Donald Sauder, CPA

Preface: Corporations are restricted on affiliate tax structures. This article is to provide awareness on corporate affiliate ownership and the pertinent tax code restrictions and permissions. Corporate Affiliates Corporations have certain ownership prohibitions on affiliate ownership. If you are purchasing other corporations (either S-Corporations or C-Corporations) with a corporate parent, certain restrictions may be applicable. First, C-corporations can file a consolidated return with any other C-Corporation they are affiliated with. C-Corporation stock can be held by either individuals, S-Corporations or C-Corporations. For instance if 555, Inc. owns 100% of 444, Inc. stock, and both corporations are taxed as C-Corporations the ownership structure is permissible for tax purposes. Now suppose 555, Inc., the parent, elects S-status. There is no prohibition on the S-election because S-Corporations can be shareholders in C-corporations. However, 444, Inc. could not elect S-Corporations status because S-Corporation stock must be held mainly with individual stock ownership. If an S-Corporation such as 2015, Inc. was acquired by a C-Corporation 555, Inc. the 2015 Inc. affiliate/subsidiary would default to a C-Corporation immediately upon purchase because C-Corporations cannot own S-Corporation stock. Most often C-Corporation status is not advantageous for active operating businesses. In addition, S-Corporation stock with the ownership restrictions, cannot be owned by a multimember LLC or partnership. Corporations are designed to be permanent entities while LLC’s are designed to have a defined entity lifespan. Some states when legislating LLC’s even limit the number of years an LLC can exist. There are nuances to the rule of S-Corporation ownership when working with say single owner LLC’s, or disregarded entities. You need a tax advisor to manage your complex entity tax architecture when relevant to your business decisions. Corporations in many states are permitted to be partners in partnerships when the “person” is defined to include “corporation” in the state statutes. These…

Preface: The decisions you make to make a decision, are key to your achievements as an entrepreneur. This article is intended to help you think about your decisions, e.g. Why did I read this? What did I learn? Decisions As an executive in your business, your most important talent is the ability to formulate good decisions. President Obama is quoted as saying i) “You’ll see I wear only gray or blue suits. I’m trying to pare down my decisions. I don’t want to make decisions about what I’m eating or wearing. Because I have too many other decisions to make”…. [and] ii) “You need to focus your decision-making energy. You need to routinize yourself. You can’t be going through the day distracted by trivia.” Good decision making is serious business. When you think about it, the highest paid work on the globe is decision making. The decisions you make today will be key to your businesses success in the future. The tools you develop to help you make key decisions will significantly improve the success and appreciation for the outcomes of your decisions. Often the tools you acquire to make strategic decisions successfully, are obtained with the development of expertise. These tools can be gained via training and advisors, or real practical experience. The case study method is designed to provide development of appropriate decision making tools. Business roundtables and advisors are too. When you’re faced with a decision, i.e. should we begin to sell product in international markets; you are making a decision that has a range of outcomes. Many companies begin by looking at what they understand about their current market, international product or service applications, and factors they think vital to success. You don’t know what you don’t know. Always start with that premise. Weather, currency markets, innovation, and social trends…

  Supreme Court? Yes.   Conestoga Wood Specialties has faced some challenging corporate decisions and walked with success. Listen and learn here.    

Avoid Wage & Hour Problems from Year End Bonus Payments to Hourly Employees By Michael Moore Preface: McNees publishes this helpful article on proper compliance with labor laws when paying employee bonus’   Many employers traditionally provide year end bonuses and holiday gifts for their employees. Bonuses may be included in a nonexempt employee’s regular rate depending upon the manner in which the bonus is calculated and the company’s prior communication. Inclusion in the regular rate impacts overtime calculations and payments…. For bonuses earned over more than one work week, the bonus must be allocated to pay periods to which the bonus applies and the regular rate recalculated. If overtime was worked during this period, the overtime rate must be revised to be time and a half the recalculated regular rate that includes the bonus payment….. Discretionary Bonuses: This is an area of DOL audit scrutiny and should not be used on a regular or aggressive basis. Truly discretionary bonuses are not included in the regular rate of pay under section 778.211, if both the fact that payment is to be made and the amount of the payment are determined at the sole discretion of the employer at or near the end of the period and not pursuant to any prior contract, agreement, or promise causing the employee to expect such payments regularly…….. Read entire article here: http://www.palaborandemploymentblog.com/2008/11/articles/wage-hour/avoid-wage-hour-problems-from-year-end-bonus-payments-to-hourly-employees/   Summary: Department of Labor laws have special rules for bonus payments, i.e. holiday or, discretionary. You should ensure compliance with an attorney on bonus payments that are unique to your business, to consistently comply with appropriate labor laws.    

