SOME BREAKING NEWS FOR S CORPORATIONS-> “What, a Potential 15% Tax Increase?”

by RIPP on July 11, 2010

There were a bunch of rumors spread among the accounting community recently that the IRS has eliminated the capability for execs who operate their business as an S Co. to get distributions from their corporations instead of a wage or income.

On May 28th, 2010, The House passed the North American Roles and Closing Tax Loopholes Act of 2010 which has a provision that proposes to raise over $11 billion by tacking on payroll taxes to certain service pros who now split earnings as salary and draws (Ihope this is you!).  And by certain service pros, Congress particularly means those in “health, law, lobbying, engineering, design, accounting, actuarial science, performing humanities, consulting, athletics, investment recommendation or management, or brokerage” services.  If this change becomes law, it can add a 15.3% surcharge to the distribution portion of the earnings that S Corp Firm owners pay themselves. The Senate has taken this issue up in its June session.

S Corp Firms are entities where the net revenue from the company passes to the investors and gets taxed at the stockholders questionable rate of taxation.  S Enterprise owners typically receive revenue from their enterprises in 2 forms:. * An income or wage (W-2) and * A distribution (K-1).

The income/wage revenue element is subject to social security tax, medicare tax and unemployment taxes.

The distribution element none-the-less isn’t subject to these payroll taxes, which in several cases permits the entrepreneur to avoid 15% or even more in payroll taxes.  The govt wants the payroll tax bucks linked with an income and the pro wants to maximize the distribution portion of their revenue from the S Corporation to save payroll tax dollars.  Though used widely in tax planning, this tactic has lately been dubbed the “John Edwards loophole” as the previous presidential contender used it to pay himself millions from his S firm.

Edwards paid himself a $360,000 income from his S corporation, but then took a further $26 million from the firm that was subjected to revenue taxes, although not work taxes.  The loophole which is totally legal likely saved Edwards at least $500,000 in taxes. (I hope you read that example again if you are not grasping this strategy)

So what should execs do today who are probably impacted by this change?  At that point it is a ‘wait and see ‘ issue on the law. S Enterprise owners must nevertheless, take fast steps to get in accordance with the present laws relative to the compensation they receive from their enterprises. The IRS needs S Enterprise owners to pay themselves a fair income from their business.  Sadly, there is not any clear standard from the IRS the entrepreneur can rely on to make this determination.

The IRS does offer some steering in its audit manual that covers this issue and they have listed these factors the auditor should gauge when deciding the reasonableness of an employee’s compensation:

The employee’s contribution to the profit making of the business.

The time gave by the worker to the business.

The business conditions generally and regionally.

The personality and quantity of responsibility of the employee.

The time of the year when compensation is determined.

The relationship of the stockholder/officer’s compensation to stock holdings (ratio).

The amount paid by similar enterprises in similar areas to similarly qualified workers for similar services.

You could be asking why it is so crucial to address this compensation issue today outside the contemporary House legislation that just passed.  The rationale is that the IRS has identified this issue as an important area for increased enforcement which interprets into higher probabilities of audit.  The Service has upgraded its PC selection technique where it can electronically compare the quantity of officer compensation reported on the tax estimate with the quantity of distributions the stockholder receives.  Pros with S Corporations that pay themselves an insignificant income are going to get selected for audit.  Additionally, the IRS in March of this year began a 3 year work tax audit program where six thousand companies will be at random selected for audit particularly targeting work tax issues.

We haven’t seen these sorts of audits in nearly twenty years.  Reasonable compensation issues have been in public identified as one of the key areas of audit stress by the Service in this program.  And eventually, there are many tax court cases matriculating thru the system where the IRS is making an attempt to re-characterize distributions as wage compensation.

So far, they’ve been successful in these legal efforts.

Due to the increased stress on work tax issues by the Service, firms must take the following speedy steps to guarantee their compensation formulas are in compliance:

(a) Document the compensation schedule in your company records

(b) S Companies should hold a board meeting at the start of the year with resolutions prepared that approve the compensatory plan for the officials

(c) Pros should pay themselves a fair income on the same cycle that their staff employees are paid on

(d) No more grossing up the salary at year end (which I have regularly seen happen in medical care practices)

Executives ought to have a compensation study performed that identifies what other similar professionals are being paid with consideration given to all of these factors.

Amount to time the pro devotes to the practice.

Whether the pro acts in a handling capacity or actually performs the work.

The final analysis is that across all levels of govt we are in an environment of increased regulation and enforcement.

For the pro that suggests higher revenue taxes, increased probabilities of audit and higher degrees of scrutiny in all areas of business.

With proper planning, many of the issues we face can be controlled or mitigated.  Please feel free to call my office at 502-713-6232 for a complementary consultation of how your particular compensation package fits into the various rules and guidelines.  Further examination of your business not only may help your business better sustain its compensation plan; it may also help you take advantage of other compensation arrangements and opportunities.

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10 Secrets of Successful Entrepreneurs

by RIPP on July 6, 2010

The following article is a fundamentally sound bit of advice from the managing editor of PowerHomeBiz.com, Isabel M. Isidro.  Enjoy!

Is there a way to determine whether you can be a successful entrepreneur, or you are better off to work for somebody else? Alas, there is no formula for success. However, most successful entrepreneurs share these ten characteristics. Check if you possess any one of them:

1. Think success.  To attain the kind of success that you want, you need to dream big. Every success story starts with big dreams. You need to have big dreams for yourself – which you want to be somebody rich, famous or fulfilled. You need to have a clear vision of what you want to achieve. But it doesn’t stop in dreaming alone. You should actively visualize success in your mind that you can almost feel it, touch it or it is within your reach. Play this image back at every opportunity. What does it feel to triple your current income? How will your life change? What will your business look like if you achieved the million-dollar mark?
 
