Bookkeeping and taxes might be the farthest thing from your mind when starting a business, but if they are done wrong, or not done at all, it can end up costing you more than you realize.
Eileen Driscoll of Supporting Strategies will discuss the “Three C’s” of proper bookkeeping - consistency, controls and cash - for your business to ensure you can produce accurate and useful financial information. She will be joined by Robert Traester and Dawn Darnell of WithumSmith+Brown, PC who will discuss tax planning opportunities for your business in a post-tax-reform climate.
Speakers
Eileen Driscoll, Managing Director, Supporting Strategies
Robert Traester, Senior Tax Accountant, WithumSmith+Brown, PC
Dawn Darnell, Senior Manager, WithumSmith+Brown, PC
Rice Manufacturers in India | Shree Krishna Exports
Get Smart on Bookkeeping and Taxes for Startups
1. Tonight’s Schedule
Get Smart on
Bookkeeping and Taxes
for Startups
www.mitforucambridge.org
Speakers
• Eileen Driscoll, Managing
Director, Supporting Strategies
• Robert Traester, Senior Tax
Accountant, WithumSmith+Bro
wn, PC
• Dawn Darnell, Senior
Manager, WithumSmith+Brown,
PC
Event Schedule
5:30 - 6:00pm - Registration &
networking (light refreshments
served)
6:00 - 8:00pm - Program with Q&A
2. Upcoming Events
• Startup Spotlight 2018 – Apply to Exhibit
– January 22 at 8:00 AM - April 20 at 5:00 PM
• Mentor Smart Program – Open Application
Period
– March 1 - March 31
• Launch Smart Clinic – Internet of Things (IoT)
– March 6 at 5:30 PM - 8:30 PM
• Blockchain & Bitcoin Workshop
– March 6 at 6:00 PM - 8:00 PM
5. Eileen Gallagher Driscoll, CPA
▹ Managing Director, Supporting Strategies | Boston
▹ Experienced in building a best in class back office
▹ Loves working with growing companies!
Eileen’s Goals in Working with Companies
▹ Owners focus on Building a Business
▹ Provide financial information to owners to make good
business decisions
▹ Develop systems that will grow with your business
ABOUT THE SPEAKER
9. THERE ARE 3 C’S IN SUCCESS
Consistency Controls Cash
10. THE FIRST C: CONSISTENCY
Consistency
Company
Accounting
What
How
Who
When
11. CONSISTENCY: WHAT
What needs to be done?
▹Invoice Customers
▹Expenses & Bill Payment
▹Payroll & HR Issues
▹Cash Management
▹Budget Tracking
▹Financial Reporting
▹Other Business Matters
16. CONSISTENCY: WHEN
▹ Post Transactions - as they occur
(Invoices, vendor payments, cash receipts…)
▹ Record Payroll – at the time of payment
▹ Reconcile Balance sheet accounts - month end
▹ Financial Statement preparation - month end
▹ Analyze results - Compare to budget & KPIs
Make sound business decisions on timely,
accurate information!
17. CONSISTENCY: WHY
▹ Make decisions based on reliable
financial information
▹ Compliance - taxes, investor requirements, etc.
▹ Planning for the future - an investor
or exit perhaps?
18. THE SECOND C: CONTROLS
Integrity & Accuracy
in
Financial
Information
Cash
Controls
Segregation
of Duties
Month-end
Close &
Review
Data
Security
Documentation
External
Review
or Audit
19. THE THIRD C: CASH
Cash
Reporting
Cash
Forecasting
Managing
Cash
20. MANAGING CASH
▹ Determine your breakeven point
▹ Focus on cash flow management
▹ Maintain some cash reserves
▹ Collect receivables ASAP
▹ Encourage customers to pay up faster
▹ Extend payables if possible
▹ Use technology to your advantage
23. MANAGING THE 3 C’S FOR SUCCESS
Controls
Consistency Cash
24. SUPPORTING STRATEGIES ROLE
Concentrate on
building your
business
Make better business
decisions with real-time
financial data
Count on financial systems
that efficiently scale as
your business grows
Benefit from a premier
team of experienced
professionals
Institute procedures
and controls that
minimize risk
By working with Supporting Strategies, you’ll be able to:
27. 27
Withum
43Years in Experience
$175MIn Revenue Per Year
17,000Clients Worldwide
Top 30
(26th) Accounting Firm
in the United States
6th
Largest Regional
Accounting Firm in
NE
1st
Accounting
Firm Pacesetter
28. 28
WithumWithum Offices
14 Office Locations
New York, NY
Whippany, NJ
East Brunswick, NJ
Paramus, NJ
Princeton, NJ
Red Bank, NJ
Boston, MA
Bethesda, MD
Philadelphia, PA
Blue Bell, PA
Orlando, FL
West Palm Beach, FL
Aspen, CO
Cayman Island
29. 29
Agenda
Types of Business Entities
Tax Saving Opportunities
Equity Compensation
Multistate Issues
Tax Reform Updates
30. 30
Choice of Entity
How should I form my business?
Is there a separate tax filing?
Can I just keep the business under my name?
