Jim Marshall - Independent Contractors Versus Full Time Employees

When it comes to getting work done in your business, you have the option of hiring independent contractors or traditional employees. Both types of workers can get the job done, but there are pros and cons of each that you need to be aware of.

Pros of Hiring Employees

There’s a reason why most companies make the commitment to hire traditional employees over independent contractors. Most companies need the stability of having the same employees day after day, in addition to the following three benefits.

Higher Qualifications

Employees tend to have higher qualifications and more education than independent contractors. When a person has acquired a professional degree or trained for years in a certain industry, they tend to go for jobs that will offer security, stability and substantial pay. Conversely, when a company is looking for solid experience and background, only a traditional employee will do.

More Company Loyalty

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There are three financial statements that every company needs to understand, review and produce, on an annual basis, at a minimum.  These consist of the Profit and Loss statement (P&L), Balance Sheet (BASH) and the Cash Flow statement.  The profit and loss statement, also commonly known as the income statement, shows the changes in the company’s profitability over the course of time.  The profit and loss can be reported in either the Cash or Accrual method.  The cash flow statement is similar, however it shows the company’s income  and outlays in a cash methodology only.  The balance sheet reports the company’s assets and liabilities in a specific snapshot of time.

The P & L  reports all of the income, or revenue, that the company receives through its normal course of business.  This is often known as the “top line.”  You subtract the costs associated with doing business, which can consist of Cost of Goods Sold for product related businesses, and ordinary operating expenses.  Once loss is subtracted from the “top line”  income, the end result is known as the “net income” or “bottom line” and is the profit,  or earnings of the business.  The profit and loss statement is often used to calculate metrics which include gross profit margin, product profit margin, operating profit margin, net profit margin, and operating ratios.

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Jim Marshall - Crowdfunding And Taxes

In recent years, raising money online through third-party backers, or crowdfunding, has grown in popularity.  Originally utilized mostly by musicians, filmmakers and for other creative endeavors, it has now become a more widespread method of raising money for a trip, medical expense, or startup, and is often a quicker and easier alternative than conventional fundraising.  Often the creator of a campaign puts little thought to the tax ramifications before launching and collecting the funds.  With this increase in utilization, the business of its taxation has become an increasing question.  While Congress and the IRS have not addressed crowdfunding income specifically, applying standard tax principles and common sense may help when talking through the issues surrounding taxable crowdfunding income and deciding how to report and pay taxes on it.

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Jim Marshall, Lease Accounting Standards

The new lease accounting standards will require some extra time and work for many companies as they race to satisfy the new requirements.

In these new rules, two leases (finance and operating) will be required on the balance sheets.

CFO sums it up this way:

Under the new guidance, an arrangement contains a lease only when the arrangement conveys the right to control the use of an identified asset. That’s a change from legacy guidance, under which an arrangement can contain a lease even without such a right if the customer takes substantially all of the output from the lease over the term of the arrangement.

In addition to the lack of bright lines used under legacy guidance, FASB added a new criterion that focuses on assets that have a specialized nature with no alternative use at the expiration of a lease. That’s important, as it may modify the lease’s legacy classification.

As 2018 progresses, your business will want to develop procedures for gathering and documenting the wide array of leases kept by your company. These procedures will need to be efficient, as technologically advanced as possible, and centralized in order to be sustainable and accurate.

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Jim Marshall, Tax And Financial Advisor, Scottsdale, Arizona

A key portion of the new Tax Cuts and Jobs Act (TCJA) is Section 199A and its deduction of qualified business income. Section 199A allows taxpayers other than corporations a deduction of 20 percent of qualified business income that is earned in a qualified trade or business, though this has some limitations. There are both positive and negative aspects to the changes depending on your situation.

Tax Adviser outlines the following crucial points about Section 199A:

  • The deduction is limited to the greater of

(1)   50% of the W-2 wages with respect to the trade or business or

(2)   the sum of 25% of the W-2 wages, plus 2.5% of the unadjusted basis immediately after acquisition of all qualified property (generally, tangible property subject to depreciation under Sec. 167). In addition, the deduction also may not exceed (1) taxable income for the year over (2) net capital gain plus aggregate qualified cooperative dividends.

