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Dear
Mark,
I
am still bullish for the small business environment for the remaining
part of 2011. However, it is worth noting that individuals are
becoming fatigue. Financial stress and exhaustion of modern life has
led many people to mental stress. Under mental stress human behavior
changes and people rationalize actions which are irrational to the
average person under normal circumstances. In many cases, the
situation has become desperate. As Horatio Nelson stated
"Desperate affairs require desperate measures." But what is
occurring is more sinister: desperate people are taking desperate
actions. These irrational and desperate actions will prolong any
recovery and extend this economic challenging era.Take advantage of
the current market opportunity and be ready to play defense very
soon.
Be
careful what you wish for! Many people wanted lower gas prices. Well
we received them, but the cost was a stock market crash were billions
of dollars of net worth was lost and a less robust economy. Perhaps
high gas prices is the worse part of a good economy?
Another
recession is looming! Historically, a recession occurs every four to
five years (47 since 1790 in the United States). Before 2007 we had
not had a recession for a number of years. Perhaps the average will
catch up and we will have the next recession earlier than expected.
Additionally, it should be noted, average tenure of a recession is
misleading; the deeper the economic slow-down the significantly
longer the resulting recession.
On
a final note, banks cannot foreclose on many properties because they
lost the original documentation and\or cannot prove they own the
mortgage. Additionally, the US Federal Reserve stated it would hold
interest rates low throughout 2013. My theory is banks will become
very liberal for refinancing home mortgages. Individuals think they
are getting a great deal (a super low long-term interest rate and
banks are actually going to give them money). On the other hand, the
banks will now be able to have the documents to prove they own the mortgage.
Best
wishes,
Mark
Wyssbrod, CPA
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S - Corporation
Update
Four
Major Updates for Small Business
 With deficits
overhanging our government, Congress has given the green light to the
Internal Revenue Service (IRS) to pick up enforcement. The
IRS has targeted small business for their
easy audit adjustments. The past several years the IRS
rhetoric has increased especially in the s-corporation arena.
S-corporation owners take heed!
Officer
Compensation
- The
Tax code requires officers of s-corporations to be compensated.
Officer compensation must be "reasonable". Reasonable
compensation may be translated into what is the fair market
value of the compensation on what would you have to pay someone
else for the same work.
- The
IRS has 40 years of tax court cases to prove the government has
the right to set the officer compensation. The IRS wins the
majority of the court cases with one basic premise: the company
has rewarded the owners, but not the managers. As a result the
equity distributions (not subject to Social Security and
Medicare) get reclassified to compensation (subject to Social
Security and Medicare)
- What
is a reasonable balance of officer compensation to equity
distributions? Every situation is different, so what might be a
good balance for some might not work for everyone. Generally
speaking, a fair balance is no less than 50% in officer
compensation and 50% or less in equity distributions.
Shareholder Health Insurance
- S-corporation
have always been required to report greater than a 2% owners
employee benefits on their W-2
- IRS
Notice 2008-1 issued in December 2007 re-enforces this position
- If the
s-corporation wants to deduct employee benefits to these owners
it must include them in the owners W-2. This includes health
insurance and long-term care insurance. Generally speaking, the
owner can then deduct these on their individual return directly
deductible against their income. If these are not reported on
the W-2 they may be indirectly (and limited) deduction against
income.
Equity Distributions
- The
IRS has demanded s-corporation behave as legal entities. This
means each equity distribution must have a board meeting, vote
and documentation of consent.
- The
IRS has successfully reclassified equity distributions to
officer compensation (subject to Social Security and Medicare)
when these formalities have not been followed.
Shareholder Loans
- The IRS
has demanded all debenture notes be documented and approved by
the board.
- A loan
document generally has the following components: lender,
borrower, address, amount, interest rate, collateral\security
and payment terms. Some loan documents have more complexities.
- Imputed
interest rate
- If
you have a related party loan with 0% (zero) interest rate and
a balance over $25,000 the IRS tells you haw much interest you
have to impute on the tax return. The imputed interest rate is
based on IRS published schedule of the Federal Applicable Rate.
- Therefore,
if a shareholder has a loan to the s-corporation for over
$25,000, even if the s-corporation does not deduct interest
expense on the loan, the shareholder is required to claim the
interest income on their individual return.
- If
the shareholder has been advanced over $25,000 at 0% documented
loan, the s-corporation is still required to report interest
income even though no interest will be collected form the
shareholder.
These are just a few of the major updates for s-corporation.
To learn more and be more specific to your s-corporation give us a
call.
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Deadline Reminder
Important
Dates to Remember
- September
15 - Final Corporation, S-Corporation, Partnership and
Trust Tax Return filing deadline for 2010
- October
1 - Final day to set up SIMPLE retirement plan for
2011
- October
15 - Final individual tax return filing deadline for
2010
- October
20 - Georgia sales tax returns are due
- October
31 - 3rd quarter payroll tax returns are due
- December
31 - S-corporation shareholders (owner of 2% or more)
must report their employee benefits in their W-2 (i..e. health
insurance, dental insurance, HSA contributions, etc.)
- December
31 - Deadline to set up SEP, 401(k) and other
retirement plans. You may need to fund the plans by this date as
well
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Black Swan Events
Bet
You Didn't See These Coming!
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 Only white swans existed, until a black swan flew
in.. Black swan events are events which were unforeseen. Unforeseen
events are not taken into consideration in forecasting models.
How accurate can models predict if Black Swan events happen on a
regular basis? Below is the most recent example of a a
Black Swan event that caught many off guard:
- August
2011 - US Congress waits to the final second to sign an
agreement not to default on US debt obligations. Perhaps
Congress should learn how to plan for major events instead of
last minute reactions?
- August
2011 - Wide ride on Wall Street. As Main Street is
stabilizing, Wall Street swung widely moving more than 500
points during the day for 6 consecutive days. Down ~5% and then
up ~5% multiple days in a row. Does anyone know what anything is
worth? Confusion leads to opportunity!
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IRS
Circular 230 disclosure: To ensure compliance with requirements
imposed by the IRS, we inform you that any U.S. federal tax advice
contained in this communication (including any attachments) is not
intended or written to be used, and cannot be used, for the purpose
of (i) avoiding penalties under the Internal Revenue Code or (ii)
promoting, marketing or recommending to another party any transaction
or matter addressed herein
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Financial
Ratio Of The Month - Inventory Days
The
Inventory Days (ID) is a measurement of the amount of inventory in
days you have on hand. If you are a business that works with
inventory, this will be an important ratio for you to follow.
The
ID equals.
(Inventory/Cost of
Goods Sold) X 365
Generally speaking the
lower the ratio the better (i.e. you are managing inventory
effectively). However, too low of a ratio could indicate you do not
have enough product on hand to meet demand.
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Contact
Information
11770
Haynes Bridge Road
Suite
205
Alpharetta,
Georgia 30009
phone:
(770)
664-8583
fax:
(678)
762-9413
www.pro-active-cpa.com
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