31. 31
Types of Business Entities
Sole proprietorships
Partnerships
Limited Liability Companies (LLCs)
C-Corporations
S-Corporations
32. 32
Sole Proprietorship
An unincorporated business owned by one individual
Sole proprietor reports all profits and losses on his/her individual tax return
(your 1040)
Individual owns all business assets and liabilities
Business normally dissolves with death of owner
Necessary to keep track of income and expenses
Separate checking account – VERY important
FID # is NOT necessary
33. 33Things to Consider
Advantages
Simplest form of business to start
and maintain
No requirements for formation; no
franchise fees or licenses, no
annual fees
No formal operations or meetings
for minutes
Complete management authority
Business losses can offset any non-
business income on the individual’s
personal tax return
Self employed SEP, Simple &
Qualified plans, and Self employed
health insurance are deductible as
adjustments for AGI on the
Sole Proprietorship
Disadvantages
Owner is personally liable for all debts
and obligations of the business;
unlimited liability
All business assets, as well as personal
assets are exposed to the risk of loss
Hobby loss rules
Owner is subject to self employment
tax
15.3% of your net income – (double
the FICA)
34. 34
Partnerships
A relationship between two or more persons or entities who agree
to carry on a trade or business together for profit
Flow through entities – K-1
Self employed SEP, Simple & Qualified plans, and Self employed
health insurance are deductible as adjustments for AGI on the
partners’ 1040
Partnership agreements – not required, but recommended
35. 35
Partnerships
Simple business formation
Partnership losses can offset any other taxable income on the partner’s tax return
Advantages
Partners are subject to the self employment tax
Automatic Dissolution (generally)
General partners are joint and severally liable
Limited partners do not have management rights
Disadvantages
36. 36
Limited Liability Companies (LLC)
Startup ease of a sole proprietorship/partnership
Legal protections of a corporation to the members (owners)
Tax structure flexibility
A single member LLCs are classified as a proprietorship by default
Multimember LLCs are classified as a partnership by default
Other classifications can be elected by filing Form 8832 (C-Corp)
Most states do not restrict ownership
Allowed under state statutes (differs across states)
Typically annual filing fees (MA - $500)
37. 37
C-Corporations
Characteristics
Legal entity separate and apart from its
owners
Files Articles of Incorporation and has
annual filings
Board of Directors must be elected
Annual meetings must be held with
minutes
Stocks must be issued
Shareholders, directors, or officers of the
corporation are normally not legally
38. 38
C-Corporations
No restrictions on type of shareholder
Attractive to foreign investors
Multiple classes of stock
Tax filing at entity level only
Advantages
Two layers of taxation
No capital gain tax difference on sale of
assets
Disadvantages
39. 39
S-Corporation
Shareholders enjoy the same limited liability as shareholders of a
C Corporation
Flow through taxation to shareholders
Maximum of 100 owners
No partnerships, corps, or non-resident alien shareholders
Only one class of stock allowed
C-Corps File Form 2553 with the Internal Revenue Service for S-
Corp status
40. 40
S-Corporation
One layer of taxation
No self-employed tax on profit
Legal protection
Advantages
Limitations as to number and types of
shareholders
Distributions must be in accordance with
stock ownership
Not recognized in all states
Reasonable compensation
Disadvantages
41. 41
You’ve Chosen Your Entity…Now What?
File a Form SS-4 to request a Federal ID (can be done online)
S-Corp Election (if choosing S-Corp status)
File with the Secretary of the Commonwealth
Create MassTaxConnect account
Use for sales tax, meals tax, withholding tax, etc.
Make tax payments
View Department of Revenue communication
43. 43
Other Issues to Think About
You may owe estimated tax payments
Other filing requirements (1099s, 3921s, etc.)
Due Dates Vary
Calendar year Partnerships and S-corps are due 3/15
Calendar year C-Corps and Sole Proprietorships (with individual return) are
due 4/15
Calendar year LLCs – it depends
44. 44
Tax Saving Opportunities
Stock acquired on original issuance from a US C-Corp after 8/10/1993
Assets below $50 million at time of and right after the issuance of the stock
and
At least 80% of the assets were used in the active conduct of a trade or
business
Investors who hold the stock for 5 or more years get a full or partial exclusion
when they sell the stock
Stock acquired after 2011 is eligible for 100% tax free sale of stock up to the
greater of $10M of gain or 10X shareholder’s basis
Must be original recipient of stock directly from company
Founder’s stock can qualify but must form a C Corporation
Qualified Small Business Stock (QSBS)
45. 45
Tax Saving Opportunities
What expenses qualify?
Lab research
Improvements to products or processes – faster, cheaper, greener
New products, software, or technology
How is it calculated?
