Taxation schemes for LLC entities

LLC's are a popular topic among startup companies. Unfortunately choosing to setup an LLC tells us nothing about your tax situation. LLC's are very flexible for tax purposes. This video outlines the various taxation schemes available to LLC's.

Representing Clients With Tax Delinquencies and Deficiencies

We don't specialize in tax disputes or deficiencies but we do receive inquiries. This type of work is very time intensive, and requires a lot of work not only to get clients caught up, but to also make sure they don't commit the same mistakes again. This article from the Journal of Accountancy does a great job of outlining what this side of the business looks like from a CPA's perspective. For anyone with big tax problems I think it should be required reading.

http://www.journalofaccountancy.com/Issues/2009/Apr/20081290.htm

The importance of defining your customer

I had an experience today that drove home the importance of having a clearly defined customer. Before I share the story I'll give you the three reasons why I think this is one of the most important things a business can do, especially a startup business.

1. Having a clearly defined customer helps you understand what products and services you should be offering.


2. Having a clearly defined customer allows you to be profitable when pricing your goods or services.


3. Having a clearly defined customer allows you to feel that you're making the right decision when you turn down the wrong kind of sales.

So here's the story. I had been referred to a prospective client by a colleague whom I've known for only a short time but whom I respect a great deal. I sent this prospect an engagement letter with our fees for some startup year tax work. The prospect called me today questioning the fees and tried to get me to lower my price. During the conversation I learned a few things about the way this person views the services they would be paying for and as a result I was not inclined to lower my price. The prospect got off the phone with me and a short time later I received a call from my colleague asking why the fees were so high. We discussed the matter and I told him our position on minimum fees and my reluctance to start a new relationship with an engagement that was not profitable for our firm. The whole thing was very civil and I have an even greater respect for this person. However, I am fairly certain we will not get the work.

Now, we do have a very specific definition of our ideal client. It is a business owner in need of something more than a tax return and a financial statement. For that reason we have setup minimum fees that discourage price shoppers and those looking for a commodity tax prep service.

So here's how having our very specific definition helped me today.

1. The customers we are looking for are interested in strategic and tactical business advice, not commodity tax prep. For this reason we don't try to compete with low value tax prep services such as payroll. We also take time to setup a fairly thorough client file that assists use with quarterly and annual tax planning.


2. When we have a client who asks that we perform low value services we make sure that we charge a premium to offset the opportunity cost of not performing higher value work. We also build the extensive file setup and tax planning groundwork into our minimum fees.


3. As tough as it is to see revenue walk out the door we feel good about it because we also know that the PERSON walking out the door is not our ideal client. By not taking a less than ideal client we have the time and capacity to go find that person who is a better fit for our firm and for whom we are a better fit in their business.

Defining the ideal customer is a key exercise in setting up or redefining your business. Make sure you go to the time and trouble to decide not only who you want to do business with but who you DON'T want to do business with. It makes all the difference in the long run.

Have computers contributed to a bloated tax code?

Over the last week we have been working on a project that requires us to prepare several very old tax returns without the aid of tax prep software. The beauty of the US tax system is that everything you need to prepare a return is freely available from the IRS web site (historical forms, instructions, tax publications, even the tax code itself). In reality, it is difficult for me to imagine a layman preparing anything but the simplest tax return manually. This just goes to show you that information is NOT power.

I'm convinced that part of the mess we're stuck with that is the US tax code is a bi-product of the widespread availability of computing power. For something like $25 anyone can walk into a retail store and purchase TurboTax. This is a great program! For $25 you get the ability to perform in an hour what could take a trained professional 4 or 5 hours to do manually. My own opinion is that IRS should purchase a copy of TurboTax for every taxpayer and send it to them in a gift wrapped box. Without something like TurboTax IRS has no hope of collecting the correct amount of tax. The current tax system is so full of exceptions, alternative calculations, recapture provisions and phaseouts that it is impossible to expect most taxpayers to get it right. Remember, the average US adult reads at an 8th grade level. If we all had to prepare our returns manually one of two things would happen a)the Treasury would go bankrupt because we would get it wrong and IRS has no hope of catching so many errors or b)the US populace would riot at the prospect of paying grossly inflated taxes because they couldn't figure out how to claim all the deductions and credits they're entitled to.

We focus mainly on businesses rather than individuals so this debate is somewhat academic to my standard of living. I do think individual tax advisers are important and worthwhile so long as they add value in the form of planning and education. It's just unfortunate that low cost tax software has enabled legislators to cram more and more complexity into a tax system that defies comprehension more times than not.

New Tax Laws for Small Business

Last week the President signed the Small Business and Work Opportunity Tax Act. Part of a package that provides money for troops and an increase in the minimum wage this law contains some provisions of interest to small business owners.

• Rise in the federal minimum wage to $7.25 per hour (up from 5.15).


• An increase in the 179 deduction for expensing business equipment purchases from $112,000 to $125,000. Additionally, businesses may purchase up to $500,000 of equipment and still qualify for the deduction (up from $450k).


• Married couples operating a jointly owned business previously had to file on Form 1065 as a partnership. The new law allows them to file as sole proprietors.


• The kiddie tax was expanded to include anyone under 19. They just can't leave this one alone. Last year it was raised from 14 to 18. Now, another increase. What's worse is that the new law allows the kiddie tax to be imposed on full time students until they reach age 24. This means that the child's unearned income (interest, dividends, etc) must be taxed at the parent's rate.