WELCOME TO CHECK POINT 49

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LEAN MANAGEMENT GUIDELINES FOR CHECK POINT 49

INFLUENCE OF TAX STRATEGIES ON BUSINESS DECISIONS

Business owners and financial managers must be familiar with various tax strategies and work closely with an experienced and pro-active CPA to ensure the most cost-effective financial performance of the organization.

Income Taxes are an important factor in the overall financial planning process and they often influence business decisions. Selection of the most effective Tax Strategies represents, therefore, an integral part of the budgeting process and necessitates continuous cooperation between business people and their accountants or CPAs.

Tax strategies depend firstly upon the form of business organization. There are four basic forms of business organization illustrated below.

FOUR BASIC FORMS OF BUSINESS ORGANIZATION

ADDITIONAL INFORMATION ONLINE

COMPARISON BETWEEN VARIOUS FORMS OF BUSINESS ORGANIZATION

Note:

For additional information please go to Internal Revenue Service online or consult with your accountant or CPA.

SOLE PROPRIETORSHIP

A Sole Proprietorship is an unincorporated business formed and owned by one individual.

A sole proprietorship provides its owner with exclusive control of operating activities and can be initiated in a relatively simple manner. Legally, this form of business represents the same economic entity as its owner.

Consequently, you as the owner are entitled to receive all profits from operations. However, you are also liable for all losses and other obligations and taxes of the business. These taxes are based on Federal Income Tax Rates, which range from 10% to 39.6%, based on the 2014 Tax Year illustrated below.

You can give your business any Fictitious Name, which is different from your personal name and it will be subject for approval by local business licensing authorities. Learn more about Registering Your Fictitious Or “Doing Business As” (DBA) Name online.

Note:

For additional information please go to Internal Revenue Service and BizFilings online or consult with your accountant or CPA.

ADDITIONAL INFORMATION ONLINE

INDIVIDUAL INCOME TAX RATES FOR THE 2014 TAX YEAR

Individual Income Tax Rates For 2014 are based on the Marginal Tax Brackets as presented below:

• Federal Income Tax Rates

• State Income Tax Rates.

Tax rates progressively increase as income increases. The tax rates apply only to the income in each tax bracket range. Also, the tax rates apply only to taxable income. Various adjustments and deductions, including the standard deduction and personal exemptions, all lower a person's taxable income. Taxable income is almost always less than your total income.

2014 TAX YEAR - TAX RATE SCHEDULE X
SINGLE FILING STATUS

• 10% on taxable income from $0 to $9,075, plus

• 15% on taxable income over $9,075 to $36,900, plus

• 25% on taxable income over $36,900 to $89,350, plus

• 28% on taxable income over $89,350 to $186,350, plus

• 33% on taxable income over $186,350 to $405,100, plus

• 35% on taxable income over $405,100 to $40,750, plus

• 39.6% on taxable income over $406,750

2014 TAX YEAR - TAX RATE SCHEDULE Y-1
MARRIED FILING JOINTLY AND QUALIFYING WIDOW(ERS) FILING STATUS

• 10% on taxable income from $0 to $18,150, plus

• 15% on taxable income over $18,150 to $73,800, plus

• 25% on taxable income over $73,800 to $148,850, plus

• 28% on taxable income over $148,850 to $226,850, plus

• 33% on taxable income over $226,850 to $405,100, plus

• 35% on taxable income over $405,100 to $457,600 plus

• 39.6% on taxable income over $457,600.

2014 TAX YEAR - TAX RATE SCHEDULE Y-2
MARRIED FILING SEPARATELY FILING STATUS

• 10% on taxable income from $0 to $9,075, plus

• 15% on taxable income over $9,075 to $36,900, plus

• 25% on taxable income over $36,900 to $74,425, plus

• 28% on taxable income over $74,425 to $113,425, plus

• 33% on taxable income over $113,425 to $202,550, plus

• 35% on taxable income over $202,550 to $228,800, plus

• 39.6% on taxable income over $228,800.

