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Host: Thomas P. Ochsenschlager, vice president of Taxation for the American Institute of Certified Public Accountants

Time: Thursday, December 22, 2005 at 1:00 p.m. EST (10:00 a.m. PST)

Topic: “Tax Planning & Preparation for Small Businesses”

Thank you for joining Host Thomas P. Ochsenschlager, vice president of Taxation with the American Institute of Certified Public Accountants, on the topic "Tax Planning & Preparation for Small Businesses." Please join us again, next month, as we address topics of interest to the small business entrepreneur.

From : AICPA
Location :

Question :

Reply :
Unfortunately, the Web chat time has ended. I’ve enjoyed conversing with each of you. Remember, we are providing the best answer possible in the circumstances of a webcast, without having full knowledge of all the details of the taxpayer’s circumstances and an opportunity to conduct in-depth research. The AICPA and its employees cannot assume liability for tax advice being given in this webcast, and before acting on any advice we provide, you should consult a CPA or other competent professional. Also, we are required by the IRS to provide the following notice: Any tax information in this webcast is not intended to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. My best wishes for a happy holiday season to each of you! Today's chat will be archived on the SBA's Web site at www.sba.gov/chats.

From : Chris Thomas
Location : Cincinnati , Oh

Question :
Is it possible for the new 401(k)/Roth IRA to work in conjunction with or even co-exist with a SIMPLE plan? If so, what is the best way to accomplish this?

Reply :
I'm not sure off the top of my hat.

From : Craig Maynard
Location : Middletown , Ohio

Question :
I understand that a tax credit is coming out in 06 for buying energy efficient boilers and furnaces. Do you have any details?

Reply :
I'm sorry, these rules change frequently and I have not committed them to memory.

From : Mary Lofton
Location : Jersey City , NJ

Question :
I operate a small nail salon in Jersey and want to know what kinds of tax breaks I can take advantage of.

Reply :
the one that ocmes to mind is the "bonus" depreciation also known as the "179" deduction that we described earlier. This allows you to expense a lot of the assets that you buy during the year. but this is a question that is difficult to answer in the time that we have available.

From : Candace
Location : Washington , DC

Question :
Back to Evan F’s question about cash method of accounting – Could he expense certain capital investments if he took advantage of section 179 expensing?

Reply :
Yes, section 179 allows expensing of certain items that would ordinarily need to be depreciated. To qualify property must be purchased for use in an active trade or business as distinguished as property acquired for the production of income. There are other requirements as well all of which should be checked before using the benefits of Section 179.

From : lydia
Location :

Question :
The Irs publishes calendar to keep track of your taxes. You may request it from the irs web site,

Reply :
Thank you Lydia

From : Chris Thomas
Location : Cincinnati , OH

Question :
What are the biggest advantages/disadvantages for an individual looking to start a sole proprietorship to form an LLC?

Reply :
LLC offers the advantage of limited liability (shareholders generally not liable for corporate debts). A disadvantage is the necessity of filing a separate tax return for the LLC.

From : Gary Byers
Location : San Antonio , TX

Question :
What kind of assistance does AICPA offer to small business owners? Are you located in my area?

Reply :
The AICPA's 360 Degrees of Financial Literacy program offers a broad range of resources to small business owners. The URL is http://www.360financialliteracy.org/Life+Stages/Entrepreneurs/

From : Toni-Anne
Location : New York , NY

Question :
Are there any eductional programs provided by NY State to help with questions that small business owners have on an ongoing basis?

Reply :
The AICPA doesn't have a hotline for technical questions, but possibly the New York State Society of CPAs does, and they can be reached at 212/719-8300. Also, some of the small business organizations may provide resources to members. There's a lot of good information aimed at small businesses on the IRS website.

From : Toni-Anne
Location : New York , NY

Question :
Do corporate tax returns and state tax filings absolutely need to be done by an accountant or is this something I might be able to do myself?

