S Corporation Medical Insurance Premiums

If you own more than 2% of an S Corporation then you need to be aware of the following.  

Health and accident insurance premiums paid by your corporation on your behalf must be reported as income on your annual Form W-2.  If the insurance premiums are not included in the W-2 then the IRS will not allow the corporation to deduct them.  The Shareholder, in most cases, is allowed to have an equal deduction on their individual tax returns.  At the end of the day, there is no impact other than the additional headache of getting the amounts reported correctly on the W-2.

One thing to be aware of is that amounts added to the W-2 should not be subject to any payroll taxes.

If this affects you and you would like additional information on how to report company paid health insurance premiums, or if you are a greater than two percent S corporation shareholder receiving this taxable income and would like information about what this means to you, please contact us at info@tysllp.com.

Have you filed your FAFSA? Financial Aid Filing Deadline Looming.

For those of you that have college bound kids and were thinking about financial aid or trying to get grants to help with college expenses you might want to read the following from SFGATE.com. Good luck with those applications, it sounds like they are making them easier now. College-bound students in California have just one more week to file their federal financial aid application to be considered for some important types of state and university aid for the 2010-11 school year. Many students will find it easier to fill out the online version of the Free Application for Federal Student Aid this year thanks to the addition of skip logic, which skips questions that are deemed irrelevant based on answers to previous questions. Students must fill out this application, known as the FAFSA, to be eligible for federal aid such as Pell grants, work study and guaranteed loans. Many states and schools use the same application to dole out their own financial aid. California residents who will attend a public or private college in California and want to be considered for a first-time Cal Grant must file the application by March 2. These grants go to undergraduate students from low- and some middle-income families. They cover systemwide fees at public universities (up to $4,026 at California State University and $10,302 at UC campuses). Students attending a private university can get up to $9,708 toward tuition. Some students can get an additional $1,551 for books and living expenses. Students must fall below certain income and asset ceilings that vary by family size and type of grant. A dependent student from a family of four with up to $80,200 in income and less than $62,000 in assets might get at least a partial grant. To get a Cal Grant, students also must verify by March 2 that they have a certain minimum grade point average. Many high schools are automatically verifying GPAs for all graduating seniors, but students should check. Students who attend a Cash for College workshop before March 2 and fill out an application and a survey will be entered in a drawing to win an additional scholarship worth $1,000. For details and to find a workshop near you, go to calgrants.org and click on Cash for College. Many universities also encourage or require students to fill out the form by March 2 (earlier in some cases) to be considered for institutional aid. "We always say, file by March 2 to be sure to get the maximum package," says Cheryl Resh, financial aid director at UC Berkeley. Despite federal efforts to simplify the application, it can still be challenging, even for financial aid experts such as Diana Fuentes-Michel, executive director of the California Student Aid Commission, which administers Cal Grants. "It's a little easier this year, but it's still daunting," says Fuentes-Michel, who recently helped her 17-year-old daughter fill out the form. Thanks to skip logic, many students will have to answer fewer questions this year, but some colleges worry they won't get all the information they need. For example, a student whose family has less than $50,000 in adjusted gross income and is eligible to file a 1040A or 1040EZ tax return is no longer required to disclose assets on the federal form. However, without that information, financial aid offices don't know whether the student exceeds the asset limit for a Cal Grant, says Yvonne Gutierrez-Sandoval, associate director of financial aid at Pitzer College and president of the California Association of Student Financial Aid Administrators. Fuentes-Michel says she is taking this and similar questions to the student aid commission. "I hope to get an answer to campuses in writing in the next five to six weeks," she says. David Levy, director of financial aid at Scripps College, says he's getting a lot of questions this year because the worksheet that students fill out before tackling the application was also simplified. The new worksheet, he says, doesn't prepare students for all the questions they will encounter, and as a result, it's taking some families longer to fill it out. Another question he's getting more often is how to explain special economic circumstances. To get aid for 2010-11, students use information from their family's 2009 tax return. That information might look too rosy if a parent recently lost a job, but there's no way to explain it on the form. Levy encourages these students to contact the financial aid offices at schools where they have applied and explain the situation, even before they have been admitted, so "colleges can make a more informed decision" when offering aid. "We want to accept the family in their current financial state," he says, but his office will ask for verification such as termination letters or confirmation of unemployment benefits. Net Worth runs Tuesdays, Thursdays and Sundays. E-mail Kathleen Pender at kpender@sfchronicle.com.

