Selecting a Legal Entity: A Brief Guide for the Business Person

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I am frequently asked the question, “What kind of legal entity should I use for my business?” In this article, we discuss several different options available when opening a business. This decision will have a significant impact on the way you are protected under the law, and the way you are affected by income tax rules and regulations.

Click below to read about different types of legal entities and how to determine which one best suits your business:

Download our free guide: Selecting a Legal Entity

How do I tell how much my business is worth?

Recently, the media website mediaShephard.com asked me to write an article about the frequently asked question, “How much is my business worth?” As a member of the  mediaShephard’s Panel of Experts, I offered the following thoughts on how to determine your  business’ valuation.  

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This is a very complex question, which I get asked frequently. The value of a business is the present value of the future streams of cash flow. These sorts of projections, however, are very difficult to make with any level of accuracy and credibility.  Therefore, media investment bankers may discuss valuations in terms of multiples of EBITDA (or Earnings before Interest, Taxes, Depreciation and Amortization). This is a surrogate for the future cash flow, mentioned above. Currently multiples range from 5x to 10x of the most recent twelve months’ worth of EBITDA.

What separates a 5x company from a 10x company? Here are my thoughts:

  • Profitability and growth in revenues and profits. Because the value of a company is based upon future cash streams, a company with growing cash streams is worth more than a company with flat or declining revenue and profits.
  • Type of media property. All other things being equal a company with significant internet activities will be worth more than a traditional print media company or a newspaper. Again the future profitability is brighter (or at least seems that way) for an internet company.
  • The industry served by the media company and the growth prospects for that industry. For example, a newspaper-centered business may be worth less than a publication serving pharmaceutical companies, all else being equal, because of the differing future prospects of the industries being served by the publishers.
  • The industry position. Are the media properties leaders in their field or are they tertiary products? The number 1 in a field is worth more than the number 5 in the same field.  Leaders always command higher profits.
  • The size of the business. Let’s say there are two media companies:  one a mature company with revenues of $2 million and the other with revenues of $20 million. It may be difficult for the smaller mature company to find any buyers. It may even be difficult for the seller to find an investment banker or broker who wants to handle such a small transaction.

The following are other important factors:

  • The existence of a strategic buyer. A strategic buyer may be a competitor who believes that acquiring your company will add more value to their company, perhaps because of technology that the seller [or buyer] has, for example. Generally strategic buyers are willing to pay more than a non-strategic buyer.
  • External factors such as the level of interest rates and the availability of capital/loans. If a buyer has to finance the purchase of an acquisition, the availability and cost of such financing will have an impact on how much they can afford to pay.
  • The quality of your management team and whether you and other team members are willing to stay with the company after the acquisition.  Buyers often prefer to retain a management team, at least for a short period of time.  They may offer earn-out, stay bonuses or other incentives to do so, which should be taken into account when assessing the overall purchase price.

Owners interested in selling their company should speak to and develop relationships with the investment bankers/brokers who handle deals in their industry. Also make sure that they handle companies of your size. Again, the mature company with $2 million in revenue may not be of interest to one of the larger well known investment bankers / brokers. There are a number of independent investment bankers, however, who may be interested.

Finally there is the question of which investment banker to hire. Let’s say that you speak to 3 investment bankers who estimate a selling price of your company to be $10 million, $11 million and $20 million, respectively. You should be wary of the broker who suggests a price of $20 million. Since all brokers are paid based upon a percentage of the selling price, all of them have the incentive to sell your company for the highest price possible.  While the broker that suggested $20 million might seem appealing, are they going to be able to actually consummate such a transaction? The inflated asking price may actually turn off potential buyers. This may hinder being able to close a transaction. I have seen brokers who do this regularly and cannot close the transaction. Meanwhile you are counting on $20 million and this is not going to happen.

One way to get a realistic view of the true value of your company is to ask each banker/broker to explain the reasoning behind their valuations–are they comparing your company to the recent transactions of similar companies, are they using reasonable estimates for financial projections of your company’s growth, or are they just guessing at a big number in order to get your business?

And finally there are the accounting records. You should make sure to have proper accounting records and methods because any serious seller will insist on seeing them. I have seen deals that did not close because the seller’s accounting methodology was questionable. You should “scrub” your accounting records. Involve a CPA.

