Monthly Archives: February 2016

PUT SOCIAL MEDIA NETWORKING SITES TO WORK FOR YOUR FAMILY BUSINESS

If you think that social media is just for teenagers, think again. More than half of those logging on to social media sites are in their mid-thirties or older.Benefits Social Media

Traditional media outlets such as newspapers, radio and television have long served the purpose of delivering one-way messages, like your company’s advertising. Social media, by contrast, uses Web-based platforms to not only deliver your message, but to allow the recipient to participate.

You’ll find a number of technologies under the umbrella of social media, including email, instant messaging, blogs and social networking websites. In fact, sites like Facebook and Twitter have now surpassed traditional search engines when it comes to reaching some segments of the buying public.Traditional media outlets such as newspapers, radio and television have long served the purpose of delivering one-way messages, like your company’s advertising. Social media, by contrast, uses Web-based platforms to not only deliver your message, but to allow the recipient to participate.

The end result? Social media is not only changing the way your customers access news and information, but how they do business. If your company has not yet embraced the power of social media, it might be time to take another look.

Social Networking Websites

Separate from our professional lives, many of us have a profile on at least one social networking website. That’s why many businesses, large and small, are employing this innovative new marketing tool.

Adopting these technologies, however, involves more than creating a profile or fan page for your family business. To really be effective, it requires a shift to a culture of transparency. And, it is this window into your business that makes it more important than ever for your message to be consistent at every point of contact with current and prospective customers.

How Social Media Puts You Out Front

Establishing a presence on social networking sites can give your business a competitive edge in several ways, including:

  1. Brand Enhancement. Profiles, fan pages and participation in groups all serve to build awareness about your company’s brand. They also provide an opportunity to interact with current customers as well as begin the relationship-building process with prospects.
  2. Open Communication. Social media, including social networking, is based on the principle of two-way communication. Your company can benefit from both the positive experiences and negative feedback that customers voluntarily share. Not only can you address these customer concerns publicly, but you then have the chance to make any necessary improvements. You have the unique opportunity to make lemonade out of lemons.
  3. Target Marketing. Establishing a presence on social networking sites can help you identify, and subsequently target, potential customers. While the need for advertising through traditional media outlets may not be eliminated, the ability to target marketing communications reduces overall costs and provides a greater return on your marketing investment.

Tapping into social networking analysis tools may also assist with targeted marketing efforts. What if, for example, you knew that online discussions about one of your key products waned during the prior 12-month period, while conversations about a similar product that you have not promoted as strongly, showed an increase? Now there is some market intelligence to take under advisement when developing your marketing message. It is important, however, to remember that overt advertising on social networking sites can be received negatively, so your message should be developed with that in mind.

Social Networking Best Practices

Whether you are new to social networking, or a seasoned veteran, it’s important to:

Make a Commitment. Social networking, like most marketing tools, requires a commitment to time and possibly finances — perhaps even cultural change within your business — in exchange for successful results.

Be Visible. Make sure that your brand remains consistent between the various social networking sites. Develop a communications plan that keeps your business visible, but does not overwhelm your online following.

Listen First, Respond Second. Once your program is established, monitor the social buzz daily to keep a pulse on both current and potential customers. Much like a dinner party, you must listen before you respond. Then, once you have a clear picture of what is being said online, you can determine a course of action.

Keep it Local. Customers and prospective customers alike want to do business with companies that are within driving distance. Keep this in mind as you develop and refine your social networking plan.

Make it Easy. Remember to make it simple for people to find you. Add social networking information to business cards as well as your company’s website.

If your family business hasn’t yet gotten its feet wet in the world of social networking, it may be time to rethink your marketing strategy. Establishing a presence on social networking sites can be particularly effective when it comes to heightened brand awareness for your company and for identification and targeting of potential customers. In addition, finding ways to tie social networking initiatives into community efforts can create a win-win situation for everyone involved.

 

If you are looking for family office assistance for your business, call 214-696-1922 and ask for Mark Patten.

McKinnon Patten is a Dallas, Texas CPA firm with expertise in business consulting. We can help you identify opportunities to increase business efficiency and profitability.

Limiting Personal Liability by Creating a C Corporation

money in handBusiness owners often use C corporations as a means of limiting personal liability. Typically, the owners attempt to shield their personal assets from business related liabilities.  While this can be a useful protection in some circumstances, like preventing a business creditor from placing liens on personal assets, it is often the case that the owner is protecting himself from an unlikely lawsuit while simultaneously subjecting himself to a guaranteed tax.  This is due in part to the fact that most lawsuits against corporations target the business’s insurance, rather than the owner individually.  There is another way to organize your business and its assets that will offer greater legal protection, flexibility, and reduce tax liability.

