Workshop 7 - Tax Planning

Access the Tax Planning Worksheets, by Bob Weins and Rich Miller used in this workshop. On the calendar, items in red will apply to most of us.

Access the 2014 Tax Planning Page with links to tax forms.

How are taxes related to sustainability?

• Government is part of the ecosystem in which our businesses exist - it can't be ignored.
• If money is being exchanged, then the government will require some share of it in order to fund itself.
• Like them or not, taxes should be thought of as one of the healthy relationships we seek to establish within our community.
• Many talented people with well run businesses run into tax problems, and these problems can be the reason your business goes down. We need to deal with taxes in a healthy way, care for our business's tax relationships.

How can we avoid land mines in the tax world?

• Start by identifying the different types of taxes, and then providing a calendar of important tax dates.

Types of taxes:

• Property taxes
• Consumption taxes
• Income taxes
• Payroll taxes (start at 15%) (Biggest problems seem to come up in payroll taxes because you have to touch it so frequently - monthly - and there are big penalties if you forget to do it or do it incorrectly).

Real Estate and Personal Property Taxes:

• Real estate taxes (building and land)/personal property taxes (what's in a building or is moveable)
  • You are sent a bill for real estate taxes 2X per year (summer bill and winter bill) In Michigan, the summer bill is the big one, the winter bill is smaller. These taxes are deductible on your tax return. If you disagree with your tax assessment, you can look up other people's assessments on line or you can go to the city and ask them to give you that information; then you can go before the tax assessment board to appeal it.
  • Businesses with multiple locations have multiple property taxes
• Personal Property Taxes:
  • There is an exemption for under $80,000 of personal property for your business. An affidavit of exemption must by filed by Feb 10, and must be filed every year. If not filed, you then lose the exemption. Personal property does not include inventory (anything you will sell), just personal property that you use to run your business.

Consumption (Sales and Use) Tax: In Michigan = 6% - The purpose is to get the final user of a product to pay the tax.

• Use tax: corollary to sales tax. If you use a product here that is bought out of state and haven't paid the 6% sales tax in Michigan, then you have to pay a use tax on it. MI-1040 (page 2) has the Use Tax line item on it and that's where you will report it. The idea is that the end user should be paying the tax. There are some large companies that will charge you your state's sales tax and will remit it to your state.
• If your business ships your product to other states, you only have to pay a sales tax in those states in which you have a "presence." You only have a presence in states in which you have facilities, employees or sales reps that transact business 2 or more days per year.
• Industrial processing exemption: you don't pay sales or use taxes on materials you buy to produce your product.
• Reseller exemption: Anything that you buy that you are going to resell is exempt from sales/use tax. There is a form you can fill out called a Sales and Use Tax Exemption Certificate that can be submitted to a vendor from whom you purchase materials so they won't charge you taxes.
• If you're a business, each state will establish a frequency with which you have to remit taxes - Bob and Rich recommend doing it monthly - making it a part of your usual, monthly routine. This can be done electronically in Michigan rather easily.

Schedule C Business Income Tax:

• Income Tax: If you're a sole proprietor or have a sole member LLC, you will report your business income on Schedule C of the IRS Form 1040 and pay an income tax on the net income.
• Self-employment taxes (Social Security and Medicare): In addition to the income tax (above) you pay on your Schedule C Income, you will pay self-employment tax (15.3% of the Schedule C Income)
• Income tax deposits: These taxes are usually paid in quarterly estimates: The maximum you could pay is 43% for feds, 4.25% for state and 2.8% for City of Detroit. Recommend talking to a tax professional to get an accurate estimate of your tax liability so that you can have that cash on hand to pay the estimates when they are due.
  • Safe Harbor: If you've paid 90% of what is due every quarter, or you pay the same amount of total taxes you paid last year, you won't be charged an underpayment penalty. This is called the "safe harbor" tax payment.
  • If your income goes up a lot from the prior year, even if you pay last year's amount in order to avoid penalties, remember to put aside money for additional income tax that will be due because you will probably owe more.
• Payment Frequencies: See Bob's calendar on worksheet: payments are due quarterly.
  • Jan 15, Apr 15 (filed with tax return), June 15 and Sept 15
  • If you don't have the money on the 15th, pay it as soon as possible because penalties are calculated daily.
  • File return on time even if you don't have the money to pay your taxes because you will be penalized for that as well.

Filing in Detroit:

• Filing date is at the 30th of the month - but make it easy on yourself and file everything on the 15th. Saves confusion.

Good idea to talk to your tax advisor each quarter before you submit your quarterly taxes - helps you to identify things that might have been forgotten.

Payroll Taxes:

What's an employee? Someone who goes to your place of work, uses your equipment to do his job, and reports to you is an employee. The employer is responsible to withhold and submit the payroll taxes for each employee. You can't just call someone an independent contractor so you as the employer don't have to collect and submit taxes. If you look like an employee (on paper or in work) then the IRS considers you an employee.

• If employee doesn't pay his share of taxes, the employer can be responsible for the amount that should have been withheld.
• If payroll taxes aren't submitted and paid by the employer, not only is the company responsible, you, as the business owner, can liable too. The IRS can go after you personally.
• Worker's comp: If you have independent contractors, you need to ask each of them if they have a worker's compensation policy, because if they don't, then you as an employer have to include them under your worker's compensation policy.

• As an employer, what are your filing responsibilities?
  • Income tax
  • Social Security
  • Medicare
  • FIT (Federal Income Tax) W/H (941 tax, named after the quarterly form that you file with IRS)
  • FUTA (940 unemployment tax filed annually) Fed Unemployment Tax - paid on the first $7000 an employee earns. This return is annual. You only have to make a deposit during the year if your liability is over $500.

• W-2 and 1099 forms need to be out to your employees and independent contractors by Jan 31st so that they can have time to prepare their taxes.

State of Michigan:

• In the state of Michigan, a business files the withholding, sales and use taxes all on one form (for most small businesses, these are filed monthly).
• MI Unemployment - paid on the first $9500 an employee earns. Tax rate starts at 3.8%, and is adjusted annually based upon your claims experience. These taxes need to be deposited quarterly.

Recommend:

• A good software system that can help you with taxes. Penalties on taxes can be huge and you don't want to get into that kind of loss.
• If you want to do your own taxes, it's a good idea to let a tax expert do it for the first year or two so that you can learn the process.