2014 TAX YEAR - TAX RATE SCHEDULE Z
HEAD OF HOUSEHOLD FILING STATUS

• 10% on taxable income from $0 to $12,950, plus

• 15% on taxable income over $12,950 to $49,400, plus

• 25% on taxable income over $49,400 to $127,550, plus

• 28% on taxable income over $127,550 to $206,600, plus

• 33% on taxable income over $206,600 to $405,100, plus

• 35% on taxable income over $405,100 to $432,200, plus

• 39.6% on taxable income over $432,200.

In additional to the Federal Capital Gains Tax Rates, capital gains will also be subject to State Income Taxes. Many states do not have separate capital gains tax rates and, instead, tax capital gains as ordinary income subject to the state income taxes rates.

PARTNERSHIP

A Partnership is an unincorporated business formed and owned by two or more individuals, called general partners, who manage the business and are equally liable for its debts. Other individuals, called limited partners, may invest but not be directly involved in management and are liable only to the extent of their investments.

Unlike a corporation or a limited liability company (LLC), in a partnership each partner shares equal responsibility for the partnership's profits and losses, and its debts and liabilities. The partnership itself does not pay income taxes, but each partner has to report their share of business profits or losses on their individual tax return.

Estimated tax payments are also necessary for each of the partners for the year in progress. Partnerships must file a return on Schedule K-1 (Form 1065) showing income and deductions. Estimated tax payments are also required if they expect their income to be greater than $1,000.

A partnership enables its owners to share control of operating activities in accordance with pre-arranged and mutually acceptable conditions. These conditions also stipulate the basis upon which all partners share profits and losses of the business.

All partnerships are further classified into two categories illustrated below.

TWO CATEGORIES OF PARTNERSHIP

IMPORTANT ISSUES RELATED TO PARTNERSHIPS

Note: 

For additional information please go to Internal Revenue Service  and BizFilings online or consult with your accountant or CPA.

ADDITIONAL INFORMATION ONLINE

REGULAR  C-CORPORATION

A Corporation Or A Regular C-Corporation is a business entity that is legally separated from its owners.

A corporation is a separate legal entity in its own right with its own Tax Identification Number (TIN), similar to the Social Security Number issued to each individual in the U.S.

The ownership of a corporation is affected through owning Shares Of Stock by shareholders. Every ordinary corporation has certain distinguishing characteristics outlined below.

CHARACTERISTICS OF A REGULAR C-CORPORATION

TWO TYPES OF CORPORATIONS

Note: 

For additional information please go to Internal Revenue Service and BizFilings online or consult with your accountant or CPA.

ADDITIONAL INFORMATION ONLINE

2014 TAX YEAR
CORPORATION TAX RATE SCHEDULE

Note:

For additional information please go to Internal Revenue Service and online or consult with your accountant or CPA.

SUB-CHAPTER S-CORPORATION

Sub-Chapter S-Corporation Or S-Corporation is designed specifically for small business owners.

You may elect to have an ordinary corporation taxed as a Sub-Chapter S-Corporation. The S-Corporation is a separate legal entity in its own rights with its’ own Tax Identification Number (TIN), similar to a Regular C-Corporation.

The ownership of a corporation is affected through owning Shares Of Stock by shareholders. This type of corporation has certain distinguishing characteristics outlined below.

CHARACTERISTICS OF A SUB-CHAPTER S-CORPORATION

Note:

For additional information please go to Internal Revenue Service and BizFilings online or consult with your accountant or CPA.

ADDITIONAL INFORMATION ONLINE

LIMITED LIABILITY COMPANY (LLC)

A Limited Liability Company (abbreviated L.L.C. or LLC) is a legal form of business organization that provides limited liability to its owners in the vast majority of United States jurisdictions. Often incorrectly called a "Limited Liability Corporation" (instead of company), it is a Flow-Through Entity, hybrid business entity having certain characteristics of both a corporation and a partnership or sole proprietorship (depending on how many owners there are).