Preface: The Section 199 deduction is a tax deduction for manufacturing and other qualifying business activities. Situational exclusiveness sometimes is relevant to this tax deduction. This article is written to bring awareness to tax savings you need to ensure you obtain should your business qualify.   In 2004, President Bush signed into law the American Jobs Creation Act and with it a tax deduction that is highly unique and beneficial for qualifying businesses. The tax deduction is the Section 199 manufacturer’s deduction or the Domestic Production Activities Deduction (DPAD). Section 199 is available for corporations (S-Corporations and C-Corporations), partnerships, and LLC’s (multi-member and sole proprietorships.) What is unique about Section 199? First, it has a multitude of applications. Although it is commonly referred as the manufacturer’s deductions, DPAD is available for qualified computer programming, qualified filming and sound recording, production of bottled water, or say even architectural and engineering services. In fact, Section 199 is available for all tangible personal property except buildings and land. Food processing activities for wholesale qualify for a DPAD deduction, unless they are prepared at a retail establishment, i.e. restaurant or market stand.  Qualified manufacturing activities encompass manufacturing or production of inventory, installation of new product, or growing crops. Farmers even qualify for the Section 199 manufacturing deduction. Construction contractors who are involved in substantial renovations, that increase property value, prolong property life, or adapt the property to new or different uses can use Section 199. So if you are a roofer or plumber, working on new construction, you could save on taxes with a Section 199 deduction. A remodeling contractor or swimming pool contractor who adds property value, also qualifies for the deduction. How does Section 199 work? The domestic production activities deduction (DPAD) qualifies a company’s eligible domestic production gross receipts (DPGR) and…

Why you need a Buy/Sell Agreement For Your Business   Preface: Buy/Sell agreements are imperative for businesses with multiple owners. This article  is written to provide a business owner with an appreciation for the importance of having a current buy/sell agreement in place.    A buy/sell agreements is a written binding contract that specifies prearranged steps should an equity holder egress ownership. Any business that has more than one equity holder needs a buy/sell agreement. The documented rules in a buy/sell agreement determine how values will be appraised, and payment made during fragile business conditions. In addition, a buy/sell agreement can prevent other partners from selling to other individuals or competitors, i.e. anyone joint equity holders would prefer restricted from holding equity. Buy/sell agreements specify rules for a business entity or other owners to acquire another equity interests in specific in the event of an owner selling for reasons such as retirement, death, or disagreement. So you could say a buy/sell agreement is a “business will”, and prevents unfair treatment of all equity holders in tenuous situations arising from a sale of a business interest, with multiple equity holders. A buy/sell agreement is prepared by an attorney. The document contains a prearranged agreement for a sale of a business interests. The agreement is not limited to i) who can purchase a departing partners or shareholder equity interests ii) the methodology for determining value, i.e. qualified appraisal iii) events that will spark a buy/sell agreement. In a corporation a buy/sell may result in treasury shares. The cost of a buy/sell agreement is low compared to prevention of turmoil that can result among family members or equity holders when an agreement would be helpful, but preparation neglected. Buy/sell agreements, plain and simple, make sense. If you have a corporation, LLC or partnership, any…

Should Your Business Apply Percentage of Completion Accounting Methods Preface: Percentage of completion accounting is necessary for large contractors. The following details specific instances requiring percentage of completion accounting and the methodology. Percentage-of-completion (PCM) method of accounting is required for construction businesses with $10m or greater of revenue. The $10m threshold is considered to be the IRS definition of a large contractor. However, any contractor with contracts that have completion duration beyond two years need apply percentage of completion to long duration contracts.   So what is percentage-of-completion method (PCM) and how does it work? PCM accounting is a method with income recognition of construction revenue as the construction project progresses; not when completed (completed contract method) or as billed (accrual method), or as cash received (cash method). Here is how PCM works. A specific $3m construction project, with an estimated cost of $2.8m, may be overbilled.  Percentage of completion method accumulates costs in a construction in progress (CIP) account as a debit, and a credit of accounts payable or cash. Let’s look at an example: say at 50% of a specific project’s completion the construction in progress account (current accumulated construction cost) has a balance of $1.5m from materials and labor. Say the progress billings (invoiced balance on project) are $1.8m. These progress billings, are posted to a contra account called contracts receivable (a debit balance of $1.8m on the balance sheet), and progress billings accounts ($1.8 as a credit on the balance sheet).   To calculate percentage of completion method on a specific contract, as the accountant deems material, you first multiply the percent of the project complete by the gross profit (example for this specific contract, a gross profit of $3m revenue – $2.8m cost = $200,000), so the estimated current period gross profit is 50% * $200,000 =…

