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Tax Tip of the Week | What Type of Entity Should I Be? October 30, 2019

Posted by bradstreetblogger in : Business consulting, Depreciation options, General, Tax Planning Tips, Tax Tip, Taxes , add a comment

Clients who are starting a business often ask us “What type of entity should I be?” While there is no definitive answer, this tax tip will cover some of the more common choices that can be made, and some of the concerns and tax treatment of those choices.

When an individual starts a business and is the only owner, if that person does nothing else tax-wise, the business is treated as a sole-proprietorship, meaning the taxpayer files a Schedule C as part of his or her annual Form 1040. If two or more people start a business, and do nothing else, the business is treated as a partnership, and files a partnership return, Form 1065.

Many clients are concerned about legal protection and will ask “Should we incorporate?” The answer, as it is with most tax questions, is “it depends”. While corporations arguably provide the most legal protection of any entity, they are also a bit more costly to form than other entities, and can be a bit more cumbersome to operate. According to Nellie Akalp, in an article published in the CPA Practice Advisor on October 10, 2019, she states “the law requires a corporation to:

•    Select a Board of Directors, meet with the board regularly and keep detailed meeting minutes.
•    Formally register the business by filing Articles of Incorporation with the state.
•    Obtain a Tax ID Number or Employer Identification Number (EIN) from the IRS.
•    Draft corporate bylaws.  Corporate bylaws are the official rules for operating and managing the company, proposed and voted on by the Board.”

Prior to 2018, corporate tax rates were graduated, the highest rate being 35%. The Tax Cuts and Jobs Act (TCJA) enacted in late 2017, changed the corporate tax rate to a flat 21% which was good for some, but not all. Corporations making less than $50,000 per year actually got a tax increase. Previously, the tax rate for this bracket was 15% so these corporations now have to pay 6% more in federal tax. Another consideration is the “double-taxation” of money taken out by the owners. Dividends paid to shareholders are not deductible by the corporation, and are taxed to the recipient.

For those who don’t want the formalities and expense of forming and operating a C corporation, forming a Limited Liability Company (LLC) can be an attractive alternative.  We have had new clients tell us they are incorporated, which we usually verify on the Ohio Secretary of State’s website, only to find out they are really an LLC. An LLC is not an incorporated entity, but does provide a layer of protection. If a business is sued, and has not incorporated or become an LLC, the owner’s personal assets can be at risk. A single-member LLC, absent any other elections, files a Schedule C, just as a sole-proprietor does. A multi-member LLC, absent any elections, files a partnership return, Form 1065. If desired, a single-member or multi-member LLC can elect to be taxed as a corporation by filing IRS Form 8832, Entity Classification Election.

Another election that can be made by either an LLC, or a corporation, is the election to be taxed as an S Corporation. This is just a taxation election and doesn’t change the type of entity making the election. The election is made by filing Form 2553, Election by a Small Business Corporation. The title of this form is somewhat of a misnomer because it indicates that only a corporation can make the election. Not only can small corporations make the election, but so can LLC’s.

Dividends paid by an S corporation (normally called distributions when made by an S corporation) generally are not taxable to the recipients (unless there are basis issues), which avoids the double-taxation issue of C corporations. The net profits of an S corporation are not taxed at the corporate level, but instead are passed through to the owners, and are taxed on their individual returns, regardless of whether any distributions were made. And this net profit is not subject to self-employment tax (FICA taxes) as is Schedule C income and partnership income reported by an active individual. Not all of the S corporation’s profits can be taken as distributions however. The IRS requires owners who are active in the business to take a reasonable salary. The salary, of course, has FICA taxes withheld, and the company has to pay matching FICA taxes as with any employee.

