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Archives for Business Advice

Tax Reform – QBID – Section 199A

If you run a business, you are probably interested in Section 199A, also sometimes called QBID (Qualified Business Income Deduction.)

Leaving the politics aside, the basic provision – with many, many interlocking conditions – is a deduction of as much as 20% of your net business income before the calculation of income tax.  Thus, if you file Schedule C, own a rental property or farm, or you receive a K-1 from a partnership or sub-S corp, you might get a little excited.

But not too excited!  The calculation is convoluted, and manages to limit the actual deduction in most cases.  It is important that the owner be actively involved in the business, a condition that has only spurred additional questions which the IRS is still trying to answer.  What is active?  What’s a business?

Then, depending on your industry, there is an income phase-out which has generated even more questions.

Finally, self-employment tax does not enjoy this deduction.

It would be easy to write about this one for pages and pages – and many people already have.  However, it is difficult to write about this one without getting into politics and/or opinions.  So let’s just take it on a case by case basis and try not to raise our collective blood pressure.

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LLC? LLP? Partnership?

Food for thought for the would-be entrepreneur (part 7 in a series)

A long, long time ago, a person who started a business was a sole proprietor, and 2 or more people who shook hands to begin a business were partners.  (And nobody was a “member.”)

A partnership happens spontaneously anytime 2 people, together, buy a house to flip – or begin any other money-making venture.  A partnership does not necessarily have “LLC” after its name, but it can.  It can also have “LLP” (limited liability partnership.)  A partnership does not even need a legal filing, though it would probably be a good idea.  That is, the group really can just shake hands and start the business.

The distinction between multi-member LLC and partnership is very small, and as far as I can tell, functionally irrelevant for tax purposes.  Most partnerships now register with their state and get the all-encompassing FEIN.  Most partnerships also formally establish themselves as LLCs.  (or LLPs.)

The real difference is fundamentally the paperwork prepared (and signed!) in advance.  Without any paperwork, that is, without any partnership agreements, a group of 2 or more people who start a venture with a profit motive are depending upon the laws of their state to work out any issues and to determine who has what responsibilities and who gets what money.

Consider this:  Kjeld and Knud shake hands on a house-flipping venture.  If Kjeld wanders away and leaves Knud to finish the job, but there is no paperwork, the state could still determine that Kjeld gets half the proceeds of the eventual sale.

Furthermore, if the money trail is non-existent, or comprised primarily of commingled receipts, Knud might not even be able to reimburse himself for all the supplies and materials he paid for from his own funds.

Bottom line:  visit a lawyer!  If you can’t afford a few hundred dollars to protect yourselves from each other, you aren’t ready to go into business.

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But what if it’s “we,” not just me? Multi-member LLC

Food for thought for the would-be entrepreneur (part 6 in a series)

So it’s not just you, but you and your buddy?  Or you and your 14 cousins?  No problem!  You can also form your business venture as an LLC.

What’s the same?  The filing process is much the same.  The banking requirements are definitely the same.  The need to keep your personal and business bank and credit card activity separate continues to be the same.  You must get a federal ID number.  My recommendation for insurance persists, too.

What’s different?  With multiple members, you are no longer treated as a disregarded entity for tax purposes.  Instead, for income tax purposes, the entity’s activities are reported on Form 1065.  (Most states also have a stand-alone form for multi-member LLC’s that file Form 1065 for federal purposes.)  Form 1065 is the federal form for partnerships.  Most multi-member LLCs are de facto partnerships, and they follow their state’s partnership tax rules.

Another big difference is that you really should visit a lawyer to draw up a partnership agreement between all of you.  You may be BFFs today, but the demands of business have a way of shoving wedges between even the closest of friends.  A partnership agreement will address each person’s responsibilities, the way money goes into the venture, the way money comes out of the venture, and what to do if things go south.  Do not get this from your uncle, the real estate attorney!  Spend the time and money to visit an experienced business attorney who will ask you plenty of hard questions.  Be prepared!

