What is a Pass Through Entity?

Pass Through Entity - What is it and what does it mean?

Most businesses do not have to pay income taxes on the corporate level. Instead the profits from their business flows through (or passes through) to the owners of the company where it is eventually taxed.

Types of Pass Through Businesses

  • Sole Proprietor
  • Partnership
  • Single Member LLC
  • S Corporation

An example of a non pass through entity would be a C Corporation. In a C Corporation the company pays taxes on the profit of the business at the corporate level.

Basic Concept: If you have a pass through entity you have income and expenses related to the business that are reported on the business tax return (Schedule C, 1065, 1120S). The profit from those businesses are then reported on a personal return where the taxes are paid.

Here is the tax treatment for the various entity types:

Sole Proprietorship or Single Member LLC

File business information on a Schedule C on a personal tax return (Form 1040).

Partnership or Multi Member LLC

File business information on Form 1065 and then each partner will receive a K1 with their share of activity which will be used to report and pay taxes on the business activity on a personal tax return (Form 1040).

S Corporation

File business information on Form 1120S and then each owner will receive a K1 with their share of activity which will be used to report and pay taxes on the business activity on a personal tax return (Form 1040).

C Corporation (Not Pass Through Entity)

File business information on Form 1120 and then pay taxes at the corporate level.

Now you know what a pass-through entity is. Majority of small business owners in the US operate using a pass-through entity.

Check out our episode on the Small Business Tax Savings Podcast for more on this topic!

JETRO Goes Gusto Gold

JETRO Goes Gusto Gold

When JETRO started way back in 2013 we were looking for a modern, cloud based solution for the payroll side of our business.

We spent time researching and testing all the various options out there and just could not find a good fit that matched our model: modern, robust, and simple to use.

Luckily in 2014 we got introduced to Gusto and have not looked back since. Based on our research and experience, it is by far our preferred choice for payroll. Whether we are doing the payroll on behalf of clients or clients are handling it themselves we know they are in good hands when using Gusto.

As part of this journey we are proud to announce that we are now a Gusto Gold Partner!

Thank you Gusto for continuing to innovate and provide such an easy to use payroll solution for both JETRO and our incredible clients.

Want to learn more about Gusto? Reach out to us!

How should I structure my business with multiple owners?

How should I structure my business with multiple owners?

We often times get business owners that reach out to us that have multiple owners in their company, wondering what the best way is to structure their business.

In this specific article we are assuming an S Corp structure is desired prior to it reaching the owners personal tax return. If you don’t know what an S Corp is, we will dig into that in future post but in a nut shell it is a tax strategy to help limit the amount paid in self employment taxes.

With that assumption there are two main options we typically suggest. Note that this also assumes that all owners are going to be active within the business (not just silent investors).

Option 1

Setup company as an S Corporation with each owner as a shareholder in the business personally.

  • Advantages
    • One company, one tax return, one payroll account
    • Easier to setup and less maintenance
    • Cheaper
  • Disadvantages
    • Various owners cannot take advantage of tax strategies that help them but not other owners.
    • If you have multiple businesses you may need multiple S Corps.
    • Less Flexibility

Option 2

Parent company is a partnership with each owner having their own S Corp that owns their percentage in the partnership.

  • Advantages
    • Each partner can utilize tax strategies as they see fit (hire kids, business automobile, etc).
    • If they own multiple businesses their personal S Corp can hold the ownership in those and all business income will flow through their S Corp prior to reaching them.
  • Disadvantages
    • Multiple companies, multiple tax returns, multiple payroll accounts
    • More to setup and maintain
    • More expensive

 

With that being said, lets run through some scenarios.

Scenario 1: Two owners and one wants a Mercedes for his business vehicle and the other wants a Prius. In option 1, there could be some conflict because the price for these are vastly different and the person with a Prius does not get as much out of the tax strategy. However in option 2, it doesn’t matter because they can hold the vehicle ownership in their personal S Corp and do whatever they want with affecting the other owner.

Scenario 2: Two owners in which they are 100% active in the business with no other ventures. In option 2 they would have to pay for a tax return for the partnership and then two S Corps. They would also have to run two separate payrolls for each S Corp. Rather if they chose option 1 it would be one business return and one payroll which means it is more cost effective.

Generally if the owners have multiple businesses they participate in, we will suggest option 2 since they will want all income to pass through an S Corp anyways so they can avoid a portion of self employment taxes.

If the owners are on the same page as far as spending and tax strategies, we typically say option 1 is fine for them to help minimize costs and maintenance.

Either way, there is no one size fits all for every situation so be sure to discuss with a tax professional to ensure you get things right from the beginning.

Check out our episode on the Small Business Tax Savings Podcast for more on this topic!

Company Retreats – Connect w/ Your Employees or Clients

On June 29th and 30th here at JETRO we held our annual team retreat. Typically we get our staff together in a city for a few days to hang out but due to COVID we were limited to a virtual retreat this year. Given the circumstances our staff made the best of it and we had a great time and covered a lot of ground.