Reply :
There is no legal requirement that you use an accoutant to prepare your return. You can do it yourself. However, I would recommend that, at least in the initial year or two, to have a professional help you becasue there are a lot of complexities, elections etc, that might take you a long time to understand. After the first year or so, if your busienss falls into a regular pattern you might be able to do your own return fairly efficently.

From : Toni-Anne
Location : New York , NY

Question :
Is there a way that I can electronically keep track of the tax deadlines in each year?

Reply :
I'm not aware of any that are electronic in nature that would seem to serve you needs. If you use a Palm or other software calander system you may want to type them in as annual events etc. The IRS website may also offer you some assistance in this where you could customize it for your own business.

From : John Norsworthy
Location : Carrollton , TX

Question :
I just started up a small staffing company. I expect to start making temporary placements next year. I am very ignorant of what are acceptable rates with regard to tax planners and/or preparers. Is it possible for you to give me a ball park range of what I should expect to spend for these services? Or is that outside of the pervue of this web chat? I just want to make sure I don't get taken to the cleaners.

Reply :
There's no standard schedule of professional fees, but generally CPAs base their charges on the number of hours and the degree of expertise required. Also, rates vary depending on costs in a community, with big city rents and costs being higher than small town rates. Fees are generally competitive, but to protect yourself, the hourly rate or the total fee should be agreed in advance, along with the scope of work to be performed.

From : Toni-Anne
Location : New York , NY

Question :
I have a very small home based business. My biggest problem is finding an accounting firm that will help prepare my statements that will not eat up all of my profits. Is there anywhere I can turn to get help?

Reply :
Iwould suggest that you call the New York State Society of CPAs at 212-719-8300. They may be able to refer you to someone.

From : Chris Thomas
Location : Cincinnati , oh

Question :
Are there any major changes to S Corporation tax for 2005?

Reply :
There are a few changes that are effective for tax years beginning in 2005 but most are probably not of great concern. Here are a few: 1) An S corp may now have 100 shareholders instead of 75; 2) to get to that 100 number, members of families can now elect to be treated as one shareholder (it used to be that just a husband and wife that both owned stock were treated as a single shareholder); 3) Both the statutory and administrative law now require that S corporation 100%-owned subsidiaries (QSubs) must have their own EIN for purposes of filing payroll and excise tax returns whereas before S corp subs had a choice to use their own EIN or the EIN of its parent; 4) beneficiaries of qualified subchapter S trusts can now utilize passive losses and at-risk amounts after the trust sells the S corp stock; 5) if you use electing small business trusts, there are some complex rules that make using some trusts much easier to use; 6) more relief has been provided when you mess up certain S corporation-related elections; 7) when stock is transferred between spouses (usually incident to a divorce) the receiving spouse is now allowed to utilized losses that were unusable by the transferring spouse because of not enough basis, etc. There are a few others, but time is short. Also, a few are anticipated in 2006, but I guess we'll talk about that later.

From : Carol Penny
Location : Chicago , IL

Question :
How does the Alternative Minimum Tax (AMT) work?

Reply :
AMT is very complex and difficult to explain but in VERY genreal terms certain deductions available for lreglar tax are not permitted for AMT, one of the major differences is accelerated deprecaiton which is less generous for AMT purposes. If, after you add back these deductions and apply the AMT tax rate your taxes are greater than your "regular" tax then you pay the higher of the two amounts. However, generally a small busienss that is a regular "C" corporation defined as one that has average annual gross receipts of $7.5 mil or less over the prior three years is not subject to AMT tax. That test is reduced to $5 mil for the first 3 years of the corporation's existance.

From : Evan F.
Location : , CA

Question :
Also in response to the accrual vs. cash accounting question you answered below, you mentioned that "In most cases, but not all, these need to be capitalized and depreciated or amortized (for intangible assets.)" Where can I find more information on which cases I can expense an asset and what cases I must capitalize, or is the only rule the useful life threshhold of 1 year?

