With the passing of the Tax Cuts and Jobs Act of 2017, many actors, writers, directors, and other professionals in the entertainment industry will likely see their taxes increase beginning in 2018. The entertainment professionals who earn wages are being hit the hardest because employee business deductions will no longer be allowed in 2018 going forward. Prior to the passing of the new bill, entertainers receiving a W-2 were able to deduct the costs for their union dues, agent commissions, talent managers, accountants, attorneys, and other ordinary business expenses. Altogether, those business expenses typically add up to roughly 20 percent to 35 percent of an artist’s income but will no longer be deductible going forward. The disallowance of these expense deductions will have a particularly negative impact on the entertainment industry.
Loan Out Corporations – To be or not to be?
In light of the new tax reform changes, many accountants are advising their entertainment clients to form a loan-out corporation for them to deduct their business expenses. Under a normal employment arrangement, a movie, TV show, or theater production would hire the individual actor, writer, or director. Under a loan-out arrangement, the individual would incorporate and set up a loan-out company. The loan-out company would employ the individual and “lend out” their services to the movie, TV shows, or theater production. Prior to the enactment of the Tax Cuts and Jobs Act of 2017, the main benefit of the loan-out corporation was a full benefit of the business expenses otherwise limited on the personal returns, as well as avoiding the alternative minimum tax. Under the new law, loan-out corporations remain unaffected whereas entertainers receiving a W-2 can no longer deduct any business expenses to offset their income. The benefits of having a corporation fall into three basic categories, business expenses, pension plans and medical expenses.
Here is a list of common reasons performers set up loan out corporations:
1. One of the major benefits of having a loan-out corporation is the ability to manage tax payments and cash flow. Many entertainment professionals work on numerous projects every year which means they are on some different payrolls. Generally, professionals without a loan-out corporation are paid W-2 wages. The problem with this is that since the professional is on numerous payrolls with irregular pay periods, the tax withholdings could be more than necessary.
2. Another tax planning benefit of utilizing a loan-out corporation is the ability to take advantage of Qualified Pension and 401ks. In the case of an S-Corporation, certain shareholders are able to deduct health insurance premiums. In addition, pension contribution limits can be more than double that of a standard 401(k) plan when administered properly. The S-Corporation election is one of the ways to reap the immediate benefit. Service providers can save money on FICA taxes by receiving a “reasonable salary” from the corporation and allowing the remaining profit to pass-through to their tax return as ordinary income taxed only at their ordinary, marginal tax rate. As for medical and other business expenses, a “C” corporation can adopt a medical reimbursement plan, which in effect, allows the corporation to pay all of your medical expenses directly to the doctor or hospital and take a tax deduction of all amounts paid (less amounts covered by medical insurance). These can include costs for mental health, eye care, chiropractic, etc.
3. The other factor to consider is the new section 199A 20% “Qualified Business Income Deduction” calculated on your net business income. This new tax change for 2018 provides an additional deduction based on your net corporate business income. For folks in creative fields, there are 2 limitations in the calculation. Individuals in the arts are considered as part of the laws “specified service businesses” and are thus limited to the 20% deduction but ONLY if their taxable income is less than $157,500 if single and $315,000 if married (after that it phases out). This is a deduction not available to an employee, but if a performer were to set up a “loan out” corporation, they might be able to avail themselves of this new tax benefit.
The question then becomes, when does this make any sense for me? We feel the individual would need at least $100k to $125K in gross income before the loan out corporation would make any sense financially, but this would also depend on the level of expenses one was going to lose under the 2017 Tax Cuts and Jobs Act legislation. Consequently, this is a movable calculation depending on the mix of gross income and expenses.While a loan-out corporation seems like a great alternative to mitigate the increased tax burden for entertainment professionals, it may not be the best solution for everyone. Entertainers must consider the costs associated with incorporatingwhich include attorney fees to set the entity up (at least $1,000), the annual report filing fee of$125, the cost of the corporation return preparation at +/- $700, cost of payroll processing +/- $500, a minimum $800 corporate franchise tax per year (for California residents), and additional payroll taxes, which include the employer’s portion of social security taxes (as high as $9,800 or 7.65 percent of wages paid up to about $128,000), workers compensation insurance at $300 and $300-$400 in Federal and state unemployment taxes. The additional costs of incorporating may offset any tax benefit received, and government compliance can be an administrative burden for the entertainer. This means that the corporation adds over $13,000 of additional expenses for the business owner. By forming a loan-out corporation, an entertainer is also forfeiting their opportunity to claim unemployment.Ideally, we want the corporation to SAVE you at least this amount in taxes, so the performer is at break even with the loan out corporation.
These fees can go significantly higher (up to 5-6% of your gross income) if “business management” services are also provided, although some firms are now charging a fixed monthly fee for these services rather than a percentage of gross income. Business management involves turning over almost all responsibility for your finances to a business manager. They, in turn, pay all of your corporate and personal bills, invoice production companies for your services and monitor the collection of income, assist with insurance and real estate issues, provide investment guidance, etc.In addition to federal and state corporate and payroll taxes, the City of Los Angeles enacted legislation requiring all loan-out corporations “doing business” in the City to pay a business tax (however, corporations generating less than a certain threshold in gross income may be exempt from this tax).
With an S corporation structure, the one we prefer for smaller operations, the performer will claw back the heretofore lost deductions plus some FICA tax savings and perhaps (depending on income levels) section 199A 20% “Qualified Business Income Deduction” that will generally offset the additional fees and taxes the corporation incurs. If you are dealing with larger amounts of income, one might look at the C corporation and the ability to defer income into other years by using a fiscal year-end as well as some additional employee benefit options that the C corporation structure provides.
