Choosing a Business Entity Type that Suits Your Needs

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Mazur & Associates: Choosing a Business Entity Type that Suits Your Needs.

Whether or not you have been in business for 20 years or you have just formed a business, you may benefit from reviewing the various forms of business to make sure that your current structure meets your needs from both a non-tax and tax point of view. There are several forms of businesses, and each of them have different tax implications. They are as follows:

Corporations and S Corporations

Corporations:

• Taxable Income
When determining income taxes due on its taxable income, corporations (excluding S corporations) use the following schedule:

• Dividends Paid to Shareholders
When corporate income is distributed to shareholders as dividends, the corporation receives no deductions for the payments, and the income is taxed again to the shareholders, although this comes with some advantages:
• Individual shareholders have a relatively low tax rate (at most 20%) on qualified dividends
• A corporation may deduct reasonable amounts of compensation paid to shareholders employed by the company. By paying out corporate earnings in the form of tax-deductible compensation, double taxation of the earnings is avoided.
• Leasing business property or equipment to your corporation is another way to draw out corporate earnings. Your corporation deducts the rent expense, and you declare the rent as income.

Corporations may receive an “accumulated earnings penalty” if it keeps more earnings and profits necessary to meet reasonable requirements. The penalty is equal up to 20% of accumulated taxable income, and is designed to encourage corporations to pay taxable dividends to shareholders.

• Alternative Minimum Tax (AMT)
Regular corporations may be subject to the alternative minimum tax (AMT), unless they are qualified as a “small” corporation. A small corporation has average annual gross receipts for all three-year periods beginning after 1993 and ending before the current year of no more than $7.5 million.

S Corporations:
S Corporations do not pay corporate income taxes at the federal level. The S corporation’s income, losses, deductions, and credits are passed through to its shareholders to be included on their tax returns. This avoids double taxation, as the corporate income is only taxed once to its shareholders.

Limited Liability Company (LLC)
LLCs typically have one owner or have several co-owners, known as “members”. The LLC’s income generally is taxed to the owners individually, and a Limited Liability Company has more freedom in allocating income and deductions among the owners than an S corporation.

Partnership
Partnerships have more than owner and do not pay federal income taxes at the entity level, but still have to file an annual informational return with the IRS (Form 1065). The partnership agreement addresses how business profits and losses will be divided among the partners.

Sole Proprietorship
Sole proprietors report their business income and expenses on Schedule C, which is an attachment to the individual income tax return. Net earnings from the business are taxed directly to the owner. To minimize self-employment taxes, plan to take as many deductions as possible on Schedule C.

Determining which business type fits your current needs requires a thorough and thoughtful analysis, which is something we at Mazur & Associates can provide to you. Reach out to us to with any questions or schedule a face to face meeting at our office. Our phone number is (732) 936-1230.

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IRS Warns Taxpayers to Stay Alert in Light of Recent Tax Scams

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The Internal Revenue Service (IRS) is warning taxpayers to stay alert against an increase of IRS impersonation scams. These scams can come from automated calls and other new tactics. The scammers will usually call and demand tax payments for iTunes and other types of gift cards.

The IRS has seen an increase in “robo-calls” where scammers leave urgent callback requests through the phone telling taxpayers to call back to settle their “tax bill.” These fake calls generally claim to be the last warning before legal action is taken. Once the victim calls back, the scammers may threaten to arrest, deport or revoke the driver’s license of the victim if they don’t agree to pay.

“It used to be that most of these bogus calls would come from a live-person. Scammers are evolving and using more and more automated calls in an effort to reach the largest number of victims possible,” said IRS Commissioner John Koskinen. “Taxpayers should remain alert for this summer surge of phone scams, and watch for clear warning signs as these scammers change tactics.”

In the latest trend, IRS impersonators are demanding payments on iTunes and other gift cards. The IRS reminds taxpayers that any request to settle a tax bill by putting money on any form of gift card is a clear indication of a scam.

Some examples of the varied tactics seen in 2016 are:
•    Demanding payment for a “Federal Student Tax.” .
•    Demanding immediate tax payment for taxes owed on an iTunes or other type of gift card
•    Soliciting W-2 information from payroll and human resources professionals.
•    “Verifying” tax return information over the phone.
•    Pretending to be from the tax preparation industry.