Limited Liability Company (LLC) is a type of organization whose owners and managers carry limited liability and usually receive tax benefits of an S-Corporation without having to conform to the S-Corporation restrictions. An LLC, although a separate legal business entity with its own Tax Identification Number (TIN), is a type of unincorporated association and is not a corporation. The primary characteristic an LLC shares with a corporation is limited liability, and the primary characteristic it shares with a partnership is the availability of pass-through income taxation.

BENEFITS OF A LIMITED LIABILITY COMPANY (LLC)

The pass-through taxation, in fact, represents one of the biggest benefits of forming an LLC. This means that each member of an LLC reports their share of profit and loss in the company on their individual tax returns, and the IRS does not assess a tax on the LLC itself. This avoids what is commonly called "double taxation" of general corporations, where profits are taxed at the corporate level and then again at the shareholders’ level. The LLC is often more flexible than a corporation and it is well-suited for companies with one or preferably two or more owners.

Finally, an LLC must file a Federal Income Tax return and it is liable for a Minimum Franchise Tax in most states in the U.S. In California, for example, the minimum franchise tax is $800 per year, which must be paid even if the business did not earn any profit during that fiscal year.

Note:

For additional information please go to Internal Revenue Service and BizFilings online or consult with your accountant or CPA.

ADDITIONAL INFORMATION ONLINE

CORRELATION OF ACCOUNTING AND TAX PERIODS

It is advisable that small and medium-sized companies keep their accounting records and tax records on the same basis to ensure that income tax expense accrued from operations equals income tax liability payable to the Internal Revenue Service (IRS).

In addition to Federal Income Tax, regular corporations are also liable for the State Income Tax in 44 different states.

Note:

For additional information please go to Internal Revenue Service online or consult with your accountant or CPA.

ADDITIONAL INFORMATION ONLINE

WOULD YOU LIKE TO PAY LESS TAXES?

The process of Reducing Or Minimizing Taxes (not avoiding!) through planning involves issues of an operational and capital budgeting nature. Some of the Common Tax Reduction Strategies are outlined below.

COMMON TAX REDUCTION STRATEGIES

• Selection Of An Experienced And Pro-Active CPA.

It is extremely important to select a CPA or an accountant who has a pragmatic approach to developing tax reduction plans on a pro-active basis instead of a reactive basis, i.e. who helps to plan tax strategies in advance and not merely prepares tax returns after the events took place.

• Selection Of The Most Suitable Form Of Business Entity.

It is extremely important to select the most appropriate form of business organization, namely: sole proprietorship, partnership, C-Corporation, S-Corporation, or LLC to ensure the most cost effective results at the end of each tax year.

• Selection Of A Tax Year For Ordinary Corporation.

The Tax Reform Act Of 1986 prescribes that sole proprietorships, partnerships, and S-Corporations adopt the tax year of their principal partners or shareholders.

• Selection Of A Suitable Accounting Method.

There are two basic accounting methods for record keeping and income tax calculation: the Cash Method and the Accrual Method.

• Selection Of The Amortization Method.

This is for such items as start-up and organizational expenses, research and development costs, and other preliminary expenses.

• Selection Of A Suitable Inventory-Count Method.

This includes FIFO, or First-In-First-Out; LIFO or Last-In-First-Out, and other methods.

• Selection Of A Suitable Method For Depreciating Capital Assets.

This includes Straight-Line Depreciation, Reducing Balance Depreciation.

• Selection Of Suitable Compensation Methods.

This includes salaries, stock options, employee benefits, retirement plans, and insurance plans for shareholders and employees.

• Selection Of A Suitable Method Of Financing.

This entails examination of the Debt Financing Method versus the Equity Financing     Method.

Note: 

For additional information please go to Internal Revenue Service online or consult with your accountant or CPA.

ADDITIONAL INFORMATION ONLINE

A COMPANY'S TAXATION

There are many other important issues which in one way or another may affect the level of the Company's Taxation. Some of these issues are outlined below.

IMPORTANT ISSUES WHICH MAY AFFECT A COMPANY'S TAXATION

Note:

For additional information please go to Internal Revenue Service online or consult with your accountant or CPA.