The final advantage I often mention in this structure is that generally speaking, your chances of getting audited by the Internal Revenue Service drop substantially inside the corporation. That is because the Internal Revenue Service does not do as much sampling or DIF scoring of business returns like they do on personal income tax returns. Secondarily the Internal Revenue Service does not require 3rd party 1099 reporting when the payment is made to a corporation. Consequently, the business will not receive 1099’s.
Don’t ignore the low-hanging fruit
For those consistently working actors, they know the QPA (Qualifying Performing Artists) is and has been, virtually worthless for many years as the qualifying threshold is unrealistically low (adjusted gross income of $16,000 or less before deducting expenses as a performing artist).However, for those actors, who are getting started, stage performers or don’t book a ton of workthis is a great way have your performing-arts-related business expenses deductible whether or not you itemize deductions.If you meet all the requirements for a qualified performing artist, include the part of the line 10 amount attributable to performing-arts-related expenses in the total on Form 1040, line 24 (or Form 1040NR, line 35), and attach Form 2106 to your return.
One of the best ways to build savings when starting your acting career is to fully fund a Roth IRA. In 2018, you can put $6,500 (If under 50) into a Roth IRA (grows tax-free and distributions are tax-free). The contributions can be withdrawn without taxes or penalty (the earnings cannot be withdrawn until age 59.5). But if you’re 18 or older, not a full-time student and are not claimed as a dependent on another person’s return, then you can take the Saver’s tax credit. The amount of the credit is 50%, 20% or 10% of your Roth IRA contributions up to $2,000 ($4,000 if married filing jointly), depending on your adjusted gross income (phased out at $63,000). Remember a tax credit is a dollar for dollar reduction of your tax bill.
Book your own kids
As the owner of a business, you have the advantage of being able to hire your child to work in your business, and that creates tax-saving opportunities for both you and your child.They can do print modeling, video, and social media marketing for your business.The new standard deduction means that a single taxpayer such as your child can earn up to $12,000 in W-2 wages and pay not a penny in federal taxes.Especially if you’re already paying them an allowance or putting money away for college. As a California resident, you do not get a state tax deduction for contributing to your child college saving 529 plan (as a few other states do).
When you hire the child under age 18, the Form 1040, Schedule C business and the partnership with only the child’s parents are exempt from Social Security, Medicare, and federal unemployment taxes. The S and C corporations and the non-spouse partnerships do not qualify for this benefit. They have to pay the payroll taxes on all employees—period. There is no parental benefit. (Similarly, the self-employed individual or the spouse-only partnership with a child age 21 or over does not qualify for any employment tax breaks.)
Talk with your tax advisor to see if you qualify for the tax-favored educational assistance program. If so, you can hire your child age 21 or older. Grant the education program to all your employees, including your employee child. Now, you may deduct up to $5,250 of your employee-child’s college tuition and book fees. The $5,250 is the annual, per-employee limit on Section 127 educational assistance.
One of the big lessons of last year’s major hurricanes and current California wildfires is in many instances; homeowners couldn’t fully repair their damaged homes with insurance proceeds because they didn’t understand until too late what their policies did and didn’t cover. And in general, over the past couple of decades, insurers have made it tougher on consumers. Increasingly, they have made home policies less generous and more complicated, shifting risks and costs off their books and onto policyholders. As insurance rates go up, people will go without, and that’s not acceptable.
A perfect example is Earthquake insurance. Your standard homeowners insurance policy doesn’t cover earthquake damage and destruction. That’s because the standard homeowners policies sold these days are a variation of a standard form called the HO-3. The more recent versions of the HO-3 have very limited coverage for household water damage leaks and pipes and expressly exclude coverage for a flood event and any type of earth movement,like what happens during an earthquake.That’s assuming you’re able to obtain earthquake coverage at all. According to the Actuarial Foundation’s and the Federal Alliance for Safe Homes’ “If Disaster Strikes, Will You Be Covered?” report, “the closer a home is to a fault line, or sits on soil types with greater exposure to loss in an earthquake, the more limited insurance options may be because of the extreme risk of earthquake loss.”If you are able to obtain it, though, you’ll likely be required to prove that your home has been bolted to its foundation before an insurer will extend this sort of endorsement or coverage to you—a renovation that can cost as much as $6,000 depending on where you live as well as the size and style of your home. You also may have to agree to a property inspection or show that you’ve properly secured certain fixtures, like hot-water heaters, using strapping guards.
A major question to consider is, with all these natural disasters dominating the headlines, will this drive up home insurance rates for everyone in 2018? You would assume so. The insurance market is already overdue for an upward correction. So for most of us, it’s a good bet that home insurance rates will rise somewhat, but not enough to give you a heart attack.Homeowners in some, but not all, high-risk areas could face big increases or even problems getting insured at all.Along with — and because of — the recent disasters, there’s growing concern about what climate change may bring, which may soon put more upward pressure on rates.
Understanding what is and is not covered by your homeowners insurance policy can be daunting. If you’re like most, your policy is in an envelope somewhere, and you probably haven’t referred back to it for a while (maybe even since buying your home). Well, find that envelope! Because in addition to understanding just where you’re protected, you may be able to make some simple changes that can save you money.
Homeowners insurance is no place to skimp, but we’ve found eight smart ways for you to save:
1. Wildfire damage is covered by standard home insurance, too. The key here is to make sure that your particular policy provides you with enough coverage. Review your policy to see if it’ll allow you to rebuild your home from the ground up, should the need arise. Also, your insurance company may require you to make a few changes to the exterior of your house and the property that surrounds it if they’re located in an area that’s especially vulnerable to wildfire.