With the revelation of this tax scam, it is important for taxpayers to not forget any past scams and to always stay alert for potential fraudulent incidents. In 2015, there was another tax scam that the IRS warned taxpayers about, and this was the impersonation of charitable organizations. The IRS suggested that taxpayers use the tools on irs.gov to check out the status of charitable organizations before they donate, be wary of charities with names that are similar to familiar or nationally known organizations, and to not give or send any cash, always contribute by ways that will provide documentation of the gift (such as check or credit card). Taxpayers should also be alert of scams after any natural disasters, because it is common for scam artists to impersonate charities to get money or private information from taxpayers.

Since these scams can take many forms and scammers are constantly changing their strategies, knowing the telltale signs is the best way to avoid becoming a victim.

The IRS will never:
•    Call to demand immediate payment over the phone, nor will the agency call about taxes owed without first having mailed you a bill.
•    Threaten to immediately bring in local police or other law-enforcement groups to have you arrested for not paying.
•    Demand that you pay taxes without giving you the opportunity to question or appeal the amount they say you owe.
•    Require you to use a specific payment method for your taxes, such as a prepaid debit card, gift card or wire transfer.
•    Ask for credit or debit card numbers over the phone.
If you get a phone call from someone claiming to be from the IRS and asking for money and you don’t owe taxes, here’s what you should do:
•    Do not give out any information. Hang up immediately.
•    Contact TIGTA to report the call. Use their “IRS Impersonation Scam Reporting” web page or call 800-366-4484.
•    Report it to the Federal Trade Commission. Use the “FTC Complaint Assistant” on FTC.gov. Please add “IRS Telephone Scam” in the notes.
•    If you think you might owe taxes, call the IRS directly at 800-829-1040.

If you think you have been the victim of an IRS scam, do not hesitate to call Mazur & Associates CPAs at 732-936-1230, and we will help you through your problem from start to finish.

The Overtime Rule: What Has Changed & How It Will Affect You.

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For the first time since 2004, the Department of Labor has updated their white collar overtime regulations and on December 1st, 2016, it will affect thousands of employers and employees across the United States. It is very important for both employers and employees to review these changes before the new regulations are put into action.

The Overtime Rule Changes
Starting December 1st, 2016, the following changes to the overtime rule will be put into effect:
•    An increase in the standard exemption from $455/week ($23,660 per year) to $913/week ($47, 476 per year).
•    An increase in the highly compensated employee threshold from $100,000 per year to $134,004 per year.
•    Up to 10% of standard salary level can come from nondiscretionary bonuses, incentive payments, and commissions, paid at least quarterly. Previously, there was no provision to count nondiscretionary bonuses and commissions towards the standard salary level.
The Department of Labor estimates that the overtime rule changes will directly impact around 4.2 million workers across the United States not currently eligible for overtime and 8.9 million salaried workers may be reclassified as nonexempt.

The 3 Tests to Prove Exemption
Under the FLSA, employers are required to pay their employees no less than the federal minimum wage rate, as well as any overtime compensation if they work more than 40 hours in a standard workweek at a rate of no less than one and one-half their regular rates of pay, unless that employee is exempt. These exemptions are for certain employees who work in administrative, professional, executive, computer-related, highly compensated, and outside sales jobs. To be considered exempt, employees must generally satisfy 3 tests:
•    Salary-level test: Employers must pay employees a minimum salary requirement ($913/week) to qualify for these exemptions.
•    Salary-basis test: Employees must receive a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed.
•    Duties Test: Employees must primarily perform executive, administrative, or professional duties, as defined by the Department of Labor.
The FLSA also provides an exemption for certain highly compensated employees ($134,004/year) who earn above a higher total annual compensation level and satisfy a minimal duties test.

