Tuesday, October 13, 2009

Long Term Care Insurance

Recently the IRS released guidance on the deductibility of Long Term Care Insurance. Long Term Care Insurance, has been around for many years, but compared to other insurance products this type of policy is considered a new type of insurance. These plans are designed to cover the rising costs associated with caring for yourself or your family as you grow older. There are many providers for this insurance, with many different coverage types, I will avoid the discussion of whether a policy makes sense for ‘you’ but rather focus on the concerns of a business owner considering the use of this policy.

Self Employed individuals:
Self employed individuals can generally deduct any LTC premiums paid for themselves, their spouses or dependents. In order to deduct these amounts, business owners must have a employer sponsored plan and deductibility would be limited to details specified in the plan document. Therefore LLC’s, S-Corps, and sole proprietors can deduct premiums for coverage of qualified members, subject to specific limits. Members are not allowed to participate if this coverage is available through their spouse, or through any other employer the owner works for, in addition to his business. In addition, businesses must have earned income to off-set with this payment, otherwise the amounts are non-deductible. Lastly, the amounts may be limited according to IRS rate tables that limit the extent of deductions for these types of contracts based upon age of the recipient (eligible LTC premium amount).

Employer/Employee relationships:
When an employer has employees and offers the employee group LTC coverage as a benefit of employment according to a plan written by the corporation, there are many potential benefits. One of the major benefits is that LTC insurance premiums are fully deductible and are not limited to the same income and personal age limitations that self employed individuals have to deal with (not limited to eligible LTC premium amount). Also benefits received are not included in the employee’s income and the employee can receive the LTC benefits tax-free. In this case, if you were an owner of a C-Corp, whom was also an employee, in theory there is no major difference between you and your other employees. Therefore, as long as your plan covers the employee group without consideration of ownership status, the owner-employee would be eligible for LTC insurance benefits.

Although, I have tried to provide plain-English explanations to this topic, please do not misconstrue this to mean that these plans are simple. If you have LTC planning considerations, please do yourself a favor and find a good insurance provider, and CPA that can go through potential benefits, and avoid costly mistakes associated with Long Term Care Insurance.

If you would like additional information on this topic please consult:
Code Sections: IRC 7702B; IRC 213(d)(1); IRC 162(1); IRC 162(a); IRC 106(a)
Finn, Daniel R., ‘Long Term Care Insurance and Tax Planning’ Journal of Accountancy. PP 44-47. August 2008 Edition.

Tuesday, September 1, 2009

Social Security Max. 2009

For the tax year 2009, employers are instructed to abstain from withholding social security tax after an employee reaches $106,800 in social security wages. This limit would limit an employee to paying $6,621.60 in social security taxes in 2009.

For 2008 the social security limit was $102,000 in social security wages, or $6,324.00 in social security taxes withheld.

Note- There is no limit on Medicare wages for either 2008 or 2009.

Monday, August 24, 2009

Keys to making Cash flow happen

Many business owners face this dilemma, I am busy, but the cash isn’t making its way to my bank account. I know what you may be thinking, this should not be a problem, but it is a problem for more businesses than you would think. In fact, many accountants would do well by more aggressively trying to collect on their overdue accounts. So, as a small business owner where do you start?

The first logical step is to set forth a plan of action. Without a sound plan you probably will not know who you should be collecting from, what types of things that should be said, and what types of results are realistic for your business. To help you set up an action plan here are some helpful hints.

1. Ask for the money. If you have completed work or have signed contracts which have payments in arrears, you have to be willing to demand payment. That doesn’t make you rude, it is as much how you ask for payment as it is what you want them to do, if you don’t ask for payment, they might not realize they are behind on payments.

2. Hold work until payments are satisfied. If you are in a position where you offer ongoing services, or better yet you have not delivered the product simply withhold the work until you are paid.

3. Offer a flexible payment option. If you have a really good customer whom you don’t want to lose, but also whom you can’t collect payments from on a regular basis, suggest a payment plan that can work for both of you. That way you keep your best customer and you are happy with the result. Just make sure that your agreement is enough to cover continuing work so that amounts owed do not keep piling up.

