Remember how it is all started?

The “Boston Tea Party” – No Taxation Without Representation. The Founders of our country fought against a tax on tea in the colonies imposed by British Crown. What started as tax issue for American Colonists ended as the Revolutionary war and the creation of Greatest Democracy the World ever known.

In The Declaration of Independence our Founding Fathers stated:

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. — That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed, — That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness. Prudence, indeed, will dictate that Governments long established should not be changed for light and transient causes; and accordingly all experience hath shewn, that mankind are more disposed to suffer, while evils are sufferable, than to right themselves by abolishing the forms to which they are accustomed. But when a long train of abuses and usurpations, pursuing invariably the same Object evinces a design to reduce them under absolute Despotism, it is their right, it is their duty, to throw off such Government, and to provide new Guards for their future security.

Today we enjoying the best standards of living in the World, and this come at a cost that every citizen has to contribute through US Tax system. Every US Resident has to pay tax on his/hers worldwide income. American tax system is based on obligation of all of us to voluntarily report and pay our fair share of taxes. Every US Citizen has a right to fulfill this obligation by self-filing or by hiring tax professionals.

At NYCTaxMaster our mission is to comply with all US, State and City tax laws and regulations and help our clients to pay minimum allowable by law. Below is the US tax table for current year.

The following table provides some important federal tax information for 2013, compared with 2012. Some of the dollar amounts change due to inflation. Other amounts are changing due to legislation.

* The American Taxpayer Relief Act provided a retroactive increase from the $125 limit that had been in place.

** The exemption is subject to a phase-out that begins with adjusted gross incomes of $250,000 ($300,000 for married couples filing jointly). It phases out completely at $372,500 ($422,500 for married couples filing jointly.)

Year 2011 income brackets and tax rates

Should Business Owners of S Corporations, LLCs and Partnerships

Convert to C Corporation Status?

While there are a variety of non-tax factors that can and should influence a business owner’s decision to operate as an S corporation, limited liability company (LLC) or partnership, it seems increasingly clear that many advisors, not to mention a few business owners, are giving the “choice of entity” issue increased attention because of what’s happening in Washington. As a result of the new tax bill, there is an almost 5% gap between the highest personal and corporate income tax brackets. In addition, the ability to shelter income at the lower income tax brackets applicable to C Corporations may be attractive to business owners who now find themselves in the top 39.6% bracket. Whether this factor alone will be sufficient to cause business owners to change how they do business remains to be seen, but this is a question that is getting increased attention and is worthy of consideration.

It’s a Pass-through World

Limitations with IRS databases make it difficult to obtain current statistics on the choice of entity question, but in 2009, the IRS reported that there were just over 4 million Form 1120S returns. That’s the tax return filed by S Corporations. Since the addition of Subchapter S to the Internal Revenue Code in 1958, Subchapter S status became the entity of choice for many business owners. Over the last 10 years, the number of S corporations has doubled. S corporations even have their own interest group. However, since the introduction of the limited liability company (LLC) business form, and because of the flexibility of LLCs, the number of LLCs has grown nearly ten-fold since 1995, rising from fewer than 120,000 to more than a million today. To put this in perspective, in 2009, there were approximately 1.7 million C corporations.

The debate over tax rates and the so-called “Fiscal Cliff” has set in motion an ancillary debate among advisors on a fundamental planning issue that’s likely to receive increased attention in 2013 and going forward – is it appropriate for owners of S Corporations, LLCs and partnerships to re-evaluate their passthrough status and consider converting to C Corporation status, especially if the business owners’ personal income tax rates go up in 2013 and beyond?

The Question – Is C Corporation Status “Better”?

In its simplest form, the argument in favor of converting any pass-through entity to C corporation status purely on the basis of tax bracket leverage is typically expressed as follows: if there’s an opportunity to have income taxed inside a C corporation at a lower bracket than it would otherwise have been taxed if it were passed through and taxed at a higher personal bracket, consideration should be given to making the switch to C corporation status. Inherent in this argument is the premise that paying less tax now, but somehow ‘getting’ the money inside the business distributed and out of the business, and taxed at more favorable/lower rates later on, is, in fact, “better.” A corollary could also be described as the ability to use money taxed at lower corporate rates to pay for fringe benefits for owners and key people.

The Answer – It’s Complicated

A recent Joint Committee on Taxation study titled “Selected Business Issues Related to Choice of Business Entity” attempted to create a number of algorithms that captured all of the factors that go into the “which is better” decision. The study looked at two corporations that were identical in every respect, except that one was organized as a C corporation and the other as an S corporation. The study then went on to calculate the total taxes on an investment by a hypothetical taxpayer in both entities. The math isn’t for the faint of heart, but here are some quick takeaways:

• The “which is better” question is much more complicated than it may seem at first glance, especially when the analysis is (and should be) broadened to include factors such as dividend payout ratios, the impact of capital gain and dividend rates, and well as the ability to reduce or eliminate the tax on capital gains by holding stock until death.