Reply :
Intangibles must be amortized over 60 months, and can't be directly expensed under Section 179. Generally, Section 179 applies to tangible personal property, except for off-the-shelf computer software which can be directly expensed. For a small business, you can directly expense capital assets placed in service up to $105,000 in 2005. This phases out for larger businesses beginning when assets placed in service in a year are more than $420,000, completely phasing out at $525,000--again, this doesn't apply to most small businesses! Otherwise, generally, you would elect to directly expense under Section 179 to accelerate the tax benefit of the deduction, unless you believe that your tax rate will rise dramatically in later years.

From : Muriel Mitchell Lawrence
Location : Trenton

Question :
The Sarbanes-Oxley law to reduce amdinistrative burdens that was being considered by Congress was looking at a 50% tax credit. Any more on that?

Reply :
I'm not aware of the provision you're referring to.

From : Dee
Location : , Washington, DC

Question :
What is the minimum amount per quarter that I can pay a part-time employee (family member) without having to pay taxes? In the past I thought it was $250.00 per quarter. Is that still correct.

Reply :
If the family member is an employee of a family-owned business, you are responsible to treat him or her as an employee for all purposes including unemployment insurance, worker's compensation, federal and state income tax withholding and FICA taxes. There is no real exemption, per se, that I am aware of in your situation. The $250 amount you may be referring to may relate to federal income tax withholding as determined based on a Form W-4 that your family member should submit to you. If he/she only makes a small amount of money (from all sources) during the year and therefore will not be subject to a requirement to file a Form 1040 for the year, then s/he may indicate on the Form W-4 that s/he qualifies for exemption from federal income tax withholding and you won't have to withhold. There is probably a similar exemption available at the state level. But this exemption does not apply to FICA and I don't believe it applies to workers compensation laws or unemployment insurance. Those laws have their own set of rules outside of tax law and usually define by statute who must be covered under an insurance policy (worker's comp) and under the unemployment insurance laws. But check with your state regarding those latter two issues. This answer may also depend on what type of business you operate and what the family member's duties are and where her place of work is.

From : Mary Lofton
Location : Jersey City , NJ

Question :
Are there any particular tax advantages I should look out for?

Reply :
Can you tell us a little more about your business?

From : Can
Location

Question :
Back to Evan F's question about cash method of accounting – Could he expense certain capital investments if he took advantage of section 179 expensing?

Reply :
Yes, he can. I ducked that point in my answer to him when I said with "some exceptions" Thanks for calling this to my attention and please see the more detailed answer to Evan that will follow shortly.

From : Evan F.
Location : , CA

Question :
Thanks for the clarification of the cash vs. accrual bookeeping issue; I recall having read somewhere that equipment purchases up to a certain limit (I believe somewhere around $100k this year) could be expensed and therefore the deduction realized in the current period instead of over the life of the asset. Did I misinterpret the rule?

Reply :
No, you didn't misinterpret. For 2005, the maximum deduction amount is $105,000. For small businesses, this is an acceleration of the deduction because you can expense it immediately rather than depreciating it over a longer period. It doesn't work for larger businesses because it's phased out when you acquire a lot of assets in a year. By direct expensing of an asset under Section 179, you also avoid a lot of record keeping and having to deal with the complexities of depreciation, but again the real value is the acceleration of the expense.

From : Dennis L. Ziegelmeier
Location : Orlando , FL

Question :
What is the best resource for accurate daily information on specific tax issues for Home Based Businesses?

Reply :
I can’t think of a daily news report on tax issues for home-based businesses. There are a number of daily news publications, including BNA’s Daily Tax Report and Tax Analysts Tax Notes Today, but these cover broader tax issues. You might find some web-based groups that share your specific interests.

From : Gee
Location : Buffalo , NY

Question :
I am small scale food manufacturer and sell my produts to retail stores, I am register my biz as DBA. Please tell me do I need to form a coporation or LLC etc? Thanks.

Reply :
This is not so much a tax question as one of legal liability. If you are sued as a corporation, your exposure is limited to the assets of the corporation. If you don’t have the corporation, your entire personal wealth is at stake. You should consult with a CPA to decide what form of business organization might be most desirable from a tax standpoint.

