment deductions.

How Do You Prove Expenses Are “Directly Related”?

Expenses are directly related if you can show:

  • There was more than a general expectation of gaining some business benefit other than goodwill.
  • You conducted business during the entertainment.
  • Active conduct of business was your main purpose.

There is a presumption (in the eyes of the IRS) that events that take place in what it considers places non-conducive to doing business are not directly related to your business. These places include nightclubs, theaters, sporting events or cocktail parties. It also includes meetings with a group of people who are not business associates, at cocktail lounges, country clubs, or athletic clubs. However, you can overcome the presumption by showing that you engaged in a business discussion or otherwise conducted business during the event.

How Do You Meet The “Associated With” Test?”

Even if you can’t show that the entertainment was “directly related” as discussed above, you can still deduct the expenses as long as you can prove the entertainment was “associated” with your business. To meet this test, the entertainment must directly precede or come after a substantial business discussion. Further, you must have had a clear business purpose when you took on the expense.

For Whom Can You Get The Deduction?

The person entertained must be a business associate. That is, someone who could reasonably be expected to be a customer or conduct business with you, including an employee or professional advisor.

In circumstances where it’s customary to entertain a business associate with his or her spouse, and your spouse also attends, entertainment of both spouses is deductible, thanks to the “closely connected rule”.

Recordkeeping And Substantiation Requirements

Tax law requires you to keep records that will prove the business purpose and amounts of your business travel, entertainment, and local transportation costs.

Which Records You Must Keep

You must substantiate the following business expenses:

  • Travel expenses while away from home (including meals and lodging).
  • Entertainment and arranging recreational activities, and
  • Business gifts.

To substantiate these items, you must prove:

  • The amount.
  • The time and place of the travel, entertainment, or recreation, or the date and a description of the business gift.
  • The business purpose, and
  • The business relationship of the recipient of entertainment or gifts.

Tip: The most frequent reason for IRS’s disallowance of travel and entertainment expenses is the failure to show the place and business purpose of an item .Therefore, pay special attention to these aspects of your record-keeping.

Keeping a diary or log book–and recording your business-related activities at or close to the time the expense is incurred–is one of the best ways to document your business expenses.

Here’s how these rules apply to your record-keeping for travel expenses, entertainment expenses, and business gifts.

Away-from-home travel expenses. You must document the following for each trip:

  • The amount of each expense-e.g., the cost of each transportation, lodging and meal. (You can group similar types of incidentals together-i.e., “meals,” “taxis.”)
  • The dates of your departure and return and the number of days you spent on business.
  • Your destination.
  • The business reason for the travel or the business benefit you expect.

Entertainment expenses. You must prove the following for each claimed deduction for entertainment expenses:

  • The amount of each separate expense, though incidentals may be totaled on a daily basis.
  • The date of the entertainment.
  • The name, address, and type of entertainment-e.g., “dinner,” or “show”-but only if the type of entertainment is not obvious from the place name.
  • The business reason for the entertainment and the nature of any business discussion that took place. Note: For business meals, you do not have to write down the nature of the discussion, but you or your employee must be present.
  • The name, title, and occupation (showing business relation) of the people you entertained.

Business gifts. You must keep the following documentation for a business gift to substantiate the deduction:

  • The cost of the gift and the date it was made.
  • The business reason for the gift.
  • The name, title, and occupation of the recipient.
  • A description of the gift.

Employees “Fully Reimbursed” 

Employees who are “fully reimbursed” by their employers are not subject to the deduction limits discussed in this Financial Guide-their employers are. “Fully reimbursed” means that all the following occur:

  • You adequately account to your employer (see below).
  • You receive full reimbursement.
  • You were required to, and did, return any excess reimbursement.
  • In your Form W-2, Box 13 shows no amount with a Code L.

You adequately account to your employer by means of an expense account statement. If you are covered by (and follow) an “accountable plan,” and your reimbursements don’t exceed your expenses, you won’t have to report the reimbursements as gross income. Some per diem arrangements (by which you receive a flat amount per day) and mileage allowances can avoid detailed expense accounting to the employer, but proof of time, place and business purpose is still required.