4. Consider adding late fees or pre-payment agreements with certain customers. For your habitual offenders this is often the best option. They will not like that they are charged interest on the money and may pay up. One word of caution, it is best to talk with your customers before you make this change; it is never good to give your customers bad surprises.

5. Always the last resort, take the customer to collections or small claims court. You want to exhaust all other options before this one as you are likely to lose this customer after this step. Unfortunately, this is often the only way businesses can collect on amounts they are owed.

Once you have your plan of action formulated, follow through with your efforts. It is stressful for most people having to call and ask for payment, but more often than you would think people are willing to work with you to make things right.

Friday, July 24, 2009

Energy Tax Credits: trying to make sense of it all

These days it seems like everyone is trying to do some small things to save money and/or help the environment. Recent tax credits offered from the federal government and State of Michigan hope to encourage this behavior. But, with new and changing credits come increased layers of confusion. If you are as confused as the rest of us on what credits are available to you as part of this new initiative, there is a bit of good news. The Michigan Alternative & Renewable Energy Center at Grand Valley State University has recently compiled some useful guides that should help to take the pain out of these tax credits.

They have both quick reference guides for those of us that need to know what types of credits are available to individuals and businesses, and more detailed information for those of us that like to know all the details (See the link below).

Another source that may be helpful for individuals would be form 5695 from the IRS (link below) or this IRS release regarding business energy tax credits.

Michigan Alternative & Renewable Energy Center release

IRS form 5695

IRS release regarding energy tax credits

Friday, July 17, 2009

To extend my posting earlier this week

Earlier this week I posted a blog titled Economic Free Fall Part I. In connection with this posting I wanted to point out that new unemployment rates came out this week. There were no surprises in this report (unfortunately). Here is a link to an article on yahoo about the newly released unemployment rates in which Michigan earned the unenviable position of first (and highest unemployment in over 25 years).


Thursday, July 16, 2009

Insurance for all may get ugly for small businesses

I have no problem with the concept, insurance for every American is something that I believe would be helpful for a majority of Americans…If it does what it is designed to do, and that would be to make health insurance affordable and/or available to all Americans. But as science teaches us: every action has an equal and opposite reaction. So we begin the real fight: WHO IS TO PAY FOR THIS PROGRAM?

Under a recently released house measure (this is not a bill, it has not passed) members of congress would like a big investment from small businesses to further this initiative. Congress would structure a penalty system for small businesses that do not provide health care to their employees and it would be structured something like this:

Employers with payrolls: Penalty amount (of gross payroll):
Over $400,000 8%
250K – 400K (some smaller penalty)
Less than 250K Exempt from penalty

To further this cause, employers with payrolls less than $250,000 would be offered a tax credit as an incentive to offer health insurance.

According to the National Federation of Independent businesses this measure would affect more than one million small businesses.

Normally I don’t comment on bills that have not been finalized, but this would be a major shift in tax policy for small businesses.

Also check out a great article in the wall street journal that I gleaned much of the facts from, and from which you can extract more information.


Tuesday, July 14, 2009

Economic freefall part 1

A recent study by the University of Michigan estimates that michigan unemployment should peak in 2010 at nearly 16%. This is a staggering estimation keeping in mind that Michigan's current unemployment rate is over 12% and climbing and the full effects of manufacturing and tool and die unemployment may increase as the big three auto makers 'make-over' their companies. The one ominous fact left out in this study was an estimation for the future.

While they believe the unemployment rate will stabilize in 2010, there is no further estimation for when things 'go back to normal'. Unless they believe this high level of unemployment is the new normal (in which case we are all in trouble). I guess what I am trying to say is that our state, and the state of our economy is in big trouble. When you begin to measure the number of unemployed people as a fraction of 1 in 7 (actually higher than this), you begin to wonder how to take these people off the unemployment roles.

Many people talk about education as the key. What most people fail to understand is that many highly educated people are out of work. Yes we have lost many jobs related to GM, Chrysler and others, but many of the jobs are tool and die related jobs that take highly skilled laborers and are very worker intensive. When Michigan businesses look back at this time they will think one of two things, either this change was needed to bring us into the 'new economy', or this was the wake up call (that we missed) showing us how important manufacturing really is to our nations' economy. I am not trying to strike fear in the hearts of Americans, and I would very much like to be wrong, but as the days pass I am leaning much more toward the later.