For many C corporations, the most valuable asset is the real estate that is used to conduct business. One of the biggest mistakes an owner can make is to place the property in the C corp.   There are two reasons why this is a mistake: 1) you have made the C corp a more attractive target for a potential lawsuits or creditor liens (there is a valuable assets that can be taken) and 2) any appreciation on the property will be subject to double taxation upon disposition of the property or liquidation of the business.  To avoid this situation, many tax planners recommend that business owners have 2 entities, a C corp for your business and a partnership or LLC to own the real estate.

The increased protection of your assets is pretty straight-forward in this situation.  Because you do not own the property, it will never be at risk in the event of a lawsuit or creditor action against the C corp.  The corporation is merely a tenet paying rent and has no claim to the property.  Since the partnership or LLC is controlled by the same owner that controls the C corp, there is virtually zero risk that the partnership/LLC would be sued by the tenet (the owner would not sue himself).

The tax benefits of placing the real estate in a partnership instead of the C corp can be realized anytime the real estate appreciates in value.  Let’s use an example to illustrate. Mr. Jones decides to start a business and purchases a building for $100,000.  Mr. Jones then forms ABC Inc. and transfers the property to the C corp, which takes the land with a $100,000 carry over basis.  Over the next 5 years, the land appreciates to a FMV of $200,000.  At this point, ABC Inc. decides to sell the real estate to capture some of the appreciation.  If the land is sold for the FMV of $200,000, ABC Inc. will recognize $100,000 of gain.  This gain is subject to corporate income tax of 35% (C corps do not get the more favorable capital gains rates).  After completing the transaction, ABC Inc. will receive $165,000.00 net of corporate tax. The second tax bite occurs with the distribution of the proceeds to Mr. Jones.  Of the $65,000 of gain remaining, Mr. Jones will owe a personal income tax of 23.8%, or $15,470.00.  The after tax proceeds to Mr. Jones on a $200,000 transaction with a $100,000 gain is $149,530, meaning over 50% of the gain was lost to taxes.  It should be noted that due to Section 311 (b), whether the property is sold by the corporation, given as a current distribution, or sold as part of a corporate liquidation, the transaction is treated as if the corporation sold the property for cash and distributed the cash as a dividend.

Now let us take the above example and modify it.  In this scenario, Mr. Jones places the property in a partnership instead of transferring it to the C corporation. After 5 years, when Mr. Jones decides to sale the property, he will not have to recognize the property’s appreciation as income at the corporate level. When transferring the property from the partnership to back to himself, Mr. Jones simply takes as basis in the property the lesser of the partnership basis in the building or Mr. Jones’s basis in the partnership.  Gain would then be recognized upon the subsequent sale of the property, but subject to the more favorable personal capital gains rates of 15%, 20% or 23.8% and without the secondary tax on the dividend.  If we use the same figures from the prior example, Mr. Jones’s after tax proceeds from the sale of his property would be $176,200, a net increase of $26,670, which is at the top marginal capital gains rate.

If you are looking for ways to limit your liability, call 214-696-1922 and ask for Mark Patten.

McKinnon Patten is  Dallas CPA that provides a full range of services to high net worth individuals. Our client base includes many corporate executives, as well as entrepreneurs and owners of closely held businesses.

How the IRS Proves Fraud and Why It Can Be Devastating

In general, a tax assessment by the IRS is presumed to be correct. A taxpayer can overcome the presumption with proof. That situation is reversed when the IRS asserts fraud. In those instances, the IRS must prove, by clear and convincing evidence, that fraud exists.

Badges of Fraud

Tax fraud is a very serious issue. There is a potential for criminal as well as civil penalties. In addition, the civil penalty can be 75 percent of the underpayment attributable to fraud. To make matters worse, if the IRS can show fraud, there is no statute of limitations, which means the tax agency can open up any earlier tax return.

While the IRS hurdle is high, even innocent taxpayers can expose themselves by their actions. Courts look for “badges of fraud,” indicating when incidents of fraud have occurred. These badges of fraud include:

    • Failure to file income tax returns.
    • Understating income.
    • Failure to maintain adequate records.
    • Concealing income or assets.
    • Failure to cooperate with tax authorities.
    • Asserting frivolous arguments.
    • Lack of credibility of the taxpayer’s testimony.
    • Implausible or inconsistent explanations of behavior.
    • Engaging in illegal activities.
    • Attempting to conceal illegal activities.
    • Filing false documents.
    • Dealing in cash.
    • Failure to provide documents to the IRS.
    • Engaging in a pattern of behavior with an intent to mislead.
    • Failure to deposit receipts into a business account.
    • Commingling personal and business income or assets.
    • Establishing multiple entities with no business purpose.