2. Hazard insurance on a standard homeowners insurance policy covers many natural disasters, like tornadoes or hurricanes. Other natural disasters, including floods, mudslides, and landslides, aren’t covered by most homeowners insurance companies. That’s why you should always refer to your policy documents for information about coverages under your particular policy.Hurricane Harvey showed last year that flooding could damage properties outside the highest-risk zones and leave empty-handed homeowners who aren’t required to buy flood insurance. People with federally backed home mortgages must purchase the coverage if they are in a designated high-risk flood area. The government policies provide up to $250,000 for rebuilding and $100,000 for contents for roughly $600-a-year policy. Consumers typically have a 30-day waiting period after purchase before the government policies take effect. A small number of private-sector insurers also provide the coverage, typically for amounts that kick in above the federal policy limits. Just make sure your policy doesn’t include an “anti-concurrent cause.” This type of clause limit(s) coverage when multiple perils combine to cause loss or damage. Wind and water is a good example.
3. For affluent families, you should consider a flood policy for the peace of mind, even if not required under terms of a mortgage. During Hurricane Harvey’s aftermath, the U.S. Army Corps of Engineers released reservoir water that caused additional flooding in areas not initially affected.
4. Check your policy limits. The maximum payout in a standard home policy may be insufficient to rebuild and replace contents. Homeowners often fail to increase policy limits if they upgrade their homes. In the past 10 years, about 10% of residential properties nationwide had remodels worth more than $25,000, according to data provider BuildFax. Homeowners also can find that their policy limits are inadequate when everyone in a disaster-hit area seeks building materials and contractors’ services simultaneously, driving up costs.
5. Homeowners also need to be aware of another pitfall: Insurers sometimes provide “actual cash-value coverage,” which takes depreciation into account, rather than replacement-cost coverage. Actual cash value could fall short of covering replacement, leaving the policyholder to foot more of the bill.
6. Make a list. Homeowners should inventory possessions and store the list outside the home. People with expensive items like jewelry can get specialized coverage.After wildfires in California last year, the state insurance department asked insurers to immediately pay policyholders for living expenses and a portion of personal contents, without requiring a very time-consuming inventory when someone had just lost everything. Many insurers agreed to waive the inventory requirement partially.
7. When you renew, scour the fine print. Especially if you’re in a recently affected area. Insurers have been known to quietly change the terms, moving more risk to the homeowner rather than raising the premium. Apparently, they hope you won’t notice. Don’t be afraid to shop around. Different insurers calculate risks in different ways, so another company’s formula might come out in favor of a lower rate. Plus, some companies offer new customers attractive rates, while loyal customers find their rates creeping up. (What the heck?!) They’re counting on you not to shop around. Just make sure you’re comparing the same coverage and the same replacement value. I tell all my clients that you can always save money on insurance, but you won’t necessarily have enough coverage.Many companies offer discounts if you take certain steps to prevent damage to your home — steps that you should consider anyway. For example, installing hurricane shutters or fire-resistant roofing, or participating in a Firewise community program.
For many people, their home is their greatest asset, so it is crucial to avoid being underinsured. To properly insure your home, it is important to ask your insurance professional three key questions: Do I have enough insurance to rebuild my home and replace all my possessions? Do I have enough coverage for additional living expenses?Do I have enough insurance to protect my assets?
If you lease a car, truck, or van that you use in your business, you can use the standard mileage rate (54.5 cents per mile in 2018)or actual expenses to figure your deductible expense.If you qualify to use both methods, you may want to figure your deduction both ways to see which gives you a larger deduction. The standard mileage rate is simple and easy to calculate. Let’s say Brooke used her leased car for business use 75% of the time and drove a total of 15,000 miles in 2018. Then she would have a car business deduction of $6,131.25 (15k x 0.545 x 0.75). If you want to use the standard mileage rate for a car you own, you must choose to use it in the first year the car is available for use in your business. Then, in later years, you can choose to use either the standard mileage rate or actual expenses. If you want to use the standard mileage rate for a car you lease, you must use it for the entire lease period.In addition to using the standard mileage rate, you can deduct any business-related parking fees and tolls(Parking fees you pay to park your car at your place of work are nondeductible commuting expenses.)
If you use actual expenses to figure your deduction for a car you lease, there are rules that affect the amount of your lease payments you can deduct. Actual car expenses include: Depreciation, Licenses, Lease payments, Registration fees, Gas, Insurance, Repairs, Oil, Garage rent, Tires, Tolls&Parking fees. If you choose to use actual expenses, you can deduct the part of each lease payment that is for the use of the vehicle in your business. You can’t deduct any part of a lease payment that is for personal use of the vehicle, such as commuting. You must spread any advance payments over the entire lease period. You can’t deduct any payments you make to buy a car, truck, or van even if the payments are called lease payments.
A taxpayer that leases a business auto may deduct the part of the lease payment representing business/investment use. If business/investment use is 100%, the full lease cost is deductible. So that lessees can’t avoid the effect of the luxury auto limits, however, they must include a certain amount in income during each year of the lease to partially offset the lease deduction, if the vehicle’s fair market value (FMV) exceeds $50,000.So, if you plan on leasing a car with a fair market value of $50,000 you will need to include a certain amount in income during each year of the lease to partially offset the lease deduction.
If you use your car for both business and personal purposes, you must divide your expenses between business and personal use. You can divide your expense based on the miles driven for each purpose.You must make a choice to use the standard mileage rate by the due date (including extensions)of your return. You can’t revoke the choice.