With a multi-member LLC, it is very important that you track money, especially money between the partners/members and the LLC.  This includes the money each person contributes and the money each person takes out, as well as each person’s share of annual profits/losses.

Finally, like the sole member LLC, the people in a multi-member LLC are still called “members.”

As for taxes…we’ll address that in its own article.

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Next? Sole member LLC

Food for thought for the would-be entrepreneur (part 5 in a series)

In an earlier article, we brushed up against the concept of “protection from exposure to legal liability,”  and we’ve seen that there is absolutely no such automatic protection for the sole proprietor.  It is for this very reason that so many people opt to become a sole member LLC.  (Sole member LLC = single member LLC = sole LLC = single LLC.)

LLC stands for Limited Liability Company.  It can have many owners/partners, or just one.  The name says it all:  liability has now been limited.  For a simple filing fee,* you’ve created a whole new entity with its very own federal ID number.

[ *This fee varies by state, but in NJ is still only $125. ]

For tax purposes, the LLC still files on Schedule C as a sub-form of your personal 1040.  At the federal level, you will be subject to self-employment tax in addition to regular income tax.  At the state level, you will just be subject to income tax.  And yup:  you are still a disregarded entity.  (Out of context, this is such a terrible phrase.)

And now a word of caution:  just because you paid a fee to acquire that limit to liability does not mean you don’t need insurance.  Depending on your activities, this could still be a requirement, rather than just a good idea.

And a second word of caution:  just because you paid a fee to acquire that limit to liability does not mean that you can’t inadvertently lose it!  Depending on your business practices, you could shred that protection.  Keep separate bank accounts for business and personal needs.  Don’t comingle credit card use, either.  Example:  Groceries are a personal expense.  If you buy coffee for the office, it gets its own receipt.

Every time your purchases share a receipt or bank account or credit card, you are chopping away at that nice thick liability wall that you purchased.  The smallest nick can be enough for someone to claim it isn’t really there at all.  The most likely party to make this claim is the IRS (and the second is your state.)  The most likely time for such a claim to be made is during an audit.  This means, a business audit turns into a personal audit, and vice versa.  Do you really want every stray deposit into your personal checking account to be considered business income?  This would apply to that $500 check from Aunt Tillie for your birthday, and the coin-counting deposit of all those coins you saved up for the last 10 years.

Best practice is to immediately set up separate banking.  Today, many banks will allow a sole LLC bank account to show up on your personal online banking page.  This allows you to easily transfer money between accounts, and provides an excellent paper trail.

Worst practice is to write a check a $1000 check from one of the accounts, and only deposit $900 of it in the other (taking the extra $100 in cash.)  Don’t do this!  (Oh, the troubles I’ve seen from this…)

Take steps to keep your credit and debit cards and purchases separate, even if you have to paste a big shiny star on one of them to make it obvious.  If you do make a mistake and spend $88.88 on the wrong card, immediately reimburse the other account for the exact amount, preferably by check, and save that receipt.  Maybe having to do so much extra work will remind you to be more careful the next time.

On a personal level, my only misgiving about this entity is that the technical, legal term for the owner/founder is “member.”

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What’s the simplest solution? Sole Proprietor

Food for thought for the would-be entrepreneur (part 4 in a series)

Simply stated, a sole proprietor is a person who is “doing something” with the intent of making money.  All it takes to be a sole proprietor is for somebody to pay you for your efforts.

This means most babysitters are sole proprietors.  Other examples include a granny who takes in ironing, a housewife selling cosmetics from a catalog, a 12 year-old with a snow shovel (or leaf rake) going door-to-door, the youngster with a lemonade stand, and anyone selling on Ebay (or the equivalent.)  Granny might be trying to earn enough to keep the lights on while junior just wants to buy comic books, but they each have what the IRS calls “a profit motive” – that is, they each want “to make money.”

But wait!  Before our system got so complicated and people worried so much about liability, pretty much every business that wasn’t a giant corporation was a sole proprietorship.  Doctors, lawyers, accountants, barbers, farmers, shop keepers… And they still can be, today.

