Posts in: November
November 30, 2016 Health Care, Small Business, Tax Planning Comments Off on The Election Didn’t Kill ObamaCare (yet): What You Need to Know

As Americans awoke on the morning of November 9, 2016, the reality of a Donald Trump presidency began to sink in.  Many believed that a Trump administration would mean the end of the Affordable Care Act (a.k.a. the ACA or ObamaCare) on day one.  Well, the reports of ObamaCare’s death have been greatly exaggerated (or are at least premature).  ObamaCare is alive and well for 2017 and Open Enrollment began November 1st and runs through January 31st.  Here’s what you need to know for what may be ObamaCare’s last ride:

  • Turns out that insurance under the Affordable Care Act isn’t really so affordable: Unless you’ve been under a rock for the past couple of months, you know to be prepared for a bit of sticker shock. ObamaCare Premiums for 2017 are up by an average of about 25%, and eight states (Alabama, Georgia, Illinois, Minnesota, Nebraska, Oklahoma, Pennsylvania and Tennessee) will see increases of more than 30%.  The steepest increase belongs to the Sooner State – as Oklahomans will see their premiums increase by an average of 76%.
  • You may have to choose between paying more for insurance and paying more for not having insurance: Insurance premiums aren’t the only prices on the rise. The penalty for not having health insurance has increased as well, and is calculated in one of two ways.  It’s either: a) 2.5% of your income; or b) $695 per adult and $347.50 per child, with a maximum of $2,085 per family.  The penalty is whichever amount is higher.  This means that anyone with an income of $83,400 or more who fails to obtain health insurance will be paying a penalty of at least $2,085, regardless of the size of their family.
  • Not all employers are required to provide health insurance for employees: The “employer mandate” which requires employers to offer acceptable coverage to their workers or pay tax penalties was one of the most controversial aspects of ObamaCare. However, this mandate only applies to employers with 50 or more full-time employees, so many small businesses are off the hook.  In addition, employers with less than 25 full-time employees with annual wages of less than $50,000 can qualify for employer tax credits through ObamaCare’s Small Business Health Options Program (SHOP).  More information on SHOP is available at https://www.healthcare.gov/small-businesses/.
  • A Health Savings Account (HSA) can be your friend: This strategy can be a huge opportunity for the small-business owner. Although non-business owners can also use a HSA, small-business owners have much more control over their health insurance plans and can utilize creative strategies to acquire the right type of insurance to allow for an HSA. In order to qualify, you have to enroll in a high-deductible health plan (HDHP), and if you’re generally healthy, this is a great chance to save on premiums and avoid the doctor as much as possible.

In the meantime, contributions to your HSA are deductible from your gross pay on the front page of your tax return, potentially putting you into a lower tax bracket.  In 2016, the tax deduction is up to $3,350 for singles and $6,750 for families.  The funds grow tax-free and aren’t a “use it or lose it” type plan.  The account can continue to grow and build year over year for your future healthcare needs. You can also spend the money tax-free on qualified medical expenses, and you can invest the money in much the same way you invest an IRA.  You can even invest HSA funds in real estate!

Knowing the deadlines is huge in order to take advantage of an HSA in 2016 or 2017. There are two deadlines to be aware of: the Setup Deadline and the Funding Deadline:

The Setup Deadline: Dec. 1, 2016 (as in this Thursday!!!) – In order to qualify to make contributions and take deductions in 2016, you must have established your HSA by this date.

The Funding Deadline: April 15, 2017 – Deadline to contribute to your HSA for 2016 and receive the tax deduction on your 2016 tax return.

  • Don’t forget about the Health Reimbursement Arrangement (HRA): This is a great strategy, but it only works for business owners, and it really benefits those with higher-than-average medical expenses. The HRA allows you to set up your own “benefit plan” for health care and reimburse yourself for ALL of your health care expenses — thereby getting a 100 percent write-off for all of your medical expenses.

The only challenge can be the structure you need to use in order to make the plan work. Sometimes it takes a little extra business planning and structuring – and certainly some attention to bookkeeping – to make it happen. But again, it can be very lucrative and worth the extra time.  With a little bit of planning with an attorney or CPA who understands the HRA, you can take massive tax deductions for your healthcare expenses over and above your health insurance.