>Ask your Employer to set up an Accountable Plan
If you are a W-2 employee and you are required to use your car for business purposing (outside of commuting to work), then you want to make sure your employer has an Accountable Plan. Accountable plans are an IRS-approved way to reimburse employees for various business expenses in a tax-advantaged manner. Everyone wins … employees are not taxed on reimbursements (the reimbursements not even reported on W-2s) and employers don’t pay employment taxes on the reimbursements.
The Tax Cuts and Jobs Act made changes that may be favorable to your business but at the same time made one big unfavorable change for employees. The Act suspended for 2018 through 2025 the miscellaneous itemized deduction for unreimbursed employee business expenses. This deduction had allowed employees who itemized their deductions to write-off their work-related costs as a deduction to the extent they exceeded 2% of adjusted gross income (AGI). Examples of employee business expenses that fell within the 2%-of-AGI rule (and could have been deductible on employees’ 2017 returns) include:
• Car or truck expenses
• Education expenses
• Home office deduction (if the office is used for the convenience of the employer)
• Tools and equipment
• Work clothes and uniforms
• Union Dues
So for 2018 through 2025, employees who pay for these business expenses out of their own pockets get no tax deduction. This limitation applies not only to rank-and-file employees but also to owners of C or S corporations who personally pay for corporate expenses because they are employees of their businesses.
There isn’t any excuse for your employer to not adopt this because there is no IRS form for this purpose. In fact, there’s technically no requirement to have the plan in writing, but you should do so. You can use a template from a CPA firm or create your own. And if you’re incorporated, it’s a good idea to reflect the adoption of the plan in your corporate minutes.
Since the global financial crisis, August has regularly proved difficult for financial markets. This summer was no exception. Investors had to digest the reintroduction of US sanctions against Iran, new tensions between Turkey and the US, a deterioration of trade talks between the US and China, and volatility in the Italian government bond market. Most equity markets and risk assets sold off, with the notable exception of the S&P 500, where extraordinarily strong macro data, and a general absence of any inflation concerns, once again pushed the index higher. Amid the geopolitical turmoil, the search for a safe haven helped push government bond prices up, with the 10-year US Treasury yield falling by 10 basis points (bps) to 2.86%. The labor market goes from strength to strength. The U6 unemployment rate – a broader measure of unemployment than the headline rate – dropped to 7.5% in July, its lowest level since 2001. This is considered to be one of the best measures of unemployment since it accounts for underemployment, such as those working part time that wish to work more, and those currently discouraged but considering re-entering the labor market.
With no shortage of political noise and the midterm elections quickly approaching, many investors have been asking what this means for markets. Putting political issues aside, we maintain the view that investors should work to separate the signal from the noise, and only make portfolio changes when the facts have changed. Midterm election years have historically seen worse than average returns, and these negative excess returns have typically come with a price of higher volatility. Since 1970, midterm election years have seen average annual returns of 6.1%, versus average returns of 11.9% during the full period. Furthermore, volatility has historically increased as the midterm elections approach, with S&P 500 realized volatility an average of 1.8%pts higher on average in the three months leading up to November. That said, the equity market has typically enjoyed a relief rally from September through the end of the year, rising 7.1% versus an average return of 3.7% during the full period, as uncertainty recedes and investors refocus on the fundamentals. As such, the historical data suggests that investors should not necessarily seek cover as midterm elections approach, but rather understand the market dynamics that will be at play and position portfolios accordingly.
After a solid 2017, emerging markets (EM) currencies have had a tough 2018, with the JPM EM trade-weighted currency index falling 14% year-to-date. EM economies have been stuck in a tug of war between still solid fundamentals, with economic growth continuing to improve relative to developed markets and earnings growing by 20% in the second quarter, and sentiment, which has turned much more negative. This deteriorating sentiment reflects rising trade tensions, some disappointment in Chinese data and concerns of second round effects of dollar strength, all of which have been clouding the outlook for EM investors. However, as we highlight in this week’s chart, there has been a wide difference in performance within EM, with certain currencies punished much more than others. In particular, countries with significant external vulnerabilities, such as Turkey and Argentina, and countries with limited visibility on growth, such as Brazil and South Africa, have been hit hardest. The takeaway for investors is not to view EM economies as one homogenous group but to separate those economies with vulnerable dynamics from those with stronger fundamentals in order to uncover the still present long-term investment opportunities.
Properly transferring your real property into a living trust ensures your desires upon death are upheld. Many people fail to file the proper deeds after establishing the trust. When this happens, the property is still subject to probate court and costs. Ultimately, the property may not go to the desired beneficiary. A California revocable living trust gives a person control of the trust assets while alive but establishes the parameters of transfer to beneficiaries after death. A trust is a unilateral contract between the grantor who owns the assets and the beneficiary receiving the assets. It is managed by a trustee. Revocable means it can be withdrawn at any time by the trustee during the grantor’s life. As such, the grantor and trustee are often the same person in a revocable living trust. Trusts allow assets to pass to beneficiaries avoiding the entire probate process as long as the trust is properly created, funded and executed.
Real estate property must be properly listed on the schedule of assets including the address, assessor’s parcel number and legal description of the property. The name on the title should match exactly the name of the grantor. Discrepancies open the door for someone to contest the trust. Trusts are often created by attorneys, but this isn’t required. As long as the elements are described, and the document is dated and notarized with original signatures, it is a legal trust. Many grantors make the mistake of never funding the trust. They think that the schedule of assets is the only thing necessary for the successor trustee to execute their wishes. This is wrong. All accounts must be renamed with the owner becoming the trust.
