Tuesday, May 7, 2019

Small Business Tax Season Aftermath and Recap

The Tax Plan Benefits for Various Small Business Structures

Lower taxes are designed to energize the markets, help empower businesses to invest in their employees, and foster economic growth. Tax reform brought new deductions, new tax credits, and tools for small business owners to reduce their tax burden. How did the first year pan-out?  Take a look at our analysis and survey results.

Decreased Corporate Tax Rate for C-Corps

Perhaps the most widely debated change provided by the Trump tax plan were cuts to the corporate tax rate. Under the Tax Cuts and Jobs Act, C-corps are now taxed at a flat rate of 21%—a cut from the previous range of 15%-35%. American Startup customers report a rise in the number of C-corporation formations occurred during the last quarter of 2018 and the first quarter, 2019 (up about 28% from previous Q4 and Q1 numbers) indicating that the lower tax rate may have caused increased C-corp formation activity.

You may well ask, how does a reduced corporate tax rate impact small businesses, especially if this tax break applies to C-corps?

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While this became a point of contention for the new tax plan, most small businesses weren't previously structured as C-corps specifically because of the higher tax rate. The majority of U.S. small business are pass-through entities, such as S-corporations and Limited Liability Companies. Up until now, relatively few small businesses enjoyed the reduced C-corp tax rate and at the time of this writing, the reduction of a 2018 tax mostly impacted midsize to large corporations. American Startup's analysts see this as a trend that will continue, but expects to see the number of small business startups elect C-Corporation status for additional reasons as we'll discuss below.

Pass-Through Deduction

The main difference that distinguishes a pass-through entity from a C-corp is how taxation is handled. So, rather than paying income taxes as a totally separate entity, the pass-through entity passes the profits or losses through to the owner. The business owner then reports the profit or loss as personal income and it is taxed at that individual's tax rate.

An additional benefit under the Trump tax plan is that small businesses filing as pass-through entities were able to take a 20% business income deduction on their 2018 returns. To qualify for the 20% deduction, business owners must have had a taxable income of below $157,500 if single or $315,000 if married and filing jointly. So, if your business is structured as a S-corporation, a limited liability company, or a general partnership you may qualify. The deduction doesn’t lower an individual's adjusted gross income, and there is no requirement to itemize in order to take advantage of it.

Unfortunately, licensed professionals and financial consultants do not qualify for the 20% deduction.
If the pass-through business generates revenue through the professional services of an individual—doctors, lawyers, accountants, and consultants, for example, the deduction is not allowed.

Acceptable Write-Offs for Big Expenses

A new provision of Trump’s tax plan lets businesses write-off a larger portion of large equipment purchases up front as bonus depreciation, instead of depreciating them over a number of years. To illustrate, when a business buys a new piece of equipment, the company typically can write it off a little at a time each tax season. This new deduction lets the company write-off the entire cost of that equipment purchase for the year it was purchased.

Repealed Corporate Alternative Minimum Tax

Essentially, the AMT is a separate way of calculating your tax liability. The repeal of the AMT, while contested in the House and Senate versions of the bill, was met with excitement by the business community. Keeping it in place would get rid of a lot of the benefits of lower tax rates for businesses, because it guarantees that businesses pay a certain rate regardless of the deductions they take.

Updates to Accounting Methods

The new tax plan also allowed more companies to take advantage of the cash method of accounting, rather than the accrual method. Using the cash method, revenue is recorded as soon as the cash is received from customers, and expenses are recorded as soon as they’re paid to suppliers and employees. That’s different from the accrual method, in which revenue is recorded when it’s earned and expenses are only recorded when consumed.

The time difference is the important part. Under the accrual method, business owners could get stuck waiting until they sell inventory to deduct the cost of it, rather than being able to deduct it when they make the purchase. The takeaway is that more small businesses were able to deduct inventory when they paid for it, rather than needing to wait until that inventory was sold. 