From : Lydia E. Robles
Location : Hyattsville , Maryland

Question :
Dear Mr. P. Ochsenschangler: Does the American Institute of Public Accountants publish books on the subject of taxes for the small bussiness owner? Thank You in advance Lydia

Reply :
AICPA publications and courses generally are intended to help CPAs better serve their clients, and are written at a fairly sophisticated level that assumes a strong background in taxes. The IRS website (www.irs.gov) has a great deal of information on small business taxation, as does the SBA website. Also, your CPA can help with any small business tax questions you may have.

From : Jim Fortune
Location : Ft. Lauderdale , Florida

Question :
In the aftermath of Hurricane Wilma, I heard a TV business commentator say to write "Hurricane Wilma" in red on the top right hand corner of my quarterly tax payment check. I did it, but never heard why I should have or who is supposed to do what from this point. Can you tell me please?

Reply :
For taxpayers in areas affected by Hurricane Wilma, the IRS extended due dates for certain required submissions, like quarterly estimated payments. To help identify those entitled to relief from penalties for late payments or filings, the IRS asked that taxpayers write “Hurricane Wilma” in red on the tops of returns or checks.

From : Anna lee Johnson
Location : Bluffton , s.c.

Question :
Tell me all you know about tax credit apartment communities in beaufort.I am going to be a property manager in that area and want to know the wants and needs that need to be met for the residents in that area.

Reply :
I think you are referring to the “low income housing” credit. The key for the investors to receive the credit is that a certain percentage of the renters must be low income individuals. This is a somewhat complicated test but generally either 1.) 20% of the units must be rent restricted and rented to individuals whose income is no more than 50% of the areas median income. The other test is similar – 40% of the units must be rent restricted and rented to individuals whose income is no more than 60% of the areas median gross income.

From : Julia Taylo
Location :

Question :
Can you please provide a referral list for tax preparers that "specialize" in assisting small businesses? I live in Washington, DC and have asked a number of friends for a referral but none of them seem to be pleased with the preparers that they are presently using.

Reply :
The American Institute of CPAs does not have a small business referral list. However, individual state CPA societies often are able to make referrals. The telephone number for the Greater Washington Society of CPAs is 202.204.8014. The telephone number for the Maryland Association of CPAs is 410.296.6250, and the telephone number for the Virginia Society of CPAs is 804.270.5344.

From : Evan F.
Location : , California

Question :
What strategies can partners/shareholders of entities with pass-through taxation (partnerships, S-corps, etc.) use to reduce personal tax liability on earnings that get filed as distributed to them on their tax returns due to the owner's distribution agreement, even though some of those earnings are in fact retained by the company as operating funds?

Reply :
First, if you are a partner or an S corporation shareholder, by law you pay tax on what is “distributable” not on what is “distributed.” The entity earnings that show up on a Schedule K-1 do not purport to be distributed to you in cash or property, they are simply items that you have a right to be distributed at some point in time or that otherwise effect your owner’s capital account in a positive way (e.g. they may reduce your liabilities/obligations to the entity). What is actually distributed to you, does not show up on a Schedule K-1, but are amounts that are used to keep a running balance on your basis in the entity for purposes of figuring what is taxable and what is not. The distribution agreement most often allows for distributions to pay for an owner’s estimated taxes, and for whatever else an owner and the entity agree to such as the owner’s living expenses. The “retained” earnings still affect the owner’s taxable income in a positive way because they increase an owner’s basis and therefore decrease the taxability of distributions that are actually made. So, while you are taxed at the time the income becomes distributable, your basis is also increased so that when an actual distribution is received, you are taxed that much less on the actual distribution. Indeed, a passthrough owner may suffer the symptoms of delayed gratification, but this is a fact of life with these entities that owners need to understand. The ways to offset these timing differences might include making additional capital contributions in the year the profits are distributable or finding other ways to increase basis (in a partnership, it might include taking on additional liabilities). Offsetting these items may also be possible in nonbusiness-related ways with 1040 planning or with other business activities.