California SDI amounts for 2010

California announced that the State Disability Insurance (SDI) rate for 2010 will remain the same as the prior year at 1.1%. However, the the taxable wage limit and corresponding maximum amount increase as follows:

	2009	2010
Taxable wage limit	$90,669.00	$93,316.00
Maximum SDI amount	$997.36	$1,026.48

For January, please be sure to update your payroll programs to reflect the changes!

5 Tips to Prepare for Next Year’s Tax Season

Few people enjoy thinking about taxes during the summer. But those who are willing to do a little prep work throughout the year can find tax time a bit less taxing. www.mylifeROI.com recommends these 5 Tips to Prepare for Next Year’s Tax Season:

1) Pretend You’re a Fortune 500 Company. Divide your year into quarters, or if it’s easier to keep track of, seasons:

• Summer – In the summer, you should start organizing your records. As of a few months ago, you actually filed your taxes. And what a relief that was. However, taxes never stop. You should make sure your filing system is intact and ready to go with the new year’s tax records, starting back in January. Make sure that the past 6 months look good and that you are ready to go for the rest of the year.
• Fall – Begin estimating your end of year annual income and taxable income. You should have a pretty good idea of your salary, hourly wages, commissions, bonuses, etc. This obviously won’t be exact, but you should have an approximate. This will let you know if you are behind or ahead on tax payments.
• Winter – The year is practically over (or is over depending on what part of winter it is!). Start preparing to file your taxes. Get all of your documents ready to go. Start gathering the different tax forms you will need. Separate receipts you will need from ones you won’t need.
• Spring – Actually file your taxes, now. If you have kept up to date over the past 3 seasons, you should be able to file relatively quickly! But, it’s not over. Continue on to “summer” and do it again!

2) Practice Good Record Keeping

What kinds of documents should you keep extra secure?

• Birth certificates for you and your family members
• Any wills that have been drafted or published for you (and your spouse)
• Stock and/or bond certificates for large holdings
• Deeds to any real estate holdings

3) Adjust Your Withholding on Your W-4

As discussed in the linked article, you usually want to adjust your w-4 to maximize your earnings, which in tail minimizes your refund or payment. The closer you can get to $0 owed the better.

There are a few thought processes:

• A tax refund is an easy way to save. It is, in a way, a forced savings plan. You probably wouldn’t have the willpower to save the money otherwise, so getting it all in one lump sum may help you apply it towards debt or towards a goal.
• A tax refund means you threw money away. Had you received the money you would have put it in an investment vehicle that pays interest. You gave the government a tax-free loan.

In the end, do what’s right for you.

4) Keep Your Receipts

The linked article will give you a lot more depth. But the gist of the article is that you should keep all important tax records filed for up to 7 years (different times for different kinds of documents).

An overview of a few of the forms you need to keep on file:

• Paycheck stubs
• W-2 Forms/1099 Forms
• Receipts for any items you can deduct if you plan to itemize
• Insurance and medical records
• Charitable records

5) Pay Your Taxes Before You File

You are required to pay your taxes. If you don’t believe me, click on the above link and see the awesome picture of Wesley Snipes.

Adjust your withholdings accordingly and make sure you pay your tax rates all throughout the year.

