Tax Law Advisors - Managing Your Business & Your Life: Articles, Tools & Resources You Can't Afford To Miss!

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Choosing the form of entity under which a business will operate is one of the first, and often the most important, decisions a business owner will make. Although the legal details underlying each entity type are inherently complex, exploring three major variables may help you determine which option is right for you: business control, owner liability, and tax implications.

The major business alternatives today include:

Sole Proprietorship

Partnership

C-Corporation

S-corporation

Limited Liability Company

The following comparison illustrates the most dramatic differences, and similarities, between several entity alternatives.

Sole Proprietorship. As its name implies, a sole proprietorship has a single owner, and is perhaps the most simplistic of all entity types. The main benefits of the sole proprietorship include its ease of implementation and lack of regulatory requirements. In addition, the sole proprietorship allows complete business control to a single business owner (proprietor). Under a sole proprietorship, the business owner is required to file a Schedule C (profit or loss from a business or profession) with their personal income tax filing. The proprietor personally assumes all liability and business risk, which can often be "transferred" through the purchase of liability insurance.

Partnership. The main difference between the sole proprietorship and the partnership is the number of business owners. Although quite easy to establish, it is a good idea to begin a partnership with a formal arrangement known as the partnership agreement. The partnership agreement sets forth the intent of the business owners in the event of a wide variety of business events such as the sale of the entire business, the sale of a single individual's holdings or the disposition of ownership in the event of the death of a partner.

Like the sole proprietorship, the partnership represents a "flow-through entity" where both cash flows and tax liabilities flow through to the business owners. The partnership provides its owners minimal protection from business risk.

C-corporation. Though often costly and time-consuming to establish and maintain, the C-corporation provides the greatest amount of liability and business risk protection to the business owner(s). Strict governmental regulations outline company structure, reporting, and disclosure requirements.

Corporations have unlimited lives with ownership rights passing to designated heirs upon the death of an owner. The corporate entity also has a great deal of income tax flexibility and can offer the broadest array of tax deductible benefits, but may also trigger "double taxation" of some corporate profits as they are taxed at the corporate level as profits and again, potentially, at the individual level as taxable dividends are paid to shareholders.

S-Corporation. The "S Corp" functions as something of a hybrid, assuming many of the best features of several other entity types. The S Corporation is a legal entity that offers owners the benefits of greatly limited liability, while allowing company profits or losses to flow directly through to the business owners for income tax purposes, thus avoiding potential double taxation. The legal requirements and costs associated with starting an S Corporation are modest, as are the regulatory requirements. There are limitations on the number of owners within an S Corporation, and a C Corporation may not be an owner.

Limited Liability Company. Like the S Corporation, the Limited Liability Company (LLC) combines many of the benefits of other entity types. In contrast to the proprietorship and partnership, the LLC provides its owners (or members) with limited liability for the debt and business risk associated with ownership. The LLC also avoids the "double taxation" of the corporation by functioning as a "flow-through entity" for income tax purposes.

Selecting a business entity can be a complex decision with long-term effects on the ownership, owner liability and taxation of a business. Once you have prepared a business plan and evaluated your business ownership goals, consider seeking the advice of trusted financial professionals and advisors in finalizing your final selection of business entity.

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Source: Financial Visions, Inc.

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With the rise of cell phones and the Internet - not to mention a growing fluidity to employment situations - more Americans are choosing to telecommute and work from home.

The tax deduction for home-office expenses is among the most misunderstood and misused (if not unused) tax questions faced by those who work from home. One of the enduring myths is that the deduction is a good way to trigger an IRS audit. This article seeks to clarify the deduction and put those fears to rest for whom the home-office tax deduction is a legitimate business expense.

When Can Home Office Expenses Be Deducted?

The costs associated with maintaining a home office can be deducted only if strict IRS guidelines are met - generally that the office is used exclusively for business purposes. A spare bedroom where your mother-in-law stays while visiting from out of town, a corner of your downstairs family room, the nook in your master bedroom ... these types of home-office spaces rarely qualify under IRS rules.

The Taxpayer Relief Act of 1997 has eased the requirements for determining if the costs associated with a home office can be deducted. The new law states that a home office qualifies as a "principal place of business" if (1) the taxpayer uses the office to conduct administrative or management activities of a trade or business and (2) there is no other fixed location of the trade or business where the taxpayer conducts substantial administrative or management activities of the trade or business.

Deductions will continue to be allowed for a home office meeting the above two-part test only if the taxpayer uses the office exclusively on a regular basis as a place of business and, in the case of an employee, only if such exclusive use is for the employer's convenience.

Home Office Deduction Limits

The home office deduction is limited to the gross income from the activity, reduced by expenses that would otherwise be deductible (such as mortgage interest and taxes) and all other expenses related to the activities that are not house-related. A deduction isn't allowed to the extent that it creates or increases a net loss from the activity. Any disallowed deduction may be carried over to future years.