If you have any questions, we offer our readers a free one-hour consultation. Please call 516-605-0276 for an appointment

Manage Your 2014 Tax Bill by Knowing Medicare Surtaxes

We’re now in our second year of the new Medicare surtaxes. If these surtaxes affect you, we will help you develop a tax plan to take them into account and keep them to a minimum.

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Take Steps to Deal with Medicare Surtaxes 

1. Earned income

  • To help minimize the surtax on earned income, try to defer excess discretionary earnings (such as commissions or bonuses) to a lower-income year.
  • If you are self-employed, consider maximizing payments of deductible expenses in high-income years while deferring late-year customer billings to the following year.
  • Think about increasing your withholding or quarterly estimate payments to cover any additional liability.


2. Investment income

  • The surtax on net investment income is trickier but provides more planning opportunities. To reduce this surtax:
    • Consider liquidating depreciating stocks to offset capital gains.
    • Shift some investments to tax-deferred annuities, municipal bonds, or other vehicles that don’t generate taxable income.
    • Maximize deductible contributions to traditional IRAs, 401(k) plans, or similar sheltered investments. Their earnings are excluded from NII, and the contributions reduce your MAGI.
    • Donate appreciated stocks to charities rather than selling them.
    • Try to make otherwise taxable investments through a Roth IRA. The earnings won’t be part of NII, and subsequent tax-free withdrawals won’t count toward the thresholds.

Marriage: Tax Penalty or Bonus

Summertime is the traditional season for weddings. If you’re planning a wedding this summer, you should take a look at how marriage could affect your tax bill.

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Marriage: Tax Penalty or Bonus?

1. Tax Penalty.

  • The so-called “marriage penalty,” is the term applied to the amount of additional taxes some couples pay after they marry.
    • If you and your spouse earn similar amounts of income, you may pay more tax as a married couple than each of you would as single individuals because your joint income pushes you into a higher tax bracket.
  • Other provisions that can create a marriage penalty include phase-outs of personal exemptions and itemized deductions.
    • The new Medicare taxes can create a penalty because the threshold for applying them is $200,000 for singles and $250,000 for couples filing jointly.
    • If one spouse has a retirement plan at work and the other contributes to an IRA, you may not be able to deduct the full amount of your IRA contributions after you’re married.

2. Tax Benefit.

  • The tax code can also create “marriage bonuses” which are situations when tax liability can decrease after you marry.
    • For example, if only one spouse has income, the wider brackets for marrieds at certain tax rates will give the couple a lower tax bill than paying as a single on the same amount of income.
  • Other marriage bonuses: A wage-earning spouse can make an additional IRA contribution for a nonworking spouse, and married homeowners get double the $250,000 gain exclusion when they sell a home.
    • What to do: Analyze the benefits of potential current income tax savings against your future goals.
    • For example, plans for distributing corporate income or selling the business have tax consequences that will affect your decision.

Manage Your 2014 Tax Bill with Summertime Tax Planning

Midyear planning is critical to individuals, as well as businesses. There’s enough of the year behind you to establish a track record and enough time ahead to make changes that matter.

Summer: the season for sun, sandals, and tax planning. Kick back in your lounge chair and review the following suggestions for easing your 2014 federal income tax bill.

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1. Bump up pre-tax retirement plan contributions.
  • Elective contributions – the ones you ask your employer to withhold from your paycheck – reduce current-year taxable income.
  • Compare the amount you’re presently depositing in your account to the maximum allowed, and make adjustments now to spread the impact over the rest of the year.
    • ​The maximum 401(k) contribution for 2014 is $17,500.
    • If you’re 50 or older this year, add an additional $5,500.

2. Open an education savings account.

  • There is not a federal tax deduction for contributions to a 529 education plan. However, if you are currently setting aside money to pay for your child’s college espenses in a taxable account, you could open a 529 plan instead.
  • Earnings on plan assets grow tax-deferred and can be tax-free when withdrawals are used for qualified education expenses.

3. Reset basis with capital loss carryfowards.

  • Would you benefit from selling an appreciated stock and using your loss carryforward to shelter the income?
  • Planning point: Reacquiring the stock immediately after selling at a gain doesn’t incur the wash sale rules. At the same time, you get an increased basis to offset future gains.

