Donald Sauder, CPA

Against More Dues To The Treasury: Self-Rental Rules As a real estate investor you may be aware of the passive and nonpassive rules for rental real estate, i.e. passive income can only be offset against passive income, and nonpassive income (active participation) can only be offset with nonpassive losses. Section 469 of the Internal Revenue Code classifies rental activity as a passive activity, unless certain tax code parameters are met, such as an active real estate professional with more than 500 hours of participation in the activities per year. Say as a real estate investor you own two commercial properties rented to unrelated businesses. Property 1 produces net passive income of $25,000, and Property 2 produces a passive loss of $15,000. Your taxable income on the two rental properties would net to $10,000. If you decide to rent Property 1 to your business, you are now subject to self-rental rules. Q: What is a self-rental? A: Renting real estate to a business or trade you materially participate in. Self-rental rules classify rental income as nonpassive; and rental losses as passive. Instead of both income and losses as passive, typical in most real estate rentals, self-rental has passive losses and nonpassive income. So in the example above, with the financial performance of the real estate comparable on the self-rental, the $25,000 of self- rental income would be nonpassive revenue, and the $15,000 of loss on Property 2 would still be passive. Now you would pay tax on the $25,000 from Property 1, and have a suspended loss of $15,000 from Property 2. The $25,000 of income can be offset by suspended passive losses from the activity of that property, but cannot be offset from other activities, such as Property 2 or additional rental estate you purchase. So, you can see that self-rental…

Should a Multi-Member LLC Own a Single-Member LLC   Is your multi-member LLC considering the purchase of another business such as a single-member LLC mulch wholesaler; or are you interested in launching a LLC subsidiary for monitoring individual performance of a new product or service?   It is not uncommon for a multi-member LLC to own a single-member LLC subsidiary. Today, proper business structuring is vital to minimizing liability in a lawsuit, or preparing for the harvesting of value from a business segment, or perhaps for individual management purposes. For instance a business enterprise may hold $3m worth of operating equipment in a holding company LLC and conduct window-front sales as a single-member LLC. The subsidiary LLC performs the marketing, sales, and service. This type of structuring is a first step toward minimizing liability to the equipment assets in the event of a lawsuit against the subsidiary from a customer or client. Proper entity structuring is not a linear conversation, and varies from business to business. These conversations should be conferenced with both a business attorney and CPA.   Single-member LLC’s are “disregarded entities” for the most part unless taxed as a corporation. The “disregarded entity” terminology is to say that these entities do not file their own federal tax return. They are consolidated into the parent member activities for federal taxation; and therefore disregarded for individual federal tax reporting. In the instance of corporate taxation of a single-member LLC, the complex tax rules can sometimes result in minimal compliance and tax benefits. Corporate taxation would most often not be advised for a single-member LLC because of the reporting and compliance factors required for corporations. Although a few instances prosper a single-member LLC taxed as a say an S-Corporation. How? You can pay yourself W-2 wages and qualify for a domestic production…

Your Trusted Advisors Trusted advisors are like the proverbial “honeycomb” to your business. If you have sought business advice before, you understand; trustworthy counsel is invaluable. Trusted advisors are more than someone with a title and business cards – whether an attorney, accountant, consultant, or coach. A trusted advisor is someone with the experience and expertise to provide you with trusted counsel, someone who places your best interests first. When you seek counsel from a trusted advisor – you are looking for perceptive solutions. The most valuable counsel a trusted advisor can provide is proactive counsel (e.g. they help you think through what to include with your LLC agreement today, and account for your future plans and the associated risks. They understand what is and is not a categorical exclusion in your legal documents.) Proactive counsel is always in your best interest…. be wise…. count the cost beforehand; think through the risks, but don’t expect it to be gratis. The benefit is like planning for retirement, you need to think ahead; and the earlier you begin seeking advice as an entrepreneur, the better. If you want to do business with integrity and respectful reflections, a trusted advisor can help you achieve that. So what should you look for in a trusted advisor? A trusted advisor should be someone with the combination of expert knowledge and experiential wisdom. Someone you feel comfortable with and ultimately can trust. A trusted advisor should understand not only what’s best for your business, but what’s best for you. Your relationship with your trusted advisor should be such that they work to understand your positions and counsel you accordingly. Trusted advisors are not someone you should contact from reading names in the yellow pages. You want an advisor that has a solid reputation, biography experience and…

