You have your company up and running.  The concept is working and you actually have revenue coming in to pay some of the bills that have been piling up.  You followed your attorney’s advice and have created an S Corporation to protect yourself from personal liability.  You’ve already filed your first corporate tax return.  The “bottom line” wasn’t great, but that’s ok since you’re just getting started.  The business is going to survive!

Now that you are through the start up stage you want to get further organized.  You’re also starting to travel some for business, taking a few clients out for lunch, and need to order some office supplies through the Internet.  No problem – just put it on a credit card.  Here’s the question: do you need a corporate credit card to charge these items and deduct them for tax purposes or can you use a personal credit card?

There is no requirement that a corporation (or an LLC for that matter) needs to have a credit card issued in its name in order for business expenses to be deductible for tax purposes.  Using a personal credit card is fine and is, in fact, usually easier to obtain given that you have most likely already established a personal credit history that is much more extensive than your newly formed corporation.

That being said, here are a couple of quick “rules” that you should consider following:

• Pick one of your personal credit cards and use it ONLY for business.
• If you have more than one business, use a separate card for each business.
• DO NOT charge personal or non-business items on this card.
• Make sure it has enough of a credit limit to allow you to charge the needed items.
• Keep the monthly statement as that is your detailed record of the expenses incurred for tax purposes.
• You DO NOT need to keep the signed receipts as long as you can document the business purpose for the charges incurred (including names of people taken to lunch or other entertainment).
• Make sure the credit card bill is paid from the company checking account.
• Have your accountant analyze the monthly statement and categorize the charges into various expense categories.

Starting and running a business is hard work, especially when you are in a growth stage.  Once the business has been established and running for a number of years you can apply for and obtain a company credit card.  In the interim, save yourself some time and effort and utilize a personal credit card.

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Russ Wertz - Founder and CEO of Wertz & Company, LLP, a Professional Services Firm located in Orange County, CA that specializes in working with entrepreneurs along their journey to success.

A tax deduction is available for the costs of having a home office.  However, there are several requirements that must be met.  This is an area that the IRS polices regularly, so if the rules are not followed exactly, the deduction will be denied and the assessment of penalties is likely.

First, the home office must be used for a trade or business activity.  Generally, this is going to be an enterprise that is reported on Schedule C in an individual income tax return.  The activity must be a real business; you cannot have a home office deduction for managing personal investments.

The home office must be used regularly and exclusively for business.  The office must be in a separately identifiable area of the home that is used only for the business (no deduction for working at the kitchen table).  If the area is used both for business and personal purposes then the requirement is not met.  It is not necessary that an entire room be dedicated to the business.  A portion of a room – as long as it is used exclusively for the business – will satisfy the requirement.

The home office must be one of the following: (1) the principal place of business, (2) a place to meet with customers in the normal course of business, or (3) a separate structure used for the business that is not attached to the dwelling structure.

It is very difficult for an employee to take a home office deduction.  To be able to take the deduction the home office must be for the employer’s convenience.  If the employer does not require the employee to work from home and provides a space for the employee, then it is likely that the home office is at the employee’s convenience and no deduction is available.

The expenses available to be deducted include allocable portions of the costs to maintain the home.  This includes mortgage interest, property taxes, maintenance, utilities, insurance, and other costs.  It is important to remember that mortgage interest and property taxes would be deductible anyway if the home office does not meet the requirements.  Depreciation on the allocable portion of the property is also allowable; however, this will possibly lead to a portion of any gain realized on the sale of the home to be taxable.  The expenses are deductible only to the extent of the business’s income.  Any expenses not deducted can be carried over to future years.

This article only covers the basics of the deduction.  As mentioned, the IRS watches this very closely, so it is important to follow the rules outlined.  But for those who do, this deduction is something that should not be overlooked.

Any federal tax advice contained in this article is not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer.

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Greg Tanner – is a Tax Principal at Wertz & Company, LLP, a Professional Services Firm located in Orange County, CA that specializes in working with entrepreneurs along their journey to success.

Don’t be surprised if you find a new tax form taking up space in your mailbox in the next couple weeks.  Beginning with calendar year 2011 credit card companies and electronic payment processors are required to prepare and file transaction reports with the IRS which list the total payment amounts made to businesses and individuals.  That means all transactions handled in this manner will appear on the new Form 1099-K.  It will be received along with other tax reporting forms sometime in late January and early February 2012.