Wednesday, July 8, 2009

Personal Service Corporations

One of the things that keep accountants up late at night is heavy taxation. That is why most accountants dread the deadly little pill that is Personal Service Corporations (PSC) and Qualified Personal Service Corporations (QPSC). Any corporation in which substantially all the activities of which involve the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial, performing arts, or consulting, and substantially all the stock, by value, is held directly or indirectly by employees, retired employees, the estate of any such employee or former employee is deemed to be a Qualified Personal Service Corporation .

For this purpose the test for ‘substantially all’ is defined as 95% or more of the time spent by employees of the corporation is devoted to these activities. This also includes auxiliary functions that may support the proper function of these services. Such functions include the supervision of employees, and support services that may be related to the proper function of the business as a whole. This same 95% test applies to the ownership of the business function.

The largest stigma of all is the fact that if you fit the QPSC test(s) you are taxed at the highest corporate tax rate of 35% on all earnings. Even the average C Corporation has a much more favorable tax rate than this form of entity.

If you are a new business preparing to incorporate, please keep these facts in mind as there are few benefits and many pitfalls associated with this type of entity. Also, if you think you own a personal service corporation and these issues have not been addressed, contact a qualified adviser or send me an e-mail at tonym@dalbergandassociates.com.

Monday, June 15, 2009

SEPs : Follow the law and everything will be okay

As business owners prepare for the second half of 2009, there are tax planning opportunities that can be advantageous even in the middle of a tax year. One such opportunity is employing a retirement plan for an employee group. I am covering one retirement plan type here, but there will surely be more to follow in the future.

Many employers have heard about SEP plans, and many small businesses use them as a helpful retirement vehicle. SEP stands for simplified employee pension, which allows for employers to contribute amounts to employees’ SEP individual retirement accounts or SEP-IRAs.

SEP plans are usually employed in small businesses as a retirement vehicle for closely held corporations and partnerships in place of traditional IRAs which have lower contribution limits. In 2009 the maximum contribution for a IRA is $5,000 while the maximum contribution for a SEP is limited to the lesser of 25% of compensation (W-2) or $49,000. So you can see the potential upside to contributing larger amounts per year to your retirement plan through a SEP plan.

It is easy to set-up a SEP plan; there are only three general rules to follow. First you have to set-up the plan. Your business can do so by either filling out IRS form 5305-SEP or any other equivalent form provided from a financial institution. Second, you have to provide all employees with a copy of the plan. Last, you have to set-up SEP-IRAs for or by each individual employee.

Once you have the plan set-up you only have to follow two very important rules. One, you have to make substantially equal payments to all employees covered by the plan. For this test note that substantially equal means that contributions can be tied to a percentage of W-2 wages, or you can use the same contribution for all employees. Second, you have to remember to always contribute amounts equally to all covered employees, even if you are husband and wife and you see your compensation as ‘shared’.

Remember that you may be able to restrict the definition of covered employees to exclude those employees that have not completed a time of service restriction, or may be considered part-time or seasonal employees. Beyond these restrictions, the only maintenance a SEP Plan should have after the initial set-up would be verifying that contributions have been made substantially equal to all employees that qualify. If you do these things you should have a very beneficial retirement plan without many of the restrictions imposed by other plans (as long as the stock market doesn’t consume all of your savings J).

Thursday, May 28, 2009

NOL carry-back for eligible small businesses

All businesses have a window of opportunity to carry-back losses (known as NOL or Net Operating Losses) to a prior period in which they had earnings (and therefore income tax payments) in order to receive refunds of these amounts. This carry-back period had been only two years under prior tax law. Now the carry-back period has been extended to five years for qualifying small businesses for tax year 2008 only; a major benefit to businesses that have been adversely affected by the recent economic downturn.

In connection with this change, if your company previously elected to forgo the carry-back period because it would not have been beneficial, you can now reverse that election and choose to carry the amounts back to 3, 4 or five years. This is a one-time allowance to reverse your election to forgo the carry-back period.