According to Nellie Akalp, “To qualify for S-Corp status:

•    The business must be a U.S. corporation or LLC
•    It can maintain only one class of stock
•    It’s limited to 100 shareholders or less
•    Shareholders must be individuals, estates or certain qualified trusts
•    Each shareholder must consent in writing to the S Corporation election
•    Each shareholder must be a U.S. Citizen or permanent resident alien with a valid United States Social Security number
•    The business must have a tax year ending on December 31”

The TCJA provided for a new deduction beginning in 2018 called the Qualified Business Income Deduction. This deduction is available for most types of “pass-through” business income and is limited to 20% of qualified business income provided certain qualifications are met. Because it is for “pass-through” income, C corporations do not get any benefit. Most other types of business income do qualify, such as sole-proprietors, partnerships, LLC’s and S corporations. So this is yet another consideration when deciding on the type of entity a business should be.

As you can see, there are several types of entities and quite a bit to consider when making the entity choice. Hopefully this article helps to give you some perspective.

Credit given to Nellie Akalp for the excerpts taken from her article “Why Small Businesses May Want to Consider Electing S Corp Status” published in the CPA Practice Advisor on October 10, 2019.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This Week’s Author – Norman S Hicks, CPA

–until next week.

Tax Tip of The Week | Did You Know All Ohio Businesses Must File An Annual Report of Unclaimed Funds? October 23, 2019

Posted by bradstreetblogger in : Business consulting, General, Tax Planning Tips, Tax Tip, Taxes, Uncategorized , add a comment

It’s that time of year again…

Time to report unclaimed funds! This one really gets business owners excited (sarcasm intended).

As stated by the Ohio Department of Commerce, “All businesses that are located and/or operate in the State of Ohio, or hold funds due to Ohio residents, are required to file an Annual Report of Unclaimed Funds.”

Unclaimed Funds Reports are due by November 1st.

The Ohio Treasury wants Ohioans to recover money that is rightfully theirs. Every year 200,000 Ohioans lose track of their funds. They either put money in financial institutions and forget about it, or simply cannot track it in their records.

What is the Division of Unclaimed Funds?

The Ohio Department of Commerce, Division of Unclaimed Funds exists to protect money lost by Ohioans in various financial institutions, find the people the money belongs to, and then returns it as quickly as possible. More than $1 billion currently is in the custody of the Division of Unclaimed Funds. The Ohio Treasury makes Ohioans aware of the Division of Unclaimed Funds, so that they get back money rightfully theirs. You can perform a search using the following link:

SEARCH UNCLAIMED FUNDS

What types of accounts qualify as unclaimed funds?

We have a document from the Ohio Department of Commerce that helps explain what qualifies as “unclaimed funds,” as well as how to report them, here:

 HOW TO FILE AN UNCLAIMED FUNDS REPORT

Even if you have no unclaimed funds to report, a negative report must be filed.

What happens if your Ohio-based company does not report?

According to the Ohio Department of Commerce:

“For failing to report unclaimed funds or underreporting unclaimed funds, the company may incur civil penalties of $100.00 per day. The company may also have to pay interest at a rate up to 1% per month on the balance of unclaimed funds due per Ohio Revised Code section 169.12.”

What is NAUPA?

The National Association of Unclaimed Property Administrators (NAUPA) is a non-profit organization that maintains a national database, called Missing Money, to help people find unclaimed property.

MISSING MONEY

For additional assistance, contact the Ohio Department of Commerce’s Division of Unclaimed Funds at 1-877-644-6823.

Still struggling in determining how to file an Unclaimed Funds Report?

At Bradstreet & Associates and Bradstreet & Company CPAs, we’re here to help. If you need assistance filing your report, please call our Xenia office at 937-372-3504 or our Centerville office at 937-436-3133.

A complete information booklet on Reporting Unclaimed Funds is available here:
http://www.com.ohio.gov/documents/unfd_AnnualReportOfUnclaimedFunds.pdf

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.  

This Week’s Co-Authors – Bobbie Haines & Linda Johannes, CPA

–until next week.