While no one factor is necessarily sufficient to establish fraud, the combination of factors can constitute persuasive evidence.

The importance of the factors varies. Dealing in cash is unlikely to be a factor for a local deli (it’s expected), but it could be for a business that accepts only or largely cash when the industry norm is for credit cards and checks. Failing to deposit receipts in a business bank account also rates high on the list. So does filing false documents such as providing receipts a business created (or modified) or asking a supplier to create for a nonexistent transaction. In fact, providing false documents can result in criminal action by itself.

But a taxpayer could find him or herself in trouble by some relatively innocent actions like requesting customers pay in cash because of financial problems, keeping poor records, paying personal expenses out of the business, etc. Reduce your exposure by avoiding these “badges” and talk to your tax adviser if you’re unsure of how to deal with a particular issue.

For guidance in complying with tax regulations, call 214-696-1922 and ask for Mark Patten.

McKinnon Patten is a Dallas CPA firm that specializes in tax compliance for individuals and businesses. We understand the importance of staying up-to -date on continuously changing tax rules and regulations.

AVOIDING PASSIVE LOSSES

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Since the Great Recession of 2008, the nation’s rental market has been an economic bright spot for investors. The median rent for a new apartment climbed to $1,372 last year, a 26% increase from 2012. The 2008 housing crash led to stricter lending standards and thus to 37% of households renting their homes in 2014—the highest level in over 45 years. There are, however, caveats to owning rental property. One of the primary drawbacks of rental income is that Section 469 of the Code classifies all rental income as passive. This limits the amount of loss a taxpayer can claim on rental properties to the amount of passive income earned in the same tax year, with any excess loss carried forward to subsequent years or until disposition of the property.  Another drawback to rental properties is a result of the Affordable Care Act. The Act reduced the potential appeal of owning rental property by imposing a 3.8% surtax on certain taxpayers’ passive rental income. Individuals will owe the tax if they have Net Investment Income and also have modified adjusted gross income over the following thresholds:

Filing Status

MAGI Threshold Amount
Married filing jointly $250,000
Married filing separately $125,000
Single $200,000
Head of household (with qualifying person) $200,000
Qualifying widow(er) with dependent child $250,000

However, the IRS has carved out exceptions to this passive income treatment and created a “safe haven” from the surtax for “real estate professionals” that meet certain “material participation” requirements. To determine whether or not you meet this two part criteria, we must first determine who qualifies as a real estate professional.  The IRS criteria is as follows:

  • More than half of the personal services you performed in all trades or businesses during the tax year were performed in real property trades or businesses in which you materially participated.
  • You performed more than 750 hours of services during the tax year in real property trades or businesses in which you materially participated.

These two criteria are designed to a) prove you truly derive your income primarily through real estate and b) disqualify retirees who spend a few hours a week managing rentals.  It should be noted however, that “real property trades or business” is defined by Sec. 469 (c)(7)(C) as “any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business.”  Qualifying as a real estate professional is only the first step—the next step is to determine if you “materially participated” in the rental activities.

Material participation tests.    You materially participated in a trade or business activity for a tax year if you satisfy any of the following tests.

  1. You participated in the activity for more than 500 hours.
  2. Your participation was substantially all the participation in the activity of all individuals for the tax year, including the participation of individuals who did not own any interest in the activity.
  3. You participated in the activity for more than 100 hours during the tax year, and you participated at least as much as any other individual (including individuals who did not own any interest in the activity) for the year.
  4. The activity is a significant participation activity, and you participated in all significant participation activities for more than 500 hours. A significant participation activity is any trade or business activity in which you participated for more than 100 hours during the year and in which you did not materially participate under any of the material participation tests, other than this test.
  5. You materially participated in the activity (other than by meeting this fifth test) for any 5 (whether or not consecutive) of the 10 immediately preceding tax years.
  6. The activity is a personal service activity in which you materially participated for any 3 (whether or not consecutive) preceding tax years. An activity is a personal service activity if it involves the performance of personal services in the fields of health (including veterinary services), law, engineering, architecture, accounting, actuarial science, performing arts, consulting, or any other trade or business in which capital is not a material income-producing factor.
  7. Based on all the facts and circumstances, you participated in the activity on a regular, continuous, and substantial basis during the year.

You did not materially participate in the activity under test 7 if you participated in the activity for 100 hours or less during the year. Moreover, under this test your participation in managing the activity does not count in determining whether you materially participated if:

  • Any person other than you received compensation for managing the activity, or
  • Any individual spent more hours during the tax year managing the activity than you did (regardless of whether the individual was compensated for the management services).