However, if your employer’s reimbursement plan is not “accountable,” you must report the reimbursements as income, and you can then deduct the expenses you paid-but you must deduct them as employee business expenses, subject to the 2%-of-adjusted-gross-income floor.

If you are reimbursed under an expense account for travel, transportation, entertainment, gifts, and other business expenses, here are the record-keeping and reporting rules that apply. If you received an advance, allowance, or reimbursement for your expenses, how you report this amount and your expenses depends on whether the reimbursement was paid to you under an accountable plan or a non-accountable plan.

If you are covered by (and follow) an “accountable plan,” and your reimbursements don’t exceed your expenses, you won’t have to report the reimbursements as gross income.

However, if your employer’s reimbursement plan in not “accountable,” you must report the reimbursements as income, and you can then deduct the expenses you paid. You must deduct them as employee business expenses, subject to the 2%-of-adjusted-gross-income floor. An accountable plan is one in which (1) your expenses are business related, (2) you adequately account for these expenses to your employer within a reasonable time and (3) you return any excess reimbursement within a reasonable time.

 
Auto Expenses

Self-employed individuals and employees who use their cars for business but either don’t get reimbursed, or are reimbursed under an employer’s “non-accountable” reimbursement plan can deduct auto expenses. In the case of employees, expenses are deductible to the extent that auto expenses (together with other “miscellaneous itemized deductions”) exceed 2% of adjusted gross income.

If you use a car for business, you have two choices as to how to claim the deductions:

  • You can deduct the actual business-related costs of gas, oil, lubrication, repairs, tires, supplies, parking, tolls, chauffeur salaries, and depreciation, or
  • You can use the standard mileage deduction, which is an inflation-adjusted amount that is multiplied by the number of business miles driven.

Tip: Parking fees and tolls may be deducted no matter which method you use.

For some, the standard mileage rate produces a larger deduction. Others fare better tax-wise by deducting actual expenses. After we tell you about limits on auto depreciation, we’ll tell you how to determine which of these two methods is better for you tax-wise.

Expensing and depreciating vehicle costs: Deduction options and amounts depend on the percentage used for business. Also, if the car is used more than 50% for business, it can be included as business property and qualify for Section 179 expensing in the year of purchase. The deduction is reduced proportionately to the extent the car is used for personal purposes. If you take this deduction you can’t use the actual mileage for that vehicle in any year.

Depreciation: Assuming the car cost more than the Section 179 limit, or Section 179 is not available or is not claimed, depreciation is also allowed. Several depreciation options are available, but there are limits to the amount of depreciation that can be claimed per year. Depreciation otherwise allowable is reduced by the proportion of personal use (for example, a car used 20% for personal use is depreciated at 80% of the amount otherwise allowed). Accelerated depreciation–depreciation at a rate higher than that resulting from dividing the vehicle’s cost by the number of years it will be used–is not allowed where personal use is 50% or more.

Finally, if you claimed accelerated depreciation in a prior year and your business use then falls to 50% or less, you become subject to “recapture” of the excess depreciation (i.e., it’s included in income).

Of course, using the standard mileage deduction allows you to avoid these limits.

Determining whether to use the standard mileage deduction. If you opt for the standard mileage rate, you simply multiply current cents-per-mile rate by the number of business miles you drive for the year.

Be aware, however, that the standard mileage deduction may understate your costs. This is especially true for taxpayers who use the car 100% for business, or close to that percentage.

Caution: Once you choose the standard mileage rate, you cannot use accelerated depreciation even if you opt for the actual cost method in a later year. You may use only straight line.

Tip: The standard mileage method usually benefits taxpayers who have less expensive cars or who travel a large number of business miles To determine which method is better for you, make the calculations each way during the first year you use the car for business.

You may use the standard mileage for leased cars if you use it for the entire lease period. Or, you can deduct actual expenses instead, including leasing costs.