• It’s possible to create scenarios where either the C or the S election is “better” depending upon the specific facts presented by the client.

• Given the quantitative variations, advisors who are asked “which one is better” by business owners may be hard-pressed to develop a model that provides a clear answer.

Pre-Conversion Cost Benefit Analysis

A decision to change entities should obviously be subjected to a rigorous cost-benefit analysis before being made. Most tax advisors have a good working grasp of the various factors that go into the choice of entity decision, and most tax services provide significant resources on this issue. As such, the following is a brief review of some of the more important planning considerations.

S to C Conversion: Potential Advantages

• Availability of a lower corporate income tax rate to shield income less than $75,000

o In an environment of rising personal income tax brackets, the ability to defer compensation could be very attractive to those with high incomes

o Life insurance purchased via split dollar arrangements in pass-through entities can be

efficient for transfer tax purposes, however, it becomes even more attractive where there is

a lower corporate income tax bracket to leverage against

• No restrictions on tax year

o May be attractive for seasonal businesses that have revenue concentrated in a small

window of time each year;

• Full exclusion of health insurance premiums from taxable income

o May be attractive for certain “high income” taxpayers subject to the new 0.9% tax on earned

wages as a result of The Patient Protection and Affordable Care Act

• Ability to issue second classes of stock

o May make it less cumbersome to do discount transactions and to control the business while

securing capital

• No ownership limitations (i.e., number and identity of shareholders)

o Makes it easier to raise capital, go public, have parent-sub relationships and file

consolidated returns

• Potential for 50% capital gains exclusion for sales of stock in “qualified small business” stock, as well as IRC Section 1045 rollover treatment of gain from the sale of stock of a qualified small business stock

How to Convert From S to C Status

Stockholders owning more than 50 percent of the shares may elect to voluntarily terminate an S election. Although it appears that no specific form must be filed with the Service, it would be prudent to attach a statement of consent signed by shareholder(s) that own more than 50 percent of the issued and outstanding stock of the corporation. If the S corporation’s revocation is made after the first two and a half months, it is effective for the next tax year if no effective date is indicated. By way of example, to be effective on the 1st day of the corporation's taxable year (e.g., January 1), you must revoke the S election by the 15th day of the 3rd month of that tax year (i.e., March 15).

When an S election is terminated during the year, a short S corporation and a short C corporation tax year are created, and all items of income, deduction, etc. are then allocated to the stockholders on a pershare/per-day basis. It is important to remember that once S corporation status is revoked, the corporation must generally wait five years before it may re-elect S status.

Conversion of LLCs & Partnerships

Many Secretary of State Departments in individual states provide forms that make conversion of an LLC or Partnership to a C corporation a “check-the-box” exercise. In Revenue Ruling 2004-59, the Service took the position that when an LLC classified as a partnership for federal tax purposes converts into a corporation under a state law formless conversion statute, the following is deemed to occur:

the partnership contributes all its assets and liabilities to the corporation in exchange for stock in such corporation, immediately thereafter, the partnership liquidates, distributing the stock of the corporation to its partners.

Although the Ruling is silent on whether the transaction is in fact income tax-free, it presumably fits the patterns of an “assets over” conversion described in Revenue Ruling 84-111 to be income tax-free under Section 351. Revenue Ruling 84-111was issued before LLCs became popular, and well before the “checkthe-box” conversion forms became available. Despite this fact, it is important to keep in mind that the corporation's basis and holding period in the assets received will be different depending upon which of the three conversion methods are used.

Conclusion

Some business owners may be motivated to change entities based solely on saving taxes. This may come with short-term benefits, but may be to their ultimate detriment in the absence of a comprehensive analysis. If you’re a business owner contemplating a conversion from a pass-through entity to a C corporation, make sure that you consult with you own tax and legal advisors to ensure that this is the right move for your business going forward, in all aspects for the business, not just taxes.

Accountants beat banks as most trusted source of advice

by Rachael Singh

ACCOUNTANTS are the most trusted business advisor, following a breakdown in honesty between companies and their bank managers.

A fifth (21%) of businesses say they are more open and honest with their accountants than their bank managers, according to a Sage Omnibus survey of more than 1,000 of its customers.

Exactly half, 50%, of those surveyed believe their accountant provides the most valuable business advice, with 4% believing this to be the case with friends, 2% family, and bank managers sloping in at 2%, alongside solicitors 2%.

The latest statistic is indicative of the detachment of business owners with their banks.

Honesty is also the best policy, with 15% of small business owners also claiming they are more honest with their accountant than even friends, family or spouse.

About 44% turn to their accountants first for business advice, 21% to the internet and 18% to business groups or Chamber of Commerce associations.