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Tax planning will become more important than ever now that the TCJA has completely transformed the tax code landscape. There are significant implications for tax planning on every level, from individuals to businesses.

The following highlights provide a bird’s-eye-view of what tax planning considerations could be made in 2018 and beyond.

For Business Owners

Biz Journal takes note of several items that businesses should consider for tax planning. In particular, sole proprietorships and owners of pass-through businesses (partnerships, LLCs taxed as partnerships, and S corporations) enjoy a new tax deduction equal to 20 percent of qualified business income from a qualified U.S. business. (This deduction is also available to individuals, trusts, and estates and expires for taxable years beginning after Dec. 31, 2025.)

However, there are several limitations to consider that will impact whether your business can take the deduction:

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Jim Marshall, How Tax Reform Affects Business Entity

The Tax Cuts and Jobs Act (TCJA), signed by President Trump in Dec. 2017, has significant implications for how businesses will assess the choice of entity. Prior to reform, partnerships were a very common choice of entity, but with the new provisions in TCJA, the C corporation has become an appealing option once again (but with some caveats).

The assessment by the National Law Reviewprovides details on these signficant developments in choice of entity. In general it makes a helpful point: the entity choice will continue to involve a number of considerations, such as the makeup of the investor base, capitalization structure, borrowing requirements, likelihood of distributing earnings, state tax environment, compensation and benefit considerations, participation of owners in the business, presence of foreign operations, and sale or exit strategies.

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If you’ve formed certain habits related to how you handle meals, entertainment, transportation, and parking as it relates to your business and taxes, the time to change those habits has come.

As this report notes, tax reform law commonly referred to as H.R. 1 Tax Cuts and Jobs Act of 2017 has changed the deductibility of certain meals, entertainment and transportation expenses. Before 2018, a taxpayer could deduct 50 percent of business meals and entertainment and 100 percent of meals provided through an in-house cafeteria or meals provided for the convenience of the employer (i.e., also known as a de minimis fringe benefit).

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The Tax Cuts and Jobs Act (TCJA), signed into law this past December, affects more than just income taxes. It’s brought great changes to estate planning and, in doing so, bolstered the potential value of dynasty trusts.

Exemption Changes

Let’s start with the TCJA. It doesn’t repeal the estate tax, as had been discussed before its passage. The tax was retained in the final version of the law. For the estates of persons dying, and gifts made, after December 31, 2017, and before January 1, 2026, the gift and estate tax exemption and the generation-skipping transfer tax exemption amounts have been increased to an inflation-adjusted $10 million, or $20 million for married couples (expected to be $11.2 million and $22.4 million, respectively, for 2018).

Absent further congressional action, the exemptions will revert to their 2017 levels (adjusted for inflation) beginning January 1, 2026. The marginal tax rate for all three taxes remains at 40%.

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Last week, we issued the National Taxpayer Advocate’s annual report to Congress. As some of you probably noticed, we also issued the first-ever edition of the National Taxpayer Advocate “Purple Book.” In this week’s blog, I will explain why we developed the Purple Book and what it’s intended to accomplish.

Section 7803(c)(2)(B) of the Internal Revenue Code requires the National Taxpayer Advocate to issue an annual report to Congress that, among other things, proposes legislative recommendations to resolve systemic taxpayer problems. Read More

Jim Marshall

In response to a question from Lisa Foster on Part II of the blog, she asked if there was a worksheet to track the cost basis. I have found no universal worksheet that could be used in all circumstances. If you would like me to send you an example of a Cost Tracker, please email me at jim@MarshallPC.com and I will be happy to send you a Cost Tracker Worksheet which will be very helpful. Read More

Jim Marshall

(This is the 3rd and final article of this series. Click here to read Part 1 and Part 2.)

By now you are getting the idea that “cost“ may be an elusive animal. Still we have only scratched the surface. Let’s talk about other factors that might affect you in the pocketbook.

While these are not all inclusive, and if you have specific questions please contact me and I will address them privately or in general depending on the issue and your preference. Read More