The Trump administration and a Republican-controlled Congress means that in 2017 we may finally have the chance to bid a fond farewell to ObamaCare, but for the time being the ACA remains the law of the land.  Take steps to make sure you are doing all you can to capitalize on its advantages and avoid its pitfalls.

Thinking About Starting a Business? Consider These Ten Tax Tips

November 21, 2016 Business planning, Corporations, Tax Planning Comments Off on Thinking About Starting a Business? Consider These Ten Tax Tips

As the end of the year is fast approaching and 2017 will be here soon, if you’ve been thinking about starting a new business, keep in mind that once you are self-employed, a huge portion of the tax code opens up and becomes available to you for tax write-offs.  Of course there are a lot of risks and rewards of starting your own business, but one of those rewards is the availability to take tax write-offs that you wouldn’t otherwise be able to take including dining, travel expenses, and entertainment.  Here are a few tax tips to give you an “eye in the sky” perspective of the tax landscape as you consider if and/or when you will start that new business:

  1. Keep Your Day Job (If You Want To). You can keep your day job / “9 to 5” career while you build your business on the side AND still take all of the tax write-offs that are available to someone who is building their business full-time.  For example, if you leave your day job for the day and meet a potential client of your part-time/side business for dinner that night, you can write-off 50% of that meal JUST LIKE the business owner sitting next to you who runs his business FULL-TIME and is likewise meeting with a potential client for dinner. It’s probably wise in terms of your budget to keep your day job while you start your business but I’m simply pointing out that you have full access to the tax code for business write-offs the same as the guy who is running his business full-time.
  1. Take a Tax Write-off for Business Start-up Costs. The IRS allows up to $5,000 of qualified “start-up expenses” as a tax deduction in the year the costs were incurred.  If you have more than $5,000 of qualifying start-up expenses then the rest is amortized / spread out over a fifteen year period.  For example, if you spend $7,000 of qualified start-up expenses in the year your business began then you can claim a write-off in that first year in the amount of $5,000 and the remaining $2,000 is spread out over 15 years.  If your business closes down prior to that, you can claim the rest as a deduction at that time. HOWEVER, you need to make a sale or receive income in your business in order to write off these start-up costs.  For example, if you had $8,000 of qualified start-up expenses in 2016 but you have no income from your business for 2016, you can’t write-off $5,000 of that for tax year 2016 – You need to have income for your business in 2016 in order to claim that $5,000 deduction for that year. ADDITIONALLY, not every expense qualifies as a “start-up expense”; however,  many expenses DO qualify such as consulting fees and fees for similar professional services, costs to organize your business, cost of travel to meet with potential customers, suppliers, distributers, etc., advertising costs to announce your business opening, and costs to analyze the market/industry in which your business will compete.  IRS Publication 535.  As a practical matter, once your business has received income, expenses after that are no longer “start-up” expenses and are analyzed under Tip #3 below. There are some other rules and caveats regarding start-up expenses but in sum, this is a powerful incentive to get your business started now!
  1. Understand Which Expenses are Tax-Deductible. With some exception, as a general rule, any business expense that is ORDINARY and NECESSARY is tax deductible, i.e., it’s a tax write-off.  The IRS has stated that the word “ordinary” means common and accepted in the industry of your business and the word “necessary” means helpful and appropriate to your business.  For example, if your business sells products online and it is common and accepted in your industry to pay advertising fees and such fees are helpful and appropriate to your business, you can write-off those fees as a tax deduction.  There are many deductions which need to be analyzed further particularly those in which the IRS has set forth specific rules and guidelines such as the home office deduction and the auto deduction but this gives you the general idea of what expenses are typically going to be tax-deductible and which are not.
  1. Keep Good Records. Good record-keeping is the key to claiming tax deductions.  You need to have records that substantiate the tax deductions that you claim on your tax return.  This includes receipts and bank statements as well as good book-keeping using a chart of accounts to track each item of income and expense.  A chart of accounts is also helpful for tracking your business assets and liabilities, which can then generate balance sheets, profit and loss statements, and other financial statements that may help with qualifying for loans, etc.  Quick Books or similar software can help with this.  If organization and record-keeping is not a strength of yours but you are otherwise very entrepreneurial and have many other skill sets to run your business, you may find it helpful to outsource some of these tasks.