4. Hold off on retirement plan withdrawals.

  • In the early years of retirement, withdraw funds from taxable accounts in the most tax-efficient manner possible.
  • For example, you could sell long-term stocks with a high basis first. The current tax saving is complemented by a longer-term benefit: continued tax-deferred growth in your retirement accounts

5. Plan for required minimum distributions.

  • What do you intend to do with the funds you’re required to take from retirement accounts once you reach age 70½?
    • Tax-efficient investing strategies can reduce the tax on the income you earn on the distributed amount.
    • Another suggestion: Using the funds for charitable donations can offset some of the tax from the distribution.​

6. Shift Income.

  • Broaden your tax-planning focus to include family members.
    • ​For instance, say your parents or children are in a lower tax bracket than you are. Employing them in your sole proprietorship can provide net tax savings.

7. Gifting offers similar benefits. 

  • You no longer pay tax on the income from the gifted asset while the income tax paid by the recipient may be minimal or deferred. (Be aware of the kiddie tax.)
    • For 2014, gifts under $14,000 qualify for the annual gift tax exclusion.

8. Track passive activity losses.

  • Make sure you’re on track to meet the active or material participation rules for your real estate rentals and other passive activities.
  • The requirements vary, but generally you must be involved in the activity in a material way, and you must have evidence proving your involvement, such as a logbook.

9. Know the alimony rules.

  • If you are already paying alimony or finalizing a divorce that will result in alimony, be sure you’re following the rules so you can claim a deduction.
  • Among other requirements, payments must be made to a former spouse in cash under a divorce or separation decree, and must cease upon the recipient’s death.

10. Preserve Deductions.

  • You’ve heard it before: Recordkeeping is essential.
    • ​Examples of tax breaks that may be disallowed if you cannot provide proof include: charitable contributions, gambling losses, vehicle costs, and travel and entertainment expenses.
  • ​If you neglected to start tracking these expenses at the beginning of the year, get going now.

11. Check dependent status. 

  • Keep your college student qualified as your dependent by monitoring the “support” test.
    • The rule: Generally, your child cannot provide over one-half of his or her own support during the year.
    • Other relatives may qualify as your dependents, including parents in nursing homes.

12. Check payments. 

  • Update your withholding or estimated tax payments in light of life changes such as marriage, divorce, or starting a new business.
    • Overpaying your 2014 tax reduces your available cash flow.
    • Underpaying your 2014 tax can lead to penalties and interest.

13. Review health insurance subsidies.

  • Review your eligibility for the advance premium tax credit
    • Premium tax credit – a refundable credit that reduces the premium you pay for a health policy purchased on a government exchange.
    • If you elected to have the credit applied to your premium and your 2014 income is higher than you expect, you may have to pay back all or part of the credit.

Road map to Startup NY

A Roadmap for Startup NY
The first step in the process comes from the Universities and Colleges; they must apply to New York State and receive approval. Once they have been approved, the business must apply to the approved University or College. After this, the University or College must approve the business. However, we have been told that businesses with over 100 net new jobs may deal directly with New York State Empire Development and bypass these past two steps. In the final step the approved application needs to go on to New York state officials. New York State will help any interested businesses in finding an approved University or College.

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Combine business, pleasure and tax breaks on summer trips!

Summer is almost here and I have begun thinking about my summer vacation. Should we go to the beach, the mountains or the west coast?

Do you plan on mixing pleasure with business on a trip this summer? There’s no problem from a tax perspective as long as you follow a basic precept: The primary purpose of the travel must be business-related. Otherwise, you’ll forfeit valuable tax deductions.

On the other hand, if you stick to the tax itinerary, you can write off most of your travel costs – even though you’re spending part of the time on personal pursuits. The key is to record significantly more “business days” than “personal days” on the trip.

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Example: John Green, a self-employed individual, flies cross-country on Monday to make a presentation to a client. He is in business meetings Tuesday through Thursday. On Friday, the client inks the deal. John decides to spend the weekend playing golf and lounging by the pool. He flies home the following Monday.

The round-trip airfare costs John $1,500. He also incurs $1,400 in lodging ($200 a day) and $800 in meals ($100 a day) during his eight-day trip.