If the real estate professional meets any one of the above criteria, not only can losses on a rental be counted against ordinary income, any profits from the rentals will be excluded from the Net Investment Income surtax of 3.8%.  It should be noted that taxpayers qualifying as real estate investors are allowed to group rental properties and treat them as a single activity.  In doing this, they can aggregate the hours they spend on multiple rental activities and avoid having to demonstrate that they materially participated in each property individually.

Although many rental property owners will find the “real estate professional” qualification impossible to meet due to other employment consuming more than 50% of their time, there is some relief for these individual tax payers.  There is a less stringent standard of participation in rental activities known as “active participation”.  Per the IRS, “ You actively participated in a rental real estate activity if you (and your spouse) owned at least 10% of the rental property and you made management decisions or arranged for others to provide services (such as repairs) in a significant and bona fide sense. Management decisions that may count as active participation include approving new tenants, deciding on rental terms, approving expenditures, and other similar decisions.”  This qualification will allow you to deduct up to $25,000 of passive losses from your ordinary income.  It will not, however, exempt your passive income from the 3.8% NIIT if you meet the income thresholds.

 

If you are seeking advice on how to avoid passes losses, call 214-696-1922 and ask for Mark Patten.

McKinnon Patten is a Texas CPA that provides accounting and advisory services to a full range of real estate entities and property types including residential, commercial and industrial.

Financial Benefits from Hiring Your Children

HireMeIt can be difficult in the current job market for young people and recent college graduates to find full time and summer jobs. Business owners with children in this situation may be able to provide them with valuable experience and income while generating tax and financial savings for themselves.

As a business owner, you may be able to turn high-taxed income into tax-free or low-taxed income, achieve Social Security tax savings (depending on how your business is organized) and even make retirement plan contributions for your child.

In addition, employing a child age 18 (or if a full-time student, age 19 to 23) may be a way to save taxes on the child’s unearned income.

Here are the key considerations.

Convert High-Taxed Income into Tax-Free or Low-Taxed Income

You can turn some of your high-taxed income into tax-free or low-taxed income by shifting some of your business earnings to a child as wages for services performed by him or her. In order for your business to deduct the wages as a business expense, the work done by the child must be legitimate and the child’s salary must be reasonable.

Example: A business owner operating as a sole proprietor is in the 39.6% tax bracket. He hires his 17-year-old daughter to help with office work full-time during the summer and part-time into the fall. She earns $6,100 during the year and doesn’t have any other earnings. The business owner saves $2,415.60 (39.6% of $6,100) in income taxes at no tax cost to his daughter, who can use her $6,300 standard deduction (for 2015) to completely shelter her earnings. The business owner could save an additional $2,178 in taxes if he could keep his daughter on the payroll longer and pay her an additional $5,500. She could shelter the additional income from tax by making a tax-deductible contribution to her own IRA.

Family taxes are cut even if the child’s earnings exceed his or her standard deduction and IRA deduction. That’s because the unsheltered earnings will be taxed to the child beginning at a rate of 10% instead of being taxed at the parent’s higher rate.

Keep in mind that bracket shifting works even for a child who is subject to the Kiddie Tax, which causes the child’s investment income in excess of $2,100 for 2015 to be taxed at the parent’s marginal rate. The Kiddie Tax has no impact on the child’s wages and other earned income. It only affects unearned income.

The Kiddie Tax doesn’t apply to a child who is age 18 or a full-time student age 19 through 23, if the child’s earned income for the year exceeds one-half of his or her support. Therefore, employing a child age 18 or a full-time student age 19 to 23 could also help to avoid the Kiddie Tax on his or her unearned income.

For children under age 18, there is no earned income escape hatch from the Kiddie Tax. But in all cases, earned income can be sheltered by the child’s standard and other deductions, and earnings exceeding allowable deductions will be taxed at the child’s low rates.

What about income tax withholding? Your business will probably have to withhold federal income taxes on your child’s wages. Usually, an employee can claim exempt status if he or she had no federal income tax liability for the preceding year and expects to have none for this year. However, exemption from withholding can’t be claimed if:

  1. The employee’s income for 2015 exceeds $1,050 and includes more than $350 of unearned income (such as dividends), and
  2. The employee can be claimed as a dependent on someone else’s return. Keep in mind that your child probably will get a refund for part or all of the withheld tax when he or she files a return for the year.

You Can Also Save Social Security Tax

If your business isn’t incorporated, you can also save some self-employment (Social Security) tax dollars by shifting some of your earnings to a child. That’s because services performed by a child under the age of 18 while employed by a parent isn’t considered employment for FICA tax purposes.