Recordkeeping:  This is best thing you can do to make the most of your auto deductions, not to mention essential to have this documentation in case of an audit. You won’t be able to determine which of the two options is better if you don’t know the number of miles driven and the total amount you spent on the car. Furthermore, the tax law requires that you keep travel expense records and that you give information on your return showing business versus personal use. If you use the actual cost method, you’ll have to keep receipts as well.

Tip: Consider using a separate credit card for business to simplify your record-keeping.

Tip: Don’t forget to deduct the interest you pay to finance a business-use car if you’re self-employed.

3 Things You Must Know When Starting A Business

Starting a new business is a very exciting and busy time. There is so much to be done and so little time to do it in. If you expect to have employees, there are a variety of federal and state forms and applications that will need to be completed to get your business up and running. That’s where we can help.

Employer Identification Number (EIN)

Securing an Employer Identification Number (also known as a Federal Tax Identification Number) is the first thing that needs to be done since many other forms require it. The fastest way to apply for an EIN is online through the IRS website or by telephone. Applying by fax and mail generally takes one to two weeks. Note that effective May 21, 2012 you can only apply for one EIN per day. The previous limit was 5.

State Withholding, Unemployment, and Sales Tax

Once you have your EIN, you need to fill out forms to establish an account with the State for payroll tax withholding, Unemployment Insurance Registration, and sales tax collections (if applicable).

Payroll Record Keeping

Payroll reporting and record keeping can be very time consuming and costly, especially if it isn’t handled correctly. Also keep in mind, that almost all employers are required to transmit federal payroll tax deposits electronically. Personnel files should be kept for each employee and include an employee’s employment application as well as the following:

Form W-4 is completed by the employee and used to calculate their federal income tax withholding. This form also includes necessary information such as address and social security number.

Form I-9 must be completed by you, the employer, to verify that employees are legally permitted to work in the U.S.

Home Based Businesses

Thanks to the rise of the Internet and other technology such as smartphones, tablets and iPads, more than 52 percent of businesses today are home-based–and that number is rising. Even people with full time jobs who are not self-employed, often take work home with them or telecommute one or more days a week.

Every day, people are striking out and achieving economic and creative independence by turning their skills into dollars. Garages, basements and attics are being transformed into the corporate headquarters of the newest entrepreneurs – home-based business people. And, with technological advances and a rising demand for “service-oriented” businesses, the opportunities seem to be endless.

This Financial Guide will discuss some of the basics you should consider in starting a home-based business. It does not attempt to cover all aspects of home-based businesses, but rather, addresses the general requirements of what’s needed to start up a business in your home.

Is a Home-Based Business Right for You?

Choosing a home business is like choosing a spouse or partner in that you should think carefully before starting the business. Instead of plunging right in, take time to learn as much about the market for any product or service as you can. Before you invest any time, effort, and money, take a few moments to answer the following questions:

  • Can you describe in detail the business you plan on establishing?
  • What will be your product or service?
  • Is there a demand for your product or service?
  • Can you identify the target market for your product or service?
  • Do you have the talent and expertise needed to compete successfully?

Before you dive head first into a home-based business, it’s essential that you know why you are doing it and how you will do it. To succeed, your business must be based on something greater than a desire to be your own boss: an honest assessment of your own personality, and understanding of what’s involved, and a lot of hard work. You have to be willing to plan ahead, and then make improvements and adjustments along the road. While there are no “best” or “right” reasons for starting a home-based business, it is vital to have a very clear idea of what you are getting into and why. Ask yourself these questions:

  • Are you a self-starter?
  • Can you stick to business if you’re working at home?
  • Do you have the necessary self-discipline to maintain schedules?
  • Can you deal with the isolation of working from home?

Working under the same roof that your family lives under may not prove to be as easy as it seems. It is important that you work in a professional environment; if at all possible, you should set up a separate office in your home. You must consider whether your home has the space for a business, and whether you can successfully run the business from your home.