California law allows the use of three different types of deeds to convey title to real estate. A grant deed is the middle-level deed because it includes more guarantees of title than a quitclaim deed but few guarantees than a warranty deed. The grant deed is also sometimes known as the special warranty deed. Like a quitclaim or warranty deed, the main purpose of the grant deed is to transfer property title from one person to another, such as from a seller to a buyer. A grant deed is written evidence that you actually own your property. Additionally, the grant deed provides title guarantees to the new owner. To be legally effective, a grant deed must include certain basic information, including the name of the new owner, the signature of the person conveying title and a legal description of the property being conveyed by the deed. The person conveying title is the grantor, and the new owner is the grantee. In California, grant deeds are filed at the county assessor’s office with a Preliminary Change of Ownership Request, applicable fees and a Tax Affidavit. All must be notarized for legal transfer and recording.
The grant deed includes a significant title guarantee. Basically, the grantor under the grant deed guarantees to the grantee that the grantor has not transferred her title to anybody else first. So, if the new owner later discovers that two weeks before the grantor provided the grant deed, the grantor actually sold the title to a third party, the new owner can sue the grantor under this title guarantee to recover the value of the property. A grant deed can include exceptions to the title guarantee. The grant deed may, for example, identify an easement running across the property. Any exception listed in the grant deed will not be covered by the title guarantee, so the new owner takes title subject to those listed exceptions. A grant deed is better than a quitclaim deed because when a grantor provides a quitclaim deed you have no guarantee that an hour earlier the grantor did not give title to somebody else. However, the grant deed is not as good as a warranty deed because a warranty deed guarantees that the grantor actually has good, marketable title to the property, while the grant deed just guarantees that the grantor has not personally done anything to affect the title of the property. However, because most property owners purchase a title insurance policy, the significance of using one type of deed over any other has diminished. Most owners will sue under the title insurance policy even if they have a warranty or grant deed from the grantor.
A good foundation is crucial in starting any business and one of the pillars that keep a business stout and upright is a great business lawyer. As a business owner, you want to allot your focus and energy in running and growing the business while someone else is on top of understanding the legalities that surround the business. Just how crucial is it to have an attorney right at the very beginning of your business journey?
Almost every aspect of your business would call for an effective business attorney – from choosing the business type upon putting up the company, to writing contracts, resolving business claims and issues, and navigating mergers and acquisitions, to name a few. A common mistake businesses make is holding off hiring a business lawyer until they need one. Here are some of the aspects of a business in which a business lawyer plays an integral role.
Preparing contracts with clients and suppliers. Business lawyers know how to make contracts iron-clad in order for all parties to be well-protected. When signing a contract for any reason, your attorney will be in charge of spotting issues and negotiate revisions to contracts with loopholes that can potentially put you in unnecessary liabilities in the future.
Securing intellectual properties through trademark and copyright protection. While patents and copyrights are handled by intellectual property specialists, your business attorney can help you with these as they are part of legal networks. It would be an advantage if your business lawyer can also help you acquire patents and copyrights.
Transacting with landlords and real estate sellers. In terms of dealing with properties, and this includes leasing and warehousing, a business lawyer can thoroughly review contracts and agreements to make sure that you are getting into a fair and legitimate deal with a seller. Your lawyer must have a standard “tenant’s addendum” that contains provisions in your favor, which can be included in the printed lease document.
Knowing the tax consequences of your business transactions. You want to make sure that you do not encounter unnecessary tax liabilities while on business. While your accountant takes care of preparing and filing of taxes, having a business lawyer means you have somebody who knows how to register your business for both federal and state tax IDs, and understands the tax consequences of your business transactions.
Venues for Finding an Attorney
In your search for a great business lawyer, make use of various resources. This will garner more options and give you the ability to make a valid judgement. There are many channels that you can utilize and here are some of them:
Referrals. It is important to understand that every lawyer has their own strengths, and one way to gauge whether a lawyer is best fit for your particular problem is to seek the advice of people who have experienced the same. Find out who they hired at the time, and gather leads from there. However, relying solely on referrals might not give you reliable leads as the relationship between the business owner and lawyer will depend on how they respond to each other’s style and personality.
Local Bar Association. A bar association is a professional organization of lawyers serving different purposes. Most bar associations make referrals based on specific areas of law, which can help you find a lawyer with the right expertise and area concentration. However, there are services that make referrals without concern for the lawyer’s level of experience. Seek out referral services that work under programs certified by the American Bar Association.
Online Services. Sites such as Upcounsel can aid in finding and connecting with top-rated business attorneys who can provide a wide array of business law services for startups and large businesses alike.
Hiring a business lawyer is a major investment for any business, which is why optimal sourcing techniques are very crucial in this process. Not finding the right lawyer for your business will cost you money, and can potentially lead to long-term consequences for your company. Watch out for these red flags when making a decision:
– The lawyer is not well-versed in the language of your business. In order to properly represent you, your business lawyer must speak your language and understand the field in which you are operating.
– The lawyer is learning on the job. Your business should not be your lawyer’s on-the-job training. If you see that the lawyer is doing something completely new to him, he may not be the best candidate to
represent your business.
– The lawyer comes up with extra costs. Hiring a business lawyer should be a well-calculated move, and needless to say, it should be cost-effective. Surprise and extra costs must always be kept to a
Choosing an Attorney
After exhausting your resources to find the right business lawyer and coming up with a short list of candidates, it is time set up interviews. In your initial meeting, be ready and upfront in describing your business and your legal needs. Make sure to express that you are interested in building a long-term relationship. Take careful notes of what the lawyer says and does during the interview, and pay attention to these aspects:
Experience. Begin by asking how long they have been practicing law and their areas of expertise. Assess whether their expertise is aligned with the needs of your business.
