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New business owner – currently only have SEP set up what other options are there

Home Tax Reduction New business owner – currently only have SEP set up what other options are there

  •  Tim 
    Participant
    Status: Accountant
    Posts: 563
    Joined: 09/18/2018

    By saying she is “not aggressive”, that probably means she is very interested in CYA rather than finding legal ways to save you taxes, but that’s just my impression of the whole situation

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    Tax planning is not in the wheelhouse of your current CPA.

    You can dissolve the corp in 2019 if you want (too late to undo all of the payroll) and change to a QJV if you want. You will file 2 separate schedule C’s on 1 tax return. You need to have a deep discussion to have with your CPA about all of these issues.

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    At this point I also do not have time to look for a different CPA and trying to figure this out

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    Fox-CPAs.com/for-doctors-only

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    Ask for Johanna Fox Turner, CPA, CFP | 270-247-0555

    Look up another CPA close to where you live. Call them too. Obviously, compare the services and the costs. Good CPA’s for professions or small businesses are hard to find. Make a choice and move on. Delaying it is going to perpetuate the problem for 2019. Payroll and billing happen sooner than tax deadlines.

    #170691 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 6116
    Joined: 01/09/2016
    Ask for Johanna Fox Turner, CPA, CFP | 270-247-0555 Look up another CPA close to where you live. Call them too. Obviously, compare the services and the costs. Good CPA’s for professions or small businesses are hard to find. Make a choice and move on. Delaying it is going to perpetuate the problem for 2019. Payroll and billing happen sooner than tax deadlines.

    Click to expand…

    Thank you, Tim, that was very kind of you. The OP actually does still have time to change CPAs, whether locally or virtually because the business form is pretty much set for 2018, although not the retirement structure. I do hope you make a change. As we’ve discussed on these forums before and WCI has talked about, it’s really hard to find CPA vetting organizations that do as good a job as NAPFA and some of the other org’s (I think NAPFA is best for CFPs because of the strict requirements for membership). There is no organization of CPAs that vets them other than passing an exam and going through 40 hrs/yr of CPE. You might even be better off looking for an EA because they are strictly focused on income taxes – and usually cheaper, to boot.

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~ 270-247-0555
    https://fox-cpas.com/for-doctors-only/

    #170722 Reply
    Liked by Tim
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 6116
    Joined: 01/09/2016

    btw, to everyone reading this thread – I corrected my above answer about the QJV via an edit. Then I realized that everyone who was following the thread wouldn’t get the edit because it wouldn’t to out as a notification. Soooo, I am posting this to notify you of that change. 30 lashes with a wet noodle to me.

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~ 270-247-0555
    https://fox-cpas.com/for-doctors-only/

    #170733 Reply
     jacoavlu 
    Moderator
    Status: Physician
    Posts: 1155
    Joined: 03/01/2018

    so now I wanna see an elegant breakdown of how a QJV optimizes the OPs situation, with X income allocated so spouse A and Y income allocated to spouse B.

    I think this is one of those questions where there really may be a “best” answer from a tax perspective, or close to one.

    The Finance Buff's solo 401k contribution spreadsheet: https://goo.gl/6cZKVA

    #170752 Reply
     spiritrider 
    Participant
    Status: Small Business Owner
    Posts: 1246
    Joined: 02/01/2016

    At this business income level and unreasonably low equal spouse compensation, the additional QJV QBI deduction is not likely to offset the FICA/SE tax difference.

    However, their are more factors at play:

    • Only 30% of net business profit as compensation is unreasonably low. By the OP’s own admission, there is no comparable salary defense, the data only reinforces the unreasonableness. This was an audit target before the Section 199A deduction. The IRS is only going to look even closer at disproportionate distributions to compensation.
    • I would be interested on Johanna’s take on this issue in the post Section 199A world and what advice they are giving and what returns are they willing to sign off on.
    • These salaries are below the SS PIA second bend point and the FICA tax savings are considered counter-productive to the SS earnings credit at this level
    • These salaries are severely limiting employer contributions. A QJV could get them maybe ~$30K each in employer contributions.
    • The OP is in CA, that is another $800 in minimum franchise tax.
    • How much are the additional costs for payroll, accounting, tax filing and general business complexity?
    #170784 Reply
    Liked by Hank
     allesandre2014 
    Participant
    Status: Small Business Owner
    Posts: 9
    Joined: 11/30/2018

    Thank you for all the replies . I would like to clarify . This years net income might be high but the placement business is volatile one year we might make 230K the next year only 150K and another year 700K or even 1MIL .          One never knows.