6% of Qualified Research Expenses – R&D payroll & supplies; 65% of contractors
Qualified Small Businesses= sale of 5M or less and no sales 5yrs prior to claim year
Credit against payroll taxes (social security)
Credit is calculated and shown on annual tax return
Benefit capped at $250,000/per year for up to 5 years
Research and Development (R&D) Credits
46. 46
Equity Compensation
Stock grants or Restricted Stock Units
Stock award subject to vesting over time; sometimes requiring a payment
Taxed upon vesting as compensation at FMV on vesting date (less any payment made)
83(b) elections – allows election to be taxed at the FMV on the date of grant rather than the FMV on the date
vested
Must be filed within 30 days from date of grant
Risk of 83(b) – value goes down, company does not succeed
New 83(i) election for some “qualified stock” to defer taxes for up to 5 years from vesting
• Must elect within 30 days of grant
• Must be “eligible corporation” – requires corp to grant at least 80% of all full-time emp’ees stock options or RSU’s with same rights and
privileges
Stock options
Options to buy stock at a defined exercise price (usu. FMV date of grant) over a fixed period of time
Typically vest over time (3-5 years), can also be performance based
Either - NQSO’s and ISO’s
47. 47
Equity Compensation
NQSO - Non-Qualified Stock Option
Taxed upon exercise as compensation at FMV less the exercise price paid
When sold, capital gain/loss is difference between FMV on date of sale and FMV on date of exercise
ISO – Incentive Stock Option
NOT TAXED UPON AWARD NOR EXERCISE
However, there is an AMT calculation that may result in tax
And, if stock is not held 2 years from the grant date and 1 year from the exercise date, will be taxed like a
NQSO (disqualified disposition)
If meet holding requirement, Capital gain/loss is difference between FMV date sold and FMV date grant
48. 48
Equity Compensation
ISO – To Qualify
Only issued by corporations
Only issued to employees (certain Board Members)
Must be issued under a written plan and grant agreement
Must exercise within 10 years and forfeit upon termination if not exercised in 90 days
Limited to 100,000 vesting per year
Restricted transfer rights
Exercise price CAN NOT BE LESS THAN FMV on date of grant
49. 49
Equity Compensation
409a Valuations –what are they and why do I need them?
• Formal valuation of company’s stock;
• Typically prepared by a valuation specialist
Why
• to avoid taxation of stock options under section 409a
• exercise price can not exceed the fmv on the date of the grant
What if?
• EMPLOYEE pays tax on options; plus 20% penalty and interest
50. 50
Multistate Tax Issues
Are you operating in multiple states now?
Have you considered your filing needs in other state?
Do you think this only applies to large companies?
51. 51
Nexus
The level of contact that must exist between a
taxpayer and a state before the state has the
authority under the U.S. Constitution to assess
a tax
Federal Limitations
Due Process Clause – Minimum Connection
Commerce Clause – Substantial Nexus
Public Law 86-272 – Tangible Personal Property
52. 52
Types of Nexus
Physical Presence
Having property in the state
Having employees in the state
Click-Through Nexus (“Amazon Law”)
Presumed to exist if out-of-state retailers refer customers to the in-
state retailer via links on websites in exchange for compensation
Economic Nexus
Presumed to exist when company does business in a state and
derives revenues from those activities but has no physical presence
in the state (i.e., earning franchise fees)
53. 53
Types of Nexus
Pass-through Nexus
Applicable by virtue of ownership by the out-of-state company in a
flow-through entity that conducts business in or has nexus in the
state
Factor Presence Nexus
Nexus is created based upon the apportionment factors of the
entity
Apportionment factors (payroll, property or sales) exceeds the
state’s statutory threshold
May not apply if they fall under the parameters of Public-Law 86-
272
55. 55
You Have Nexus – Now What?
Just one state – just one tax return
More than one state – apportion/allocate income
among the states
Payroll – total payroll in each state vs. total payroll
everywhere
Property – total property in each state vs. total property
everywhere
Sales – total sales in each state vs. total sales everywhere
56. 56
Other State Taxes
Sales and Use
Generally required to be imposed on the sale of tangible personal
property
Some jurisdictions tax software as tangible personal property
Services are generally exempt BUT some states do have sales tax on
services
Withholding Taxes
Meals Tax, Occupancy, Beverage, Property, Tourism, etc.
58. 582018 Tax Law Changes
Effective Dates
Signed into law on December 22, 2017.
Most changes are effective on January 1, 2018.
Most individual tax changes expire December 31, 2025.
Expect additional complications at the state and local level because many states
automatically adopt federal changes and others may adopt them in part or in whole at
some future date.
59. 592018 Tax Law Changes
S-Corps, Partnerships, “Schedule Cs and Es”:
20% Qualified Business Deduction
Effective top rate on pass-throughs becomes 29.6%
Limitations/Exceptions:
The wage limit doesn’t apply if the taxpayer earns less than
$157,500 (if single, $315,000 if married).
If over this income threshold
Limited to certain industries (no “professional services”)
complex calculations must be performed on an individual
business level
60. 602018 Tax Law Changes
Pass-through Change: 20% Qualified Business
Deduction
Special rule for taxpayers claiming section 199A deduction: In
the case of any taxpayer who claims the Section 199A
deduction, there is a substantial understatement of income tax
if the amount of the understatement exceeds the greater of:
5 percent of the tax required to be shown on the return, or
(typically 10%)
$5,000.
Section 6662: Imposes a 20% penalty on any “substantial
underpayment” of tax
61. 612018 Tax Law Changes
Corporate Changes
The corporate income tax rate is reduced to a flat rate of 21%.
AMT & DPAD are repealed.
The Act limits the NOL deduction to 80% for losses arising in tax
years beginning after Dec. 31, 2017.
The Act eliminates carrybacks (except for farming NOLs, which
would be permitted a two-year carryback) and allows unused
NOLs to be carried forward indefinitely.