Ability to communicate. It is crucial that you and your business lawyer have rapport, and you can gauge this as early as your initial interview. Your lawyer must be able to express himself clearly, without the use of too much jargon or legalese.
Availability. Ask the best way to reach him and how quickly he responds to phone calls or emails. Will he be available after business hours? This is crucial in your working relationship.
References. Ask the history of business and cases he had handled in the past, and see if they are similar with yours. You can also ask for a list of clients you can contact to ask about his competence, service, and fees.
Fees. Ask about his rate and the payment terms – flat, hourly, capped, etc. It is important to get this information as you can use it when you compare your candidates. However, do not decide based on the rate alone. The lowest rate may not be indicative of quality work
Tax reform likely has you considering your business’s tax structure. We’ll show how you can use a spousal partnership to reduce your tax hit compared with a sole proprietorship. And here’s the real surprise: you can possibly save more money with this type of partnership compared with the S corporation.
It works like this:
1) You own an existing sole proprietorship or want to start a new business.
2) You and your spouse form a general partnership or limited liability company to manage the business.
3) You and your spouse provide cash or property for your interests in the new business.
4) Your spouse does not participate in any way in the business. He or she is merely an investor.
Here are the tax benefits to you:
– Your spouse’s income is free from self-employment tax.
– You and your spouse both still qualify for the new pass-through income deduction under Section 199A.
– The IRS audits partnerships at a much lower rate than proprietorships (Schedule Cs).
– You don’t have to worry about the costs or hassle of running payroll or determining your reasonable
compensation as you would if you operated the business as an S corporation.
Here are the potential issues:
– The passive activity rules limit your spouse’s use of any losses against regular income.
– Your cost of preparing a partnership return (but you’d have this cost with an S corporation, too).
No Self-Employment Tax?
Limited partners in a partnership don’t pay self-employment taxes on their share of partnership net income. To make your limited-partner situation crystal clear to the IRS, make sure your spouse meets the limited-partner requirements by:
– providing no services to the partnership
– complying with the limited partnership statute of your state
– and signing a document delegating management authority of the LLC to you.
Proposed regulations originally issued in 1996 would clarify who is a limited partner for self-employment tax purposes, but the Treasury Department never finalized them. Under the proposed regulations, a limited partner can’t have personal liability for the debts of the partnership by reason of being a partner, have authority to contract on behalf of the partnership, or participate in the partnership’s business for more than 500 hours during the partnership’s taxable year. (Note. Above, we recommended no participation for the spouse.)
Planning note. Although the IRS has not finalized the proposed regulations, you should follow them because they represent substantial authority and protect you from the substantial underpayment penalty.
Tax reform gave you a new 20 percent pass-through deduction starting in 2018. Partnership pass-through income qualifies for Section 199A, but partnership guaranteed payments do not. Guaranteed payments compensate partners for services to the partnership and are self-employment income to the partner, and deductible as a business expense by the partnership. Unlike S corporations, which require reasonable compensation by salary for owner/employees, the tax law has no requirement that a partnership make guaranteed payments to its partners. Therefore, in your spousal partnership, you and your spouse can take cash distributions of the partnership profits and no guaranteed payments in order to maximize your pass-through deduction. Another bonus: unlike an S corporation, where shareholder distributions must be pro rata based on ownership interest, partnerships have no such requirement.
Example. Louis and Lisa, a married couple, have a partnership. Louis is a 60 percent partner and Lisa is a 40 percent partner. The partnership has net income of $100,000, and none of the Section 199A limitations apply to them. With no guaranteed payments, they get a $20,000 Section 199A deduction. If the partnership pays Louis a $50,000 guaranteed payment, then only the $50,000 partnership net income qualifies for the Section 199A deduction, reducing that deduction to $10,000 (20 percent of the net income).
Passive Loss Issues
Under the passive loss rules, a passive loss can only offset passive income. A limited partner’s interest in a partnership is automatically passive regardless of participation level. If it’s unlikely your business will suffer a loss, then this isn’t a major concern. If your business does have a loss, you’ll have to
carry forward the loss until there is passive income that can absorb it. If you have activities that create passive losses (a rental activity, for example), then the passive income created by this strategy could allow you to use your losses in the current tax year.
Example. John is a limited partner in his spouse’s business. The partnership passes through $10,000 of passive net income to John. John also owns a rental property that generates a $5,000 passive loss. John can net the partnership income and the rental loss and only pay taxes on the $5,000 of net passive income. This income offset works with privately held partnerships, but not with publicly traded partnerships, where the tax law requires separate application of the passive loss rules.
By the Numbers
Jean wants to start a graphic design business. She has three options:
1) Form a single-member LLC with herself as sole owner
2) Form a multimember LLC with her husband, Tom, who would have no involvement in the business
3) Form a single-member LLC or corporation and elect S corporation status
Let’s assume that the business nets $50,000 in the first year of operation, Jean’s S corporation reasonable compensation is $35,000, and they are in the 22 percent tax bracket. Here’s a comparison of four options.
Jean pays the least amount of taxes on the structure where her husband is a 40 percent limited partner. Note that the S corporation results in more tax than the single-member LLC taxed as a sole proprietorship because the increased pass-through deduction from the sole proprietorship negates the payroll tax savings from the move to the S corporation.