Many businesses are looking for every advantage to be competitive in today’s manufacturing environment. Implementing the right mindset will help your business continue to be successful. Following are 5 key components to the lean manufacturing mindset.   Component 1. Lean manufacturing begins with continuous improvement or kaizen (the Japanese word for continuous improvement.) Kaizen should truly be the first element of your lean manufacturing and the key component around which your manufacturing facility is managed.  Continuous improvement is the mindset you need your workforce to own. You need your employees, and managers too, to always be thinking how they can work smarter with less effort, and fewer hours. Start with small improvements, and they will lead to the larger improvements. People are your most valuable resource. Make certain management understands the weight of this concept.   Component 2. Respect for employees is the second characteristic of lean manufacturing. Without people your business would not succeed. People need to feel respected. They need to feel they are vital to your businesses success, because they are. You employees need to be happy. Happy employees are more productive, more likely to show up on time, work more, and take an interest in their work. It will be more than work for them, it will a positive atmosphere to enjoy. That positive atmosphere will ultimately translate to more success for your business in quality of product, employee retention, and employee productivity. Lean manufacturing is more common sense than computer science. Constant communication with employees with praise for a good job, listening to ideas for improvements and productivity, and providing for a work-life balance all lead to greater employee success.   Component 3. Equal production should be maintained. You don’t want to stress out your employees manufacturing 100 components today and 40 tomorrow, when they…

The Affordable Care Act, colloquially “Obamacare” signed into law by President Barack Obama on March 23, 2010, requires all individuals in the US, including children, to have either a compliant health insurance plan, or a qualifying exemption as of 2014. The health insurance coverage is easy to understand, but what about the exemptions? This article describes the exemptions commonly applied to individual tax filings. Religious conscience exemption. This exemption is available for individuals who choose to be exempt from compliant health insurance because of religious conscience. To obtain this exemption your religious group membership must be in a registered qualifying church group. This is specifically an appropriate exemption filing in place with the Social Security Administration exempting your church. This is not a Form 4029, but the form required for your church to sign a Form 4029 on your behalf. If you are Form 4029 exempt, you qualify for this exemption. To obtain a religious conscience exemption you would need to complete the religious conscience application with the Health and Human Services (HHS) and obtain your exemption certificate number (ECN). You then add your ECN with Form 8965 on your tax filing for the exemption from the minimum essential coverage penalty. The exemption is from the penalty only. You cannot elect out of the Affordable Care Act regulations; you can only elect out of the penalty. Health Care Sharing Ministry exemption. Health care sharing ministries (HSCM) are qualifying pools where members share health expenses. If you are a member of healthcare sharing ministry, or choose to be a member of a healthcare sharing ministry, you can file for an ECN with your tax filing on the form 8965. Healthcare sharing ministries such as Samaritan Ministries have certain compliance requirements, but provide sharing coverage of health expenses for qualifying participants, similar to a…

With the implementation of the Affordable Care Act, i.e. Obamacare, beginning January 1, 2014, new employer health coverage regulations take effect. Employers can no longer expense health care costs paid on behalf of employees, if the payments are not part of a qualified group health plan. This is to say that for employers, other than for a qualified group health plan (qualifying health insurance coverage) cannot pay employee health expenses on behalf of employees, and expense those payments in the business as an employee benefit. Let’s say 555 LLC has 5 employees. 555 LLC contributes $200 to each employee per month in a separate check. The employee selects appropriate personal health coverage, e.g. health insurance, healthcare sharing ministry coverage, etc. If 555 LLC records an expense on its books as employee health benefits, it could be subject to a penalty of $100 per employee per day, up to $36,500 per year, after June 30, 2015. So for one year of noncompliance, the employer could have penalties assessed, exceeding $150,000. Compliance with appropriate regulations is vital. Employers who prefer the defined contribution approach for employee health benefits will not be permitted to pay health coverage in this manner. The only coverage they can provide employees is a qualified group plan with the appropriate regulation guidelines in place, for compliant Affordable Care Act coverage. Because the IRS realizes that many small employers have health reimbursement arrangements, and were to subject to these regulations January 1, 2014, they have provided some relief regulations in Notice 2015-17, issued in 2015, from the penalties as follows: 1. S Corporations reimbursing 2% shareholder employees (even if reimbursements are after tax) can transition out before December 31, 2015 without facing a penalty. 2. Employers paying coverage for employees for health care sharing ministries or personal health insurance…