To make matters better, a non-fiscal year ending business can elect to either use the carry-back provision in the year that begins or ends in 2008. Very good news for those businesses as it gives them the flexibility to plan themselves into a loss for either year and maximize this one-time carry-back extension.

Eligible small businesses are those that have had $5 Million in Gross Receipts or less on average over the last three years ending with the year they are attempting to claim the refunds in question. So if you own a business that has averaged less than five million per year in gross receipts over the last three years you are an eligible small business for purposes of this test. Please note that the rules are not this clear-cut in all cases and certain other businesses may be eligible, and generally the IRS has furthered the definition as Section 172(b)(1)(F)(iii) businesses replacing 15 million with 5 million for purposes of the gross receipts test.
There are also many specific filing requirements that may be pertinent to your specific case, with that in mind please consult a tax professional or consult Rev. Proc 2009-26

Thursday, May 21, 2009

New IRS 941-X: Finally a tax form that makes sense

The IRS recently released a new form for correcting previously misstated federal withholding amounts. This new form, form 941-X replaces the previous form 941c, Supporting Statement to Correct Information.

If you have ever worked with the old form 941c, you will love the changes 941-X has offered. With the old form you had to separately calculate discrepancies for social security withheld, Medicare withheld, social security matched by employer, etc., then you had to show the difference for each line item instead of using a simple grouping method (that would have been more than sufficient). The 941-X makes simple changes that allow for much easier explanation of discrepancies found by employers.

Another difference is that with the new 941-X, if you have both over-reported and under-reported your 941 liability for a tax period, you must file two separate 941-x statements to correct your mistake.

In connection with this change, the IRS has also eliminated interest charges on errors corrected with form 941-X. In order to qualify for the interest free adjustment, a business must file and pay for adjustments with form 941-X by the due date of the return for the return period in which the error was ascertained. If you do not pay the amount due to the adjustment, then interest will accrue from the time the return was due to be filed (per Code Sec. 6205).

Example: On February 11, 2009, you discover that you under-reported $10,000 of social security and Medicare wages on your 2008 fourth quarter form 941. File 941-X and pay the amount you owe by April 30, 2009 because you discovered the error in the first quarter of 2009, and April 30, 2009, is the due date for that quarter. If you file form 941-X and pay the amount when you file (before April 30, 2009) you will avoid interest on your discrepancy.

If you have further questions related to under-reporting of tax liabilities consult a tax professional or access this link to the IRS form 941-X instructions.

Note- This only applies to previously filed form 941 if you file 941-X within 3 years of the date form 941 was filed or 2 years from the date you paid the tax reported, whichever is later.

Friday, May 1, 2009

Standard Mileage Rate for 2009

Recently the IRS increased the standard mileage rate for personal use of a vehicle for business. As many small business owners are aware, this rate is the rate that employees can be reimbursed for business use of a personal car. If a company vehicle is used, business owners cannot take standard mileage rates.

For 2008 the standard mileage rate from July 1, 2008 through Dec 31, 2008 was 58.5 cents per mile.

For 2009 the standard mileage rate has been decreased to 55.0 cents per mile. This change has been effected through both increasing average cost of vehicle ownership, and the decreased relative cost of gasoline.

Monday, April 27, 2009


Depreciation is an item that most small business owners worry about, and an item that has experienced many changes recently. Although the premise of depreciation remains the same; the idea that certain items purchased have a life that benefits the business beyond one year, The Small Business and Work Opportunity Tax Act of 2007 (or SBWOTA) and the Economic Stimulus Act of 2008 brought many changes. Including increases to the allowable deduction of both sec. 179 depreciation expense and sec. 168(k) or “bonus depreciation” as it is more commonly known.

For 2008 section 179 depreciation expense increases to $250,000 for qualified property with a phaseout threshold to $800,000.

For 2009 section 179 depreciation expense decreases to $133,000 for qualified property with a phaseout threshold to $530,000.

For 2008 Section 168(k) “Bonus Depreciation” expense increases to 50% of qualified property for first year purchases, aka purchases made in 2008.

As of this date, there is no “Bonus Depreciation” expense allowable for the calendar year 2009.