Example: A sole proprietor who usually takes $120,000 of earnings from the business pays $5,700 to her 17-year-old child. The business owner’s self-employment income would be reduced by $5,700, saving $165.30 (the 2.9% Medicare health insurance portion of self employment tax the owner would have paid on the $5,700 shifted to the daughter). This doesn’t take into account the sole proprietor’s income tax deduction for one-half of his or her own Social Security taxes.

A similar but more liberal exemption applies for the federal unemployment tax (FUTA), which exempts earnings paid to a child under age 21 while employed by his or her parent. The FICA and FUTA exemptions also apply if a child is employed by a partnership consisting solely of his or her parents.

Note that there is no FICA or FUTA exemption for employing a child if your business is incorporated or is a partnership that includes non-parent partners. However, there’s no extra cost to your business if you’re paying a child for work that you’d pay someone else to do anyway.

Retirement Benefits

Your business also may be able to provide your child with retirement benefits, depending on the type of plan it has and how it defines qualifying employees.

For example, if your business has a simplified employee pension (SEP), a contribution can be made for the child up to 25% of his or her earnings, but the contribution cannot exceed $53,000 for 2015. The child’s participation in the SEP won’t prevent the child from making tax-deductible IRA contributions as long as modified adjusted gross income (computed in a special way) is below the level at which deductions for IRA contributions begin to be disallowed. For 2015, that amount is $61,000 for a single individual.

If you have any questions about how these rules apply in your particular situation, contact your tax adviser. Also keep in mind that some of the rules (such as the maximum amount they can earn tax-free) change from year to year, and may require your income-shifting strategy to change, too.

If you are seeking advice on how to minimize taxes, call 214-696-1922 and ask for Mark Patten.

McKinnon Patten is a local DFW CPA firm that specializes in tax strategies. We understand that good tax planning is critical to minimizing your taxes and offer these services for individuals, trusts and estates and businesses.

Various Tax Benefit Increases for 2016

For tax year 2016, the IRS recently announced many annual inflation adjustments. IRS Revenue Procedure 2015-53 provides details about these amounts.

Because inflation is low, many of the amounts for 2016 will not change from 2015. For example, the elective deferrals to 401(k) and 403(b) plans will remain $18,000 next year. Other retirement plan contribution limits also will not change.

Recently, the Social Security Administration announced that the Social Security wage base (the amount of earnings subject to taxation) will remain at $118,500 for 2016, the same as 2015.

Here are some of the other tax amounts for 2016, as compared with 2015

Tax Item

2016

2015

Highest tax rate of 39.6 percent Will affect singles with income exceeding $415,050 ($466,950 for married taxpayers filing jointly) Affects singles with income exceeding $413,200 ($464,850 for married couples filing jointly)
Standard deduction Remains $6,300 for singles and married persons filing separately; $12,600 for married couples filing jointly. For heads of household, the amount rises to $9,300 $6,300 for singles and married persons filing separate returns and $12,600 for married couples filing jointly. The standard deduction for heads of household is $9,250
Limitation for itemized deductions For singles, will begin at incomes of $259,400 ($311,300 for married couples filing jointly) For singles, begins at incomes of $258,250 ($309,900 for married couples filing jointly)
Personal exemption $4,050 $4,000
Alternative minimum tax exemption $53,900 ($83,800, for married couples filing jointly) $53,600 ($83,400, for married couples filing jointly)
Estates Decedents who die during 2016 will have a basic exclusion amount of $5,450,000 Decedents who die during 2015 have a basic exclusion amount of $5,430,000
Annual exclusion for gifts $14,000 $14,000
Foreign earned income exclusion $101,300 $100,800
Gifts to non-U.S. citizen spouse The exclusion from tax on a gift to a spouse who is not a U.S. citizen will be $148,000 The exclusion from tax on a gift to a spouse who is not a U.S. citizen is $147,000
Kiddie Tax Amount used to reduce the net unearned income reported on a child’s return that is subject to the Kiddie Tax remains $1,050 Amount used to reduce the net unearned income reported on a child’s return that is subject to the Kiddie Tax is $1,050
Flexible spending arrangements (FSAs) The annual limit on employee contributions to employer-sponsored health FSAs will remain $2,550. The annual dollar limit on employee contributions to employer-sponsored healthcare FSAs is $2,550.

If you are seeking guidance of CPAs who understand the implications these changes can have on your tax obligations, call 214-696-1922 and ask for Mark Patten.

McKinnon Patten is a leading CPA Accounting Firm that specializes in tax planning strategies for high net worth individuals and small to mid-size owner operated businesses.