What Actions Should I Take?
As an employer, the following should happen as you are assessing the new overtime rules:
•    Review Employee Classifications. You should ensure that all of your employees are properly classified as either exempt or nonexempt and make any changes necessary if their classification does change.
•    Assess the costs of raising employees’ salaries. Compare the costs of raising these employees’ salaries to meet the exemption criteria vs. what it would cost to reclassify them as nonexempt and pay them overtime when they work over 40 hours in the workweek. If an employee’s salary is closer to the old minimum, and they rarely work overtime, it may be smarter to classify them as non-exempt. On other hand, if an employee’s salary is closer to the new minimum and they work a lot of overtime, it may be beneficial to raise their salary and classify them as exempt.
•    Consider the impact on internal pay equity. Internal equity means that employees are paid fairly when compared with other employees within your company. If you significantly increase some employees’ pay, other employees may be confused and will have questions. Communication is key here, and being able to effectively explain the new overtime rules is important to both you and your employees.

Deciding on whether or not to adjust the pay of certain employees will require a thoughtful and reasoned analysis.  We at Mazur & Associates Certified Public Accountants and Business Advisors have the financial know how and expertise to help guide you through these changes in the most cost effective way possible. Reach out to us with any questions, or schedule a face to face meeting at our office. Our phone number is (732) 936-1230.

Tax Break for Helping the Kids: When Does It End?

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Besides the tons of sacrifices, both financial and otherwise, that parents face in rearing their offspring, all parents know that their children automatically go down as dependents on their annual tax return.  Adding a child as a dependency exemption equates to a $4000 subtraction from adjusted gross income – not too bad.  This rule is hard and fast up until the youngsters are 19 years old, at which time some rules inevitably are changed.

The 19 – 24 year olds

These children are the easiest to consider if they happen to be attending full-time college at least 5 months out of the year.  Once they satisfy this student status, as long as they do not provide more than half of their own support, you are free and clear in claiming them as a dependent.  It is important to note that a parent need not consider any financial support that they may receive or scholarships/grants that they were awarded.

Moreover, for these 19 – 24 year olds, there is no gross income test, which is a change from previous years.  In fact, the qualifying child may earn a fair amount of income, but as long as he/she does not earn over half of what it takes to support his or herself, you may claim the child.

In a nutshell, in order for you to claim a dependency exemption for your 19 to 24 year old he/she must:

  • fall within the age limits
  • attend full-time college (5 or more months)
  • the student cannot provide more than half of his/her own support

The Qualifying Relative Exemption

With the downturn in the economy over the past several years some parents saw the unfortunate occur:  their grown college graduates were unable to find a job and had to return home.  So now you have a child who you are still supporting despite the fact that he/she has completed college.  In order for you to claim him/her the IRS rules for qualifying relative need to be applied.

To put things into perspective, this category is the same one in which you could add a dependent such as an elderly parent in.  The IRS has put into place these tests to see if the person can be included:

  • The person you wish to add cannot be your qualifying child (i.e. satisfies the 19 -24 criteria stated above)
  • He or she is a citizen or resident of the U.S. or a resident of Canada or Mexico
  • The person either:
    • Must be related to you in one of the ways listed under relatives who do not have to live with you
    • Must live with you all year as a member of your household
  • The person’s gross income for the year 2015 must be less than $4,000
  • You must provide more than half of his/her total support for the year

To summarize the above: as long as your adult child is living under your roof, has earned less than $4,000 during 2015, and you furnish more than half of his/her support, then you the parent are entitled to take the dependency exemption – this time under qualifying relative rule.

Of course, as we all know, raising and supporting a child no matter the age goes well beyond whatever credit or deduction the IRS gives us; however, every dollar shaved off our your income tax bill can be useful for your household budget!  We at Mazur & Associates Certified Public Accountants and Business Advisors are up-to-date in all aspects of tax regulations and new tax planning opportunities.  Reach out to us with any questions or to schedule a face to face meeting.  Our phone number is (732) 936-1230.

Childcare Expenses? Here’s Some Relief

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All families who have small children certainly feel the pinch when in it comes to paying for daycares, nannies, or day camps for childcare while mom and dad are off to work.  In particular, single moms have a tough time with this expense or even households where both parents work at long hours and low paying jobs.  Thankfully, the IRS has taken note of this incredible financial hardship and is offering a tax credit of up to 35% of qualifying $3,000 expenses for one child or $6,000 for two children.

How It Works

The exact percentage is a determination of parents’ income and the child must be under the age of 13 or a disabled dependent of any age.   Below is an example to help you put into perspective what you can expect to receive as a tax credit.