Family Leave Credit

This new credit for wages paid for family or medical leave. The intention of this tax credit was to encourage employers to pay when their employees need leave—a fringe benefit that can be tough on small businesses. Depending on the amount of wages paid out, the tax credit can range from 12.5% to 25%. This part of the Trump tax policy isn’t permanent, though. Since it only lasts through 2019, we're not sure how many companies have used or plan to use this credit.

Some Negative Impacts to Small Businesses

American Startup VIP Managers report that a few leading CPA partners and wealth managers remarked that the new tax changes removed a few important benefits that small business owners may no longer claim. Here they are in no particular order:

Business Interest Deduction

The business interest deduction was an important part of the prior tax code that helped out business owners who took out small business loans to cover relevant operating costs. The interest on those business loans would be deductible as an ordinary business expense.  While the business interest deduction wasn’t fully repealed in the Trump tax plan, it was significantly decreased. Companies may only deduct an interest expense of up to 30% of their business’s EBITDA (earnings before interest, taxes, depreciation, and amortization).

While this mostly impacts companies with a taxable profit, like C-corps, small businesses that have a lot of debt on their books should be especially conscious of this change. But it’s not all bad news: If your small business has an annual average gross receipts of $25 million or less for the past three years, your business is exempt from this rule.

Section 199 Manufacturing Deduction

Trump’s new tax plan eliminated a deduction commonly claimed by manufacturing businesses, called the Section 199 deduction which allowed business owners to take a 9% deduction on income from qualified production activities.  For example, if a company assembled, a gift basket onsite, even if the basket comprised fully pre-manufactured goods, the gift basket company could claim the Section 199 deduction.  Manufacturing firms can no longer claim this benefit because it was repealed in this tax bill.

Deduction for Entertainment Expenses

Any business owner in client service is familiar with the dynamic of wining and dining a client. Sports games, dinners, drinks—all of that entertainment is fun, but pricey. At the same time, it can often be the best way to attract new business, so the trade-off is often worth it. Especially if you could write it off come tax season.

Prior to the Tax Cuts and Job Act, business owners could deduct up to 50% of expenses they’d paid for business-related entertainment. No more: The new tax plan does away with deductions for entertainment expenses entirely. Unfortunately, that means a lot of business owners are going to have to start paying taxes on things like box seats and dinners out with clients. Or drop them from their business plans entirely.
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Deduction for Providing Employee Meals

Another employee perk, popular at tech startups for attracting top talent, is company-paid employee meals. Previously, if you fed your staff on business premises, that food that was 100% deductible under the former tax law. It is now only 50% deductible. By 2025, it won’t be deductible at all. We have yet to hear how companies will adjust their meal programs - so far, there are not a lot of open discussions.

Deduction for Transportation Expenses

This one is pretty straightforward—and one that will cause a lot of pain for employers and employees alike. Under tax reform, business owners can no longer deduct the cost of providing employee parking, public transportation passes, and bike commute reimbursements. This one is going to hurt a lot of businesses in expensive metropolitan areas where parking is very expensive and normally paid by the company on behalf of the employees.

Things to Consider When Starting a Business

1. Invest in your mastermind team of professionals.
The most important assets a company has are it's key employees and management team - both inside the organization and outside through consultants, accountants, and lawyers. Hire the best and brightest, and expect to pay them well.

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2. Tax rules change. Stay up to date.
Speak with a CPA-accountant for the most accurate advice and especially the kind that pertains to your specific industry, and you personally. American Startup works with the very best business managers in the entertainment, fashion, and celebrity goods industries. If you need a referral, just visit our website at https://american-startup.com and request a referral.

3. Your company can change its tax status.
In some cases, it may be worth considering a change in tax classification for your company. Is your business set up the most advantageous way? Since this will impact the way you file your taxes and the eligible credits/deductions, this should be top-of-mind. Lower taxes are designed to boost the economy, help empower businesses to invest in their employees and growth. Talk to your mastermind team and take advantage of all of the small business tax information resources available to help you succeed.