The idea of this law was to “improve voluntary tax compliance by businesses and sole proprietors.”   That’s another way of saying that the IRS has found a way to force people to report income that has been previously unreported because it was never subject to reporting under the existing rules for 1099 forms.  The 1099-K is an effort to bring a halt to what the IRS believes is an underground and untaxed economy consisting of those who transact business on eBay, Etsy, and other similar online retailers.

So how does it really affect you?  If you accepted merchant cards for payments (credit cards or gift cards) or if you received payments through a third party network (PayPal) then you may be receiving a 1099-K.  The threshold for receiving a 1099-K is total payments in excess of $20,000 or more than 200 transactions.  The 1099-K will show the total amount of payments received for the year as well as a breakdown by month.

All income received is subject to reporting on your tax return, not just income reported on a 1099.  It is important to review those 1099s and be sure they are correct so the IRS is not expecting higher numbers on your tax returns.  Beginning in 2012, payments reported on a 1099-K must be identified on a separate line of your income tax return.  Although, you will be receiving a 1099-K in 2011, the separate reporting of these transactions will not take place until 2012.  We suggest that you set up new income accounts to separate payments received by way of credit card or third party service from payments received directly from customers by way of cash or check.  It will make the reconciliation to the 1099-Ks received much easier.

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Katie Sterling – is a Tax Manager at Wertz & Company, LLP, a Professional Services Firm located in Orange County, CA that specializes in working with entrepreneurs along their journey to success.

 As a continuation to our last post, we want to share with you some points we believe are crucial in setting and attaining goals.

“What gets written down gets done!”  While this is probably not what you want to hear, in all honesty it is the truth.  So, why is that and what are the benefits to setting goals?

Getting Organized
Have you ever heard of a successful sports team that never practices and doesn’t have a game plan going into a competition?  Organizing your goal thoughts by writing them down forces you to become realistic in terms of your situation.  It also allows you to be able to repeatedly refer to them while you are figuring out what your next action step will be.

Setting Priorities
After getting organized you need to rank your goals in terms of priorities which will allow you to concentrate your efforts on those goals that are most important to you.  This will also help you avoid distractions created by losing focus on what is truly important.

Roadmap
Setting goals gives you a sense of direction, like a roadmap, that will assist you in getting to where you want to go.

Strengths/Weaknesses
By setting goals (and writing them down!) the strengths and weaknesses of your ideas will become apparent.  You may then aggressively plan or defensively guard against certain situations.

Accountability
Goal setting defines responsibility.  If your plans are thought through, organized and written down, you own them!!  The success or failure of the effort will be yours.

Confidence
Well thought-out goals will lead to confidence in both direction and outcome.  Your self image will improve and as you succeed your sense of accomplishment will motivate you to even greater goals in the future.

Leaders Lead!  Get organized, set your goals and win!!

www.wertzco.com

Russ Wertz – Founder and CEO of Wertz & Company, LLP, a Professional Services Firm located in Orange County, CA that specializes in working with entrepreneurs along their journey to success.

Wishing you a happy and healthy New Year!

www.wertzco.com

Wertz & Company, LLP, a Professional Services Firm located in Orange County, CA that specializes in working with entrepreneurs along their journey to success.

When it comes to saving money on taxes, there is always a lot to consider.  What works for one person may not work for another.  While some of the following suggestions are no-brainers and will surely save you money on taxes, others may contain some hidden traps.  So get some good advice, consider all the details, and hopefully deny Uncle Sam a few bucks.

Retirement Plans (401(k), IRA, and other plans):
These are at the top of the list.  For those who are early in their careers, a contribution to a Roth IRA can be a tax saver.  It won’t save any money in taxes today, but when distributions are taken during retirement years, it is all tax free.

If your employer offers a 401(k) or some other plan, take full advantage of the contribution provisions.  If your employer matches contributions, the more you put in, the more he puts in.  Your contribution reduces your own taxable income and the matching contribution is just plain free money.

Business Income and Expenses
Business owners have some opportunities to save money as well.  As most small businesses determine their taxable income using the cash basis (income is recognized when customers pay you and expenses are deductible when they are actually paid for) it is possible to accelerate deductions by paying some bills normally paid in January before December 31.  The same principle works for income.  Delay your year-end billings late enough in the year so that payments won’t be received before December 31.

Personal Deductions
Last minute deductions can be had without much effort.  But be careful not to “buy” a deduction.  Don’t just spend money on something because it will be deductible.  Look for things that you have to pay anyway, such as a mortgage payment or property taxes.  Prepay the January mortgage payment in December.  If you have a property tax installment due in the early part of the following year, pay that in December too.  Of course, you’re just moving the deduction from one year to another so it is always wise to take a multi-year approach.  But if you need savings this year, pre-paying is a way to go.  Be careful on the property taxes though.  If you are subject to the AMT, that payment does no good since it is not deductible anyway.  However, if you’re on the fringes of AMT spend some time and see if you’ll escape the clutches next year – then defer that payment to when it will benefit you.