62. 622018 Tax Law Changes
Depreciation – Section 179 Expensing & Bonus
Depreciation
Increases the amount that a taxpayer may expense under §179 to $1,000,000.
The Act also increases the phase-out threshold to $2,500,000.
The Act also expands the definition of qualified real property to include all
qualified improvement property and certain improvements made to
nonresidential real property
(roofs, heating, ventilation, and air-conditioning property, fire protection
and alarm systems, and security systems)
Taxpayers are able to fully expense 100% of the cost of qualified property
acquired and placed in service after September 27, 2017 and before January 1,
2023 (with an additional year for certain qualified property with a longer
production period)
Phases down from 100% over the next 5 years
No longer has to be new property, just new to the taxpayer
63. 632018 Tax Law Changes
Business Interest Limitation
Doesn’t apply to businesses with average receipts of less than $25M.
For years after 2017, Net interest expense is only deductible to the
extent of 30% of “adjusted taxable income.”
Doesn’t include investment interest expense.
For flow-through entities, the limitation is first applied at the entity
level.
Excess interest expense is carried forward indefinitely.
Doesn’t apply to electing “real property trades or businesses” or car
dealerships with floor-plan interest.
64. 642018 Tax Law Changes
Entertainment expenses disallowed, Meals
limited
For year after 2017, generally, no deduction is allowed for:
an activity considered to be entertainment, amusement, or recreation,
membership dues for any club organized for business, pleasure, recreation, or other social purposes
or a facility used in connection with any of the above items.
The deduction for business meals equal to 50% of the food and beverage expenses
associated with operating a trade or business is retained.
Meals provided for the convenience of the employer (on the premises) that are
nontaxable to the employee as a de minimis fringe benefit are now only 50%
deductible.
Exceptions under §274(e) are unchanged (i.e. 100% deductible Holiday Party, etc.)
65. 652018 Tax Law Changes
Tax Accounting-Cash Method; Inventory
Capitalization, etc
Gross receipts limit for cash-method use raised to $25 million,
related rules changed.
Alternatives to inventory accounting are made available to most
small businesses meeting a $25 million gross receipts test.
Small business exception to UNICAP rules is expanded to apply to
producers and resellers meeting the $25 million gross receipts test.
66. 662018 Tax Law Changes
New Paid Family and Medical Leave Tax Credit – §45S
An eligible employer is allowed the credit equal to the applicable percentage of
the wages paid to qualifying employees during any period in which those
employees are on family and medical leave
Credit is between 12.5% and 25%
Qualifying employees: any employee who:
• has been employed by that employer for 1 year or more
• and was paid less than $72,000 in 2018.
Paid leave cannot be vacation leave, personal leave, or medical or sick leave, as defined in
FMLA section 102(d)(2).
A taxpayer can't take both a credit and a deduction for amounts for which the
paid family and medical leave credit is claimed.
67. 672018 Tax Law Changes
International Changes
Foreign Source Dividends
100% of the foreign-source portion of dividends paid by a foreign corporation to a U.S.
corporate shareholder that owns 10% or more of the foreign corporation would be exempt
from U.S. taxation.
The American international tax system would be switched from a worldwide income model to a
territorial model where foreign profits are generally exempt from U.S. taxation
No foreign tax credit or deduction would be allowed for foreign taxes paid or accrued with
respect to any exempt dividend
Foreign Derived Intangible Income (FDII)
Impacts domestic C Corps
Deemed Intangible Income of taxpayers that is deemed foreign sourced
Calculates an amount of income that can be attributed to intangible assets
Taxed at rate of 13.125%.
To encourage US Corps to not hold intangible property abroad
68. 682018 Tax Law Changes
International Changes
Global Intangible Low Tax Income (GILTI)
GILTI is the income of a Controlled Foreign Corporation (CFC), reduced for
certain adjustments
• US Shareholder is 10% or greater owner
• US Shareholders own more than 50% of vote or value of corp (direct & indirect tests)
Tax on intangible income that has been taxed at lower foreign rates
Deemed repatriated in the year earned.
An individual shareholder or an investor in a flow-through entity
• Taxed at the highest ordinary income tax rate applicable to such individual.
A corporation with GILTI
• Pays an effective tax of 10.5% on its GILTI. An indirect foreign tax credit is allowed to
reduce the GILT Income
GILTI has its own separate foreign tax credit limitation basket with no
carryforwards
69. 692018 Tax Law Changes
Mandatory Repatriation
The Act imposes a mandatory tax on post-86 accumulated foreign earnings
Tax rate depends on how the accumulated deferred earnings are held:
cash or cash equivalents taxed at 15.5%
Illiquid assets taxed at 8%.
Taxpayers would be able to elect to pay any resulting liability over an eight-year
period. Limitations period for assessment of tax on these mandatory inclusions
are extended to six years.