7 Tips When Starting a Business

Last week, the IRS published the top seven things it wants you to know if you plan to start a new business:

• First, decide what type of business entity you are going to establish.
• Identify which taxes you must pay and how you pay them. The four general types of business taxes are income tax, self-employment tax, employment tax and excise tax.
• Obtain an Employer Identification Number (EIN).
• Implement a good recordkeeping system.
• Determine your company's tax year end.
• Determine your accounting method for calculating income and expenses. The most commonly used accounting methods are the cash method and an accrual method.
• Visit the Business section of IRS.gov for resources to assist entrepreneurs with starting and operating a new business.

The page includes links related to starting a business, operating a business, and closing a business. As unexciting as these issues seem, it's a good idea to take care of them. When it comes to taxes, an ounce of prevention is worth a pound of cure - and then some.

Shareholder Agreements - Do You Have One?

I recently read the following blog entry from Open Forum Blogs. It was a great reminder of why you need to have an up to date shareholders agreement and things that should be included in your agreement. I think this is a great summary of goals and necessities of a good shareholders agreement. If you have a business that is not a corporation the concepts still apply and can be included in partnership agreements and operating agreements.

Shareholder’s Agreement: What It Is and Why You Need to Review Your Own Nora Dunn for Wisebread June 29th, 2009 - 03:11 PM When you get into business with a partner or partners (be they a friend, family member, or simply a business acquaintance), you do so with the best of intentions. As such, in many cases, the apparent need for a Shareholder’s Agreement goes unnoticed. In fact, you may be embarrassed to bring up the idea since it seems like a complicated legal mess that screams of a business version of a “pre-nup”: something that protects your interests if the business relationship goes belly up for some reason.

But a Shareholder’s Agreement is so much more than just something to deal with the breakdown of a business relationship. Life happens while we are busy making plans, and sometimes life’s happenings can throw us curve balls that will affect not only our relationships, but the business. Disabilities, untimely deaths, marriage breakdown, and simple falling-out between partners can mean disaster if these scenarios (and others) have not been given due consideration.

Also known as a Buy-Sell Agreement, a Shareholder’s Agreement is designed to help you and your business navigate life’s tricky twists and turns. Although the reference to “shares” implies it is limited to corporate ventures, similar partnership agreements can be drawn up for other business structures.

Among other things, a Shareholder’s Agreement will contain terms that come into play when a partner:

• Wants to sell their share of the business.
• Becomes disabled.
• Dies.
• Has life changes that affect their personal estate plan.

Advantages of having a well-drafted Shareholder’s Agreement include:

• Having a road map to follow when an unexpected change happens.
• The value of the business is preserved.
• Taxes are minimized.
• Surviving (or remaining) owners are protected, as is the business.
• Elimination of miscommunications and discord between surviving family members (of a deceased or disabled partner) and the other business partners.

10 common clauses found in a Shareholder’s Agreement

1. Valuation
2. Restrictions
3. First Right of Refusal
4. Shot-Gun Clause
5. Disability
6. Death
7. Retirement
8. Marriage Breakdown
9. Funding
10. Payment

As with any legal agreement, a Shareholder’s Agreement is something that requires a lot of conversation and thought prior to walking into your lawyer’s office. This is not conversation that will likely come easily or naturally to you and your partners, and so your financial planner or accountant may be able to help you discern the issues that are of importance.

Life’s curve balls do not have to have tragic consequences. Review your current Shareholder’s Agreement for viability, and if you don’t have one – well then, you know what to do.

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Estate Tax Planning – Time is Right!

Many experts in the estate planning arena feel that there is no better time than now for estate planning. The experts are calling the current economic climate, the "estate planning triple witching hour" because of the convergence of three events which have created a terrific opportunity for individuals to make the most of their estate planning. The three events are:

1. A favorable interest rate environment
2. Depressed asset values, and
3. A potentially limited timeframe to continue getting high valuation discount

As the economy improves the benefits of the lower interest rates and assets values will diminish. Also, there is already a house bill (H.R. 36) in the works which may take away the benefit of valuation discounts if passed.

If you haven't completed your estate planning, now may be the perfect time to contact your estate tax planner to take advantage of the current environment.