Who hasn’t heard of Coca Cola? This universal company has beverage prices with a wide retail bell curve; you could pay 50 cents from a grocery store, or $4 dollars at a restaurant. The perceived value in the venues makes all the price difference. So, how can a business pay twenty-five cents for something, and then sell it for fifty cents or four dollars?  Simply – the where; and the who. Let’s say you sell a Coca Cola for $2.50 that costs you twenty-five cents? How do you defend the premium pricing if challenged, and how much more revenue could you obtain a year from a 10 cent premium on each sale? Let’s say these are rhetorical questions.   Your business is much more complicated than selling a Coca Cola, or buying a Coca Cola, for that matter. Businesses are valued for many reasons: estate planning, a transaction, a partner or shareholder dispute, a settlement, or say an employee stock ownership plan. The most common valuation is transaction valuation – sale of a business interest. Let’s say you look at your balance sheet and it reports assets of $4 million. Is that the true value of your business? Any CPA or business valuator will tell you that it’s not the true value of your business. Business valuation has a plethora of factors such as normalized earnings, strategic marketplace positioning, goodwill, and fair market valuations of assets, e.g. equipment, real estate, or patents.   Rules of thumb in business valuation work for estimates, but should never be used for the above, such as estate planning or a transaction. For instance, in estate planning, you need a defensible written report for the IRS if audited. This report need detail how the valuation was computed. If your valuation is not satisfactory to the IRS,…

Lancaster County Business History – CNH In 1895 Abe Zimmerman started a repair shop in New Holland, PA. 120 years later his business still prospers. Would today’s CNH developments be a surprise to Abe? This is what one entrepreneurs endeavors achieved. CNH 2015     Where could your business be in 120 years?  

Hiring your first employee(s)? Welcome to payroll taxes. If you’re new to venturing into payroll taxes, the advice in your best interest is probably to work with a payroll service provider. A payroll service provider will prepare payroll checks, record the proper withholdings, and file the appropriate tax forms. Your times valuable; and learning how to file payroll taxes is most often best outsourced for the busy entrepreneur. A payroll service provider will provide fiduciary oversight of the payroll process, and keep your business in compliance with payroll tax filings, and prompt payments.   Should you choose to outsource your payroll, it’s still helpful to understand the services your payroll service provider provides. Payroll service providers prepare employee paychecks from time cards or salary information each payroll. These checks can most often either be drawn from your businesses bank account, or from the payroll service providers account. They remit payments using the employer identification number of your business so they are not liable as an employer or agent of the employer for payroll taxes, your business remains liable. It is advised to use EFTPS for payment of payroll taxes with a payroll service provider. This provides confirmation that payments are being made.   A payroll service provider computes the appropriate withholding from the employees paycheck, i.e. federal withholding, FICA, state taxes, local taxes, and retirement withholdings, if applicable. Applicable tax forms need filed too. Form 941 for instance, needs file by the last day of the month following the end of the payroll roll quarter; for Q1, ending March 31st, the Form 941 needs filed by April 30th. Payments on the 941 may need remitted on payments corresponding with payroll, i.e. monthly, minimizing the payment with the 941. A payroll service provider will handle all these compliance aspects. Some accounting firms even…

Maybe your business has developed far beyond what your initial expectations of a small business? Have you been thinking about the benefits of lower liability with an LLC instead of your sole proprietorship? If you started your business simply as a sole proprietorship, this may be the year to organize as a limited liability company (LLC). The benefits of reorganizing as an LLC are two-fold. As an LLC you have lower liability and have a business structure that can easily be developed into as large an enterprise as you envision. The disadvantage is the cost of creating and reorganizing your assets. If you consider your business a success, the cost should be secondary to the advisable step for your scope of business activity and developments. What specific lower liability does an LLC provide? For one, LLC members are not responsible for the debts of the company, unless personally guaranteed. Your business could borrow $250,000 against assets of the company, and absent a personal guarantee have no personal risk. You also receive protection from liability for torts by employees. So maybe you do everything right, but if an employee creates a lawsuit for your business, in a sole proprietorship you could be held responsible.   Taxation on an LLC is not much different than a sole proprietorship for federal purposes. State tax can differ. In Pennsylvania you need file an additional corporate form – an RCT-101. After all the documents are signed, tax compliance will not have much additional expense compared to a sole proprietorship. Here is what is involved in reorganizing your sole proprietorship. You need an attorney to write the operating agreement, outlining LLC name, activities, management, ownership, etc. Once the attorney has the legal entity registered and active with state of organization, transferring the assets into the LLC…