IRS SECTION 179

The Internal Revenue Service (IRS) allows a Write-Off of specific amounts spent by companies on various types of new office and capital equipment such as computers, furniture, machinery, and equipment. This write-off can be exercised through the IRS Section 179, which is summarized below.

According to Section179 online:

• For 2014 tax year, Section 179 has been restored to its original limits of $25,000 plus an adjustment for inflation.

• Section 179 has been enhanced for 2013 tax year due to the passage of The American Taxpayer Relief Act Of 2012.

IRS SECTION 179 TAX INCENTIVES FOR QUALIFIED ASSETS PURCHASES IN 2013

WHAT TYPE OF PURCHASES QUALIFY FOR SECTION 179?

Note:

For additional information please go to Internal Revenue Service online or consult with your accountant or CPA

ADDITIONAL INFORMATION ONLINE

RETIREMENT PLANS

According to the retirement plan contribution rules in The Economic Growth And Tax Relief Reconciliation Act Of 2001, small business owners have an advantage in saving for retirement. This act also makes it possible for a one-person business owner to establish a Solo 401(k) Plan. 

Up to now a self-employed business person or a one-person owner has found it difficult to implement retirement savings plans beyond the Simple IRA or Simplified Employee Pension Individual Retirement Account (SEP-IRA). A self-employed individual can contribute a significant part of his net self-employment income to save more for retirement, borrow from their plan, which is impossible with a SEP and accept rollovers from previous employer plans, without requiring contributions in years when income is down. 

A key component in the 2001 Tax Act allows employees to make elective deferrals, or 401(k) contributions, into a plan where these deferrals do not count toward the limit on the employer's deduction for making retirement-plan contributions. This allows both the employee and the employer, to maximize the limits of plan contribution by both parties up to the combined cap of $51,000, or 100% of pay, if lower.

401 (k) PENSION PLAN CONTRIBUTION LIMITS

RETIREMENT PLAN EXAMPLE

Assume, for example, that an independent sales agent is making $100,000 in self-employment income. This agent can deduct $17,500 for a 401(k) contribution and 20% of $100,000 for a combined retirement savings of $37,000. 

A family or second income business can also benefit from the new rules. For example, a stay-at-home spouse starts a profitable business on the side. The marginal tax paid on this additional income will be the highest paid by the family. Now this spouse, who earns $25,000 in self-employment income, may put away $17,500 in employee deferral plus 20% of $25,000 or $5,000 of employer contributions for a total tax-deductible savings of $22,000. 

A family business, where kids and parents all participate, also can benefit from the new rules. If the family business is organized so that all earn self-employment income, each family member may put away 100% of their pay, up to $17,500 in their deferral account, plus the business may contribute an additional 20% of compensation.

RETIREMENT PLAN FOR S CORPORATIONS

The one-person S Corporation can also benefit from the new rules. S corporation owners typically pay themselves a lower salary and a higher partnership distribution. The former can be used for retirement-plan contribution calculations while the latter cannot. Now, the S corporation owner who elects to pay himself only $40,000 can put $17,500 into his deferral account and 25% of $40,000, or $10,000, into an employer contribution, for a total contribution of $37,000.

ADDITIONAL INFORMATION ABOUT RETIREMENT PLANS

Small business owners seeking to adopt these new plans should keep several points in mind:

1. Elective deferrals are still considered income for computation of self-employment tax
   calculations.

2. Enhanced contribution rules are more restrictive if the business employs common-law    employees. 

Small business owners, who intend to adopt retirement plans immediately, should evaluate available plans based upon cost and services provided, such as investment options, loan support, and the ease of transitioning the plan when adding any common-law employees. 

Finally, when assets in these plans exceed $250,000, an annual plan information return must be filed with IRS. Check with your prospective plan sponsor to determine if this information-return preparation and filing is included in the fees you will pay.

Note:

Additional information about 401(k) and other retirement plans is provided in Tutorial 2.