    I am not sure what a QJV is and how it would benefit us but i am willing to listen and read up on it .

    I would love to see a suggested breakdown as suggested above :

    jacoavlu :so now I wanna see an elegant breakdown of how a QJV optimizes the OPs situation, with X income allocated so spouse A and Y income allocated to spouse B.

    As far as a C-corp how would that be beneficial with our income that can fluctuates yearly and no employees and we are not looking to hire people in the next 2 years.

     

    In regards to switching CPA within the next couple of weeks what else would they be able to change beside retirement contribution at this point?

    Payroll up until is set since we already ran them ..

    The net income at end of year is at 230K now the question is if we should open a solo 401k and what we  could contribute to it .

    As far as changing structures from Scorp to something else might be useful maybe for next year but won’t change this year .

    Could someone chime in on what the 199 Section is – maybe Joanna can chime in ?

    If someone could use number examples I would appreciate it very much and it would be very helpful I am somewhat a visual person .

    Should we increase the last salary payroll run ? what difference would that make ?

    Can we change salary from year to year say in a good year pay a salary of 100K and in a not so profitable year 35K .

    #170845 Reply
     HumbleInvestor 
    Participant
    Status: Physician, Small Business Owner
    Posts: 76
    Joined: 12/28/2016
    Earnest refinancing bonus

    Could someone chime in on what the 199 Section is – maybe Joanna can chime in ?

    If someone could use number examples I would appreciate it very much and it would be very helpful I am somewhat a visual person .

    Should we increase the last salary payroll run ? what difference would that make ?

    Can we change salary from year to year say in a good year pay a salary of 100K and in a not so profitable year 35K .

    Click to expand…

    Instead of changing salary every year have a reasonable salary and a bonus structure where you can change the bonus as you desire. You will end up paying the FICA taxes just like salary and it will give you flexibility to increase your pay with out changing the base.

    #170848 Reply
     jacoavlu 
    Moderator
    Status: Physician
    Posts: 1155
    Joined: 03/01/2018

    It is mandated that an S corp pay shareholders a “reasonable salary.” Which is the reason for questions about the nature of the business, what you and spouse do for the business, and comparative numbers were you to be employed by someone else for the same task.

    Now “reasonable” is open to interpretation but it’s surprising to hear your CPA characterize themselves as “not aggressive” because most CPAs would consider paying only 30% of net income as compensation to be aggressive. A very general rule is that >50% net income should be in compensation. The best starting point in determining reasonable salary is comparable salary data. Could you (and your CPA) defend your salary number in the case of an audit?

    These issues go away with a qualified joint venture. https://www.irs.gov/businesses/small-businesses-self-employed/election-for-married-couples-unincorporated-businesses

    I’m not trying to optimize numbers here. Just an example of how this works from a solo 401k contributions perspective:

    Net profit is $330,000

    Spouse A allocated $165,000

    Elective deferral to solo 401k $19,000, profit sharing $30,910 = $49,910

    Spouse B allocated $165,000

    Elective deferral to solo 401k $19,000, profit sharing $30,910 = $49,910

    Total deferral of income $99,880

    Each spouse completes a schedule C.

    The Finance Buff's solo 401k contribution spreadsheet: https://goo.gl/6cZKVA

    #170850 Reply
     Tim 
    Participant
    Status: Accountant
    Posts: 563
    Joined: 09/18/2018

    1) 2018- Do you need a year-end bonus? IRS compensation requirements and payroll taxes.
    2) 2018- Which tax deferred plan(s) and how much given the answer to 1).
    3) Compensation needs to have a limited base.
    Commissions could be annual to reflect earnings.

