2007 Small Business Tax Workshop Material

Table of Contents / Page No.

HELPING CLIENT READ FINANCIAL STATEMENTS  1-20
Balance Sheets  1 - 9
Assets  2
Liabilities  2
Equity  2
Historical Values  3
Current Assets  5
Long Term Assets  6 - 7
Current Liabilities  7 - 8
Long-Term Liabilities  8
Types of Equity  8
Income Statements  10
For the Period Ended  10
Seeing the Big Picture  10
Sales Revenue  10
Cost of Goods Sold (COGS)  11
Gross Profit  12
Other Expenses  12
Statement of Cash Flow  14
Basic Structure of Statement of Cash Flows  14
Cash Transactions from Ordinary Operations  15
Cash Transactions from Investment Activities  15
Cash Transactions from Financing  15
Adjustments for Operating Activities  15
Adjustments for Investing Activities  16
Adjustments for Financing Activities  16
Return on Sales (ROS)  17
Return on Assets (ROA)  18
Gross Margin  18
Operating Margin  18
Net Profit Margin  19
Interest Coverage Ratio  19
Debt to Shareholders Equity  19
Debt to Capital Ration  20
Final Thoughts  20
SECTION 179  21-27
Election to Expense Certain Depreciable Business Assets  21
Investment Limitation  22
Phaseout  22
Taxable Income Limitation  22
Qualifying Property  23
Property Acquired by Purchase  24
Section 179 depreciation expense election and the AMT depreciation adjustment  24
Recapture  24
Sport Utility and Certain Other Vehicles  24
Married Individuals  25
Joint return after filing separate returns  25
Go Zone Areas  26
Carryover of the Section 179 Deduction  26
Amending or Revoking the Section 179 Deduction  27
Section 179 depreciation expense election and the AMT depreciation adjustment  27
DEPRECIATION  28-32
What Property Can be Depreciated  28
Property having a determinable useful life  28
Land  28
Property you own  28
Rented property  28
No deduction greater then basis  28
MACRS Recovery Periods  29
“Qualified leasehold property” placed in service after October 22, 2004 and
before Jan. 1, 2008 as 15-year MACRS class property  30
Placed in Service Date  30
Cost Basis  31
Loans with low or no interest  31
Real Property  31
Land and buildings  32
CAPITAL LEASE  33-39
Is it really a lease  33
Real Estate vs. Equipment  34
Equipment Leasing  34
Leveraged lease  34
Minimum Unconditional “At Risk” Investment  34
Lease Term and Renewal Options  35
Purchase and Sale Rights  35
No Investment by Lessee  35
No Lessee Loans or Guarantees  35
Profit Requirement  35
Equipment / Limited Use Property  36
Practical Considerations  36
What if the lease is properly characterized as a sale  36
OFFICE-IN-THE-HOME  40-53
Principal place of business  40
Form 8829  42
In-home Daycare Facilities  43
Income Limitation  43
Deductions by the entity  45
Sole Proprietors  45
Partnership  45
S Corporation  45
C Corporation  45
Depreciation in a Home Office  47
Effect of Rental or Business Use on Exclusion of Gain  47
Property Used in part as Principal Residence  53
BUSINESS TRAVEL  54-58
Determination of “Tax Home"  54
Taxpayers with Home Offices  56
Deducting Local Transportation Costs  57
Temporary Work Locations  57
Deducting a Saturday Night Stay  58
MEALS AND ENTERTAINMENT  58-67
Business Requirement for Meals and Entertainment Expenses  58
50% Limitation for meal and entertainment  59
Exceptions to the 50% limitation  59
Substantiation of Travel and Entertainment Expenses  60
Adequate Records  61
Documentary Evidence  61
Per Diem Method of Substantiating the Amount of Travel Costs  61
Proration of federal per diem rate for partial travel days  62
Transportation Industry Workers  63
