March 30, 2010

Health Care Reform - What Does It Mean For Small Businesses

To make sure employers play their part in ensuring more workers get health insurance coverage, the new health care law contains a combination of incentives for smaller businesses and penalties for larger businesses. Here's an overview of the main provisions that will impact businesses, as reported by Rhonda Abrams in an article in USA Today called "The good and bad in health care reform for small businesses."

Tax Credit. Small businesses with 25 or fewer employees and $50,000 or less in annual average salaries can receive a tax credit for providing health insurance for employees. For 2010 through 2013, the credit will be up to 35% of the health care premiums the company pays for its employees each tax year. The credit will go up to 50% in 2014 provided the company buys its insurance through the new small business health insurance exchanges that will begin operating in 2014.


Penalties. Starting in 2014, businesses with more than 50 employees that don't offer affordable health care options for employees would be subject to a penalty. However, according to a blog on health care reform posted by Robb Mandelbaum in the New York  Times, as bad as this may sound, it won't really affect many businesses because "Ninety-six percent of businesses in the country with more than 50 employees offer health insurance (according to the Kaiser Family Foundation). . . .And 95 percent of the 28 million small businesses in America have fewer than 50 employees."


Health Care Exchanges. Starting in 2014, Small Business Health Options Programs - or SHOP exchanges - will be established. Through these exchanges, small companies with 100 or fewer employees will be able to pool their resources so they have greater buying power. This could result in tremendous savings for these small businesses. Also acording to Robb Mandelbaum of the New York Times, supporters of health care reform legislation predict that health costs for small businesses will drop by 20 to 30% and the current inequity between what small and big businesses pay for health care will be lessened.

March 24, 2010

New Tax Benefits for Small Businesses Under the HIRE Act

There are three significant tax breaks for small businesses in the Hiring Incentives to Restore Employment (HIRE) Act signed into law this week. 

Payroll tax credit: Under the Act, businesses do not have to pay their share of Social Security taxes (6.2%) on wages paid to qualifying new hires. Qualifying new hires include anyone hired to a new position after February 2, 2010 and before January 1, 2011 who has been unemployed for at least 60 days or only working part-time.  Workers hired to fill existing positions qualify only if the worker they are replacing left voluntarily or for cause.

Business tax credit:  For qualifying new hires, small businesses can also claim an additional general business tax credit of up to $1,000 per worker on their 2011 tax returns provided the worker stays employed for at least a year.

Section 179 deductions: The HIRE Act extends the American Recovery and Reinvestment Act provisions that allow small businesses to deduct up to $250,000 of the cost of qualifying property in the year purchased (with a phase-out for expenditures over $800,000). Without this new legislation, the Section 179 deduction was scheduled to go down to approximately $133,000 in 2010. The extended higher limits apply for any qualifying property purchased during the 2010 tax year.   


March 17, 2010

Mistakes to Avoid When Filing Your Tax Return

For many small businesses, it's taxtime. When it comes to doing your tax returns, it pays to slow down and pay attention to details. It's the small things that can cause delays with the IRS--which means a longer wait for you for any refund you are owed. Here is the IRS list of the most common errors on tax filings:

  1. Incorrect or missing Social Security Numbers. When entering SSNs for anyone listed on your tax return, be sure to enter them exactly as they appear on the Social Security cards.

  2. Incorrect or misspelling of dependent's last name. When entering a dependent's last name on your tax return, ensure they are entered exactly as they appear on their Social Security card.

  3. Filing status errors. Make sure you choose the correct filing status for your situation. There are five filing statuses: Single, Married Filing Jointly, Married Filing Separately, Head of Household, and Qualifying Widow(er) With Dependent Child. See Publication 501, Exemptions, Standard Deduction, and Filing Information to determine the filing status that best fits your needs.

  4. Math errors. When preparing paper returns, review all math for accuracy. Remember, when you file electronically, the software takes care of the math for you!

  5. Computation errors. Take your time. Many taxpayers make mistakes when figuring their taxable income, withholding and estimated tax payments, Earned Income Tax Credit, Standard Deduction for age 65 or over or blind, the taxable amount of Social Security benefits, and the Child and Dependent Care Credit.

  6. Incorrect bank account numbers for Direct Deposit. If you are due a refund and requested direct deposit, be sure to review the routing and account numbers for your financial institution.

  7. Forgetting to sign and date the return. An unsigned tax return is like an unsigned check - it is invalid.

  8. Incorrect Adjusted Gross Income information. Taxpayers filing electronically must sign the return electronically using a Personal Identification Number. To verify their identity, taxpayers will be prompted to enter their AGI from their originally filed 2008 federal income tax return or their prior year PIN if they used one to file electronically last year. Taxpayers should not use an AGI amount from an amended return, Form 1040X, or a math error correction made by IRS. 