Tax Tip of the Week | Could You or Someone You Know Be Missing Out On Earned Income Credit? October 16, 2019

Posted by bradstreetblogger in : Deductions, General, Tax Deadlines, Tax Planning Tips, Tax Tip, Taxes , add a comment

The Earned Income Tax Credit aka EIC is a benefit in the form of an income tax credit designed for working people with low to moderate income. To be eligible, one must meet certain requirements including filing an income tax return even if a tax return was not otherwise necessary to file. EIC is a refundable tax credit which means that a refund may be due you even if a tax liability did not exist. This credit may be as much as $6,431 so we can be talking about some real money. Although, the calculation is not complex, there are enough moving parts that estimating it short of preparing the income tax return is difficult. Many people miss out on this credit by not filing. Too often, a taxpayer looks at the tax return filing requirements and concludes filing a return is not necessary because their income is below the filing threshold. In many of these instances, the taxpayer may be walking away from a very significant refund.

The below Detroit Free Press article by Susan Tomporat was published on February 7, 2019. It provides additional information on the Earned Income Credit.

                                                     -Mark Bradstreet

The Earned Income Tax Credit is the biggest single check many working families see in a year. But they have to file a tax return — and be aware of the credit — to get the money.

Three years ago, low- to moderate-income households in Detroit left upwards of $80 million in unclaimed money by not claiming the credit. It was estimated that about 26,000 Detroit households were eligible for the credit but did not file tax returns to apply.

After a targeted awareness campaign that began in 2017, though, city officials say an average of 13,500 more Detroit residents each year have claimed their EITC. On average, $63 million more is being claimed each year. 

About $300 million has been claimed on average annually for the 2016 and 2017 tax years by Detroiters. The average EITC Refund: $4,600. The amounts represent a combination of state and federal earned income tax credits. 

Nearly 88,000 returns for Detroiters included the Earned Income Tax Credit. 

“It was a blessing to learn about this tax credit,” said Renee Perkins, 29, who works at MGM Grand Detroit at game tables dealing cards.

Perkins, a single mother with two children ages 7 and 1, expects to receive a tax refund of about $6,000 this year for state and federal taxes. It’s money she plans to save and use one day toward opening her own business offering assisted living to the elderly.

In the past, she has used the credit to pay down her debt and also put a down payment on a home once owned by the Detroit Land Bank.

“The extra cash helped me to accomplish a lot,” she said Tuesday as part of an awareness campaign event held at Focus: HOPE in Detroit.

Even so, the credit still remains overlooked by thousands of families. Here’s what you need to know:

Who qualifies to get the credit?

You must have earned income from a job and meet other requirements. For example, both your earned income and your adjusted gross income must be less than $45,802 in 2018 to qualify if you are single and have two qualifying children.

The limit is less than $51,492 for married couples filing a joint return with two qualifying children.

What’s the credit worth? 

The credit, for example, can be worth up to $6,431 this year for a working couple who qualifies with three or more children. 

But the size of the tax refund would vary considerably depending on your income, filing status and the number of qualifying children claimed on the tax return. 

To claim the credit, a tax return must be filed. 

The refundable tax credit enables tax filers to get back more from the federal government than you paid in taxes, so there’s a good chance for a significant refund. 

Nationwide, 25 million eligible workers and families received about $63 billion in the Earned Income Tax Credit during 2018. 

The average amount of EITC received nationwide was about $2,488.

Do you need a child to get the credit? 

No. But the income limits and the actual amount of the credit are significantly lower for those without children. 

The credit ranges from $2 to $519 for those with no qualifying children.

If you do not have children, your earned income and adjusted gross income must be less than $15,270 if you’re single to qualify for the credit. The limit is $20,950 for those who have no children and are married filing a joint return. 

Special EITC rules also apply for calculating the credit for those receiving disability benefits or have a qualifying child with a disability, members of the military, and ministers or members of the clergy. 

Why don’t people file for the credit?

Some don’t understand the credit. They might not have qualified in other years but may qualify now because their income has fallen. 

Some people think they just paid their taxes through payroll withholding and don’t need to file a return. They don’t understand how the complex credit can help get them more money.

Some people who don’t make a lot of money may not actually be required to file a federal income tax return. 