From : Evan F.
Location : , CA

Question :
We are service company and have always used cash-based accounting, expensing all our relatively negligible capital purchases so that other than cash, we have no assets on the books. We are considering a conversion to a C-corp, but are concerned about the tax implications of switching. Does a C-corp HAVE to use accrual-based accounting, or if not, are there actually benefits to the increased burden of bookkeeping under the accrual method? We never intend to go public or anything like that.

Reply :
If you do not have inventories then even as a C corp you can use the cash method if your average annual gross receipts are $5mil or less over the last three years. Keep in mind however, just becasue yoou're on the cash method does not mean you can expense purchases of assets that you expect to have a useful life of more than a year. In most cases, but not all, these need to be capitalized and depreciated or amortized (for intangible assets.)

From : Cherylle Morrow
Location : Honolulu , HI

Question :
Why would a Limited Liability Company choose to be taxed as a Corporation or an S-Corp?

Reply :
A limited liability company (LLC) can be taxed either as a C corporation, S corporation, partnership (if it has 2 or more members) or ignored and treated as a sole proprietorship or a corporate division (if it has only one member). So, if your LLC is 100% owned by one individual, your three choices are sole proprietorship (file Schedule C if the owner is an individual), C corporation (must elect to be taxed this way on Form 8332), or S Corporation (after electing to be a C corporation, you must file Form 2553 to elect S status; the S election can be effective that same date as the election to treat the LLC as a corporation.) If your LLC has two or more members, than it, by default, will be treated as a partnership (Form 1065 must be filed annually), but the corporate elections mentioned above may be made. If your question goes to why an LLC would choose to be taxed as a corporation over a partnership, this is not the norm. A few reasons why this may be done is that certain types of highly regulated businesses, such as financial institutions, must be treated as corporations; or an existing corporation that is acquired by an LLC may have numerous assets that are registered for state purposes in the name of the corporation and so continuing as a corporation might avoid hassles related to the transfer and retitling of assets. Other folks simply have the idea that S corporations are easier and more taxpayer-friendly than LLCs because the rules are more well known and better tested in the courts. This is quickly becoming less and less true as the courts get comfortable with the limited liability protection of LLCs; as states enact more LLC-friendly laws; and as practitioners get more comfortable with setting up the governing documents required of an LLC and of advising on their tax implications. S Corporations and LLCs that are treated as partnerships or sole proprietorships both offer the taxpayer a single level of federal taxation and most states recognize the federal treatment. A few states do not and levy taxes on either an S corporation or an LLC as though it were a separate entity. The transfer of interests to heirs, etc in LLCs are becoming much better understood and are generally no more difficult to value and transfer than stock in a closely-held corporation. A partnership has an advantage that the owner’s “basis” (investment in the partnership and therefore the amount that can absorb the pass-through of operating losses tax-free) includes a portion of the partnership’s debts such as accounts payable and other liabilities, whereas the basis to an S corporation shareholder only includes debt that is money/property that the shareholder directly loaned to the corporation. If your question goes to the differences between regular (or “C”) corporations versus S corporations, then clearly the S corp is the way to go as long as you meet the requirements (e.g. can’t have more than 100 shareholders, can’t have certain types of shareholders, can’t earn too much passive income). But once you are a corporation, it may be hard to convert back to a partnership without paying a tax on the fictional sale of your appreciated assets at the time of conversion. There are many differences between S corporations and partnerships (and many similarities) well beyond the scope of this forum. Your choice will depend on the type of business you are in, the history of that business, the anticipated future growth, whether you would like to structure the sharing of your deduction (and other) items differently than simply based on your percentage ownership of the business, and on many other factors.

From : Muriel Mitchell Lawrence
Location : Trenton , New Jersey

Question :
Any further information about tax credits to assist small businesses in providing health insurance for their employees?