  1. Most Tax Deductions are Entity-Agnostic. Almost all of the tax deductions that we discuss for the typical small business owner are available to claim as a tax write-off REGARDLESS of whether your business is a sole proprietorship, LLC, s-corporation, partnership, etc.  For example, with some exception, you can take advantage of many, if not, all of that low hanging fruit such as dining, travel expenses, entertainment, retirement plan contributions, paying kids in your business, health care expenses, home office, etc. and you can be a sole proprietor, an LLC, an s-corporation, etc., it generally does not matter!
  1. Don’t Let the Tax Tail Wag the Dog (Your Business). Be smart about what you purchase in your business.  Simply because an expense is tax-deductible doesn’t mean you should buy it.  Don’t let the tax tail wag the dog, i.e., make the decision to buy business related expenses based on the needs and circumstances of your business.  For example, even if you can deduct that very expensive laptop that might not be the best use of your business capital whereas it could be spent somewhere else in your business much more efficiently and a moderately priced laptop could be sufficient for your business needs.
  1. Some Business Expenses Must be Spread Over Multiple Years. When you purchase an asset in your business you generally cannot claim a deduction for the full cost of the asset in the year of purchase – rather, the cost generally determines the basis meaning when you sell the asset you only pay income tax on the sales price minus the basis.  Further, the cost is generally spread out over multiple years and allows you to claim a portion of the cost each year as a tax deduction, i.e., depreciation. For example, if you purchase office furniture for $8,000 – the cost is generally spread out over seven years (IRS Form 4562).  However, IRS Code Section 179 would allow you to make an election to write-off the full cost in the year of purchase.  Section 179 is a powerful tool for the small business owner!
  1. Consider an accountant/CPA. Once you begin working for yourself, even if only part-time, it pays off to hire an accountant/CPA to do your taxes.  It also pays off to get some training on bookkeeping using software like Quick Books or at least until you’re knowledgeable it may be wise to outsource that task to a competent bookkeeper.  Also, you probably primarily think of federal income tax – don’t forget state income tax, as well as self-employment tax, payroll tax, as well as potentially excise tax, franchise taxes, etc.  All the more reason to consider an accountant/CPA.
  1. There isn’t a legitimate “Pay No Tax Quick” Scheme.  Just like Get-Rich Quick Schemes are usually too good to be true, similarly, the “tax game” is one in which the winner is the one who is steady, aggressive (not too aggressive – remember pigs get fat but hogs get slaughtered), and utilizes sound strategies over the course of many years.
  1. Understand the Type of Income Generally Determines How It is Taxed. Income you make in your business (after subtracting all those tax deductions) is generally included with your other income such as W-2 income to determine what personal income tax bracket you’re in.  But not all income is taxed in the same manner.  For example, income you make in your business is generally subject to self-employment tax whereas other type of income, such as rental income, dividends, and capital gain income is not.  The more you understand how various types of income is taxed then you can learn to be strategic with how you spend your time pursuing some types of income over others.  This where your business can ultimately build wealth for you and your loved ones for many years.

There are many other tips I could give a potential new business owner including the hobby loss rule as well as specific rules regarding home office deductions, auto deductions, Rule 179 deductions, health care deductions, and self-employment tax savings, etc., but these Tips hopefully give a baseline starting point to consider.  Note: many specific tips on various tax deductions can be found at www.markjkohler.com and www.kkoslawyers.com.  If you need assistance with business and tax planning, please call our office at 602-761-9798.

How to Negotiate a Solid Contract

November 15, 2016 Asset Protection, Business planning, Law, Small Business Comments Off on How to Negotiate a Solid Contract

Lets face it, we all have to deal with contracts, many of us on a daily basis, and it is the law of contracts which forms the very foundation for our civil and commercial society.  The main purpose of a contract is to memorialize and confirm the intentions and future performance of the parties to the contract, and our society would be fraught with chaos were it not for laws that bind parties to their contractual agreements.