Cash donations to a charity provide a tax deduction and can make you feel good about supporting a favorite cause.  You can also make non-cash donations.  The value of your old clothes, furniture, and household items are deductible.  Be careful not to overestimate the values as the IRS pays attention.  Keep good records on what you give away.  Make a detailed list and determine a reasonable value for the items.  Pile everything up and take a picture of it.  Have as much proof as you can and always insist on getting the receipts – they are required documentation!

Another option for donations to charity is appreciated stock.  If you’ve got some stuck away in your portfolio you can donate it and receive a deduction for the full fair market value.  And then you’ll never have to pay tax on the gain that had built up since you acquired the stock.

If you are lucky enough to have equity in your home, you may be able to convert nondeductible credit card or auto loan interest into deductible interest by paying them off with a home equity loan.

Conclusion
Tax savings can be had just by spending a little time and considering the options available.  Don’t waste them!

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Greg Tanner – is a Tax Principal at Wertz & Company, LLP, a Professional Services Firm located in Orange County, CA that specializes in working with entrepreneurs along their journey to success.

I remember when I purchased my first home thinking I now had the advantage and luxury of no longer dealing with a landlord and worrying about rent increases when the lease expired.  Also, I was able to decorate my home any way I wanted to without being afraid to change the color or put nails in the wall.  (As a side note, since my fiancé has begun slowly moving in, these decorations and colors have changed substantially.)  But it turns out that owning your home has more advantages than just the sense of stability and personal touch.  The purchase of a first home is going to be one of the biggest financial decisions of your lifetime and along with this comes tax advantages that renting simply cannot offer.

Upon buying your first home, most of the mortgage payment is going to be made up of interest, with only a portion going against the loan principal (unless you have an interest-only loan).  As you continue to pay your mortgage each month, the payment slowly shifts from less interest to more principal.  The interest paid is deductible on Schedule A of your income tax return as an itemized deduction.

The real estate taxes you pay on your residence are also deductible on Schedule A.  However, if you happen to be subject to the alternative minimum tax, this deduction is eliminated as no state or property taxes can be deducted under the AMT.

For most people the act of purchasing a home, and the resulting interest and property tax deductions, increase their total itemized deductions to an amount that exceeds the standard deduction.  Because of that there may be some other items that you can get a tax benefit from for the first time, such as contributions to charity.

Once you have equity in the home it is possible to obtain a loan against it.  One great benefit of this type of loan is that the proceeds be used for any purpose, such as paying off high-interest credit cards, purchasing a car, or starting a small business and the interest remains deductible.  The interest rates for home equity loans are often much lower than credit cards, and the interest is deductible, unlike credit card interest.

One of the biggest tax advantages of owning a home is that the gain realized on the eventual sale of the home may be tax free.  As long as you have lived in the home for two of the previous five years, then the first $250,000 of gain (if you’re single) is excluded from taxation.  Married couples filing jointly get to exclude $500,000.  There are not too many ways in life where you can earn money without being taxed, but this is one of those unique opportunities.

It’s important to consider all factors when considering the purchase of your first home.  Keep these tax advantages in mind and check with us to see the potential tax savings each year of owning your first home versus renting!

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Brad Zaumseil - Is a Tax Manager of Wertz & Company, LLP, a Professional Services Firm located in Orange County, CA that specializes in working with entrepreneurs along their journey to success.

You’re getting ready to get your business off the ground and you can’t seem to get a straight answer: should you form your business as an S-Corporation or Limited Liability Company (LLC)?

To start with, both of these choices have similarities.  Both an LLC and an S-Corporation give you the “corporate veil protection” that is so important.  This means that if the entity is formed and utilized correctly, your personal assets will be protected in the event of a lawsuit.  Another similarity (and advantage as compared to a normal corporation) is that neither of these entities pays any federal income tax.  All profits and losses are “passed through” to the owners’ tax returns where it is recognized at that level.

What are the main differences between these two choices?  S-Corporations follow corporate tax law.  LLCs follow partnership tax law.  What does that mean?  Partnership tax law favors certain types of businesses.  If your new venture is going to own appreciating property (i.e., real estate, patents, other intangible assets) OR if your company is going to have multiple owners that may come and go over the years, partnership tax law allows for this to happen on a tax free basis in some instances.  In other words, an LLC can give you more flexibility.  An S-Corporation at times will have more restricting provisions due to corporate tax law.  This is why most real estate developers and multi-owner service companies utilize LLCs.  If your company has only a few owners (even one) and you do not anticipate frequent ownership changes, the corporate law restrictions may not seem too restraining.