Thursday, August 16, 2018

Music and Motivation Underwater?

We love sharing new business ideas that entrepreneurs offer, particularly those that greatly impact or benefit humanity. This month, we're looking at a great idea by a woman-owned business.

Get ready to listen to music underwater!  

You heard that right, and we're not talking about dolphin or whale noises.  Thanks to the technological innovators at Zygo, headed up by Sheera Goren, CEO, the Playa Vista, CA startup is making waves in the digital wireless headset industry. 

Zygo recently announced that it's proprietary technology transmits audio through vibrations instead of earbuds, providing a safer and more comfortable solution in aquatic environments. The handheld transmitter broadcasts high-quality audio up to 3 feet below the surface at a distance of at least 50m making it perfect for above water to below water communications.  Above water, it’s over half a mile and we can see how this use can be extremely critical for search and rescue operations in marine environments. Take that Meg! 

The anticipated retail price of $225 (USD) includes the headset and transmitter and comes with a free App now available on the Apple App store.  While no launch or order fulfillment date has been announced, you can sign-up at Zygo.com to get on the wait list. 

About American Startup: American Startup is one of the few corporate service providers that specializes in assisting attorneys, wealth managers, and bank holding corporations by automating routine entity maintenance and compliance tasks, assist with annual state filings, offer standardized shareholder and board resolutions, certificates of incumbency, and serve as your Registered Agent in California and Delaware. Learn more at American-Startup.com.

Friday, June 29, 2018

American Startup Announces Amenity™ for CPAs and Business Managers

Corporate Legal Professionals and Entertainment Business Managers Alert

(Los Angeles, CA - June 30, 2018) American Startup, Inc. (ASI) announced today that it has launched its incorporation and entity maintenance service platform - Amenity™.

Amenity™ is a proprietary business service package for certified public accountants, investors, banks, and wealth managers featuring a suite of VIP-level incorporation and registered agent services including virtual minute books, shareholder equity tracking and voting, corporate finance tools, and corporate compliance & maintenance monitoring.

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For more information, please visit us at https://american-startup.com

About American Startup: American Startup offers white glove assistance for investors, wealth managers, and other professionals by automating routine entity maintenance and compliance tasks, annual state filings, and serves as your Registered Agent in California and Delaware. Registered Agent service includes filing of annual reports. Stop overpaying for routine entity maintenance and get fast personalized service. Find out more at American-Startup.com.
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Monday, September 4, 2017

How to Form a LLC

How to Form a Limited Liability Company (LLC)
What do I need to form a LLC?

Forming a LLC (limited liability company) is straightforward in most cases. Follow these steps and you'll be on your way to LLC ownership.

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American Startup Guide to Single-Member LLC
American Startup Guide to Multiple-Member LLC
American Startup Guide to Member-Managed or Manager-Managed LLC
California LLC Formation Kit
Delaware LLC Formation Kit

Step 1
1. Select a business name for your LLC. The name must be available in your state (not in use by someone else). In most states, you can search the state records online. For example, in California search for "California business search" and the link usually will come up in your search result. Your LLC name must include either one of the words or letters such as, "LLC, L.L.C., or Limited Liability Company, such as Mary's Cakes, LLC. The comma after the business name and before the LLC designation is optional. The best way to ensure that your name remains available for you is to file a LLC name reservation. The reservation allows you time (usually 30-60 days) to figure out the information needed to form the company such as address, members, and other details.

Step 2
2. Find the state form of certificate or articles of formation or organization for the LLC. Be sure to read all the instructions that usually accompany the state form and complete the information. At this time you'll need to determine whether your LLC will be member-managed (meaning all members will run the company together) or managed by a manager (the members designate one person to handle the management). You'll also want to designate a Registered Agent as required by each state. American Startup is an approved Registered Agent and can assist you in fulfilling that requirement. Order registered agent service and keep your company's business private.