70. 702018 Tax Law Changes
New Partnership Audit Rules
Effective for partnership taxable years beginning after December 31, 2017;
Exams conducted, Adjustments Assessed and Collected at the partnership
level;
All partners are bound by a final determination in the partnership audit
proceeding
Partners do not have the right to participate in the audit proceeding or
receive notice of the proceedings from the IRS (Unlike under TEFRA)
Only partnership‐level statute of limitations apply– a partner’s statute of
limitations is no longer taken into account (unless the partnership elects out
of the new rules)
Partnership can elect to file adjusted partner statements (quasi amended
K‐1s) for each partner for the “reviewed year”
71. 712018 Tax Law Changes
New Partnership Audit Rules
Partnership Agreements must be amended to assign partnership
representative:
“Partnership Representative” has the sole authority to act on behalf of the
partnership.
PR must be a “person” with a substantial U.S. presence.
• The term “person” includes, an individual, trust, estate, partnership, association,
company, or corporation.
PR is not required to be a partner in the partnership (i.e., now the CFO can
serve in this role)
IRS will appoint a PR if the partnership does not designate one.
72. 722018 Tax Law Changes
New Partnership Audit Rules
Election out for “small” partnerships
Partnerships with 100 partners or less can opt out of the entity‐level
partnership determination
Election‐out is an annual election
The election must include a disclosure of the name and TIN of the each
partner
Partners must be individuals, C corporations (including any foreign entity
that would be treated as a C corporation if domestic), S Corporations or
estates of deceased partners (no upper‐tier partnerships)
S corporation shareholders must be counted for purposes of the 100
partner test and disclosed to the IRS
The partnership must notify each partner of the election out.
78. 782018 Tax Law Changes
Individual Changes-Tax Rates – Capital Gains
Income 2017 2018
$0 - $38,600 0% 0%
$38,601 - $425,800 15% 15%
$425,800+ 20% 20%
Single
Married filing Jointly
Income 2017 2018
$0 - $77,200 0% 0%
$77,201 - $479,000 15% 15%
$479,000+ 20% 20%
79. 792018 Tax Law Changes
Individual Changes- Standard Deduction & Exemptions
Standard Deduction
The standard deduction increases from $6,350/$12,700 (single/MFJ) to
$12,000/$24,000.
$18,000 for Head of Household (an unmarried individual with at least one
qualifying child).
Personal Exemptions
Personal exemptions are suspended starting in 2018.
80. 802018 Tax Law Changes
Expanded Child Tax Credit
Child tax credit increased
For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the
child tax credit is increased to $2,000.
$1,400 of the credit is refundable.
New temporary $500 credit for other dependents
Credit is allowed for each dependent other than a qualifying child.
Substantially Increased Income Thresholds
Prior Law:
• Phase-out began at $75,000 for single individuals or heads of households, $110,000 for
married individuals filing joint returns.
New Law:
• Phase-out begins at $400,000 for married individuals filing joint returns, $200,000 for all
others.
81. 812018 Tax Law Changes
Individual Alternative Minimum Tax
AMT remains for 2018 but with increased exemption Amounts
Joint returns and surviving spouses, $109,400.
Single Taxpayers, $70,300.
Rates are still 26% & 28%.
Significantly higher phase-out of AMT exemption:
Exemption amounts reduced to an amount equal to 25% of the amount by
which the taxpayer's alternative minimum taxable income (AMTI) exceeds:
• $1,000,000 – Joint Returns and Surviving Spouses.
• $500,000 – All other taxpayers (other than estates and trusts).
Most AMT adjustments are gone:
Personal Exemptions.
State and local income taxes.
Other miscellaneous itemized deductions.
82. 822018 Tax Law Changes
Individual Changes – Itemized Deductions
State Taxes: The aggregate deduction for an individual's state and local real
property taxes; state and local personal property taxes; state and local income
taxes; and general sales taxes is limited to $10,000
For amounts paid in a tax year beginning before Jan. 1, 2018, with respect to State or local
income taxes, beginning after Dec. 31, 2017, the payment is treated as if paid on the last day of
the tax year for which such tax is imposed for purposes of applying the limitation of the
deduction.
Home Equity: Loan Interest on home equity debt is suspended.
Mortgage Interest: Mortgage interest on home acquisition debt is limited to
underlying debt of up to $750,000 incurred after Dec. 15, 2017.
Mortgage debt incurred prior to December 15, 2017 is grandfathered under the prior law
($1,000,000 limit). Refinancing does not subject the debt to the new limits.
For tax years beginning after Dec. 31, 2025, the limitation reverts back to $1,000,000
regardless of when the debt was incurred.
83. 832018 Tax Law Changes
Individual Changes – Itemized Deductions
Cash contributions to public charities and certain private foundations- the 50%
of AGI limitation is increased to 60%. Contributions exceeding the 60%
limitation generally may be carried forward and deducted for up to five years,
subject to the later year's ceiling.
Miscellaneous itemized deductions, that are subject to the 2%-of-adjusted-
gross-income (AGI) floor, are no longer deductible, including:
Tax preparation fees
Investment management fees
Unreimbursed employee business expenses
Estate planning fees
Pease limit on itemized deductions is suspended. Under prior law, the
otherwise allowable amount of certain itemized deductions was reduced by 3%
of the amount of a taxpayer's AGI exceeding a threshold amount; the total
reduction couldn't be greater than 80% of all itemized deductions.
Medical Expenses: Allowable subject to a 7.5% of AGI floor in 2017 and 2018.