  9. Claiming the Making Work Pay Tax Credit. Taxpayers with earned income should claim the Making Work Pay Tax Credit by attaching a Schedule M, Making Work Pay and Government Retiree Credits to their 2009 Form 1040 or 1040 A. Taxpayers who file Form 1040-EZ will use the worksheet for Line 8 on the back of the 1040-EZ to figure their Making Work Pay Tax Credit. The credit is worth up to $400 for individuals and $800 for married couples filing jointly. Many people who worked during 2009 are slowing down the processing of their tax return by not properly claiming this credit.


For help in developing the best tax plan for your small business, see Tax Savvy for Small Business, by Frederick Daily (Nolo).

March 13, 2010

Corporate Tax Return Deadline March 15

Don't forget, corporations have a different tax deadline than individuals. March 15 is the deadline by which most corporations must submit their corporate tax returns -- at least for corporations whose tax period is a calendar year. For corporations that use a fiscal year -- that is, a tax period other than the calendar year -- tax returns are due on the 15th day of the 3rd month after the end of the corporation's tax year. By this date, corporations must submit IRS Form 1120 or 1120A, or for S corporations, Form 1120S, or request an automatic 6-month extension of time to file (IRS Form 7004).

To learn the ins and outs of the tax code and create a comprehensive tax strategy for your small business, see Tax Savvy for Small Business, by Frederick Daily (Nolo).

March 9, 2010

Moratorium on IRS Tax Shelter Penalties for Small Business Retirement Plans

The IRS recently extended--for the second time--a moratorium on collecting penalties for failing to report certain transactions considered tax shelters by the IRS. Caught in the IRS tax shelter snare are small business owners who paid into certain retirement accounts (namely 412(i) and 419(e) plans), even though the provision was intended to go after big corporation and wealthy individuals. As reported by Margaret Collins in a recent Business Week article, the IRS moratorium will suspend penalties on individuals who received less than $100,000 in savings from the unreported transactions and under $200,000 for other taxpayers. "Some of these businesses were assessed tax penalties as high as $300,000 per year but received a tax benefit for as little as $15,000 from the transaction," according to Senator Charles Grassley, an Iowa Republican. There is proposed legislation that would make the penalty proportional to the tax benefit received.
March 6, 2010

SBA Stimulus Funds Are Running Out

Back in October we posted about the availability of new lending for small businesses. Now it appears the stimulus money is running out (a second time), because so many small businesses have taken advantage of the new loan money. The programs at stake, the 7(a) and 504 lending programs, have been popular with banks because they increased SBA guarantees up to 90% for lenders, and they've been popular with small businesses because they decreased loan fees for borrowers. According to the Wall Street Journal's article on the dwindling SBA stimulus funds, "The 90% guarantee and reduced fees have catalyzed SBA loan activity, even as conventional loans have continued to decline. According to the SBA, average weekly loan volume has increased by nearly 90% since the stimulus measures kicked in one year ago." 
You can still sign up for the SBA loan queue and possibly get a loan if a borrower fails to qualify for their loan. Go to to find out more.
March 1, 2010

Online Social Media - The New Marketing Platform

Small businesses can no longer afford to ignore the importance of online reviews, blogs, local search sites, and other social media. Word of mouth, the Yellow Pages, and other traditional marketing tools are no longer what people rely on when making decisions about where to shop, eat, or visit. As reported in an article by Kermit Pattison in the New York Times, "84 percent of Americans say online reviews influence their purchasing decisions." Don't get left behind--or worse, find out too late that you haven't properly managed your online reputation.

What to do? First, find out what is out there already, advises Pattison in "Managing an Online Reputation." Do a Google search of your business name and see what comes up. What impression would the search make on a customer? Are you easy to find? If there's not much there, list your business on local search sites like Yelp, Citysearch, and others. Then, get active and engaged in the online community. Stay on top of the online buzz with Google alerts and do your own online browsing to see what's out there and what people are saying about you and your competitors. What do people think about your product or services? Are there changes you should make to better serve your customers? Respond to reviews to show you care and listen to what people have to say.

Figure out what sites are popular in your area and learn to use others like Twitter and Facebook. Try to develop your own following and stay up to date. Finally, never, ever post fake reviews or do anything false or misleading solely to make your business look better or to harm a competitor. You could face fines from the attorney general's office or worse, ruin your hard-earned reputation.