Possible Legal Requirements

A home-based business is subject to many of the same laws and regulations affecting other businesses and you will be responsible for complying with them. There are some general areas to watch out for, but be sure to consult an attorney and your state department of labor to find out which laws and regulations will affect your business.

Zoning

Be aware of your city’s zoning regulations. If your business operates in violation of them, you could be fined or closed down.

Restrictions on Certain Goods

Certain products may not be produced in the home. Most states outlaw home production of fireworks, drugs, poisons, sanitary or medical products, and toys. Some states also prohibit home-based businesses from making food, drink, or clothing.

Registration and Accounting Requirements

You may need the following:

  • Work certificate or a license from the state (your business’s name may also need to be registered with the state)
  • Sales tax number
  • Separate business telephone
  • Separate business bank account

If your business has employees, you are responsible for withholding income, social security, and Medicare taxes, as well as complying with minimum wage and employee health and safety laws.

Planning Techniques

Money fuels all businesses. With a little planning, you’ll find that you can avoid most financial difficulties. When drawing up a financial plan, don’t worry about using estimates. The process of thinking through these questions helps develop your business skills and leads to solid financial planning.

Estimating Start-Up Costs

To estimate your start-up costs, include all initial expenses such as fees, licenses, permits, telephone deposit, tools, office equipment and promotional expenses.

Business experts say you should not expect a profit for the first eight to 10 months, so be sure to give yourself enough of a cushion if you need it.

Projecting Operating Expenses
Include salaries, utilities, office supplies, loan payments, taxes, legal services and insurance premiums. Don’t forget to include your normal living expenses. Your business must not only meet its own needs, but make sure it meets yours as well.

Projecting Income
It is essential that you know how to estimate your sales on a daily and monthly basis. From the sales estimates, you can develop projected income statements, break-even points and cash-flow statements. Use your marketing research to estimate initial sales volume.

Determining Cash Flow
Working capital–not profits–pays your bills. Even though your assets may look great on the balance sheet, if your cash is tied up in receivables or equipment, your business is technically insolvent. In other words, you’re broke.

Make a list of all anticipated expenses and projected income for each week and month. If you see a cash-flow crisis developing, cut back on everything but the necessities.

 

SIMPLE IRAs

Several different types of retirement plan – 401(k), defined benefit, and profit-sharing – can be made to suit a prosperous small business or professional practice. But if yours is a really small business such as a home-based, start-up, or sideline business, maybe you should consider adopting a SIMPLE IRA plan

A SIMPLE IRA is a type of retirement plan specifically designed for small business and is an acronym for “Savings Incentive Match Plans for Employees.” SIMPLE IRAs are intended to encourage small business employers to offer retirement coverage to their employees, but work just as well for self-employed persons without employees.

SIMPLE IRAs contemplate contributions in two steps: first by the employee out of salary, and then by the employer, as a “matching” contribution (which can be less than the employee contribution). Where SIMPLE Plans are used by self-employed persons without employees – as IRS expressly allows – the self-employed person is contributing both as employee and employer, with both contributions made from self-employment earnings. (One form of SIMPLE allows employer contributions without employee contributions. The ceiling on contributions in this case makes this SIMPLE option unattractive for self-employed individuals without employees.)

Note: If you establish a SIMPLE 401(k) Plan, you:

    • Must have 100 or fewer employees.
    • Cannot have any other retirement plans.
    • Need to annually file a Form 5500.
    • Employees must earn $5,000 a year.

A Quick list of pros and cons:

  • Plan is not subject to the discrimination rules that everyday 401(k) plans are.
  • Employees are fully vested in all contributions.
  • Straightforward benefit formula allows for easy administration.
  • Optional participant loans and hardship withdrawals add flexibility for employees.
  • No other retirement plans can be maintained.
  • Withdrawal and loan flexibility adds administrative burden for the employer.

How Much You Can Put in and Deduct

Those with relatively modest earnings will find that a SIMPLE lets them contribute (invest) and deduct more than other plans. With a SIMPLE, you can put in and deduct some or all of your self-employed business earnings. The limit on this “elective deferral” is $11,500 in 2012 (same as 2011). This limit is expected to be adjusted for inflation in future years.