Retreats are important not only for us but for you in your business. Here is why we hold an annual retreat:

  • Get to know each other on a more personal level
  • Be transparent and update your team on the company vision and what the future looks like
  • Make important decisions and involve everyone
  • Show appreciation and how much the team means to you and your company

Whether you bring everyone together or hold a virtual team retreat I encourage to make it happen as you will see it truly unites your team.

On the Small Business Tax Savings Podcast below we share more information on this!

JETRO Goes Xero Gold

JETRO Xero Gold

When JETRO started way back in 2013 we were on the the forefront of virtual accounting. As part of that, we needed to find a cloud accounting solution that we could utilize not only internally but across our client base. We needed something that we could access via the cloud anywhere, anytime. After a lot of research and trial we landed on Xero, who at the time was fairly fresh in the US market.

Since then we have not looked back and continue to introduce Xero to thriving clients across the country. As part of that journey we are proud to announce that we are now a Xero Gold Partner!

Thank you Xero for continuing to innovate and provide such a “beautiful accounting software” to both JETRO and our incredible clients.

Want to learn more about Xero? Reach out to us!

Paycheck Protection Program (PPP) Forgiveness Cheat Sheet

Coronavirus (COVID-19) - Paycheck Protection Program (PPP) Forgiveness for Small Businesses

LAST UPDATED: 6/22/20

As you know, things are constantly changing with the Paycheck Protection Program. Our goal is to create an outline here of the things you need to know about when it comes to forgiveness.

Bookkeeping is the back bone to every business. With that being said, bookkeeping can quickly become an incredibly hard task unless you follow these four simple rules.

Facts

  • Time to Use Funds: 24 Weeks or December 31st (Whichever comes first) — You have an option to use 8 weeks if you received funding prior to June 5th
  • Required Amount Used on Payroll: 60%
  • Amount NOT Forgiven Loan Term: 5 Year Term at 1% (accruing immediately) with 6-month payment deferral from the date of loan disbursement

Costs Eligible for Forgiveness

  1. Payroll Costs (Must be at least 60%):  Paid or incurred during the covered period including: Salaries, wages,  employee health insurance contributions by employer, employee retirement plan contributions by employer, and state and local payroll taxes. NOTE: Capped at $100k Annualized per Employee and employer share of FICA is not included in the costs.
  2. Self Employed/Owner Payroll Max: $15,385 (8 Week Period) or $20,833 (24 Week Period) – They are also capped by the amount of their 2019 employee salary and retirement contributions. NOTE: Owner health insurance is no longer figured into the eligible costs for forgiveness. Non-owner health insurance still is.
  3. Max 40% of: Mortgage interest, Utilities, Rent

Employee Headcount or Pay Reduction

Your forgiveness amount may be reduced if:

  1. You reduce employee pay in excess of 25% (Salary or Hourly)
  2. You reduce employee headcount or Full-Time Equivalent (FTE). There are two methods to calculate FTE:
    • Long Method: Average hours each employee paid per week, divided by 40 and rounded to nearest 10th with a maximum of 1.
    • Simple Method: 40+ Hours = 1 FTE and <40 Hours = .5 FTE
    • Example 3 employees working 25, 35 and 42 hours per week. Using the long method your FTE would be 2.5 and using the simple method it would be 2.
  3. If you restore to original numbers by December 31st or end of the covered period (date you file your application) you are fine.
  4. Exceptions:
    • Inability to rehire individuals or similarily qualified individuals (or employee denies offer to come back at original level)
    • Able to document inability to return to the same level of business activity as business was operating at before 2/15 due to COVID restrictions.

Loan Forgiveness Process

  1. Complete and Submit Forgiveness Application to Bank (SBA Form 3508 or 3508EZ) within 10 months after the last day of the covered period. NOTE: A borrower may submit a loan forgiveness application before the end of the covered period if the borrower has used all of the loan proceeds for which they are requesting forgiveness.
  2. Lender has 60 days from receipt of application to issue a decision to SBA.
  3. SBA will deduct EIDL advance amounts from the forgiveness amount.

Check out our episode on the Small Business Tax Savings Podcast regarding this topic!

What Bookkeeping Rules Do I Need to Follow?

Top 4 Bookkeeping Rules to Follow

Bookkeeping is the back bone to every business. With that being said, bookkeeping can quickly become an incredibly hard task unless you follow these four simple rules.

1. Separate Business Bank Account

Have a separate bank account (and credit card, if applicable) specifically for your business. This is important even for you sole proprietors. Regardless of your business setup, this is vital.

If you are unable to get a credit card under your business name, make sure you dedicate one personal card strictly for business use only and use the payments to it as a reimbursement.

2. No Commingling

No personal expenses on the business bank or credit card account. In the rare occasion that you accidentally put a personal expense on the business account, record it as an owners draw or reimburse the business for it.