NEW OPTIONS AND SOLUTIONS FOR RETIREMENT PLANS

The Economic Growth And Tax Relief Reconciliation Act Of 2001 (EGTRRA) provides a broad range of new options and solutions for small business owners and financial professionals. Business owners now can save more money on a pre-tax basis and, in addition, offer their key employees additional financial incentives, while keeping the overall cost of the pension plan as low as possible. A brief summary of the major changes in the pension plan area is outlined below.

INTRODUCTION OF A RETIREMENT PLAN IN YOUR COMPANY

In order to introduce a new retirement plan into a company, it is essential to complete the following information:

1. The company's census.
2. The company's short, medium and long-term objectives.
3. Details of the existing plan.

All retirement plans must be finalized by a Third Party Administrator (TPA), who will perform the required actuarial testing to ensure that such plans conform to the stringent requirements imposed by the IRS. Moreover, retirement plans are designed to enable business owners to maximize their retirement savings and at the same time to maximize their business tax deductions.

The development of retirement plans will also enable CPAs to offer important tax-reduction advantages to their clients on a pro-active basis. Furthermore, the long-term objectives of the retirement plans will help business owners take their focus off the long-term challenges and profit fluctuations.

ADDITIONAL INFORMATION ONLINE

You can obtain additional information about retirement plans provided by the Internal Revenue Service   online.

If you are ready to establish a Retirement Plan within your organization and would like to know how to go about it, please send your e-mail to Lean Business Club, the Member Benefits Department at: Retirement@LeanBusinessClub.com for additional free information.

BUY-SELL AGREEMENTS

Buy-Sell Agreements may also have specific tax consequences on business owners and partners. Buy-sell agreements are legal agreements between business partners. They are of paramount importance in case of separation of one or more partners from the partnership or from the corporation, or in case one of the partners dies.

Buy-sell agreements are designed to stipulate the Payoff Mechanism for the shares of stock owned by the departing partner. These agreements specify that upon separation, the departing partners or shareholders must sell their share in the partnership or their shares of stock in the corporation to the remaining partner or partners at a nominal pre-determined buy-back price.

In case of partnership dissolution, it must also proceed in accordance with an existing buy-sell agreement between partners.

ADDITIONAL INFORMATION ONLINE

Additional information regarding the Buy-Sell Agreements may be obtained from Lean Business Club, the Member Benefits Department at: BuySell@LeanBusinessClub.com

LIFE INSURANCE POLICY

Life Insurance Policies issued on the lives of all key partners or shareholders in a particular business may also carry substantial tax consequences. Very often partners select to purchase a life insurance policy on the life of each partner, whereby the partnership itself is the beneficiary, and pays the premiums to the insurance company.

The life insurance policy is designed to provide an After-Tax Death Benefit to the partnership or corporation, equal to the market value of the shares held by each partner. In this case, if one partner dies, the life insurance will pay the death benefit to the partnership, or corporation, which in turn, will have sufficient funds to pay out the deceased partner's beneficiaries in lieu of that partners' financial interest in the business. Otherwise, the deceased partner’s spouse or other relatives will become “new partners” in the existing business, which in turn may cause serious problems and disputes between the existing and new partners.

ADDITIONAL INFORMATION ONLINE

Additional information regarding a Life Insurance Policy for key partners or shareholders in a business may be obtained from Lean Business Club, the Member Benefits Department at: Insurance@BestBusinessInfo.com

UPDATED TAX INFORMATION

Since most Tax Laws change every year, it is virtually impossible to keep track of all such changes. It is essential, therefore, to obtain regular updates from the company's tax advisors, or accountants, who are expected to have sufficient expertise in the field of taxation. 

You can obtain the updated information about Current Tax Rates, Allowances And Write-Offs online from Internal Revenue Service online.

Once the latest Tax Information is obtained, management will be in a better position to develop the most effective tax reduction strategies, thereby improving overall company performance results.

Note:

Please consult with your accountant for additional information.

ADDITIONAL INFORMATION ONLINE