In our practice, we see a lot of bad deals and lost investments that result from the failure to have the deal memorialized in a solid written agreement, or that the agreement that was signed did not have sufficient provisions to protect the party’s interests.  While it is true that oral agreements can be binding, the problem is how will you prove in court what the terms of the oral agreement were if the other side fails to perform?  If and when a dispute does arise from an oral agreement, be assured that the opposing party will likely have a different version of what was said, or at least their recollection will be foggy.  For that reason, we will always recommend that your deal or understanding should be confirmed in a comprehensive, written agreement.

While no article can address all of the issues that could arise in a given transaction, and certain types of transactions will call for varying type of contractual provisions, here are a few tips to help ensure that your contracts will adequately protect your interests in any given transaction.

  1. Make sure the contract addresses all of your expectations for the transaction. The whole reason for having contracts is to confirm who will do what, when, where, and how.   We have seen our share of overly simplistic agreements that the parties “thought” were adequate, but failed to contain sufficient specificity as to all of the expectations of the parties.  For example, I had a case where the parties signed a written agreement that they would start a business and be 50-50 owners.   Nothing else was mentioned regarding who would do what, who was responsible for what, and what would happen to the business if they split or disagreed.  The subsequent result was years of litigation and tens of thousands of dollars in legal fees even though technically they did have a written contract.   A contract should be very specific and detailed as to each and every expectation you have of the other side.  Anything you expect the other side to do, not do, or any rights, protections or contingencies you want to preserve should be confirmed in detail in the contract.   Don’t assume that if the other side told you something verbally, in an email or text, that it necessary be enforced.  If a particular issue, term, or detail has any importance to you, put it in the final written agreement.
  2. Make sure terms are objectively clear and comprehensive.  Terms in a contract should be objectively clear and understandable.  I often see agreements that contain references that would only be understood by those in the industry, or worse, only by those individuals who were parties to the agreement.  Keep in mind that if the other party defaults and you need to have the agreement enforced, it will likely be a lawyer, judge, or jury that decides your case.  Therefore, the terms in your contract should be written as if it were to be interpreted by someone who has no experience or knowledge with your particular transaction, since realistically they will likely be the ones to interpret or enforce the agreement in court.    Many contracts written by attorneys will begin with a summary of the facts and circumstances giving rise to the agreement itself which helps provide context to third parties for the provisions that follow.
  3. Make sure you properly address foreseeable contingencies or breakdowns. Similar to No. 1, many laypersons inexperienced in negotiating agreements frequently fail to consider all the possible ways their agreement could fail.  One of the most important aspects of a solid contract is to fully address all the “what ifs” in a given transaction.  Indeed one of the best ways to protect your rights in a transaction is to fully address each and every way the transaction could go wrong (i.e. events of breach or default), and what will be the rights of the parties if or when those events occur (i.e. remedies or enforcement upon default).  Some may feel they are disrespecting or offending the other side by bringing up these concerns, but the best time to address these types of issues is BEFORE they occur.    Similarly, many inexperienced with contracts or the process that is involved to enforce a contract in court fail to even consider the possibility that a dispute could arise, and that they may end up having to pay attorneys’ and other fees to enforce their rights.  The general rule in America is that unless you specifically provide for attorney’s fees in the contract, each party will pay their own attorney’s fees if court intervention becomes necessary.  Therefore, I generally recommend dispute resolution provisions and attorney’s fees clauses in every contract.

These tips are not intended to be a substitute for consulting with your attorney or other professionals who have experience in your particular type of transactions, and can advise you on terms and issues that could likely arise that should be included in the contract.   Given the proliferation of contracts in today’s society, it would be unrealistic to expect that you would apply this level of scrutiny to every contract you see.  However, if you have important rights at stake in a given transaction, these tips along with consulting your attorney will help ensure that, for THIS contract, your interests are adequately protected in the deal.