Some jurisdictions require that sole proprietors register, which could come with fees.  This is generally accomplished at the local or county level rather than the state level.  There could also be zoning restrictions if you work out of your home.

Being a sole proprietor means you are the one-and-only owner and boss.  You are also the one-and-only responsible party and all profits are yours.  Think of it as having yet another pocket built into your pants.

All problems are yours, too!  As a sole proprietor, the business is considered an extension of your personal person.  Suing the business is the same as suing you personally:  either way, both personal assets and business assets are at risk.  A recommendation: get insurance!

You will file annual taxes on Schedule C, which is a sub-form of the IRS individual 1040.  At the federal level, you will be subject to self-employment tax in addition to regular income tax.  At the state level, you will just be subject to income tax.  The IRS has a term for this:  Disregarded Entity.  This sounds terrible, but it only means that for tax purposes, the business is not a separate entity with its own stand-alone tax form.

Yes, you can have employees.  To have employees, you would need a Federal Employer Identification Number (FEIN.)  You would also need to register at the state level in order to remit your employment taxes to the state.

Yes, you can sell products/services that are subject to sales tax.  You will need to register at the state level. Some states allow you to use your SSN, but others require you to obtain an FEIN.  (The FEIN is not used strictly for employment taxes.)  Be careful!  Some states actually make you pay for a license to collect sales tax.  I think this is very weird, but it probably allows the state to fine you more if you don’t get that precious license in advance.

Yes, there could be other state/local taxes, depending on your industry and your geography, and the same registration procedures would be necessary.

This is the easiest form of business to start, but as you can see, you definitely need to call your local and county governments to find out non-state-level rules.

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Food for thought for the would-be entrepreneur (part 3 in a series)

I can feel you getting impatient!  All you really want to know is, How do you do it?

To form any business entity, you have choices.  You can meet with an attorney, or you can do it with one of those online companies, or you can call a number from a radio ad, or you can do it online, all by yourself.  Let’s look at these for a minute.


I know all you do-it-yourselfers like the idea of skipping straight to the federal and/or state websites where the only cost is the state filing fee, but, beware!  You sure aren’t getting any expert advice at all if you choose this method.  Too many times, I’ve seen the person actually only do half the filing.  NJ for instance, is a 2-part process, and the IRS is completely separate.  Don’t rush into this!

Radio/Online Solution

If you follow the advice of the radio/online ad, it is highly likely you will get no advice.  None.  Not legal advice, not tax advice, nothing.  Think about it:  their business model is just luring you in to spend money on a standard product which may or may not be suitable for your needs.  Additionally, NJ, like other states, has peculiarities which are not taken into consideration by the easy ad options.  From what I’ve seen, pretty much everyone who used this method got a shiny binder full of meaningless papers.  It may be cheaper than the lawyer, but it’s hardly better than DIY.


It is hoped that an attorney will give you solid, dependable, legal advice, and basically explain all the different choices, and the ramifications of each, as it pertains to the state where you live and work.

Unfortunately, you have to make sure you have an appropriate attorney!  A wills-and-estates attorney isn’t the best choice for forming your business.  Neither is a personal injury attorney.  Or a divorce attorney.  Or a real estate attorney.  And maybe not even your well-meaning brother-in-law.

You need to find someone who specializes in business matters or you won’t get very good advice.  You are going to pay more to the attorney than to anyone else, so you should make sure you get one that is worthy.  Then, ask questions!  You’re paying for it:  get your money’s worth!


Sadly, I’ve seen all of these methods fail.  DIY folks can end up being registered for the wrong state tax forms.  The online/radio solution ignores a state basic, or provides a feature that is useless in that state.  Sure, Mr. DIY might not complete all the steps…but I’ve seen the radio/online solution and the attorney fail in this same way.  One fellow paid $800 to an attorney to become a sole member LLC…but he did not even get a federal ID number.  Some attorneys just log into the online solution and read the screens to you.  Other attorneys make a big deal out of doing all the paperwork longhand, mailing it in, then making you come back when it’s all been completed; I think this is just a ruse to let you think it is more complicated than it really is.  A really crazy one was a fellow whose trusted banker insisted he could do it for him for free:  he was trying to establish a bagel deli, but he ended up registered as a farm with seasonal labor.