For some people, things could be more confusing this tax season. 

Under the new tax rules, the filing requirement thresholds have increased on 2018 returns somewhat because of the new standard deductions, according to Marshall Hunt, certified public accountant and director of tax policy for the Accounting Aid Society’s tax assistance program in metro Detroit.

“For example, as a general rule, a single person under 65 is required to file with gross income of $12,000 or more,” Hunt said.

“And for a married filing joint couple under 65 it’s $24,000.”

Last year, he noted, the amounts were $10,400 and $20,800. However, many should file in order to get a refund of money through credits such as the Earned Income Tax Credit even if they’re not required to file, Hunt said.

Returns can be amended for up to three years for any unclaimed benefits.

Families and individuals with incomes up to $55,000 may be eligible for the Accounting Aid Society’s free full service tax help. If so, the service offers to prepare and file your federal, state and local income tax returns, and to ensure you receive all of your federal and state Earned Income Tax Credits.

When do you receive a tax refund? 

Early filers may have to wait longer than expected, if they’re claiming the Earned Income Tax Credit or the Additional Child Tax Credit on a tax return.

The Protecting Americans from Tax Hikes Act, passed in 2015, mandated that the Internal Revenue Service cannot issue tax refunds that benefit from the Earned Income Tax Credit or the Additional Child Tax Credit before mid-February. The mid-February rule was put into place to combat tax refund fraud. 

This tax season, the IRS said people will have to wait until at least Feb. 27 for refunds with those credits to be available in their bank accounts or on their debit cards via direct deposit. That’s if there are no other issues with their tax return.

Credit given to: Susan Tomporat.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.  

This Week’s Author – Mark Bradstreet, CPA

–until next week.

Tax Tip of the Week | “Transfer on Death” Designation – Be Vigilant!! October 9, 2019

Posted by bradstreetblogger in : General, tax changes, Tax Planning Tips, Tax Tip, Taxes , add a comment

Using the “transfer on death” or “payable on death” beneficiary designation is very easy to set-up for your investments. This type of designation allows the account owner to choose a beneficiary to whom the assets would quickly pass upon the owner’s death. Often your broker, banker or financial planner will suggest using these designations as a means to avoid probate court on these assets.

The “transfer on death” or “payable on death” beneficiary designation is also easy to change. BUT you have to remember to make the necessary changes “in the event of changing circumstances such as births, deaths or divorces – or for no reason at all.” Failure to add a new child, lack of consideration for the tax bracket that your beneficiaries are in, a beneficiary death, or your death “before beneficiaries reach adulthood” are a few of those life events which necessitate a beneficiary update.

The “transfer on death” or “payable on death” beneficiary designations are not always a good quick fix for estate planning. “Experts advise monitoring (them) periodically. Consider (them) a part of estate planning, not a substitute for it.”

Excerpts from the WSJ article below, titled “Pitfalls of “Designated Beneficiaries” for Mutual-Fund Accounts was published in the WSJ on July 9, 2019.

                                                                                                         -Mark Bradstreet

Sometimes what seems to be simple isn’t really so simple at all.

Consider investment accounts with a “transfer on death” or “payable on death” designation. This type of account, which can be set up easily at brokerage firms and may contain mutual funds, stocks, bonds or other investments, allows the owner to designate a beneficiary or beneficiaries to whom the assets will pass quickly once the owner dies.

The advantage most often cited with these accounts is that whatever funds are in them go directly to beneficiaries, without having to go through the probate process. Beneficiaries typically only have to present proof of identity and a certified copy of the account owner’s death certificate to the investment company and the account passes to them.

Another advantage is that the designated beneficiaries can be changed at any time, and without consequence, up until the account owner’s death. The owner has the right to add or remove names in the event of changing circumstances such as births, deaths or divorces—or for no reason at all.

But there also are pitfalls associated with these types of accounts, which is why financial experts recommend people do their homework before establishing one. A few of the issues:

Life changes

As noted, one of the advantages of these accounts is that they can be changed at any time. But one of the disadvantages is that people may not change them when they should.