84. 842018 Tax Law Changes
Individual Changes – Other
Tax on unearned income of a child (“Kiddie tax”) modified to apply tax rates for
estates and trusts to child's net unearned income.
Inflation adjustments now based on chained CPI-U instead of the CPI-U.
Personal casualty losses are nondeductible unless attributable to a federally
declared disaster.
Alimony no longer deductible to the payor or taxable to the recipient for
divorce agreements entered into starting in 2019.
Gambling expenses can now offset gambling winnings.
Moving expense deduction eliminated.
529 Plans can now be used for more than college education, including
elementary and high school.
85. 852018 Tax Law Changes
Individual Changes – Excess Losses & NOL
Starting in 2018 “excess business losses” of a taxpayer other than a corporation
are limited to $500,000 ($250,000 if single).
An excess business loss for the tax year is the excess of aggregate deductions of the taxpayer
attributable to the taxpayer's trades and businesses, over the sum of aggregate gross income
or gain plus the threshold amount.
Excess business losses are not allowed for the tax year but are instead carried
forward and treated as part of the taxpayer's net operating loss (NOL)
carryforward in subsequent tax years.
Net Operating Losses: For years after 2017, the NOL deduction is limited to 80%
of taxable income.
NOLs can only be carried forward (indefinitely) and can no longer be carried back.
86. 86
Sourcing of Sales – Tangible Personal
Property
Generally included in the state where the item is shipped
If that jurisdiction does not tax it, you may have to “throwback” the
sale to the state it was shipped from
87. 87
Sourcing of Sales – Services and Intangibles
Two main methods:
Cost of Performance
Based upon where the income producing costs are incurred
Market Based Sourcing
Assigns the receipts from services to the locations of the
customers or where the customers are receiving the benefit of the
service
Issues may arise if the location of the benefit cannot be readily
determined
States rules differ – contact your accountant for specifics
More and more states are moving towards market based sourcing
88. 882018 Tax Law Changes
Pass-through Change: 20% Qualified Business Deduction
What is a “qualified business?”
Any “trade or business” other than: A specified service business, or the business of being an
employee.
What is a “specified service business”?
Section 199A references Section 1202(e)(3)(A), which states: "any trade or business involving
the performance of services in the fields of health, law, engineering, architecture, accounting,
actuarial science, performing arts, consulting, athletics, financial services, brokerage services,
or any trade or business where the principal asset of such trade or business is the reputation or
skill of 1 or more of its employees.“
Section 199A Removes architects and engineers from the list of disqualified businesses and
adds the following as disqualified businesses: investing and investing management, trading, or
dealing in securities, partnership interests, or commodities.
Regulations are expected on the application to tiered partnerships.
89. 892018 Tax Law Changes
Revoking an S Election
For the first year, any distributions as a C corporation will NOT be taxed as a
dividend to the extent of the Accumulated Adjustments Account. (They will
thus be tax-free to the extent of stock basis).
For the second year after revocation, the distributions will be allocated pro-rata
between the E&P of the corporation (and thus taxed as dividends) and the AAA
of the former S corporation (and thus be tax-free to the extent of stock basis).
In addition, any Section 481 adjustment resulting from the revocation (for
example, a required switch from the cash method to the accrual method) will
be taken in over 6 years rather than 4 years.
In order to use these rules, the same shareholders must own the former S
corporation in the same percentages two years after the revocation.
90. 902018 Tax Law Changes
Partnership Changes
Repeal of partnership technical termination rule.
A partnership no longer terminates upon sale of 50% or more of its interests
during 12 month period.
Mandatory Section 754 adjustment.
You have a “substantial build in loss” and most step down the basis of
partnership assets if either:
(1) the partnership's adjusted basis in the partnership property exceeds by
more than$250,000 the fair market value of the property, or
(2) the transferee partner would be allocated a loss of more than
$250,000 if the partnership assets were sold for cash equal to their fair market
value immediately after the transfer.
Basis reduction for partnership charitable contributions amended.
91. 912018 Tax Law Changes
Bonus Depreciation
100% expensing will apply to:
Tangible property with recovery period of 20 years or less
Computer software
Qualified improvement property
“qualified film or television production” and a “qualified live theatrical production.”
It will not be allowable on assets depreciated using the ADS method.
It will not be allowed to car dealerships deducting floor plan financing interest.
Depreciation of listed property:
For passenger autos with a weight of less than 6,000 lbs
• $10,000 for year 1
• $16,000 for year 2
• $9,600 for year 3
• $5,760 for all other years until fully depreciated
If you claim 100% expensing, you can take an additional $8,000 for year 1 on listed property.
If you purchase an SUV (weight > 6,000 lbs) the luxury auto rules don’t apply. You can deduct
the FULL COST in year 1 under the bonus depreciation rules.
92. 922018 Tax Law Changes
Business Interest Limitation
Adjusted taxable income is taxable income BEFORE:
Any income/deduction/gain/loss not properly allocable to a trade or
business,
Any business interest expense or income
Any net operating loss deduction
Any depreciation, amortization, or depletion deductions.
Section 199A deduction
93. 932018 Tax Law Changes
New Paid Family and Medical Leave Tax Credit – §45S
An eligible employer is allowed the credit equal to the applicable percentage of
the wages paid to qualifying employees during any period in which those
employees are on family and medical leave
Credit is between 12.5% and 25%, as long as the amount paid to employees on leave is at least
50% of their normal wages and the leave payments are made in employer tax years beginning
in 2018 and 2019.