In reality, for most small entities, the entire process can be done online in about an hour…if you know what you are doing.

Please be careful.  Please do your due diligence!

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Food for thought for the would-be entrepreneur (part 2 in a series)

Why do entrepreneurs want to get incorporated in the first place?

Many entrepreneurs think incorporation is the first step to a successful business.  After all, it worked for (insert name of any giant corporation,) didn’t it?

More often, people want to incorporate (or become LLC’s) because they have the idea that incorporating provides some amount of protection against personal liability.

They heard about it on the radio, or maybe they’ve pieced together some overheard conversations and movie dialogue.  Well, hold your horses!  There are various ways to go into business in these United States, and incorporation is only one of them.  Each choice carries different levels of responsibility … and different types of taxation.  (We’ll get to that.)

First, the best way to keep yourself out of the courtroom is to keep your business practices on the up and up.  Even if you are properly incorporated (or properly any other type of business,) improper business practices can nonetheless open you up to the terrifying prospect of personal liability.  Sorry to be the one to tell you this, but you have to follow the rules.  (More on this later.)

Second, if you are seriously concerned about protection from lawsuits, then it’s a good idea to be properly insured.  Regardless of your form of business or your industry, in today’s litigious society, if someone wants to sue you, they will find a way.  (Yeah, there I go again with the doom and gloom.)

I can’t stress the need for plenty of appropriate insurance.  Some forms of insurance are required by industry, or by activity.  For instance, if you have a professional license, you need professional liability insurance.  If you drive a vehicle, you need an auto policy.  If you have employees, here in NJ, you need a worker’s compensation policy.  So before you decide to incorporate, go talk to an insurance agent to find out what you might need.  It could make a difference in what you decide.

In the next few articles, I’ll address the how-to, and then discuss the options ahead of you – incorporation, partnership, sub S corporation, LLC, and of course, sole proprietorship.

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Ready to quit the day job?

Food for thought for the would-be entrepreneur (part 1 in a series)

The good news:  about 80% of new businesses make it through the 1st year.  ????

The bad news:  about 50% of new businesses don’t make it through the 5th year.  ☹

Interestingly, these statistics are consistent whether it’s boom time or bust in the economy at large.

The most frequent excuse for a failed business is “undercapitalization.”  What does that mean in everyday English?  It means even after closing the doors, the owners still believed they would have made their requisite millions if only they’d had enough money to keep paying the bills (including their own living expenses) until their product/service caught on sufficiently.

So, if the business isn’t paying its own bills, and if the business isn’t supporting the owners (and paying their bills,) we have to wonder how are all these bills being paid?

Most new business owners dig deep into their own pockets.  Savings get depleted.  Retirement funds are cashed in.  An unwitting spouse works overtime at a “real” job to pick up the slack.  Credit cards are maxed out.  The home might be re-mortgaged.  And all this cash is poured down the greedy throat of the needy new business.  Worst of all, sometimes it even ends in personal bankruptcy.

Owners are frequently indignant that they can’t get a loan to keep things going.  The usual lament is, “I can’t get a loan until I’m successful, but if I were already successful, I wouldn’t need a loan.”

In this series, I will address some of the underlying concerns of most wannabe entrepreneurs.  Should I incorporate?  What’s a business plan and why do I need one?  How do I know when to hire my first employee?  What kind of paperwork do I need to do?  Can I write off my car?  What’s this nexus thing I hear about?  I am a CPA, not a lawyer, so I can’t give legal advice.  However, I can tell you the tax consequences of various decisions and situations (which is something that baffles many lawyers,) and I can share my experience and observations from a couple decades of working with entrepreneurs.

So, if I haven’t scared you off… let’s go!

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