S-Corporation owners will be required to take a salary from their business.  There is flexibility in the salary amount, but the IRS is strict on this issue as the pass-through of income to the owners is not subject to self-employment tax.  On the contrary, the pass-through of income by an LLC to its owners IS subject to self-employment tax.  There are some exceptions depending on the nature of the business and involvement of the owners.

One last point: both S-Corporations and LLCs pay a state fee (in California).  S-Corporations pay a 1.5% tax on profits (with an $800 minimum tax) and LLCs pay an annual gross receipts fee that ranges from $900 on revenue of $250,000 to $11,790 on revenue of $5,000,000 or more.  It may be necessary to look into the future and make some calculations to determine which entity type would result in more state tax.

Hopefully this information can help make the decision a little easier.  However, the choice of entity is a serious consideration and getting help from competent professionals is highly recommended before signing the papers.

www.wertzco.com

Russ Wertz – Founder and CEO of Wertz & Company, LLP, a Professional Services Firm located in Orange County, CA that specializes in working with entrepreneurs along their journey to success.

Simply defined, “The Cloud” or cloud computing is the delivery of computing as a pay-per-use service rather than a product, whereby shared resources, software and information are provided to computers and other devices as a utility over the Internet.

As an entrepreneur, you should see cloud computing as a way to gain immediate access to a level of technology that has previously been restricted to companies with excess capital to invest into large IT resources.  This ability to start small with almost no up-front capital investment and grow your IT resources at the same pace as your business, should present itself as good news in a time where good news can be hard to come by.

The flexibility and agility of cloud based systems allow new ventures to truly focus on their core business activities, and enable them to attempt new business strategies, previously only attainable by large well-established  companies in the pre-cloud era.  The scalability of cloud computing allows new ventures to pay for what they use, and increase their costs as their business grows.

However, along with the above listed benefits comes plenty of confusion and doubt surrounding cloud computing in the forms of jargon, acronyms, resistance to change, regulations and questions of reliability and security.  In an attempt to not further muddy the waters on this topic, I will present a single point on the question of security.  Any reputable cloud vendor has security at the forefront of their minds and will offer a far higher level of security than any small business can achieve in-house.

Almost as confusing as the amount of cloud jargon is the plethora of cloud offerings to be considered for use.  Most cloud vendors offer a free trial period to allow you to truly use and compare their systems prior to implementation.  A few examples of well established cloud vendors offering business and productivity tools are Microsoft Office 365, Zoho.com and Salesforce.com.

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Sean McRoberts - is CTO at Wertz & Company, LLP, a Professional Services Firm located in Orange County, CA that specializes in working with entrepreneurs along their journey to success.

Many people are well acquainted with FICA and its ability to suck the joy out of a paycheck.  FICA consists of Social Security and Medicare taxes.  FICA has a cousin that goes by the name of the self-employment tax.  The S/E tax has a tendency to suck the joy out of a hoped-for tax refund of the uninitiated and unsuspecting.

The self-employment tax generally applies to people who receive income from a business.  This “business” can be a sole proprietorship, an LLC or partnership interest, or even a position paid as an independent contractor.  That’s right, the income reported on any 1099 you receive for commissions, consulting, or other services is subject to self-employment tax.  The S/E tax is the same Social Security and Medicare tax that employees pay, except that it consists not only of the employee, but the employer portion of Social Security and Medicare as well.  You didn’t know that your employer paid FICA too?  Now you do.  Since business owners are their own employer, they have to pay both portions.

The rate for self-employment tax is 15.3%.  Social Security is 12.4% and Medicare is 2.9%.  In 2010 the rate is actually 13.3% because the employee portion of Social Security was reduced 2%.  President Obama has called for other rate reductions in his jobs package, though these are not yet passed.

It’s important for business owners and independent contractors to know self-employment tax will be assessed on their earnings and reported on their individual income tax return.  As with everything, there are some exceptions (S-corporation owners are one), but most business owners will find it necessary to take S/E tax into consideration when quarterly estimated tax payments are calculated, so April 15th comes and goes with no major surprises.

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 Greg Tanner – is a Tax Principal at Wertz & Company, LLP, a Professional Services Firm located in Orange County, CA that specializes in working with entrepreneurs along their journey to success.