As part of its stated mission to be "kinder and gentler" to taxpayers, the IRS has eased guidelines somewhat on those taking deductions for their home offices. However, it's a good idea to solicit the advice of a knowledgeable professional to ensure you meet all the requirements before taking this deduction. We can help.

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Source: Financial Visions, Inc.

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Under the Jobs and Growth Tax Relief Reconciliation Act of 2003, generating long-term capital gains or investing for dividend income could be two of your big opportunities to save on taxes. Be aware that the Act of 2003 created "sunset provisions," however, meaning that the tax rates on both capital gains and dividends may go up again unless congress acts to extend the rates. The lower rates are currently only legislated through 2008, although many observers believe these rates will eventually be made permanent.

Capital Gains

Rates: The maximum tax rate on net capital gains from assets held 12 months or more has been reduced to 15% (from 20%) for most taxpayers and reduced to 5% (from 10%) for taxpayers in the 10% and 15% tax rate brackets for property sold or otherwise disposed of after May 5, 2003 (and installment sale payments received after that date). The reduced rate applies for both the regular tax and the alternative minimum tax.

(Note: The higher rates that apply to unrecaptured section 1250 gain, collectibles gain, and section 1202 gain have not changed.)

Tax Treatment of Capital Losses: If you incur losses from the sale of a capital asset, you can deduct those losses to the extent they offset capital gains from the sale of other assets. If your losses exceed your gains, you can only deduct up to $3,000 ($1,500 if you are married and filing separately) of capital losses in a tax year against other income on Form 1040. You can carry losses forward and continue to deduct $3,000 ($1,500 if filing separately) annually against other income until your losses are used up.

Other Issues: A long-term gain generally applies to assets held for a minimum of one year or more. Short-term capital gains are considered as part of your Adjusted Gross Income (AGI) and taxed at your ordinary income tax rate. Investors must avoid "wash sales" (selling and repurchasing the same or virtually the same asset), and you should also be aware of potential Alternative Minimum Tax (AMT) implications of taking large capital gains.

Dividends

Changes Create Tax Savings Opportunities: In the past, dividend income was treated as just another source of ordinary income, and taxed at your normal tax rate. Now, the same 15% (or 5%) maximum tax rate that applies to net capital gain also applies to dividends paid by most domestic and foreign corporations after December 31, 2002.

For taxpayers in higher brackets, this represents a significant reduction. Certain dividends from regulated investment companies such as mutual funds, real estate investment trusts, and certain foreign corporations do not qualify for the reduced rates. There are also some holding requirements, consult your tax professional for more details.

As with capital gains, the Tax Relief Act of 2003 also created "sunset provisions" for dividend rates, so tax rates may go up again unless Congress acts to extend the rate reductions. The lower rates are currently only legislated through 2008.

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Source: Financial Visions, Inc.

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~Tax Law Advisors provides customized pre-tax planning today, so Corporations and their Owners can enjoy a better tomorrow.~

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For the small-business owner, attracting and retaining valuable employees can be a daunting challenge. One way to make working for your business more attractive to current and potential employees alike is to implement a qualified retirement plan for you and your employees. Besides greater appeal to your workers, qualified plans can also provide you with numerous tax advantages, including:

Contributions for all participants are 100% tax-deductible to the business up to certain limits.

Annual contributions by the business are not considered taxable income to the plan participants.

Capital gains and interest earned are deferred from taxation during the accumulation years. Income taxes are payable upon withdrawal.

At retirement, favorable tax treatments may apply such as spreading payments over the participant's lifetime and special averaging formulas.

Non-Tax Advantages

In addition to the obvious tax and employee hiring/retention advantages, there are many other, equally important, reasons to implement a qualified plan. For example, plan assets are creditor-proof. The assets of the plan are not subject to malpractice lawsuits or bankruptcy rulings.

These and other advantages combine to help improve morale as the participants realize that their company provides the mechanism to help secure their retirement.

Types of Plans

The two most common types of qualified retirement plans are pension and profit-sharing plans. A business can also sponsor an IRA or SEP (simplified employee pension plan).

Pension Plans. There are three major types of pension plans -- defined benefit, money purchase, and target benefit.

1. A defined benefit plan is one where the retirement benefit is determined by a plan formula - usually based on years of service.

2. A money purchase pension plan is one where the plan formula specifies the percentage of each participant's compensation that will be contributed each year.

3. A target benefit plan is a hybrid. It starts out as a defined benefit plan, which determines the benefit. Once the benefit is calculated, the plan converts to a defined contribution or money purchase plan.

Profit-Sharing Plans. The most popular type of profit-sharing plans is 401(k) plans. Elective deferrals to these plans are limited to $15,000 for the year 2006 ($20,000 for people 50 years of age and older, including catch-up provisions). Annual contributions to a profit-sharing plan are generally not required; instead, they can be discretionary each year.

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Source: Financial Visions, Inc.

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