To learn more about using online social media in your marketing efforts, see Nolo's article Increasing Traffic to Your Website.

February 24, 2010

Banks Urged to Look Beyond Numbers When Lending to Small Businesses

The Board of Governors of the Federal Reserve System issued a press release this month urging banks to make small business loans based on a broader-based analysis of the viability of a business rather than simply a credit score. In essence, the Board of Governors is asking all banks to act more like community banks which are often more willing to lend to small businesses. Community banks often have a better understanding of the local market and the borrower as opposed to commercial lenders who simply rely on numbers and credit scores in their analysis.

The statement assures banks that "financial institutions that engage in prudent small business lending after performing a comprehensive review of a borrower's financial condition will not be subject to supervisory criticism for small business loans made on that basis. Financial institutions should understand the long-term viability of the borrower's business and focus on the strength of a borrowers' business plan to manage risk rather than using portfolio management models that rely primarily on general inputs, such as a borrower's geographic location or industry."

As reported in a Business Week article by John Tozzi, "Banks have been pulled in two directions over commercial lending. The Obama Administration and members of Congress have urged them to expand lending to small businesses, but regulators want them to reduce their risk. In this statement, the regulators say they won't penalize banks for making loans to businesses in troubled industries or locations, as long as the bank has soundly assessed the borrower's ability to repay."

February 18, 2010

Proposed Tax Credit for New Hires in 2010

In an effort to stimulate hiring and increase employment, the Obama administration has proposed a one-year tax credit for businesses that hire new employees in 2010. Under the proposal, any firm that hires a new employee in 2010 would get up to a $5,000 tax credit for each hire. The credit is capped at $500,000 per company. In addition, firms that hire new employees or increase salaries of current employees would be reimbursed for Social Security taxes related to their increased payroll. The Social Security reimbursement would not apply to wages above the $106,800 Social Security maximum to make sure the benefit is tied to -- and encourages the hiring of -- less highly paid workers.

The administration estimates 1 million small businesses will take advantage of the credit, which is expected to cost the government $33 billion. The money would come from savings from the Troubled Asset Relief Program, which officials now think will cost $200 billion less than expected.  

February 16, 2010

New Credit Card Rules Don't Help Small Businesses

New credit card rules designed to protect consumers from overreaching practices by credit card companies take effect on February 22nd. These new rules, however, apply only to consumers--they do not cover credit cards issued to small business owners. So small businesses that carry credit card debt won't benefit from the new credit card rules unless they start charging business expenses on their personal credit cards. But, as noted by Emily Maltby in "Entrepreneurs Weigh Credit-Card Options,"while this may sound tempting, it's probably not a good idea. First, the new rules are intended to protect consumers, not businesses--they may not cover a personal credit card that is used too much for business purposes. Also, one of the first things most business owners do when they get started is to separate personal and business spending and expenses for tax and other reasons. Going back on this basic good business practice is not a good idea. 

February 13, 2010

Obama Proposes New $30 Billion Fund to Promote Small Business Lending

President Obama has announced a new lending plan which would provide smaller community banks with new capital to lend to small businesses. Under the proposal, which will require Congressional approval, the government would use $30 million it receives back from Wall Street banks repaying bailout loans under the Troubled Asset Relief Program (TARP) and set up a new Small Business Lending Fund. This fund would be available to banks with assets under $10 billion--primarily smaller community banks. These banks account for 50% of all small business loans.  

"These are the small, local banks that work most closely with small business -- they're usually the ones that provide them their first loan, and they watch them grow through good times and bad," Mr. Obama said. . . "The more loans these banks provide to creditworthy small businesses, the better deal we'll give them on capital from this fund that we've set up."

President Obama has also proposed continuing other small business lending incentives such as waiving fees and increasing guarantees for loans backed by the Small Business Administration. In his State of the Union address, President Obama also said he will be proposing new tax breaks for small businesses that create new jobs or increase hours and wages on existing jobs.