These accounts need to be carefully coordinated with your overall estate plan—and updated as life changes. If you fail to do this, family discord and litigation among your heirs could ensue. For example, if two children are named as beneficiaries of a transfer-on-death account, and a third child is born later, that child won’t be entitled to share in the distribution even if all three are named as heirs of the estate.

Similarly, if one of your beneficiaries is in a high tax bracket and another in a low one, an even distribution of a transfer-on-death account might result in an uneven distribution of your assets—even if that wasn’t your intention when you set it up originally. And if your beneficiary dies before you do, and you fail to update the designation listed on the account, the assets will go into your estate upon your death.

“People never get around to changing their accounts” says Ralph M. Engel, senior counsel in the trusts, estates and wealth-management group of Dentons US LLP. “When there are uneven amounts and you aren’t treating your kids equally, it could break up families.”

Another reason these accounts should be coordinated with your overall estate plan: If most of your assets are in one of these accounts, there may not be enough money left over to pay taxes, debts and other expenses associated with your estate. Your executor may then have to negotiate or go through legal proceedings with the account beneficiaries to access the necessary funds for these expenses.

“If an estate is more complicated, you don’t have as much flexibility with a transfer-on-death account as you do with a will or trust,” says Roger Young a senior financial planner at T. Rowe Price in Baltimore.

Spousal rights

Naming minors as beneficiaries of transfer-on-death accounts also can lead to problems if you die before your beneficiaries reach adulthood. That’s because investment firms won’t release assets to minors without a court order or evidence of a guardianship, indicating that an adult has the legal authority to make financial decisions for the child. As such, bequeathing funds through a will or trust may be preferable if your beneficiaries are young children.

Married couples can create joint transfer-on-death accounts, but it is important to remember that if one spouse dies the other generally receives full control of the account under the right of survivorship. That means the surviving spouse could revoke or modify the beneficiary designation at any time. It also means beneficiaries won’t receive the account until the surviving spouse also dies.

Of course, you can’t shortchange your spouse by creating a transfer-on-death account in your name only because your spouse may have rights to some or all of the money upon your death, regardless of who is named as the account’s beneficiary. Although details vary by state, a surviving spouse can make a spousal election, which gives him or her the right to receive a certain percentage of the estate’s assets. This percentage is generally between one-third and one-half of the assets. If you live in a community-property state, the surviving spouse may even own half of any account that is in your name only. The value of the transfer-on-death account would be included in this calculation.

Finally, keep in mind that your beneficiary has no right to the transfer-on-death account while you are still alive—unless you have a power of attorney granting that right.

If you decide to establish a transfer-on-death account despite these pitfalls, experts advise monitoring it periodically. Consider it a part of estate planning, not a substitute for it.

Credit Given to:  Leonard Sloane. Mr. Sloane is a writer in New York. He can be reached at reports@wsj.com.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.  

This Week’s Author – Mark Bradstreet, CPA

–until next week.

Tax Tip of the Week | How Divorce Affects Social Security Benefits?? October 2, 2019

Posted by bradstreetblogger in : Deductions, General, tax changes, Tax Planning Tips, Tax Preparation, Tax Tip, Taxes , add a comment

Social Security Benefits experts are difficult to find. I am not one. We understand the calculations of Social Security and Self Employment taxes along with some areas (and entity choices) in which they may be minimized. But, the nuances of Social Security Benefits do not fall directly into our world of income taxes, accounting and business consulting.

Social Security Benefits are complicated and a divorce increases this level of complexity.  Practically 50% of USA marriages end in divorces. The following article explains some of these rules and also walks us through an example of a divorced couple.

                                     -Mark Bradstreet

Here’s how a divorce can affect your Social Security situation.

A whopping 91% of Americans over the age of 50 don’t understand what factors determine the amount they can potentially receive in Social Security benefits, a survey from the Nationwide Retirement Institute found.