On these facts, John spends six days on business – the two days traveling count as business days – and only two days on pleasure. So the trip qualifies as business-related travel. He can deduct the entire airfare as well as five days’ lodging and 50% of the meals attributable to his business stay. Result: John deducts a total of $2,800 ($1,500 airfare, $1,000 lodging and $300 meals).

Note that any personal expenses, such as green fees at the golf course, are nondeductible. Also, if family members accompany you on a trip, you can’t deduct their expenses, but your travel may still qualify as business-related.

Of course, this is just a brief summary of the pertinent tax rules. To review the tax requirements for your travel plans, check with us before you hop on board.

 

Watch Jack Craven on AriseTV!

Startup New York is a program that offers tax-free incentives to start up companies in New York State.  Jack Craven has been interviewed on AriseTV’s business news show  Xchange to discuss this program.

Watch Jack as he discusses the program in more detail.

The rules are new and appear to be complicated. We can help. We have prepared a 10-page guide to help you understand the benefits and how to qualify. Please click on the following link in order to obtain the guide.

Download our free guide:Startup-NY: New Tax Free ZonesTo Attract  Businesses

PS We love working with Startups!

Please feel free to contact us at (212)605-0276 or jfcraven@MediaCPAs.com.  We are happy to help with any questions that you may have.

Meet Our Interns

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We are pleased to announce the hiring of 3 interns:

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Nicole Garlick is a marketing intern.Nicole is a  senior majoring in marketing at St. John’s University, Staten Island where she plans to pursue an MBA. Nicole is President of the  Student Government at St. John’s where she manages 7 standing committees and 2 ad-hoc committees. She came to St. John’s from Kennewick, Washington where her family resides.

 

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Angela Hawro is an accounting intern. Angela is a senior majoring in accounting at St. John’s University. She is an experienced QuickBooks user. Angela plans to pursue an MS in accounting and ultimately become a CPA.

 

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Danny Park is an accounting intern. Danny is a graduate of Baruch College Zicklin School of Business  MBA program with a concentration in Information Systems.  He is currently pursuing the Master of Science in Accounting Degree from Saint John’s University  and is on track to sit for the uniform CPA exam in the summer of 2014. Danny served over 5 years in the United States Marine Corp and was promoted to the rank of Captain. Captain Park served 3 deployments in Iraq and was awarded the Navy and Marine Corps Achievement Medal, Navy Unit Commendation Medal, and Certificate of Appreciation for outstanding information technology project management, information systems planning, and superior leadership in support of Operation Iraqi Freedom 9.2.

Please welcome our new interns.

Get a Head Start on Your 2014 Tax Planning

 

Now is the time to get started on your 2014 tax planning!

2014 Tax Plannine

Take advantage of the unique opportunity that the beginning of the year brings for your tax planning! By looking back on the still-fresh prior events, you can look forward to determine what you can replicate or improve.

Individualize your plan

Your individual situation will dictate the tax-saving moves you should consider as you look back on 2013 and ahead to 2014. Please call us at 212-605-0276 for a review of the options that fit your circumstances. We’re ready to help you minimize your tax bill for 2013 and get a head start on smart tax planning for 2014.

Start with retirement plans

A good place to apply this tax strategy of looking back and looking forward is with your retirement plan contributions. An example of this is by making an after-year-end planning move by making a calendar-year 2013 contribution to your IRA until April 15, 2014. Any deductible contributions will reduce your 2013 tax bill.

Now let’s look ahead with this strategy by beginning to think about 2014 IRA contributions. By starting early you are able to set money aside for current contributions and to decide what mix of contributions offers the best tax advantages. The most that you can contribute to your IRA for 2013 and 2014 is $5,500 ($6,500 when you’re over age 50).

If you are a business owner, you can benefit from retirement plan tax savings too! It is not too late to set up a Simplified Employee Pension (SEP) plan for last year. Business can make contributions for 2013 until the due date of your tax return, so you could have until October 15 of this year to save money on last year’s return. The maximum contribution to a SEP for 2013 is $51,000 ($52,000 for 2014).

Retirement plans play a large role in tax-saving strategies because contributions reduce your adjusted gross income (AGI). For 2014, AGI, or a modified version of AGI, will affect your eligibility for various tax and nontax benefits. You will want to manage your income to keep it within the range that’s most advantageous to you.