Reply :
Rising health insurance costs are a major problem for small businesses, and the tax law has some provisions to help, although I don't know of any credits for health insurance. One provision that might be worth looking into is a health-savings account, coupled with a lower cost, but high-deductible health insurance. This way, the employee gets to deduct payments into a fund to take care of him or herself for small expenses (making the expense tax deductible) and the insurance kicks in for major expenses. This cuts insurance costs for companies and employees, alhtough there may be problems if there are a lot of expenses before the fund is built up. For medical insurance planning, you should definitely consult a CPA or other competent professional.

From : Candace
Location : Washington , DC

Question :
Do you think the cost of calculating the new manufacuturing deduction will out weight the benefit to small firms?

Reply :
that's probably a yes particualrly when we're only talking about a 3% deduction this year. As it gets phased up to the 9% level it might be more worthwhile. But keep in mind, if you are only a manufacuturer i.e. no services etc and have no foreign components then the ocmputation is much simplier - its just 3% times taxable income limited to no more than 50% of the W-2 wages.

From : Craig Maynard
Location : Middletown , OH

Question :
I believe David was referring to a state of Ohio initiative with the Corporate Franchise Tax.

Reply :
It’s my pleasure to have the opportunity to join the SBA’s web chat series as the host for the December web chat, Tax Planning & Preparation for Small Businesses. I’d like to welcome everyone who is joining us today. Please note that we are providing the best answer possible in the circumstances of a webcast, without having full knowledge of all the details of the taxpayer’s circumstances and an opportunity to conduct in-depth research. The AICPA and its employees cannot assume liability for tax advice being given in this webcast, and before acting on any advice we provide, you should consult a CPA or other competent professional. Also, we are required by the IRS to provide the following notice: Any tax information in this webcast is not intended to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Let’s get started!

From : Craig Maynard
Location : Middletown , OH

Question :
I believe David was referring to a state of Ohio initiative with the Corporate Franchise Tax.

Reply :
Thank you, Craig, for that clarification. The Ohio corp tax is being pahsed out and replaced with a gross receipts tax.

From : Sabrina
Location : Los Angeles , CA

Question :
I just started a company with my husband and we're wondering if we're liable for unemployment taxes since we don't have employees.

Reply :
If you are a corporation, you are probably liable for unemployment taxes because officers of a corporation are treated as employees of their corporation for a number of purposes generally including unemployment insurance. On the other hand, generally, if you are self-employed (sole proprietor or partner in a partnership) you are not liable for unemployment insurance unless you have [non-owner] employees. S Corporation owners are considered employees and are liable for unemployment insurance on themselves. Remember that unemployment insurance compliance is a joint federal/state undertaking and you will have to check with the laws of your specific state.

From : Dustin Stamper
Location

Question :
Is the AICPA concerned about the list of average fees for tax preparation that the IRS plans to include in the 1040 booklet for the 2006 filing season?

Reply :
Yes, the IRS has lumped commercial and professional return preparers into its statistics so that the numbers don't reflect the cost of preparing a true professional return. A commercial preparer might be a high-school dropout who has had a brief course in return preparation, and this doesn't compare with the education, experience, and commitment to service of a professional. The AICPA complained to the IRS, but the instructions had already gone to print.

From : mike
Location : hinckley , ohio

Question :
i would like to know how i can get my step dads shop back without going to court or useing an sba loan or funding for it..

Reply :
I’m afraid your question sounds like it’s more of a legal issue rather than a tax issue. I would suggest that you consult an attorney who specializes in small business.

From : David Kronour
Location : DAYTON , Ohio

Question :
What tax is replacing the Corporate Franchise Tax and when will companies be subject to the tax?

Reply :
David No tax is replacing the corporate tax, at least not this year and maybe no ever. You’re probably thinking about the recommendation of the President’s Tax Reform Panel that developed two proposals one of which would repeal the corporation income tax and replace it with a “consumption” tax. However, this proposal has considerable distance to go before it could become law. Secry of Tres Snow is going over the proposals now in an effort to see what, if any, recommendation he makes to the President. Also any such change is likely to be politically controversial. So, at this time, it is far from clear that the corporate income tax will be eliminated.

From : AICPA
Location

Question :