February 11, 2010

The L3C LLC: Low-Profit Limited Liability Company

In our last two posts, we talked about the series LLC and the nonprofit LLC. Here's one more: the L3C, or LLLC.
L3C is a nickname for a "low-profit limited liability company." Why would anyone go into business to make little profit? Similar to a nonprofit, an L3C is organized to perform services or engage in activities that benefit the public. But a L3C is run like a regular profit-making business and is allowed to make a profit as a secondary goal. 
A small but growing number of states, including Illinois, Michigan, Utah, Vermont, and Wyoming, allow L3Cs. These states' LLC statutes set out the purposes for which an L3C company can be formed; the statutes are modeled on the IRS requirements for program-related investments (PRIs). However, the IRS has not yet ruled on whether investments in L3Cs will qualify as PRIs. The idea behind an L3C is to allow public-spirited LLCs to receive seed money from large nonprofit foundations. But because the IRS has not yet ruled on this issue, because L3Cs are not automatically qualified as tax-exempt nonprofit organizations under federal and state tax laws, and because they may not be eligible to receive foundation funds without the addition of restrictions to their articles of organization or operating agreement, they face challenges finding credibility in the real world of nonprofit-foundation funding. 
Update: I just read a February 9 article on L3C companies written by Malika Zouhali-Worrall of CNN Small Business, focusing on a farmer-owned milk processing company in Maine. An interesting example of how the L3C structure can be used.

To learn more about making informed choices when forming an LLC, see Form Your Own Limited Liability Company, by Anthony Mancuso (Nolo).

February 6, 2010

A Nonprofit LLC?

In our last post we introduced a new type of LLC, the series LLC. Here we'll talk about another interesting way to use the limited liability company, the nonprofit LLC.
Nonprofit LLCs are usually formed by larger nonprofit corporations to house some of their activities. Some larger tax-exempt nonprofit organizations like to segregate nonprofit funds or assets in a nonprofit LLC. The assets of the nonprofit LLC must be irrevocably dedicated to nonprofit purposes, and the LLC cannot pay out profits to its members. 
As another strategy, some larger nonprofits form a regular profit-making LLC to place a limited liability shield around some of the nonprofit's unrelated business activities (activites that bring in a profit and are only tangentially related to the nonprofit's mission). As long as the LLC's income and activities are insignificant, relative to the overall income and activities of the parent nonprofit, this arrangement may pass muster with the IRS. The parent nonprofit has to pay income taxes on profits it receives from its LLC subsidiary. Next, up a hybrid LLC called the L3C, which has a mix of profit and nonprofit motives. 

To learn more about making informed choices when forming an LLC, see Form Your Own Limited Liability Company, by Anthony Mancuso (Nolo).

February 1, 2010

New Types of LLCs on the Horizon

There are three new types of LLCs (limited liability companies) that have come along in the past year or so: the series LLC, the LC3, or "low-profit limited liability company," and the nonprofit LLC. Each is unique and limited in scope and purpose. 
The series LLC allows LLC members (the owners) to own interests in different series of assets and to collect ifferent revenue streams from the LLC. So far, only fourteen states currently allow for the formation of a series LLC: Delaware, Florida, Indiana, Illinois, Iowa, Minnesota, Mississippi, Nevada, North Dakota, Oklahoma, Tennessee, Utah, Virginia, and Wisconsin. 
The main characteristic and advantage of the series LLC is that it allows the LLC to set up one or more series of assets within the LLC. Each series is administered separately from the other series, which means that separate businesses and properties can be subsumed into one LLC entity, but the business and assets of each series can be managed and operated separately from the business and assets of the other businesses. For example, each series can have separate owners and managers, a separate LLC operating agreement that specifies a separate division of profits and losses associated with the series, and other separate formation and operation characteristics.
An important aspect of some states' statutes regarding series LLCs is that each business is insulated from the liabilities of the other businesses within the LLC. A series LLC can work well to insulate multiple real property parcels owned by a real property developer. It may also work for an LLC engaged in separate lines of business that have unique legal liabilities attached to each business. Generally, however, for locally owned and operated small businesses, it is unnecessarily costly and complex to form a series LLC.
We'll talk about the nonprofit LLC and the LC3, or "low-profit limited liability company, in our next posts.

To learn more about making informed choices when forming an LLC, see Form Your Own Limited Liability Company, by Anthony Mancuso (Nolo).

December 14, 2009

IRS Lowers Standard Mileage Rates for 2010

The IRS announced the 2010 standard mileage rates for the use of a car (including a van, pickup, or panel truck). Effective January 1, 2010, the standard mileage rates are:
50 cents per mile for business miles driven 
16.5 cents per mile driven for medical or moving purposes 
14 cents per mile driven in service of charitable organizations 

The 2010 rate for business miles is lower than the rate that was in effect for 2009, which was 55 cents per mile. According to the IRS, the lower rate for business use of a vehicle for 2010 reflects "generally lower transportation costs compared to a year ago," such as the cost of gasoline.
Self-employed people can choose either the standard mileage rate with the rate set annually by the IRS or they can calculate their actual costs of operating a business vehicle. There are certain restrictions on using the standard mileage rate however. You must use that method the first year you use the vehicle in your business, and you can't have claimed accelerated depreciation deductions or have taken any Section 179 deductions for the vehicle.