If you and your spouse’s earned income was $52,000 and you paid a daycare center $8,000 for the care of two small children, you a entitled to a 20% credit. Therefore, your childcare credit would be based on $6,000 of expenses paid, or $3,000 per child.  The maximum credit against your federal tax liability would be $1,200, or $6,000 x 20%.

For those with incomes of $15,000 or less, the credit is 35% of childcare expenses up to $6,000 for two or more dependents which results in a federal tax savings of $2,100.  As earned income rises, the credit drops by 1% per $2,000 increment.  Once income reaches $43,000 or more, the childcare credit goes to the minimum 20% of qualified dependent care expenses.

How to Qualify

There are certain criteria that need to be met in order to qualify for the childcare credit.  Namely, the rules are laid out in such a way that makes it essential that you require this childcare in order for you to work or actively be seeking employment.  For those couples who want to use the credit, both individuals must have earned income and the care must be directly connected to the ability to go to work.

Therefore, this credit would be disallowed if the expenses are paid to a babysitter who cared for your child during off-hours or you are trying to apply it to your child’s overnight camp.  Other qualifications that are not mentioned above which must be met include:

  • You must be the custodial parent or main caretaker of the child
  • Filing status must be single, head of household, qualifying widow with a dependent child, or married filing jointly
  • The childcare provider cannot be your spouse or dependent or the child’s parent

In addition, to claim this credit you will need to fill out IRS Form 2441. On this form you will need to furnish the babysitter’s Social Security Number or daycare center’s Employer Identification Number.   This information will allow the IRS to do some fact checking and ensure that all parties are reporting income properly.

Mazur & Associates Certified Public Accountants and Business Advisors are uniquely qualified to review your income tax situation each year.  Our goal is for each of our clients to pay the lawful minimum in federal and state income taxes on every tax return that we prepare.    Call us at 732 936-1230 to schedule an appointment and experience firsthand the Mazur & Associates advantage!

PATH Act of 2015 Extends Tax Benefits

At the tail end of 2015, President Obama signed legislation for the Protecting Americans Against Tax Hikes Act, known as the PATH Act of 2015.  This legislation was designed to provide or extend some provisions while making others permanent for hard-working American families, college students, charities, small business and enterprises on the forefront of innovation.  Many working Americans will find it easier to attain financial stability due to the numerous tax relief incentives that are included in the PATH Act.

The PATH Act of 2015 made the Research and Development Tax Credit permanent for the first time in the credit’s 34 year history.  The benefits from research and tax credits include:

  • Small business with average annual sales of less than $50 million can claim the credit against Alternative Minimum Tax (AMT).
  • Some start-ups can offset payroll taxes with the credit, which cannot exceed $250,000 for up to five years.

In addition, Section 179 was made permanent under the PATH Act of 2015.  Here are the important guidelines to follow for tax benefits:

  • Deduction limit is $500K and is good for both new and used equipment, which must be financed/purchased and put to use by the end of the year.
  • Spending cap on equipment is $2 million before the available deduction begins getting reduced on a dollar for dollar basis.
  • Bonus depreciation is 50% for 2015 and available only on new equipment.  This benefit will be phased out eventually and incrementally reduced yearly until 2019.
  • Qualified leasehold improvement property will continue to be eligible for 15-year MACRS depreciation.

Another permanent tax incentive for small businesses is the reduced 5-year built-in-gains period for C corporations electing S corporation status.  The Act makes permanent provisions allowing for exclusion of tax gain on sale of Qualified Small Business Stock (QSBS).

For individual taxpayers, the PATH Act of 2015 offers a few tax benefits as well.  Important highlights include:

  • Itemized Deduction of State and Local Sales Taxes:  taxpayers may take an itemized deduction for state and local sales taxes instead of deducting state income taxes.
  • Earned Income Tax Credit, Child Tax Credit, and American Opportunity Tax Credit: these refundable credits are now returned to their previous levels and, in some cases, the value of the credits has increased by either increasing the income level that the credits phase-out at or by decreasing the earned income amount needed to receive the credit. The credits allow low-income and middle-class taxpayers to eliminate much of their tax liability and in many cases to receive refunds.
  • Qualified Mortgages:  the exclusion of cancellation of indebtedness a principal resident mortgage is extended through 2016 as is the deductibility of qualified mortgage insurance premiums.