    2019 structure needs to be nailed down so payroll, bank accounts, etc. can be setup. If you run 3 months of business and change, it gets messy.
    If you have a down year, you certainly wouldn’t want to pay your CPA to fight 2018 problems. On top of that, untangle first half as well. This is a “start-up” cost.
    Legal structure, payroll, benefits plan for a recruiting business. You are fortunate the business did well.
    Use that good fortune now to fix it.

    #170859 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 6116
    Joined: 01/09/2016

    A QJV is a Qualified Joint Venture. The only reason to recommend it over a partnership is to avoid filing a partnership return. I am still on the fence about which would be better, considering that you will have to split all fixed asset purchases into separate balance sheets and maintain an exact division of costs.

    For a small side business with no capital purchases (equipment, use of house as home office, etc), this makes good sense. For your main business that may realize as much as $1M in sales in a year, I’m kind of leaning toward a partnership, now that I’ve thought more about it. Others may have opposing ideas and I’m totally open to other’s thoughts.

    But I think the added cost of maintaining 2 separate sets of books may not be worth the cost saved of not filing a partnership return. After all, once the bookkeeping is finished the partnership return is not usually that complicated in this situation. And a partnership allows much flexibility not available to QJV filers. While we seem to be leaning toward an S-corp as probably not in your best interests, see my next-to-last paragraph.

    re: your question about changing compensation based upon profits, this is not only possible, it is recommended.

    Section 199a is a creation of the recent TCJA (Tax Cuts and Jobs Act) bill. Its purpose is to afford tax savings to “pass-through” businesses (those that pass profits and losses through to the owners) in an effort to stimulate business growth. Certain professional businesses dependent on the services of their owners have strict limits to qualify for the deduction, but I believe yours is not one of those on the “evil list of professionals” so not an issue to you. CPAs, lawyers, and doctors are, though  😈 .

    For @spiritrider ‘s question addressed to me, I’m not sure what you mean by “willing to sign off on”, but I think I do, so I’ll answer as I understand your question. Unless there is a compelling reason not to recommend a 50:50 allocation (minimum 50% of profits paid to owners via W2), we are not comfortable signing the return. Usually, however, when the client comes to us after the year has closed and we have no choice to alter the split, and we’ll sign as long as they are correcting for the current tax year and after we have explained and documented the risk of audit and that they did not allocate salaries according to our rec’s. Also, as we have seen, the taxpayer is limiting their available retirement contributions by minimizing the salaries, which is kind of self-destructive. Should they drop the corporation, won’t be an issue.

    otoh, this couple needs to understand that, should they drop the s-election in 2019, they will have to wait 5 years before electing again. Now that we know that, in some years, revenue could grow way beyond $400k, I believe this is something that needs careful thought and 5-year projections focusing on the interplay of FICA taxes, possible retirement contributions, and the section 199a deduction before they make that decision. Fortunately, this choice does not have to be made at the beginning of the year, so they will have time to consider and work through the numbers.

    Hope this helps – I know it’s a lot of info and opinion!

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~ 270-247-0555
    https://fox-cpas.com/for-doctors-only/

    #170877 Reply
    Hank Hank 
    Moderator
    Status: Attorney
    Posts: 981
    Joined: 03/27/2017

    You may or may not need change your corporate structure. It sounds like you do need to change your compensation and your CPA.

    Johanna provides good answers and is taking on new clients. Tim provides good answers. I don’t know if he takes on new small business clients or if he’s an in house accountant working for ExxonMobil or something. You certainly could shoot him a PM and ask.

    You mentioned you’re in California, but you didn’t say what part of the state. If you’re in Southern California and want someone local, we use Duffy Kruspodin. Full disclosure, we have a family member working there, so we are getting a bit of a discount. However, they do good work. Effective planning and money saved are the main reasons we work with them.

    #170901 Reply
     jacoavlu 
    Moderator
    Status: Physician
    Posts: 1155
    Joined: 03/01/2018
    I’m not trying to optimize numbers here. Just an example of how this works from a solo 401k contributions perspective: Net profit is $330,000 Spouse A allocated $165,000 Elective deferral to solo 401k $19,000, profit sharing $30,910 = $49,910 Spouse B allocated $165,000 Elective deferral to solo 401k $19,000, profit sharing $30,910 = $49,910 Total deferral of income $99,880 Each spouse completes a schedule C.