Step 3
3. Submit your LLC form to the state with the appropriate filing fee ranging anywhere from $100 to $800 depending on your state. If your state offers an opportunity to obtain a copy of the document, order that too. The copy cost is usually only a few dollars more. We can submit your LLC forms to the state here.

Step 4
4. Prepare a operating agreement for your LLC. The operating agreement helps the members (and manager or managers, if selected) run the company by setting up the rights, procedures, and goals of the company. Nearly every state requires the LLC to have an operating agreement. The operating agreement also outlines the percentages of ownership of each member if, particularly important if ownership is not split equally. Have all members and any managers sign the operating agreement.

Step 5
5. Obtain a taxpayer identification number for your LLC. You may use IRS Form SS-4 or use the online taxpayer identification number application. Once you have your tax ID, you'll be able to open a bank account in the name of the LLC.

Step 6
5. Find the state form initial report or statement of information. File your initial report with the state.

Order your LLC Formation Kit
The American Startup LLC Formation Kit contains all of the documents and forms needed to for your LLC.
Need more information? No problem! Contact American Startup at (310)752-1157 or by email at service@american-startup.com

Saturday, April 1, 2017

Record Keeping for Coders, Inventors, and Startup Geeks

A startup's value to the company and its investors rests firmly in its intellectual property rights. Intellectual property ("IP") is the single biggest asset of 60% of U.S. startups today and that number is expected to grow exponentially over the next five years. If there is ever a dispute about who owns the IP, an inventor's notebook could very well be the saving grace.

Determining the Author and Inventor
To determine inventorship, you must first determine what the invention is and then determine who contributed to making it. Often, inventorship is defined by negatives. For example, an inventor is not someone who merely contributed non-inventive information; or, an inventor is also not someone who simply ran routine tests.
How to Record Your Invention
Keep detailed notes of meetings, telephone calls, alpha/beta testing dates and outcomes, work and other writings in a bound notebook. Have the pages of the notebook witnessed, meaning signed and dated by someone who understands the invention but is not a co-inventor. Maintain records of slides and or disclosures made in presentations and copies of your reports.
The Purpose of a Coder's Notebook
A software patent for example, grants its owner the right to sue those who manufacture and market products or services that infringe on the claims declared in the patent. Typically, governments award patents on either a first to file or first to invent basis. Therefore, it is important to keep and maintain records that help establish who is first to invent a particular invention.

The inventor's notebook is a systematic device for recording all information related to an invention in such a way that it can be used to develop a case during a patent contestation or patent-related lawsuit. The notebook is also a valuable tool for the inventor since it provides a chronological record of an invention and its reduction to practice. Each entry must be signed and dated by a witness. The witness should not be someone with a conflict of interest (such as a research partner). If an inventor ever has to go to court to prove he or she was the first to invent, then the witness would be called to the stand to testify that the signature is theirs and they signed that page on that date.
Virtual Mistake
A "virtual inventor's notebook", in which one scans note pages and emails them to oneself, would not provide the same legal protection as a bound inventor's notebook since it is easier to commit fraud with a virtual notebook.