Optional high-low substantiation method for per diem travel expense allowances  64
START UP EXPENSES  68-73
Effective for amounts paid or incurred after October 22, 2004  68
Start-up expenditures incurred on or before October 22, 2004  68
Distinguish Deductible and Amortizable Costs from Capitalized Costs  69
Investigation expenses  69
Pre-opening costs  69
Election to Deduct Start-up Costs  71
Business Expansion Costs  72
Treatment of Costs after Disposition or Abandonment of Business  73
DOMESTIC PRODUCTION ACTIVITIES DEDUCTION  74-83
Activities eligible for U.S. production activities deduction  74
What is substantial renovation  74
Land improvements may qualify  75
Food and Beverage Industry  75
What constitutes manufacture “in significant part” in the United States  75
Packaging design and development activities  76
QPAI for purposes of the U.S. production activities deduction  77
Domestic production gross receipts defined  78
COGS and other expenses allocated to qualifying production activities  78
Three options available to allocate costs  78
Taxable income/AGI limitation on U.S. production activities deduction  79
How does NOL affect the taxable income limitation  79
50%-of-W-2-wages limitation  80
Calculation methods  80
Guidance Issued for Determining Wages for §199  81
Effective Date  81
Domestic Employees  81
Married Filing Joint vs. Married Filing Separate  81
Deduction of pass-thru entities  81
Deduction of “expanded affiliated groups"  82
Example of the Domestic production activities deduction  82
DISABLED ACCESS CREDIT  84-86
Partnership / S Corporation Rules  84
Eligible small business  84
Eligible access expenditures  85
Disabled Access Credit Example  86
Form 8826  86
BUSINESS VS. HOBBY  87-92
Factors to determine a business from a hobby  87
Hobby Loss Rules  88
Deductions  88
Example of a Hobby income and expenses  89-92
EMPLOYESS vs. INDEPENDENT CONTRACTOR  93-94
Behavioral Control Over the Worker  94
Financial Controls Over the Worker  94
Parties’ Views of the Relationship  94
ENTITY SELECTION  95-97
Introduction  95
How is income taxed  96
Liability Issues  96
Types of Entities  97-170
1) Sole Proprietorship  97 - 102
Sole Proprietorship – Non-Tax Considerations  97
Sole Proprietorship – Tax Considerations  97
Income Splitting Among Family Members  99
Hiring the Children  99
Hiring the Spouse  100
Self Charged Rent  101
FORM 1040, SCHEDULE C, PROFIT OR LOSS FROM BUSINESS  103-140
Line B, principal business or professional activity code  103
Line D, employer ID number  103
Line F, accounting method  103
Line G  104
Line H  104
Part I: Income, Lines 1 to 7  104
Line 1, Gross Receipts or Sales  104
Statutory employees  104
Line 4  105
Line 6  105
Part II: Expenses, Lines 8 to 31  105
Car and truck expenses, Line 9  106
Simultaneous use of multiple automobiles  106
Consistency rules  106
Line 11, Contract Labor  106
Employee benefit programs, Line 14  107
Pension and profit-sharing plans, Line 19  107
Rent or lease, Line 20  107
Repairs and maintenance, Line 21  107
Taxes, Line 23  107
Utilities, Line 25  107
Wages, Line 26  107
Other expenses, Line 27  108
Bad debts  108
Tentative profit (loss), Line 29  108
Net profit or loss, Line 31  108
At Risk, Line 32  108
2) Partnership  109-117
Partnership Non-Tax Considerations  109
General Partner vs. Limited Partner  109
Termination of the Partnership  109
Tax Matters Partner (TMP)  110
Partnership – Tax Considerations  110
Pass through items  111
At-Risk Rules  111
Unreimbursed Partnership Expenses  111
How to make a Section 754 election  111