There are a number of other areas affected by the PATH Act of 2015 such as REIT reporting reforms, filing for ITINs, energy tax incentives, and more intricate tax provisions for both individual and business taxpayers.  Because many of the new requirements provide numerous opportunities for people to enjoy significant tax savings on their 2015 income tax returns, hiring a CPA firm with a thorough understanding of PATH can potentially save you and business thousands on your 2015 and future tax return filings.  We at Mazur and Associates Certified Public Accountants and Business Advisors, PC are uniquely qualified to guide you to the highest possible tax savings allowed by the PATH Act of 2015!  Give us a call at (732) 936-1230 to set up an appointment today.

Good Practices for Payers of Contractors

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It is imperative that businesses classify their workers correctly in order to avoid wasted time and costly legal consequences down the road.   In the long run, an employer should strategize on this issue and choose the correct distinction when it comes to who is hired so that the proper taxes are withheld when they are supposed to and in order to avoid a draining IRS or New Jersey Dept. of Labor audit in the future.

Small businesses especially have become partial to hiring independent contractors because of some important benefits such as reduced liability, added flexibility on the human resource side, and some financial savings in labor salaries.  However, haphazardly classifying an individual as an independent contractor, when in fact that person is really an employee can bring dire consequences to your doorstep, and they can include:

  • Facing a Department of Labor investigation
  • Fines for each misclassified contractor
  • Penalties of 1.5% of wages and interest, including payroll back taxes
  • Fraud and intentional misconduct can lead to even steeper circumstances

The bottom line here is that the U.S. Government does not take the issue of worker misclassification lightly because, simply put, it means that the fair shares of taxes are not being paid.  In addition, workers may be losing out on their rights to participate in any employee benefits, such as vacations, holidays and retirement plans.  As a business owner, when in doubt, there are certain guidelines to follow in order to get it right.

Playing It Safe

The first important area to be familiar with is the ABC Test.   The New Jersey Supreme Court just this year adopted this test as the governing tool for classification of independent contractors.   This test was formulated through two key employment statutes:  the Wage Payment Law, which governs the timing and mode of payment of employee wages, and Wage and Hour Law, which obligates employers to pay minimum wages and overtime.

In a nutshell, the ABC Test places the burden of proof on the employer as to his classifications of independent contractors.  There are three distinct areas which a payer of contractors must satisfy:

  1. The individual who serves as a contractor is and continues to be free from control or direction over the performance of the work he or she is responsible for;
  2. The specified work is either outside the usual course of business for which it is performed, or that it is performed outside of all the places of business of the enterprise for which it is performed; and
  3. The contractor is customarily engaged in an independently established trade, occupation, profession or business.

If these three prongs are fully followed, employers who hire independent contractors can rest easy with their arrangement.

Another good practice includes having all workers complete a W-9:  Request for Taxpayer Identification Number and Certification.  This form allows you to accurately report payments that are made to your contractors.  Those who fill out the W-9 provide their full name, social security number or Employer Identification number, and those professionals who operate partnerships, corporations or estates can select the appropriate classification for their situation.

Payers of contractors must keep W-9s on file on or before January 31, 2016.  Moreover, any unincorporated workers who receive at least $600 in payments during a calendar year must receive a Form 1099-MISC, which reports gross payments from your business.  To reiterate, having a completed, signed W-9 on file will save you time and energy each January if the contractor has been paid $600 or more, as you will be using the information on the W-9 to complete the 1099-MISC.  IRS regulations state that a Form 1099-MISC payee of non-employee compensation must receive his or her statement no later than January 31st.

It pays to revisit our employment habits and policies when it comes to worker classifications.  Because the penalties and potential for legal ramifications can be quite costly, it is best to seek the advice of professionals who are skilled in the areas of recognizing the distinction between independent contractors and employees and who are experienced negotiators with the Internal Revenue Service and State Department of Labor auditors.  Following the proper guidelines can save you time and money down the road.  We at Mazur and Associates Certified Public Accountants and Business Advisors, PC can assist you in this area and will lead you down the right worker classification path.  Give us a call at (732) 936-1230 to set up an appointment today.