There are several factors that can affect how much you receive in Social Security benefits, such as the age at which you claim benefits, whether you continue working after you claim benefits, and how much you earned during the years you paid into Social Security.

One factor that’s easy to overlook, however, is divorce. If you are currently divorced and were married for at least 10 years, you or your ex-spouse could be earning more in Social Security benefits than you think.

How divorce affects Social Security

Not all divorced couples are eligible to receive additional benefits once they start claiming Social Security, and there are certain requirements you’ll have to meet.

The first thing to consider is how your benefits compare to your ex-spouse’s. If you’re receiving more in Social Security benefits than your ex-spouse (or if you haven’t claimed yet but are expected to receive more than your ex-spouse), you’re not eligible for any additional money each month. But if you’re receiving less each month than your ex, you may be eligible for an increase in benefits based on your ex-spouse’s work record.

Assuming you’re receiving less than your ex-spouse in benefits, there are a few other requirements you’ll need to meet. First, you and your former spouse need to have been married for at least 10 years, and you cannot currently be married (although it doesn’t matter whether your ex-spouse has remarried or not). In order to start claiming benefits, you also need to be at least 62 years old.

If you and your ex-spouse are old enough to file for benefits but your ex hasn’t claimed them yet, you can still claim your benefits based on their work record if you have been divorced for at least two years. Also, if you’re eligible for benefits based on your own work record, that money will be paid out first. Then if you’re also eligible to receive extra benefits based on your ex-spouse’s record, you’ll receive an additional amount each month.

Exactly how much extra you’ll receive depends on the age at which you claim. In order to receive the full amount you’re entitled to, you’ll have to wait until your full retirement age (FRA) – which is either age 66, 67, or somewhere in between. If you claim before then (as early as age 62), your benefits will be reduced. By waiting until your FRA, assuming you’re eligible to receive benefits based on your ex-spouse’s record, you can receive half of the amount he or she is receiving in benefits.

One last thing to keep in mind is that regardless of how much someone is receiving in benefits based on their ex-spouses record, it doesn’t affect how much the other person or their current spouse receives in benefits. So, if, say, your ex-wife is receiving benefits based on your record, you and your current wife’s benefits will not be reduced as a result.

Social Security in action: A hypothetical example

Figuring out whether you can claim benefits based on an ex-spouse’s record and calculating what you’d actually receive is complicated and confusing. So, let’s look at a hypothetical example to make it a little easier to understand.

Let’s say you and your husband were married 20 years, and you never remarried after the divorce. Your FRA is 67 years old, and if you claim at that age, you’d be receiving $1,000 per month based on your own work record and earnings. Your ex-husband, however, is currently receiving $2,500 per month in benefits. Because you were married at least 10 years, you’re unmarried now, and you’re eligible to receive less in benefits than your ex-spouse, you can apply for benefits based on your ex-husband’s record.

For simplicity’s sake, let’s say you wait until your FRA to claim. By doing so, you’ll receive the full $1,000 you’re entitled to based on your own record. Based on your ex-husband’s work record, you’re eligible to receive half of what he’s receiving, or $1,250 per month. With ex-spouse benefits, you’re not allowed to “double dip” – meaning you won’t receive your $1,000 plus $1,250 based on your ex-husband’s record. Rather, you’ll receive your $1,000 and an additional $250 per month so that your total benefit amount is equal to half of what your ex-spouse is receiving in benefits.

Also, all the normal Social Security restrictions still apply here. So, if, for example, you claim earlier than your FRA, your benefits will be reduced. And if you continue working after claiming benefits, you may see a (temporary) reduction in benefits as well, depending on how much you’re earning.

Social Security benefits can seem complex, and there are many factors that contribute to how much you’ll receive each month. But by understanding how much you’re entitled to and whether you’re eligible for additional benefits, you can maximize your monthly checks – and enjoy a more financially stable retirement.

Credit given to:  Katie Brockman, The Motley Fool This was published on July 1, 2019

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.  

This Week’s Author – Mark Bradstreet, CPA

–until next week.