Manage your income

How do you manage your income? One way is by making sure that you can take deductions that reduce your gross income. An example is, if you started a business and you are expecting it will take time to show profits, understanding the hobby loss rules can save money, these rules affect the amount you can deduct.

You can claim losses in full and apply the excess against other income on your personal tax return, reducing your AGI as a self-employed business owner. When your activity is a hobby, for tax purposes you must claim the income but your deductions are limited.

To retain the tax advantages of business treatment, establish your profit-making intentions early. Set up a business plan, a bank account, and a recordkeeping system. For an additional tax deduction this year, set up your home office.
Net operating losses from an established business also present AGI planning opportunities. If your business expenses exceeded your business income in 2013, you have until you file your 2013 federal income tax return to decide whether to apply the loss to a prior year or carry it forward into 2014.

By carrying the loss back you can generate a refund, boosting current year cash flow. However, depending on the type of business, your expected 2014 income, and your tax bracket, it may make more sense to use the loss to offset your 2014 income.

Document your expenses

An additional way to preserve business tax deductions is to have a strategy for obtaining written documentation supporting your expenses. Anautomobile mileage log is a typical case in point. The rules for substantiating vehicle expenses require you to keep a record, generally one made at or near the time you incur the expense or use the vehicle for business purposes.

Other documentation to put in place now includes a written policy for taking advantage of new “repair regulations.” These rules let you currently deduct certain purchases of assets that might otherwise have to be capitalized.

One more reason to start managing your 2014 AGI early in the year is thenet investment income tax. This 3.8% surtax generally applies when you have investment income, including, capital gains, interest, and dividends, and your AGI exceeds $200,000 ($250,000 when you’re married filing jointly).

Income from passive activities, such as businesses in which you own shares but do not “materially participate,” is also subject to the tax. Since material participation is typically measured on the basis of the time you spend working in the business during the year, a smart beginning-of-the-year tax strategy is to create a schedule for increasing your hours.

If you own more than one business and there’s simply not enough time to materially participate in all of them no matter how early you start, you may be able to “group” the different activities. Grouping lets you combine your hours to meet the material participation rules. If you grouped activities in a prior year, special circumstances may give you the opportunity to make changes in 2014.

Consider taxes in setting your 2014 investment strategy

As you investigate opportunities for managing your portfolio in 2014, remember to pause and plan for the effect of tax laws. Here are some important rules to consider.

Capital gain tax rates

For 2014, the tax rate you’ll pay on gains from sales of assets dependson your taxable income and how long you’ve owned the investment. Gains on assets owned a year or less are taxed at the same rate as your ordinary income.

The rate for qualified dividends and sales of most assets you own longer than a year can vary.

  • The rate is 0% when you’re married filing a joint return and your income is $73,800 or less ($36,900 when you’re single).
  • When your income is between $73,800 and $457,600 ($36,900 and $406,750 for single filers), the maximum rate is 15%.
  • A 20% rate applies when your taxable income is more than $457,600 ($406,750 when your filing status is single).
  • The 3.8% surtax applies to your income from capital gains, interest, and dividends when your adjusted gross income exceeds $250,000 ($200,000 when you’re filing single).

Analyze your options

Your overall financial goals should be complemented by planning strategies for tax-efficient investing. For example, purchasing stocks and other securities that offer long-term growth potential instead of current income from dividends can help reduce the amount of income subject to the net investment income tax. However, if you need cash flow from your investments, you might choose an alternative tax-saving strategy, such as adding tax-free municipal bonds to your portfolio. A mix of the two could be preferable if you’re subject to the alternative minimum tax.

Likewise, the same analysis applies to investment accounts. Let’s say you own bonds or other investments that generate taxable interest income. Holding these assets in a taxable account means that you will pay federal income tax based on your ordinary tax rate. Including them in tax-advantaged accounts such as IRAs might be a better idea because you could delay the tax bill until you begin making withdrawals.

We can help you create the best plan for 2014. So, please give us a call at (212)605-0276 to discuss the tax consequences of your investment decisions.

 

IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with Treasury Department regulations, we inform you that any U.S. federal tax advice contained is not intended or written to be used, and cannot be used for the purpose of (i) avoiding penalties that may be imposed under the U.S. Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein

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