The amount of family and medical leave taken into account for any employee for any tax year
can't exceed 12 weeks.
Eligible employer: any employer who has in place a written policy allowing (1) qualifying full -
time employees at least two weeks of paid family and medical leave a year, and (2) less than
full-time employees a pro-rated amount of leave.
Qualifying employees: any employee who 1) has been employed by that employer for 1 year or
more, and 2) was paid less than $72,000 in 2018.
Paid leave cannot be vacation leave, personal leave, or medical or sick leave, as defined in
FMLA section 102(d)(2).
A taxpayer can't take both a credit and a deduction for amounts for which the
paid family and medical leave credit is claimed.
94. 942018 Tax Law Changes
Compensation Changes
Section 83(i): In limited circumstances, an employee who exercises a
nonqualified stock option or is granted restricted stock to settle a RSU can elect
to defer the recognition of income until the EARLIER OF:
The date the stock becomes transferrable
The date the employee ceases to be an employee
The date the corporation goes public
Five years from vesting, or
The date the employee revokes the election.
The amount of income is determined on the earlier of:
The date the stock is transferable, or
No longer subject to a substantial risk of forfeiture
No changes to Payroll taxes - Still be due on the earlier of vesting/transferability.
95. 952018 Tax Law Changes
Compensation Changes (83(i))
Qualified employee: one who isn’t:
A 1% owner
The current or former CEO
Related to one of the above
One of the four highest compensated employees
Eligible corporation:
Stock is not publicly traded
The corporation has a written plan under which at least 80% of employees are granted options
or RSUs under the same terms
96. 962018 Tax Law Changes
New Partnership Audit Rules
Or may prefer to pay tax at entity level:
Total tax due for reviewed year may be less than under
§6226
No 1411 tax (Net investment income tax)
Interest rate lower by 2%
Section 6226(c)(2)(C) imposes a 5 percent increase above the federal
short‐term rate for an imputed underpayment that is pushed out, while an
imputed underpayment that is paid at the partnership level is subject to a 3
percent increase.
Penalties may be less (may be no “substantial understatement” at
partnership level whereas may be a “substantial understatement” at
partner level.
Notas do Editor
BASIC HOUSEKEEPING -
Separate personal from professional
Open a business bank account
Open a separate credit card for business
Apply for an EIN #
Strongly consider engaging an attorney - many very start-up friendly
Build your base of Business Advisors
STORY OF
John Smith, CEO of ABC Software, a start-up software business in Cambridge. John’s company has been backed by an angel round, located in Kendall Square, has 5 employees and is starting to sign on customers. He has VENDOR bills to pay, EMPLOYEES TO BE PAID (payroll to run), and POSSIBLY reporting requirements for his board.
AND VERY IMPORTANTLY HE IS READY TO INVOICE THESE CUSTOMERS
JOHN IS LIKELY AN EXCELLENT DEVELOPER/ INNOVATOR / DEAL MAKER – Unlikely THAT JOHN”s CORE COMPETENCY IS THE BOOKKEEPING AND ACCOUTNING FOR HIS COMPANY OR THAT IT IS A GOOD USE of HIS TIME
The issue is, while John has a business plan for his company, he does not have a plan to do the business of his business! He has found himself overwhelmed and not sure where to start.
THERE ARE THREE VERY IMPORTANT CONCEPTS FOR JOHN TO EMBRACE AS HE BEGINS THE BUSINESS OF RUNNING A BUSINESS BACK_OFFICE - CONSISTENCY / CONTROLS / CASH
What John’s Company needs is an outline what his needs are, and then assistance to design and implement systems to manage these needs on an on-going basis. I am now going to talk about how John will do that in the context of the 3 C’s – which stand for Consistency, Controls, and Cash
The 1st is the concept of consistency, or “Consistent Company Accounting” basically framing the idea that whatever the systems are that John sets up for his company, they need to be consistently followed and managed.
Prior to being able to follow systems, the systems of course need to be established.
John needs to first start with the what. What does he need to accomplish. He needs to have his bills paid, he needs to track his employees expenses, he needs to get the employees paid, he needs to provide his investors with monthly financial statements.
Next, he needs to define who is going to do this work. Will he do it himself? Hire an in-house bookkeeper? Perhaps he will outsource the function. There are pros and cons to be weighed and measured, and we will discuss those.
John also needs to determine at what frequency and what deadlines these tasks need to be completed, and also needs to define a system for those tasks that are not easy to identify in advance. If a notice from the MA Department of Revenue comes in the mail, who is going to handle that follow-up?
The “Why” is common sense, but in my experience working with start-ups, many do not prioritize “Consistent Company Accounting” when they open their does for business. The Why is because it is critical to every company’s success for some of the following reasons:
Clean books and records for both tax purposes, as well as to assist with the due diligence process if raising capital is a concern
To ensure that vendors, employees, and customers are managed on a professional and timely basis, and
To ensure that the management team has the pulse on the numbers to know how they are performing, and to help them to make informed business decisions
This slide contains a listing of the major buckets that accounting tasks fall into. John needs to review each bucket and determine for ABC Software specifically what items pertain to him.