 2. Be passionate with what you do. You start a business to change any or all part of your life. To attain this change, you need to develop or uncover an intense, personal passion to change the way things are and to live life to the fullest. Success comes easily if you love what you do. Why? Because we are more relentless in our pursuit of goals about things that we love. If you hate your job right now, do you think you will ever be successful at it? Not in a million years! You may plod along, even become competent at the tasks, but you will never be a great success at it. You will achieve peak performance and do what you have to do to succeed only if you are doing something that interests you or something that you care about. Entrepreneurs who succeed do not mind the fact that they are putting in 15 or 18 hours a day to their business because they absolutely love what they do. Success in business is all about patience and hard work, which can only be attained if you are passionate and crazy with your tasks and activities.
 
 3. Focus on your strengths. Let’s face it; you cannot be everything to everybody. Each of us has our own strengths and weaknesses. To be effective, you need to identify your strengths and concentrate on it. You will become more successful if you are able to channel your efforts to areas that you do best. In business, for example, if you know you have good marketing instincts, then harness this strength and make full use of it. Seek help or assistance in areas that you may be poor at, such as accounting or bookkeeping. To transform your weakness to strength, consider taking hands-on learning or formal training.
 
 4. Never consider the possibility of failure. Ayn Rand, in her novel The Fountainhead, wrote, “It is not in the nature of man – nor of any living entity, to start out by giving up.” As an entrepreneur, you need to fully believe in your goals, and that you can do it. Think that what you are doing will contribute to the betterment of your environment and your personal self. You should have a strong faith in your idea, your capabilities and yourself. You must believe beyond a shadow of a doubt that you have the ability to recognize and fulfill them. The more you can develop faith in your ability to achieve your goals, the more rapidly you can attain it. However, your confidence should be balanced with calculated risks that you need to take to achieve greater rewards. Successful entrepreneurs are those who analyze and minimize risk in the pursuit of profit. As they always say, “no guts, no glory.”
 
 
5. Plan accordingly. You have a vision, and you have enough faith in yourself to believe that you can achieve your vision. But do you know how to get to your vision? To achieve your vision, you need to have concrete goals that will provide the stepping-stone towards your ultimate vision. Put your goals in writing; not doing so just makes them as intangible fantasies. You need to plan each day in such a way that your every action contributes to the attainment of your vision. Do you foresee yourself as the next Martha Stewart of hand-made home furnishings? Perhaps today, you need to see an artist to help you conceptualize the new line of hand-made linens that you hope to launch. Intense goal orientation is the characteristic of every successful entrepreneur. They have a vision, and they know how to get there. Your ability to set goals and make plans for your accomplishment is the skill required to succeed. Plan, plan and plan – because without which failure is guaranteed.
 
 
6. Work hard! Every successful entrepreneur works hard, hard and hard. No one achieves success just by sitting and staring at the wall every single day. Brian Tracy puts it out this way, “You work eight hours per day for survival; everything over eight hours per day is for success.” Ask any successful businessperson and they will tell you immediately that they had to work more than 60 hours per week at the start of their businesses. Be prepared to say goodbye to after-office drinks every day, or a regular weekend get-away trip. If you are in a start-up phase, you will have to breathe, eat and drink your business until it can stand on its own. Working hard will be easy if you have a vision, clear goals, and are passionate with what you do.
 
 
7. Constantly Look for Ways to Network. In business, you are judged by the company you keep – from your management team, board of directors, and strategic partners. Businesses always need assistance, more so small businesses . Maybe the lady you met in a trade association meeting can help you secure funding, or the gentleman at a conference can provide you with management advise. It is important to form alliances with people who can help you, and whom you can help in return. To succeed in business, you need to possess good networking skills and always be alert to opportunities to expand your contacts. 
8. Willingness to Learn. You do not need to be a MBA degree holder or PhD graduate to succeed in your own business. In fact, there are a lot of entrepreneurs who did not even finish secondary education. Studies show that most self-made millionaires have average intelligence. Nonetheless, these people reached their full potentials achieved their financial and personal goals in business because they are willing to learn. To succeed, you must be willing to ask questions, remain curious, interested and open to new knowledge. This willingness to learn becomes more crucial given the rapid changes in technologies and ways of doing business.

9. Persevere and have faith. No one said that the road to success is easy. Despite your good intentions and hard work, sometimes you will fail. Some successful entrepreneurs suffered setbacks and resounding defeats, even bankruptcy, yet managed to quickly stand up to make it big in their fields. Your courage to persist in the face of adversity and ability to bounce back after a temporary disappointment will assure your success. You must learn to pick yourself up and start all over again. Your persistence is the measure of the belief in yourself. Remember, if you persevere, nothing can stop you.

10. Discipline yourself.  Thomas Huxley once said, “Do what you should do, when you should do it, whether you like it or not.” Self-discipline is the key to success. The strength of will to force yourself to pay the price of success – doing what others don’t like to do, going the extra mile, fighting and winning the lonely battle with yourself.

 

Successful entrepreneurs possess an attitude of openness and faith that you can have what you want if you can simply envision it as the first step on the path of action to acquiring it. Management gurus have taught us the power of visualization – seeing yourself in your mind as having accomplished your dreams. If you want to be a successful writer, envision yourself signing books for a throng of people who have lined up to have your autograph. If you want to be rich, picture yourself in luxurious surroundings holding a fat bank account. And the process of envisioning success for you should be a constant activity! You need to think that you are successful (or will be one) every single waking hour. A personal development coach shared me her secret to help her continuously visualize her goals for the moment: when climbing stairs, recite your goal with every step you take. So if you want more money, say “I will have money” in every step of the stairs. This technique will reinforce your goal and keep it fresh in your consciousness.

 

 

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