Example of a §754 Election  112 - 114
Employer/Employee Relationship  115
Partnership basis  115
Determining a Partner’s Initial Basis (No Liabilities Involved)  116
Adjusting a Partner’s Initial Outside Basis  116
Basis is increased to reflect the following  116
Basis is decreased, but not below zero, to reflect the following  116
Partner’s Basis Worksheet  117
3) Corporations  118-159
Corporation – Non-Tax Considerations  118
It’s not just liability  118
Consider General Law and Income Tax  118
Corporation – Tax Considerations  119
S Corporation (never been a C Corporation)  119
S corporation basis  120
Initial Basis in S Corporation Stock  120
Basis Adjustments  121
Shareholder’s Basis Worksheet  122
Employer/Employee Relationships  123
Health insurance for a sole S Corporation shareholder  123
Health insurance bought by S Corporation  123
Health insurance bought by S shareholder  124
State law limits on group plans  124
Reasonable compensation  124
What is “reasonable compensation” for comparable work  125
Treasury Audit Report for S Corporations  126
IRS Launches Study of S Corporation Compliance  127
S Corporation Distributions with Previous “C” Corporate Earning  127
What if the distribution exceed both S and C earnings  127
C Corporation – Tax Effects  128
Employer/Employee Relationship  128
Qualified Personal Service Corporation  129
Payroll vs. Dividend examples  130 - 134
Distributions to Shareholders & Two Sets of Low Brackets  135
When are Corporate Taxes Due  138
Other Tax Benefits of C Corporation  138
Deductible Fringe Benefits and Other Costs  138
Taxes on Investment Income  138
IRS Standards  139
Accumulated Earnings Tax & Reasonable Needs  140
Accumulated Earnings Tax Worksheet  141
Switch from C to S  142 - 143
Personal Service Corporation  144
Other Tax Determents of a C Corporation  144 - 146
Built-In Gains Tax  146
Built-In Gains Tax Example  148 - 158
4) Limited Liability Company  159-170
Non-Tax Considerations  159
One Member LLC  159 - 161
Tax Considerations  161-164
Husband and Wife (Community Property States)  162
Self-Employment Tax and the LLC  163- 164
Rental Income and the LLC  164 -165
Required Records for LLC  165 - 166
LLC vs. LLP  167
Switching from Corporation to LLC  168
Switching from Partnership to LLC  168 – 169
Employer Identification Number  169 – 170
RETIREMENT PLANS  171- 202
Simplified-Employee Pensions (SEPs)  171 - 175
Self-Employed Contribution Rate  172
SEP Worksheet – 2007  173
Simplified-Employee Pensions – Example  174 - 175
Savings Incentive Match Plan For Employer - SIMPLE  176 - 187
Lower matching percentage permitted in some years  177
Employees who may be permitted to participate  180
SIMPLE plan contribution withholding and employment tax liability  182
Tax and penalty of distributions  182
Tax-free rollovers from SIMPLE IRAs  183
How to set up a SIMPLE IRA plan  183
SIMPLE Worksheet – 2007  185
SIMPLE Example  186
Reporting for the Employee/Participant  187
Individual 401(k)  188 - 193
Timing Considerations  189
Individual 401(k) Worksheet – 2007  190
Individual 401(k) - Example  191
Individual 401(k) - Summary Points  192-193
Retirement Plan Comparison  193
Traditional 401(k) Plan  194 - 197
Discrimination Rules  194
Contributions  194
Age 50 and Over  195
Reporting requirements  195
Traditional 401(k) Worksheet – 2007  196
Safe Harbor 401(k) Plan  198 - 200
Vesting  198
Notice Requirements  198
Hardship Distributions  199 - 200
Retirement Plan Loans  201 - 202
Term Requirement  201
Repayment  201
Dollar Limit  201 - 202
Deemed distributions  202