Foreign Bank and Financial Accounts Reporting   Preface: Foreign financial and bank account reporting is becoming increasingly relevant with global investments. This blog is written to help you appreciate the importance of compliance with FinCEN and FBAR.     So you have a bank account in Hong Kong, or a brokerage account in Shanghai, or maybe you’re an investor in GoldMoney.com. Welcome to the Bank Secrecy Act, FinCEN and compliance with FBAR.   Reporting of Foreign Bank and Financial Accounts (FBAR) now requires reporting of financial interests or signature authority on accounts outside the US that have an aggregate maximum value of $10,000. If you have 1 or more, say 5 foreign bank accounts for diversification of your currency portfolio, with cash in banks in China, Japan, Germany, Australia, Canada, or New Zealand with an aggregate, or combined, balance in excess of $10,000 during the tax year, you need to report those accounts with FinCEN Report 114. Other accounts that with require reporting i) security accounts ii) commodity accounts iv) insurance policies with cash value v) mutual funds vi) checking accounts vii) other accounts, i.e. Canadian Registered Retirement Savings Plan, or Canadian Tax-Free Savings Account.   Maybe you decided to open a brokerage account in Canada, or invest in a Canadian business interest, you’re subject to FBAR even if the foreign financial account produces no taxable income. There is no minimum age reporting requirement either. So if you have accounts outside the country in your children’s name, you will need to report those accounts with a FinCEN Report 114 too. Nonetheless, accounts that are located in US branches of foreign banks, say, a New York branch of Bank of China are not subject to FBAR.   FBAR is required to prohibit the concealment of foreign assets from the IRS. Do not…

Lancaster County Business History – Turkey Hill   More than 75 years ago, in Lancaster County, Armor Frey started a business with his touring sedan. It was the Great Depression, and every penny helped….slowly, Armor’s milk route grew. Until one day his “extra milk” business became his only business. The business developed. In 80’s, the Freys took a big step into ice cream production. Turkey Hill Ice Cream quickly became a favorite in local Lancaster County stores. …The ice cream was always good, but priced so everyone could enjoy it…..Little by little, this tiny dairy became a favorite in some of the country’s biggest markets.   Today, people all over the country enjoy the products that are “Imported from Lancaster County”. And more than just ice cream and frozen yogurt. Turkey Hill’s product lines include Iced Tea, Ice Cream Sandwiches, and Sundae Cones. It all began with one man launching a local route for his milk. Today, more than 25,000,000 gallons of ice cream per year; and product distribution in more than 45 states. http://www.turkeyhill.com/about/history.aspx   Watch how Turkey Hill is managed today.    

Electing your LLC to be Taxed as an S-Corporation Preface: LLC’s can be taxed as disregarded entities, partnerships or corporations. This blog outlines the initial parameters on an LLC taxed as a partnership electing to be taxed as an S-Corporation     Typically limited liability companies (LLCs) are taxed as partnerships or disregarded entities. Yet, LLCs can also be taxed as S-Corporations too. One reason a tax advisor may suggest S-Corporation taxation for your LLC is the savings on the self-employment taxes assessed on the partnerships distributive share of income. This tax can be avoided in an S-Corporation. Let’s say your distributive share of business earnings are $400,000 a year. If you distribute the $400,000 in partnership earnings, you would be subject to self-employments taxes on that distribution balance. An additional tax that easily could exceed say $15,000 per year. With an S-Corporation election for your LLC, you would not be subject to these additional taxes on distributions. Making the choice to convert your LLC to S-Corporation needs to be a calculated tax decision. Why? Because S-Corporations have multifarious rules that partnerships are not subject to. Converting your LLC taxed as a partnership to an LLC taxed as an S-Corporation requires the following steps.   LLCs are typically initially formed with an operating agreement designed for partnership tax. If you convert your LLC to be taxed as an S-Corporation you will need an attorney involved with the tax conversion to modify or amend partnership provisions in the operating agreement to be consistent with those of a corporation. These amendments include single class of stock requirements, equal rights to distributions and liquidation, terminology of stock instead of say units, removal of Section 704 partnership language including qualified income offsets and minimum gain charge backs, and updates to the buy-sell agreement.   The election is…