Bell and Company Employees make a Trip to Haiti

June 1, 2010

Kelly Phillips and Deanna Lovelady went on a trip to Haiti. We headed with 27 bags full of school supplies bound for a school located in a remote village in Seguin. Where we handed out 400 school boxes that contained a ruler, pencils, sharpeners, scizzors, glue stick, crayons, a coloring book and various other items that we collected and stuck in the boxes. We also have the pleasure of working with the Seguin Cloud Forrest free medical clinic in which Dr. Clayton Bell is managing for a year. This was a trip of a lifetime and to see the looks on the kids faces as they received their school supplies is something we will never forget. If you would like more information on our trip or the chairty in which Clayton has formed go to Www.wherethestarsstillshine.org.

Or feel free to e-mail us at deanna.lovelady@bellandcompany.net. We would love to tell you more about our trip and adventures in Haiti.

Employer Paid Insurance Policy

Breaking News on employer paid life insurance policy.

The IRS requires that information on any employer paid insurance policy be disclosed with the filing of the corporate or partnership returns. If you have these type policies that you pay thru the corporation, and the policies were issued after August 17, 2006, please provide information to us to assist in preparing proper form 8925 to attach to tax returns. If you have any questions on this new rule please contact Richard Bell best way to contact him is through e-mail at richard.bell@bellandcompany.net.

New Tax on "S Corps" May Become Law in the Fall

S Corp dividends will probably be taxed for 2011 and beyond for self employment tax purposes, under House and Senate Bills, currently in Congress, for personal service type S – firms. A personal service type firm would be a CPA , Attorney, Engineer or other service provider type entity.

Currently S – Corp dividends paid to professional service providers are not subject to self employment tax rates. Self-employment tax rates are currently 15.3 % on the first $106,800 of earnings, and 2.9% on the excess. The IRS has contended that this is a tax loop hole for non payment of taxes, since more dividends are paid than W-2 wages, and professional service providers provide only earnings from services and not capital.
Interesting, when you have to invest money for facilities, and computer systems, oh well!

A question remains whether

W-2’s will be issued to owners of the S – Corps, or will quarterly taxes estimates become the preferred method of paying in withholding and self employed taxes.

Bell and Company Wins 2010 Spotlight Award

We are so proud to announce we won form the Governor's Work-life Balance Award the Spotlight Award. The Spotlight Award recognizes unique programs that address the needs of employees and their families.

We were awarded the award for our motto with emphasizes coming to work with a "healthy mind, body and spirit" we have incorporated bicycle riding into our everyday routine. Providing bikes to employees that want to ride. We are so honored to have received this award from the Governor.

Deductibility of Covenants Paid Not to Compete

In a recent ruling, Recovery Group, Inc., v. Commissioner, (TC Memo 2010-76), the tax court answers a common question about the sale of a partnership or corporation interest that involves a covenant not to compete. A common scenario for transferring an owner’s interest when the owner leaves a company is that the remaining owners purchase that interest. A purchase price allocation is made between the value of the partnership or stock interest, goodwill, and a covenant not to compete.

The values assigned to each component are more important than you might think. The value assigned to purchase the partnership interest is usually stepped up, and the assets within the partnership receive new values. In order to properly accomplish this, tax elections must be filed. This usually leads to tax deductible assets for the remaining partners in the form of inventory or fixed assets. If a stock interest is purchased, then the value is not currently deductible, similar to buying stock shares in Walmart, until the stock interest is later sold. If goodwill is purchased, the goodwill asset is amortized over 15 years.

This leaves the question about value assigned to the non-compete agreement, and when and how much is deductible. In the case examined by the tax court, $400,000 of the purchase price was assigned to the covenant not to compete and was deducted over the term of the agreement, the following twelve months. The purchase terms of the departing owner’s interest consisted of a down payment of $200,000 and a note for $600,000 over three years. The tax court disagreed with the twelve month deduction, and ruled that the non-compete was akin to goodwill, i.e. an intangible asset, and should be amortized over 15 years, the amortization life of that asset group.

In reviewing this case, it should be noted that the term of the non compete , one year, and the payment period of the non compete , three years, did not govern the deductibility term. In reviewing the tax side of a proposed purchase transaction, covenants not to compete will be treated like goodwill for deductibility purposes.
If you have questions or comments, please let Pancho or Kelly know call them at 501.753.9700.

Presidents Tax Return

On 4/15/10 the President released their 2009 tax return. I find it interesting the amounts on this return which reported and AGI of $5.5 million and tax of $1.8 million. President Obama earned $5.6 million in book royalties and made charitable contributions of $329,000 to 40 different charities. The President's return can be downloaded at www.whitehouse.gov/blog/2010/04/15/president-obama-and-vice-president-biden-s-tax-returns.

S Corporations: A Target of Missed Tax Revenue for the IRS?

S corporations are the fasted growing legal entity choice; there are approximately 4 million nationwide. With that, they have attracted the attention of Congress and the IRS to ensure reporting practices meet applicable standards. The IRS conducted audits on 2003 and 2004 S corporation tax returns as part of a “National Research Program.” The result? An estimated 68% of S corporations misreported their net income understating their combined net profits by $85 billion.

Background - Why are S corporations attractive?
• S corporations do not pay corporate income tax. Instead, the earnings or losses are passed through to its shareholder(s), and the taxes are paid at the individual level.
• Opposed to other “pass-through” entities, such as partnerships, S corporation earnings are not subject to payroll taxes (self-employment tax reported on the individual income tax return). “Reasonable compensation” is required to be paid S corporation owners in lieu of payroll taxes on passed through earnings.

Through the Eyes of the IRS - Missed Tax Revenue
If S corporation net profits are understated as reported in the IRS audit results above, those affected shareholders’ individual income taxes are understated as well. Furthermore, if the reasonable compensation requirement is ignored by setting an unreasonably low salary or even no salary at all, the payroll taxes on that amount are missed. As a result of the same IRS audits discussed above, S corporation owners were underpaid an estimated $24 billion in wages in accordance with the reasonable compensation requirement.

What is Congress going to do about it?
Although nothing has been passed to date, there is much discussion of raising payroll taxes to increase tax revenue. A Medicare tax rate increase and raising the Social Security tax on earnings above $250,000 are just a few ideas being kicked around. If payroll taxes are increased, you can bet the effort to enforce S corporations to pay reasonable compensation will likely increase as well.

Already paying a reasonable salary? Well, you still might not be safe. Other ideas that have made the paper: subjecting S corporation owners who perform services (i.e. doctors, accountants, attorney, etc) to Social Security and Medicare taxes on all of their earnings, and imposing payroll taxes on all earnings of any S corporation owner who owns more than 50% of the corporation.

In summary, there is no reason to shy away from forming or maintaining an S corporation. Rather, S corporation owners should make sure they are in compliance with the taxation rules, consult their tax advisors for guidance, and be prepared for increased IRS audits.

Stay tuned for the latest developments!