EMPLOYER PROVIDED FRINGE BENEFITS  203 – 212
Categories of nontaxable fringe benefits  203 – 204
Food and Lodging Provided by Employer  205
Employer Provided Vehicle  205 – 209
Rules for Withholding, Depositing, and Reporting  209 – 211
Summary of Fringe Benefits  212
EMPLOYEE BUSINESS EXPENSES  213 - 218
Accountable Plan  213
Form 2106  214
Special Rules for Travel and Mileage Reimbursement Plans  215
Failing to Seek Reimbursement  215
Auto Allowances and Employer-provided Vehicles  216
Substantiation of Travel and Entertainment Expenses  217
Adequate Records  218
HEALTH PLAN CONTRIBUTIONS  219 – 224
Self-employed  219
Partnerships  219
S Corporations  219
Self-insured  220
Withholding and employment taxes  220
Sample Medical Reimbursement Plan  221 - 224
MEDICAL SAVINGS ACCOUNTS (MSA)  225 – 232
Important Change  225
High Deductible Health Plan (HDHP) for an MSA  226
MSA Contribution Limitations  226 – 227
Taxes on Distributions  228
MSA Example  229 – 232
HEALTH SAVINGS ACCOUNTS (HSA)  233 – 246
Eligible individuals  233
High Deductible Health Plan (HDHP) for a HAS  234
Establishing an HAS  235
Contribution Limits  236
Additional contribution for age 55 and older  236
Timing of HSA Contributions  237
State Tax Issues  238
Time period for satisfying HDHP deductible provisions  239
Taxes on Distributions  240
Tax Consequences after the death of the HSA Account Beneficiary  241
Combination of HSAs with HRAs and Health FSAs  242 – 243
HSA Example (Form 8889)  245 - 246
HEALTH REIMBURSEMENT ARRANGEMENT (HRA)  247 – 249
Benefits of the HRA  247
Allowable Reimbursements  247
How the HRA works  248
Nondiscrimination Rules  248
HRAs and Cafeteria Plans  249
SECTION 125 PANS / FLEX SPENDING ACCOUNTS  250 – 256
Use-it-or-lose-it Rule  250
Exception to the Use-it-or-lose-it Rule  251
Medical Expense Flexible Spending Arrangements (Health FSAs)  252
Substantiation  252
Dependent Care Flexible Spending Arrangement (Dependent Care FSA)  254
Withholding and Payroll Reporting  256
DISABILITY BENFITS  257 - 262
What about Social Security?  257
What is “Disability”?  258
How much will the policy pay?  259
Cost of Living Adjustment (COLA) rider  259
Taxation of Disability Benefits  260
Probationary Period  261
Elimination Period  261
LONG-TERM CARE INSURANCE  263 – 268
LTC is provided in four different settings:  263 – 264
Taxation of Long-Term Care  265
Long-term Care Insurance Premiums  265
Long-term Care Insurance Benefits  266
Long-term Care Example (Form 8853)  266 - 268
DEPRECIATION RECAPTURE AND UNRECAPTURE  269 - 280
§1231 - Trade or Business Assets   269
§1245 - Gain from Disposition of Certain Depreciable Property  270
§1250 - Gain from Disposition of Certain Depreciable Realty  270 -271
Recapture of depreciation under Code Sec. 1245  271
Depreciation Concerns   272 - 274
Depreciation Example  273 - 274
What about depreciation overlooked?  274
Section 481(a) Adjustment  275
Comprehensive Example (Form 3115)  276 - 280
BUSINESS SALE  281 - 293
Business Sale Example  281 – 288
Form 8594 – Asset Acquisition Statement  289
Allocating Purchase Price  289 – 290
Section 197 Considerations  290
Form 8594  291
Articles of Dissolution – Limited Liability Company  292 - 293
BUSINESS VALUATIONS  294 – 316
Importance of Business Valuations   294 - 296
Setting Ground Rules for Business Valuations  296
Relevant Data  296 – 297
Valuation Methods  298 - 307
Worksheet Formula Method  308
Example Illustration   310 - 312
Concluding Points on Business Valuations  312 –314
Business Cash Flow  314
Sample Business Cash Flow  315 – 316