If your earnings exceed that limit, you could make a modest further deductible contribution–specifically, your matching contribution as employer. Your employer contribution would be 3% of your self-employment earnings, up to a maximum of the elective deferral limit for the year. So employee and employer contributions for 2012 can’t total more than $23,000 ($11,500 maximum employee elective deferral, plus a maximum $11,500 for the employer contribution.)

Catch up contributions: Owner-employees age 50 or over can make a further deductible “catch up” contribution as employee. This is $2,500 in 2012 (same as 2011).

Example: An owner-employee age 50 or over in 2012 with self-employment earnings of $40,000 could contribute and deduct $11,500 as employee plus a further $2,500 employee catch up contribution, plus $1,200 (3% of $40,000) employer match, or a total of $15,200.

Low-income owner-employees in SIMPLE IRAs may also be allowed a tax credit up to $1,000 in 2012 (same as 2011). Income must not be more than $57,500 for married filing jointly, $28,750 for singles, and $43,125 for heads of household.

SIMPLE IRA plans are an excellent choice for home-based businesses and ideal for full-time employees or homemakers who make a modest income from a sideline business.

If living expenses are covered by your day job (or your spouse’s job), you would be free to put all of your sideline earnings, up to the ceiling, into SIMPLE retirement investments.

Keogh plans could allow you to contribute more, often much more, than SIMPLE Plans. For example, if you are under 50 with $50,000 of self-employment earnings in 2012, you could contribute $11,500 as employee to your SIMPLE plus a further 3% of $50,000 as an employer contribution, for a total of $13,000. A Keogh 401(k) plan would allow a $29,500 contribution.

With $100,000 of earnings, it would be a total of $14,500 with a SIMPLE and $42,000 with a 401(k).

Withdrawal: Easy, but Taxable

There’s no legal barrier to withdrawing amounts from your SIMPLE, whenever you please. There can be a tax cost, though: Besides regular income tax, the 10% penalty tax on early withdrawal (generally, withdrawal before age 59 1/2) rises to 25% on withdrawals in the first two years the SIMPLE IRA is in existence.

A Simple Plan

A SIMPLE IRA plan really is simpler to set up and operate than most other plans. Contributions go into an IRA you set up. Those familiar with IRA rules investment options, spousal rights, and creditors’ rights don’t have a lot new to learn.

Requirements for reporting to the IRS and other agencies are negligible, at least for you, the self-employed person. Your SIMPLE plan’s trustee or custodian, typically an investment institution, has reporting duties and the process for figuring the deductible contribution is a bit simpler than with other plans.

What’s Not So Good about SIMPLE Plans

We’ve seen that other plans can do better than SIMPLE once self-employment earnings become significant. Other not-so-good features:

Because investments are through an IRA, you’re not in direct control. You must work through a financial or other institution acting as trustee or custodian, and will in practice have fewer investment options than if you were your own trustee, as you could be in a Keogh. For many self employed individuals however, this won’t be an issue. In this respect, a SIMPLE IRA is like the SEP-IRA.

Other plans for self-employed persons allow a deduction for one year (say 2011) if the contribution is made the following year (2012) before the prior year’s (2011) return is due (April 2012 or later extensions). This rule applies with SIMPLE IRAs, for the matching (3% of earnings) contribution you make as employer. But there’s no IRS pronouncement on when the employee’s portion of the SIMPLE is due where the only employee is the self-employed person. Those who want to delay contribution would argue that they have as long as it takes to compute self-employment earnings for 2011 (though not beyond the 2011 return due date, with extensions).

Tip: The sooner your money goes in the plan, the longer it’s working for you tax-free. So delaying your contribution isn’t the wisest financial move.

It won’t work to set up the SIMPLE plan after a year ends and still get a deduction that year, as is allowed with SEPs. Generally, to make a SIMPLE plan effective for a year it must be set up by October 1 of that year. A later date is allowed where the business is started after October 1; here the SIMPLE must be set up as soon thereafter as administratively feasible.