The need for an inventor's notebook will diminish in the future as the United States is progressively implementing a first-to-file system. It has been said that first-to-file eliminates a troubling source of litigation, particularly for individual inventors who may lack the processes and legal resources to defend against evidentiary challenges by large corporate research organizations.
Physical Requirements for Your Notebook
Integrity is the primary reason for a physical book. To best serve its evidentiary function an inventor's notebook should be in a form where it will be readily apparent that the contents have not been tampered with, such as having pages that may have been removed, replaced, or altered. Accordingly, an inventor’s notebook should:
  • Be permanently bound with a fixed number of pages (no loose-leaf binders);
  • Have all of the pages sequentially numbered;
  • Have space on each page for at least one witness to sign and date.
Permanency matters, so be sure to:
  • Write in permanent ink & legibly; 
  • No empty spaces or skipped pages;
  • Permanently attach any supplemental materials;
  • NEVER make alterations of any kind. Never tear out pages, erase anything, or alter notebook entries. If you make a mistake while making an entry just draw a line through it so that the mistake is still readable, then date and initial next to the line. 
  • Don’t record any communications with your Attorney. These are always confidential and protected from disclosure under the attorney-client privilege. 
American Startup is a full-service online retailer of legal forms, corporate formation kits, and corporate legal products including several Inventor's and Software Coder's permanent notebooks, Non-Disclosure and Confidentiality Agreement forms. Check out the selection of Record Books here or visit American-Startup.com for more information.

Thursday, November 24, 2016

The REAL Cost of Your Employee

How much does it cost to hire an employee? Take a look at the chart below.
An employee's cost to the company is more than just the wage or salary you offer them. You are required to pay taxes on the wages your employee earns. Some of these taxes are split between the employer and the employee, while others are the sole responsibility of the employer. The rates vary based on the employee’s earnings. You can chalk it up to the cost of doing business, but it’s important to understand what your true cost will be before making that next key hire.
Your true cost to hire is a sum of the employee wage plus employer taxes. Of course there are additional expenses that are optional for businesses, like health and dental benefits, equipment, and office space, but for now let’s just focus on the payroll costs.
In California the payroll tax rates for employers break down like this:
  • Social Security: Social Security is a federal insurance program that provides benefits to retired employees and the disabled. Employers must pay 6.2% of taxable wages on the first $113,700.
  • Medicare: Medicare is a federal system of health insurance for people over 65 and certain younger people with disabilities. Employers must pay 1.45% of taxable wages on the first $200,000, then 2.35% of taxable wages beyond that.
  • California Unemployment: A state-sponsored insurance program, California provides benefits to unemployed workers, the disabled, and those on paid family leave. The employer tax rate varies from 1.5% to 6.2% of taxable wages on the first $7,000 depending on the rate given to you by the Employment Development Department (EDD). The standard new employer rate is 3.4%.
  • Federal Unemployment: The Department of Labor oversees state unemployment programs that provide benefits to workers who become unemployed due to no fault of their own, and meet certain other eligibility requirements. The employer rate of 1.2% of taxable wages on the first $7,000 per employee is dependent on your timely filing of all state unemployment taxes and includes a credit reduction for California.
  • Employment Training Tax: The ETT provides funds to train employees in targeted industries to improve the competitiveness of California businesses. Employers must pay an extra 0.1% of taxable wages on the first $7,000.

Sunday, November 13, 2016

Business Growth Projections for 2017

Get ready for growth in 2017!
Several sources, including the U.S. Chamber of Commerce and the Kaufman Foundation, have published reports on how well small and medium businesses have performed in recent years. The disappointing news is that business policies, regulations, high corporate taxes, and skyrocketing health care premiums during the last eight years, have caused many would-be small business owners to either throw in the towel, or postpone business growth altogether. According to the Wall Street Journal's Ben Leubsdorf, before the U.S. Presidential election, forecasters agreed the U.S. was set for only moderate economic growth.
Running on a pro-American business platform, Donald J. Trump persuaded voters around the country to support his agenda resulting in a major election night upset and his victory. Susan Solovic, said in her post-election blog, The Small Business Expert, that she views the President-elect as someone who can remove many of the barriers that small businesses face. "I’m counting on you to create a vibrant economy which gives all Americans an equal opportunity to work hard and build success," she wrote in her articles congratulating Trump. Similar sentiments have entrepreneurs and investors alike expecting a surge of startup businesses in 2017 in large part due to the promises of lower taxes and post-election pro-business policies. We hope they're right.
For more information about how to start your company, find a networking event, or to order your custom incorporation kit, go to American-Startup.com