Jim Scott (pictured), managing director of Sage Accountants Division, said: "Accountants have played a key role in the success of many businesses, but it is in challenging times that the value they bring really comes to the fore. More business owners than ever are turning to accountants for guidance as the regulatory landscape evolves, and the fact that over one in seven are more honest with their accountant than they are with their nearest and dearest underlines just how valued their counsel and advice really is.

"Businesses that view accountants more as trusted partners and less as mere service providers when accounts need to be filed are also better placed to make the most of new technologies, including cloud-based software and mobile apps that provide access to up-to-the-minute information anytime, anywhere."

10 Questions to Ask Before Hiring a Tax Accountant

BY Jane Porter|January 14, 2013|

When it's time to look for a tax accountant, you want one who not only can help save you money and avoid potential trouble with the IRS, but also can provide useful information for your business. "We tend to think of accountants as numbers people, but a good accountant does more than just figure the numbers," says Ed Lyon, co-founder of the American Institute for Certified Tax Coaches. "A good accountant will communicate what the numbers mean to us."

So shop around, interview accountants and figure out which one is the best fit for you and your business. Here are 10 key questions to help you make the decision:

1. What kinds of clients do you work with?
You want to make sure your accountant understands your type of business. A restaurant will have certain rules to follow for wages and tips, for instance, just as a construction business must deal with issues related to contract workers and a real estate development firm will have certain criteria about how income is reported. You need an accountant who has worked with other businesses like yours and knows the ins and outs of the industry.

2. Are you available year round?
Some accounting firms shut their doors after April 15 and only reopen for the following tax season. But when you're running a small business, you're going to need help all year, says Melissa Labant, director of taxation at the American Institute of CPAs in New York. "If something comes up, you don't want to wait until tax season in order to get your issue addressed."

3. What's your experience with the IRS?
Often people will tell you it's important to hire a certified public accountant rather than an EA, or enrolled agent, because CPAs have more comprehensive certification requirements. While CPAs are state-certified and have training in such areas as financial planning and bookkeeping, EAs are certified by the federal government specifically to handle taxes and are often former IRS agents with extensive experience dealing with audits. "They've been in the belly of the beast. They may have more inside knowledge of how the IRS really works," Lyon says. On the other hand, a CPA will likely have more experience with broader financial planning issues. Rather than focusing on certification, Lyon says, focus on how your accountant's experience is relevant to your business.

4. Who will be doing the work?
Accountants will often outsource work to a third party. This doesn't mean their services are bad, but you want to be sure they are forthright about who is doing the work, says Kerry Kerstetter, a Harrison, Ark., CPA. If you want to talk with someone familiar with your bookkeeping and that's a third party, it likely will be difficult to speak with him or her directly, Kerstetter says.

5. Are you a conservative or more aggressive accountant?
Some accountants want to write off everything they possibly can, while others take a more conservative approach. It's important to figure out where you fall on the spectrum and find an accountant who agrees with your philosophy, Lyon says. If accountants tell you they specialize in finding red flags that could trigger audits, they may be hesitant to maximize your deductions. For example, some accountants believe taking a home office deduction might be a red flag to the IRS, Lyon says.

6. How do you bill for your services?
Some accountants charge by the hour; others bill a flat rate. If you want to take a more hands-on approach to your bookkeeping, an hourly rate might be better because you won't have as much continuous work for an accountant, Kerstetter advises. Regardless of the billing approach, be sure to get an estimate of an accountant's likely fees. Provide a copy of your previous year's tax returns so the accountant can familiarize himself with your business before giving a quote, Labant says.

7. How do you handle working with multiple entities?
If you have more than one entity under your name, be sure the person you hire can manage them simultaneously--a skill not all accountants possess. If you own rental property as an LLC and a retail store registered as a C-corporation, for example, you'll need an accountant who can coordinate and track money moving between those entities, Kerstetter says.

8. What can you tell me about the medical expense reimbursement plan?
This question may seem technical, but not all accountants will know about this plan, which allows you to deduct your family's medical expenses on your return, Lyon says. If the accountant you're speaking with is unfamiliar with such plans, you should be wary because that might be a red flag that he or she isn't well versed in deductions that could save your business money.

9. What tax program do you use?
You shouldn't choose accountants based on the tax program they use, but it's a good detail to ask about. QuickBooks is commonly used for small businesses, which means your information would likely be easily transferred between different accountants, Kerstetter says. Hiring an accountant who uses more obscure tax software won't affect the quality of the work, but it might make it tricky to switch accountants.

10. How often will we communicate about tax issues?
Every accountant will be different when it comes to frequency of communication for tax planning purposes. Ask about a prospective accountant's approach and be sure you're satisfied with the degree of communication, Labant says. "You want to feel comfortable calling them with issues relating to your taxes."