JOHN IS VERY BUSY WITH PRODUCT PROOF OF CONCEPT and CLOSING THAT FIRST CUSTOMER PO - BUT KNOWS SOME BUSINESS FUNDAMENTALS NEED TOP BE PUT IN PLACE - TODAY THERE ARE SCALAEABLE SOFTWARE SOLUTIONS FOR MOST BUSINESS SECTORS. IN ADDITION THE COMPANY SHOULD START WITH GOOD BUSINESS PROCESSES FROM THE GET GO
Once John knows the what, he next has to determine how these tasks are going to be completed. He needs to decide on software and other tools to use in managing these tasks, and once those are known, needs to then define the business process that will accompany the tools.
DELETE “XERO”
There are several options available to assist John with his “Consistent Accounting”:
Accounting Software. I am sure most of you are familiar with QuickBooks, which is a fully web-based product designed for small businesses.
Payroll Services – ESSENTIAL TO HAVE A REPUTABLE PAYROLL PROCESSOR TO ENSURE COMPLIANCE AND PROPER REMITANCE OF TAXES
Web-based productivity tools such as Bill.com and Expensify
Again, once the tools and software are selected, John needs to map out the business processes using these tools to get his accounting tasks completed consistently
MAKE GRAPHIC MATCH ICONOGRAPHY
What John needs to also identify is who is going to responsible for developing these business processes and consistently managing them.
This is a traditional but somewhat outdated accounting department organization structure. At the top we have a CFO, and an outside CPA firm. Reporting to the Controller is a staff accountant, an HR/payroll person, and bookkeeper
Company ends up building a department that is not in their core competencies.
This next org chart is more representative of what you would see in a growing organization today:
First step. Identify and hire a CPA Firm CPA FIRM MAY INIITALLY BEING INVOLVED IN TAXES - AUDIT OR REVIEW LATER -INITIAL ELECTIONS VERY IMPORTANT, ADVICE ON TAX PLANNING
In terms of the internal accounting, The same work that was getting done in the prior slide with 5 individuals is here done by 3.
In many start-ups, there is less than a full-time equiv. of work, but the same aspects need to get covered.
It is critical to get the right people in each role.
SIMPLIFY TOO MUCH ON SLIDE
Now that John knows the what and who, his new accounting departments needs to determine a schedule for when things are going to get done:
First, outline and schedule all things that are recurring, for instance …
Next, as I mentioned earlier, have a system for those special tasks that pop up …
Lastly, I believe it to be extremely beneficial for the accounting team to meet with the CEO once a month to check in, and most importantly, review the numbers
By having all of your needs clearly defined, as well as a team in place to meet these needs with a set of tools and business processes and tools to support them, you are now able to meet the goals of a Consistent Company Accounting
EILEEN TO EMAIL NEW CONTENT FOR THIS SLIDE
The next area I want to touch on is controls. As part of developing your accounting processes, you should give focus to defining adequate APPROPRIATE controls for your business to ensure integrity and accuracy in the business’ accounting and in the numbers.
It makes a lot of sense to involve your bookkeeper, CPA (or part-time CFO early) in the development of these controls.
- Cash Controls. WILL NEED A a process for approving cash disbursements including payroll and employee expense reimbursements.
Segregation of Duties. In a smaller organization, this may be difficult as one person may be doing 100% of the accounting. Something as simple as having the CEO or part-time CFO review the bank statement monthly is a good way to deal with this.
Month-end close and review. Prepare reconciliations and supporting documents for all balance sheet accounts and go through a thorough review of the financials. A part-time CFO or outsourced controller may have this as part of their process.
Make sure that all of your business processes are documented and followed and review these regularly.
It makes a lot of sense to keep all of your documentation electronically using a secure server or service like DropBox or SmartVault.
Lastly, you may be required by your bank or investors to get an annual review or audit done by a CPA firm. This will be of benefit to the company as the CPA firm will review your controls, processes, and numbers to ensure accuracy.
TOO MANY WORDS ON SLIDE
Lastly, but of equal if not of more importance, is to keep your eye on your cash. As a new business with a lot going on, the best thing to do is to simplify the cash activity as much as possible, for instance:
TOO MANY #S and DETAIL ON SLIDE - will simplify and discuss concept
As part of the month-end close process, you should review a Statement of Cash Flows report to understand what happened with your cash balance for the prior month.
Many business owners try to manage their business only from the Profit & Loss Statement which shows revenues and expenses for the period, but the change in actual cash balance might be very different from what appears on the P&L
AGAIN WILL SIMPLIFY
Another great way to manage cash flow is to regularly forecast cash.
Depending on how tightly you need to manage cash, you should look at a forecast like this weekly or at the very least monthly.
Startup businesses that are spending more money than they’re making usually maintain an 13 week cash forecast to cover about three months at a time
We come back to Jon Smith of ABC Software company, who has now established a set of tools and systems to help him meet the “Why” and also allows him to properly control the finances of his business and to also keep his eye on his company’s cash.
We come back to John Smith of ABC Software company, who has now established a set of tools and systems to help him meet the “Why” and also allows him to properly control the finances of his business and to also keep his eye on his company’s cash