There’s this problem if the SIMPLE is for a sideline business and you’re in a 401(k) in another business or as an employee: The total amount you can put into the SIMPLE and the 401(k) combined can’t be more than $17,000 in 2012 ($16,500 in 2011)–$22,500 if catch up contributions are made to the 401(k) by one age 50 or over. So someone who is under age 50 who puts $8,000 in her 401(k) can’t put more than $9,000 in her SIMPLE IRA in 2012. The same limit applies if you have a SIMPLE IRA while also contributing as an employee to a “403(b) annuity” (typically for government employees and teachers in public and private schools).

 
How to Get Started in a SIMPLE

You can set up a SIMPLE IRA on your own by using IRS Form 5304-SIMPLE or Form 5305-SIMPLE, but most people turn to financial institutions. SIMPLE IRAs are offered by the same financial institutions that offer IRAs and Keogh plans.

You can expect the institution to give you a plan document (approved by IRS or with approval pending) and an adoption agreement. In the adoption agreement you will choose an “effective date” – the beginning date for payments out of salary or business earnings. That date can’t be later than October 1 of the year you adopt the plan, except for a business formed after October 1.

Another key document is the Salary Reduction Agreement, which briefly describes how money goes into your SIMPLE IRA. You need such an agreement even if you pay yourself business profits rather than salary.

Printed guidance on operating the SIMPLE IRA may also be provided. You will also be establishing a SIMPLE IRA account for yourself as participant.

Keogh SEP SIMPLE
Plan type: Can be defined benefit or defined contribution (profit-sharing or money purchase) Defined contribution only Defined contribution only
Owner may have two or more plans of different types, including a SEP, currently or in the past Owner may have SEP and Keoghs Generally, SIMPLE is the only current plan
Plan must be in existenceby the end of the year for which contributions are made Plan can be set up later–if by the due date (with extensions) of the return for the year contributions are made Plan generally must be in existence by October 1st of the year for which contributions are made
Dollar contribution ceiling (for 2012): $50,000 for defined contribution plan; no specific ceiling for defined benefit plan $50,000 $23,000
Percentage limit on contributions: 50% of earnings, for defined contribution plans(100% of earnings after contribution). Elective deferrals in 401(k) not subject to this limit. No percentage limit for defined benefit plan. 50% of earnings (100% of earnings after contribution). Elective deferrals in SEPs formed before 1997 not subject to this limit. 100% of earnings, up to $11,500 for 2012 for contributions as employee; 3% of earnings, up to $11,500 for contributions as employer
Deduction ceiling: For defined contribution, lesser of $50,000 or 20% of earnings (25% of earnings after contribution). 401(k) elective deferrals not subject to this limit. For defined benefit, net earnings. Lesser of $50,000 or 20% of earnings (25% of earnings after contribution). Elective deferrals in SEPs formed before 1997 not subject to this limit. Maximum contribution $11,500 (in 2012)
Catch up contribution 50 or over: Up to $5,500 in 2012 for 401(k)s Same for SEPs formed before 1997 Half the limit for Keoghs, SEPs (up to $2,750 in 2012)
Prior years’ service can count in computing contribution No No
Investments: Wide investment opportunities. Owner may directly control investments. Somewhat narrower range of investments. Less direct control of investments. Same as SEP
Withdrawals: Some limits on withdrawal before retirement age No withdrawal limits No withdrawal limits
Permitted withdrawalsbefore age 59 1/2 may still face 10% penalty Same as Keogh rule Same as Keogh rule except penalty is 25% in SIMPLE Plan’s first two years
Spouse’s rights: Federal law grants spouse certain rights in owner’s plan No federal spousal rights No federal spousal rights
Rollover allowed to another plan (Keogh or corporate), SEP or IRA, but not a SIMPLE. Same as Keogh rule Rollover after 2 years to another SIMPLE and to plans allowed under Keogh rule
Some reporting duties are imposed, depending on plan type and amount of plan assets Few reporting duties Negligible reporting duties