3. Keep Your Receipts

Store them in a file in your office or take a picture of them and save them in the cloud. This is vitally important in the event of an audit.

On each receipt write on it: who, what, where, when, why, and how much. Not only does this help backup the business purpose but it also reminds you in case you forget down the road.

4. Ditch the Cash

Cash is hard to track and prove. In the rare event cash is your only payment option, be sure to get a receipt so you can properly document the business expense.

Check out our episode on the Small Business Tax Savings Podcast regarding this topic!

JETRO Giving Back to the Community

Giving Back to the Community

Here are JETRO we take seriously the act of helping others and the community. Every year we make a donation to various charities and initiatives based on the amount of tax returns we file. This year we also included an additional amount for each Small Business Tax Savings Podcast review we received.

As a client of ours and reviewer of our Podcast you play a role in this donation. The amount we contribute is directly related to you partnering with us.

I just want to say, THANK YOU! Thank you for working with us and listening to our Podcast so we can make a donation on your behalf.

This year we are proud to announce our support for the following charities and initiatives:

1. Mobilize MKE

COVID-19 has caused a 35-50% spike in the number of people needing the services of food banks in Metro Milwaukee. This pandemic has also forced the cancellation of many food drives, multiplying the food crisis our neighbors are facing right now. These food pantries tell us they anticipate seeing even greater need in May. Donations made will service local food pantries.

Learn More Here

2. American Foundation for Suicide Prevention

A gift to the American Foundation for Suicide Prevention helps fund their mission to save lives and give hope to those affected by suicide. Each dollar brings us closer to a world without suicide.

Learn More Here

 

3. Make-A-Wish

The mission of the Make-A-Wish Foundation is to create life-changing wishes for children with critical illnesses. The children they serve are fighting for their lives, and their families are doing everything that they can to help them in their battles.

Learn More Here

 

4. National Multiple Sclerosis Society

Multiple sclerosis (MS) is an unpredictable disease of the central nervous system that disrupts the flow of information within the brain, and between the brain and body. The Society’s mission is: People affected by MS can live their best lives as we stop MS in its tracks, restore what has been lost and end MS forever.

Learn More Here

 

Again, we are able to make these donations on your behalf due to your partnership with us. We thank you for that and look to continue to help the communities around us and those that are less fortunate.

Five Useful Tips From Experts in Bookkeeping

Five Useful Tips From Experts in Bookkeeping

Not everyone loves bookkeeping. There are some people who would rather pour salt on a wound than update business records. Are you the type to throw all your records into a trash bag? If you are, then you know the struggles of trying to put everything together at the end of the fiscal year. Waiting until the last minute can be costly for your business. It can also lead to frustration, anxiety, and mistakes. If you own a business, accurate and up to date business records are a necessity.

Not to mention, it is a requirement, by law, that your business records are correct and completed promptly. As a result, your only choice is to get your records organized and keep them updated. The following are five useful tips from expert bookkeepers to give you that added push to keep your documents in good order.

Establish Bookkeeping Time

The most important tip for keeping your business records updated is to establish a time each week to work on your paperwork. When you stay on top of your bookkeeping, you will not become overwhelmed. Additionally, by keeping accurate and timely records, you will instantly know if any concerning issues are developing.

Accounting Software

Another tip is to purchase an accounting software program that works for your business. Not all software is created equal. Furthermore, the number of available products can be overwhelming. Therefore, you may want to consult a bookkeeping expert before proceeding.

Banking Accounts

As a business owner, you need to keep your business account separate from your personal account. You should keep them separate to prevent personal liability from your business transactions. If you don’t keep your accounts separate, you can become personally liable for business transactions that go wrong.

Taxes and Compliance Regulations

To keep yourself out of hot water, you must properly register your business. Moreover, if you have employees, you will need to register to withhold taxes on their behalf. If you are a sole proprietor with no employees, an accounting software program may be all you need. However, if you have a large operation or a complicated business structure, you should contact an expert accountant to discuss your bookkeeping needs.

Receipts

Finally, you must keep your receipts. All of them. If you want to deduct business expenses, you can only do so if you have your receipts on hand. Regarding paying employees wages, you will need to keep a record of those payroll transactions. Likewise, if you make money on sales of products, goods, or services, you must keep copies of your invoices. Thankfully, there are electronic options available. In the past, you might have needed to use that trash bag, but now you can upload those receipts into a software program.

In Conclusion

As a business owner, it is important to stay on top of your records. Not only is it a legal requirement, but it is also necessary to monitor business progress. By following the five tips from expert bookkeepers, you should avoid becoming overwhelmed with your bookkeeping. On the other hand, if you are struggling to keep up with the complexity of your business records, contact an expert accountant for your bookkeeping needs. Look no further than Jetro Tax to help solve your bookkeeping concerns. Call 844-327-9272 today!