As business owners in California, we are inundated with mail.  The volume can be overwhelming and often it’s hard to tell the difference between “official” notices and scams.  If you own a corporation, you have undoubtedly received an official looking offer to keep you in compliance with annual requirements, for a fee.  Something that should not be ignored is the requirement for qualified purchasers to register with the Board of Equalization and file an annual use tax return, even if there is no use tax liability. 

You are considered to be a qualified purchaser if your business receives $100,000 or more in gross receipts in any given calendar year from business operations.  Gross receipts include rental income, personal service income, and all income reported by a business entity (corporations, partnerships, LLCs, trusts, non-profits, and Schedule C or F filers).

 If you are a qualified purchaser, you must register with the Board of Equalization by filing a paper form, BOE-404-A, with your local Board of Equalization field office.  Once registered, you will be provided with information for filing your annual return, due April 15^th of the subsequent year.  This annual use tax return is used to report and pay use tax on untaxed purchases made in the preceding calendar year.

 The requirement to pay use tax on untaxed purchases is not new; in general, you must pay California use tax if you purchase an item from an out-of-state vendor including purchases by telephone or over the Internet.  Use tax is similar to the sales tax paid on purchases you make in California.  If you do not meet the registration requirements, you will continue to report use tax on your California state income tax return.

For additional information or clarification, please don’t hesitate to contact me directly.

Many of us have already received a paycheck in 2011.  You may have been pleasantly surprised to see that your take home pay was more than last year.  A provision in the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 reduced the Social Security withholding percentage from 6.2% to 4.2%; employer matching percentage remains at 6.2%.

 The good news also applies to self-employed individuals.  The 15.3% S/E tax liability that many of us forget about will be reduced to 13.3%.

 How this will affect the amount of your future benefits remains to be seen. 

 Social Security taxes apply to the first $106,800 of earnings so the maximum savings will be $2,136.

 Be sure to look over your first paycheck of 2011 carefully to make sure that your check is properly calculated.  Any error should be brought to the attention of your payroll department immediately.

 Don’t hesitate to contact me if you have any questions about this or any other matter.

One of the most popular forms of business is the S-Corporation.  Depending on your point of view, an advantage of this form of business are the flow-through characteristics meaning any residual profits or losses from the business flow-through to the shareholders’ individual tax return.  A quick way to get yourself in trouble is to deduct a disallowed flow-through loss on your personal return because of basis limitations.

What is this thing called basis?  Basis is your investment in the company.  When you incorporated, you purchased stock, this gives you basis.  If you invested additional capital or contributed assets to the corporation, this increases your basis.  If your business shows a profit, this increases your basis.  Business losses and monies taken out of the business in the form of distributions to shareholders decrease your basis.  For example, you purchase stock in your corporation for $5,000, contribute additional cash in the amount of $10,000, and your first year profit is $25,000.  Your basis in the corporation is $40,000. 

Your ability to deduct flow-through business losses is limited to the extent that you have basis, as described above.  Continuing the example, if your second year of operations results in losses of $50,000, your deduction is limited to your basis of $40,000, the remaining $10,000 becomes a suspended loss and carries forward until such time as you have reestablished sufficient basis to take the loss.

To further complicate matters, if you have personally loaned the corporation money, you have what is called debt basis.  Debt basis allows you to deduct an otherwise suspended loss.  For example, if you had also loaned your corporation $25,000, the $10,000 previously suspended loss becomes deducible because of your debt basis. 

This is a simplification of the computations that must be performed to maintain your basis.  I recommend consulting your tax professional as soon as you setup your S-Corporation to make sure you understand the tax implications of this form of business entity.