Tax planning after tax reform has mostly focused on C and S corporation tax strategies. But as you have just seen, in the right circumstances a spousal partnership can:
– provide optimal tax reduction over the sole proprietorship and S corporation,
– eliminate the need for payroll and reasonable compensation determinations, and
– reduce your overall risk of an IRS audit.
By running your partnership as a limited liability company, you also leave the door open to electing a different tax treatment in a later year if business changes make the S corporation a better tax strategy for you.
Crowdfunding websites such as Kickstarter, GoFundMe, Indiegogo, and Lending Club have become increasingly popular for both individual fundraising and small business owners looking for start-up capital or funding for creative ventures. The upside is that it’s often possible to raise the cash you need but the downside is that the IRS considers that money taxable income. Here’s what you need to know.
What is Crowdfunding?
Crowdfunding is the practice of funding a project by gathering online contributions from a large group of backers. Crowdfunding was initially used by musicians, filmmakers, and other creative types to raise small sums of money for projects that were unlikely to turn a profit. Now it is used to fund a variety of projects, events, and products and in some cases, has become an alternative to venture capital.
There are three types of crowdfunding: donation-based, reward-based, and equity-based. Donation-based crowdfunding is when people donate to a cause, project, or event. GoFundMe is the most well-known example of donation-based crowdfunding with pages typically set up by a friend or family member (“the agent”) such as to help someone (“the beneficiary”) pay for medical expenses, tuition, or natural disaster recovery.
Reward-based crowdfunding involves an exchange of goods and services for a monetary donation, whereas, in equity-based crowdfunding, donors receive equity for their contribution.
Are Crowdfunding Donations Taxable?
This is where it can get tricky. As the agent, or person who set up the crowdfunding account, the money goes directly to you; however, you may or may not be the beneficiary of the funds. If you are both the agent and the beneficiary you would be responsible for reporting this income. If you are acting as “the agent”, and establish that you are indeed, acting as an agent for a beneficiary who is not yourself, the funds will be taxable to the beneficiary when paid–not to you, the agent. An easy way to circumvent this issue is to make sure when you are setting up a crowdfunding account such as GoFundMe you clearly designate whether you are setting up the campaign for yourself or someone else.
Again, as noted above, as the beneficiary, all income you receive, regardless of the source, is considered taxable income in the eyes of the IRS–including crowdfunding dollars. However, money donated or pledged without receiving something in return may be considered a “gift.” As such the recipient does not pay any tax. Up to $15,000 per year per recipient may be given by the “gift giver.”
Let’s look at an example of reward-based crowdfunding. Say you develop a prototype for a product that looks promising. You run a Kickstarter campaign to raise additional funding, setting a goal of $15,000 and offer a small gift in the form of a t-shirt, cup with a logo or a bumper sticker to your donors. Your campaign is more successful than you anticipated it would be and you raise $35,000–more than twice your goal.
Taxable sale. Because you offered something (a gift or reward) in return for a payment pledge it is considered a sale. As such, it may be subject to sales and use tax.
Taxable income. Since you raised $35,000, that amount is considered taxable income. But even if you only raised $15,000 and offered no gift, the $15,000 is still considered taxable income and should be reported as such on your tax return–even though you did not receive a Form 1099-K from a third party payment processor (more about this below).
Generally, crowdfunding revenues are included in income as long as they are not:
– Loans that must be repaid;
– Capital contributed to an entity in exchange for an equity interest in the entity; or
– Gifts made out of detached generosity and without any “quid pro quo.” However, a voluntary transfer without a “quid pro quo” isn’t necessarily a gift for federal income tax purposes.
Income offset by business expenses. You may not owe taxes however, if your crowdfunding campaign is deemed a trade or active business (and not a hobby) your business expenses may offset your tax liability.
Factors affecting which expenses could be deductible against crowdfunding income include whether the business is a start-up and which accounting method (cash vs. accrual) you use for your funds. For example, if your business is a startup you may qualify for additional tax benefits such as deducting startup costs or applying part or all of the research and development credit against payroll tax liability instead of income tax liability.
Timing of the crowdfunding campaign, receipt of funds, and when expenses are incurred also affect whether business expenses will offset taxable income in a given tax year. For instance, if your crowdfunding campaign ends in October but the project is delayed until January of the following year it is likely that there will be few business expenses to offset the income received from the crowdfunding campaign since most expenses are incurred during or after project completion.
How do I Report Funds on my Tax Return?
Typically, companies that issue third-party payment transactions such as Amazon if you use Kickstarter, PayPal if you use Indiegogo, or WePay if you use GoFundMe) are required to report payments that exceed a threshold amount of $20,000 and 200 transactions to the IRS using Form 1099-K, Payment Card and Third Party Network Transactions. The minimum reporting thresholds of greater than $20,000 and more than 200 transactions apply only to payments settled through a third-party network; there is no threshold for payment card transactions.
Form 1099-K includes the gross amount of all reportable payment transactions and is sent to the taxpayer by January 31 if payments were received in the prior calendar year. Include the amount found on your Form 1099-K when figuring your income on your tax return, generally, Schedule C, Profit or Loss from Business for most small business owners.
Again, tax law is not clear on this when it comes to crowdfunding donations. Some third-party payment processors may deem these donations as gifts and do not issue a 1099-K. This is why it is important to keep good records of transactions relating to your crowdfunding campaign including a screenshot of the crowdfunding campaign (it could be several years before the IRS â€œcatches upâ€) and documentation of any money transfers.
Don’t Get Caught Short
If you’re thinking of crowdfunding to raise money for your small business or startup or for a personal cause, consult a tax and accounting professional first. Don’t make the mistake of using all of your crowdfunding dollars on your project and then discovering you owe tax and have no money with which to pay it.
