For small businesses formed as an S Corporation and with plenty of profits, reasonable compensation is a term you may want to be familiar with.  

Many small businesses have organized as an S Corporation form of entity.  In many cases, the S Corp election allows a business owner to save money on self-employment taxes, especially if they are operating as a sole proprietor.  S Corp profits, or distributions, are not subject to payroll taxes. 

If you are a business owner taking a salary and contributing substantially to the operations of the business, you may think that you should just take the distributions and forget the salary.  After all, think how much you would save in payroll taxes.  But this has already been tried and shot down by the IRS in the courts.  And this is where the term reasonable compensation comes in. 

The IRS requires that business owners that perform a substantial contribution to the business be paid a salary according to a number of factors.  This is called reasonable compensation. You can’t pay yourself below market and take a large amount in distributions.  

The IRS has issued a fact sheet that describes the guidelines that can be used to determine reasonable compensation. They include employee training, experience, duties, time spent, history of distributions, bonuses, and many other factors.  

There are also reasonable compensation ramifications for C Corporations as well.  

If reasonable compensation is an issue or concern for your business, please feel free to reach out and let us know how we can help. 

There are several business items you need to file by the end of  February (remember this is leap year, so you have until February 29 this year!)

First of all, if you have employees and pay payroll, you have to file your W2s with the Social Security Administration with the W3 Transmittal Form.  If you pay independent contractors, you have file 1099MISC with the Internal Revenue Service with the 1096 Transmittal Form.  If you pay interest to any one, you should also file 1099INT forms with the Internal Revenue Service (use a separate 1096 Transmittal for each type of form 1099.)  

If you do business in the City of Los Angeles (and probably many other cities across the country) you have to file your Los Angeles City Business Tax Form and pay your calculated business tax by February 29 (this form is normally filed online, plus you may qualify for the $100,000 gross receipt small business exclusion or the $300,000 creative artist exclusion if you file on time; otherwise you will lose this exclusion.)  

It is important to  make sure all these items are taken care of this month (the only other day to worry about this month is Valentine’s Day – so now you are covered.)

 For financial,  accounting and tax musings,

Well, the tax extenders were signed into tax law for 2014.  Everyone who wants expanded section 179 depreciation for their business is breathing a sigh of relief.  But not so fast!  It is now January, 2015 and those 2014 extenders have expired again.  If not extended by the end of the year, section 179 depreciation write off reduces back from $500,000 to $25,000.  That could be a big tax increase for many small businesses who purchase assets to grow their businesses.  Are there other tax credits and deductions that would make it profitable to purchase these expensive assets?

There are a couple other items that generate tax savings:

1. Fifty percent bonus depreciation – another acceleration of normal depreciation, it can allow you to expense half  of a purchase of a new asset (but this also expired at the end of 2014 and will have to be renewed.)

2. Research and Experimentation Credit – 20% of certain R & D costs are allowed to be taken as tax credit (but this also expired at the end of 2014 and will have to be renewed.)

However, the most important thing to remember is that tax savings are only one component in figuring overall profitability of purchasing assets for your business.  You need to look at all factors, like comparing rate of return and cash available for the asset purchases.  Having an available source of asset funding can help you get that asset in service faster.  One simple source of funds is a 6 month working capital line of credit through companies like Kabbage.  That may look expensive at 24% annualized, however (because the loan cost is fee-based and not an interest rate) you can pay it off early without penalty and save big. Also, with a short term loan you can get that asset into service or stock inventory sooner.

       For financial,  accounting and tax musings,