    Click to expand…

    Alternatively, maintaining S corp structure, same net income $330,000, allocating >50% to salary:

    Net profit is $330,000

    Spouse A salary $85,000

    Elective deferral to solo 401k $19,000, profit sharing $21,250 = $40,250

    Spouse B salary $85,000

    Elective deferral to solo 401k $19,000, profit sharing $21,250 = $40,250

    Total deferral of income $80,500

    Distributions $80,000 to each spouse (assuming 50% ownership each)

     

    Now I’m not sure OP’s health insurance situation. But if S corp purchases insurance, premiums paid count toward compensation (salary). Same for HSA contributions if an eligible plan. These considerations may change the net income number but in truth the taxable salary is much less than $85,000. Perhaps health insurance is $12,000 per year for an HDHP and HSA contributions are $7,000. So now wages that actually become subject to income tax are $85,000 less ($12,000 + $7,000 + $19,000) = $47,000. The health insurance and HSA contributions are FICA exempt.

    The Finance Buff's solo 401k contribution spreadsheet: https://goo.gl/6cZKVA

    #170913 Reply
     HumbleInvestor 
    Participant
    Status: Physician, Small Business Owner
    Posts: 76
    Joined: 12/28/2016
    Fundrise eREIT

    I understand the rationale for reasonable salary but I don’t understand the 50% split for W2 and distributions Hypothetically if a private practice owner employs two other associate docs at 200K each and pays $250k for self ($50k more for added ownership roles) but has a distribution of 1M, is the salary not considered reasonable?

    #170929 Reply
     jacoavlu 
    Moderator
    Status: Physician
    Posts: 1155
    Joined: 03/01/2018

    I think the word “most” is used in some IRS document in reference to salary vs distributions. Some interpret this to mean >50%.

    Of course it comes down to opinion. Experts disagree. As business owner, you ultimately make your informed choice and are responsible for the result.

    The Finance Buff's solo 401k contribution spreadsheet: https://goo.gl/6cZKVA

    #170934 Reply
     spiritrider 
    Participant
    Status: Small Business Owner
    Posts: 1246
    Joined: 02/01/2016

    Most parts of the tax code have gray areas.

    If you use the Oxford Dictionary it gives two definitions.

    most (PRONOUN & DETERMINER)

    1 Greatest in amount or degree.

    1.1 The majority of; nearly all of.

    Most tax professionals prefer: majority of (50% + $1), rather than nearly all (100% – $1).

    The 50% + $1 rule is a tax professional safe harbor of sorts (the IRS has never stated any such thing), but the actual court rulings have all based their decisions on the IRS guidance. The key determining factor has always been; What is a comparative W-2 salary for someone working in the same geographical region with the same knowledge, skills and experience.

    The last decade has demonstrated that the “rule” has survived audits without notice. The IRS has tended to only go after those with excessive unreasonably low salaries. I would point out that that when the IRS has confirmed unreasonably low salaries, they have tended to place a spotlight on all of the S-Corp returns from that CPA/Firm. This is why some CPAs prefer higher levels of compensation and/or a comparative salary review and justification.

    I should add that the “rule” is really only applicable to a business where according to IRS guidance “most of the gross receipts and profits are associated with the shareholder’s personal services.” If your business generates the majority of its gross receipts and profits from; the services of non-shareholder employees, capital and equipment, the sale of products and services, etc…, then distributions can certainly exceed compensation.

    A perfect example is this website. A significant majority of the gross receipts and profits of this website do not involve the personal services of WCI. Full disclosure, I am only speculating and have no inside knowledge.

    What is unknown at this time is whether the IRS will get more aggressive with this issue because of the Section 199A deduction. Most QBI eligible S-Corps have an even greater motivation to minimize compensation and maximize distributions.

    #171021 Reply

Reply To: New business owner – currently only have SEP set up what other options are there

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