Many parents are looking for ways to save for their child’s education and a 529 Plan is an excellent way to do so. Even better, is that thanks to the passage of tax reform legislation in 2017, 529 plans are now available to parents wishing to save for their child’s K-12 education as well as college or vocational school.
You may open a Section 529 plan in any state, and there are no income restrictions for the individual opening the account. Contributions, however, must be in cash and the total amount must not be more than is reasonably needed for higher education (as determined initially by the state). There may also be a minimum investment required to open the account, typically, $25 or $50.
Each 529 Plan has a Designated Beneficiary (the future student) and an Account Owner. The account owner may be a parent or another person and typically is the principal contributor to the program. The account owner is also entitled to choose (as well as change) the designated beneficiary.
Neither the account owner or beneficiary may direct investments, but the state may allow the owner to select a type of investment fund (e.g., fixed income securities), change the investment annually as well as when the beneficiary is changed. The account owner decides who gets the funds (can pick and change the beneficiary) and is legally allowed to withdraw funds at any time, subject to tax and penalties (more about this below).
Unlike some of the other tax-favored higher education programs such as the American Opportunity and Lifetime Learning Tax Credits, federal tax law doesn’t limit the benefit only to tuition. Room, board, lab fees, books, and supplies can be purchased with funds from your 529 Savings Account. Individual state programs could have a more narrow definition, however, so be sure to check with your particular state.
Distributions from 529 plans are tax-free as long as they are used to pay qualified higher education expenses for a designated beneficiary. Distributions are tax-free even if the student is claiming the American Opportunity Credit, Lifetime Learning Credit, or tax-free treatment for a Section 530 Coverdell distribution–provided the programs aren’t covering the same specific expenses. Qualified expenses include tuition, required fees, books, supplies, equipment, and special needs services. For someone who is at least a half-time student, room and board also qualify. Also, starting in 2018, “qualified higher education expenses” include up to $10,000 in annual expenses for tuition in connection with enrollment or attendance at an elementary or secondary public, private, or religious school.
Note: Qualified expenses also include computers and related equipment used by a student while enrolled at an eligible educational institution; however, software designed for sports, games, or hobbies does not qualify unless it is predominantly educational in nature.
Federal Tax Rules
Income Tax. Contributions made by the account owner or other contributor are not deductible for federal income tax purposes, but many states offer deductions or credits. Earnings on contributions grow tax-free while in the program. Distribution for a purpose other than qualified education is taxed to the one receiving the distribution. In addition, a 10 percent penalty must be imposed on the taxable portion of the distribution, comparable to the 10 percent penalty in Section 530 Coverdell plans. Also, the account owner may change the beneficiary designation from one to another in the same family. Funds in the account roll over tax-free for the benefit of the new beneficiary.
Gift Tax. For gift tax purposes, contributions are treated as completed gifts even though the account owner has the right to withdraw them – thus they qualify for the up-to-$15,000 annual gift tax exclusion. One contributing more than $15,000 may elect to treat the gift as made in equal installments over that year and the following four years, so that up to $75,000 can be given tax-free in the first year.
Estate Tax. Funds in the account at the designated beneficiary’s death are included in the beneficiary’s estate – another odd result, since those funds may not be available to pay the tax. Funds in the account at the account owner’s death are not included in the owner’s estate, except for a portion thereof where the gift tax exclusion installment election is made for gifts over $15,000. For example, if the account owner made the election for a gift of $75,000 in 2018, a part of that gift is included in the estate if he or she dies within five years.
Tip: A Section 529 program can be an especially attractive estate-planning move for grandparents. There are no income limits, and the account owner giving up to $75,000 avoids gift tax and estate tax by living five years after the gift, yet has the power to change the beneficiary.
State Tax. State tax rules are all over the map. Some reflect the federal rules, some quite different rules. For specifics of each state’s program, see http://www.collegesavings.org.
Considering the differences among state plans, the complexity of federal and state tax laws, and the dollar amounts at stake, please call the office and speak to a tax and accounting professional before opening a 529 plan.
The U.S. economy is growing at an above-trend pace, and the rest of the world seems to be finding its footing. Meanwhile, the Federal Reserve (Fed) continues to normalize monetary policy, and it appears that other central banks are following suit. Interest rates have come down off the highs seen earlier this year, and equity valuations are no longer looking as pricey. With this as the setup, how should investors think about navigating markets during the second half of the year?
With respect to growth, the second half of this year should be better than the first. The weakening in global goods demand that led to disappointing growth metrics in the first quarter seems to have worked its way through the system, with U.S. consumption expected to have grown by nearly 4% from a year prior in the second quarter, and retail sales in Europe showing signs of stabilization. Furthermore, the Purchasing Managers Indices (PMIs) and other soft data all point to a continued improvement in growth outside of the U.S. While the hard data will need to provide confirmation of this trend, the clouds which have been hanging over the international economy for the past few months finally seem to be breaking.
Solid growth in and outside the U.S. would align with policymaker expectations, leading the Fed to continue hiking rates and the European Central Bank (ECB) to hike for the first time around the middle of next year. If these expectations are realized against a backdrop of solid economic growth, it could lead the dollar to soften, providing a boost to emerging markets and supporting a resynchronization of growth as we approach 2019. This resynchronization of global growth could help alleviate trade-related concerns, and provide support for risk assets to move higher. With earnings growth looking solid, equity valuations in-line with or below their long-term averages around the world, and interest rates still historically low, stocks should be able to rally into 2019. However, diversification should remain the central tenet of any investment strategy given the political risk premium which continues to exist in markets around the world.