Tax and Financial News December 2018
What’s the Best Type of Business Entity for Tax Purposes
There are several major types of business entities, including S Corporations, C Corporations, Limited Liability Companies (LLCs) and being self-employed. Each type of structure has its own advantages and disadvantages when it comes to taxes, assets and liability protection.
Generally, certain types of businesses are best for certain professions from a tax perspective; however, with the tax law changes last year it may be time to reconsider. Under the current tax law, what used to be the best business entity type for certain scenarios may no longer be the same due to the pass-through deduction and corporate tax rate changes. Let’s look at the most common business entity types and see what’s best.
Self-employed
The self-employed includes everyone who is a freelancer, independent contractor and many business owners who don’t have any partners. The nice thing about being self-employed is that it’s simple; you don’t need to set up any type of legal entity. Moreover, if you qualify for the 20 percent pass-through deduction, you’ll pay even less. Being self-employed is best for simple businesses without major assets and little potential legal liability due to the lack of protection.
The self-employed are required to pay both halves of self-employment taxes on top of their regular income (if you are an employee, you pay one half and your employer pays the other) so you’ll need to take this into account.
S Corporations
Aside from taxation, asset protection is a major consideration when selecting a corporate entity. For those who have significant assets that need protection, especially if they don’t have any partners in the business, an S Corporation may be the best bet. There are restrictions on ownership structure; for example, S Corporations are limited to 100 shareholders, so this might be a limitation for some.
As a pass-through entity, an S Corporation doesn’t pay taxes on income at the corporate level; instead, it passes through to the business owners. As a result, S Corporations can benefit from the 20 percent pass-through deduction as well, though high earners may be phased out. S Corporations are generally favored by certain professions such as doctors, dentists and certain types of consultants.
C Corporations
Unlike S Corporations, there are no restrictions on ownership for C Corporations, and they provide great asset protection. Therefore, almost all public companies and those that want to go public are C Corporations, such as start-ups.
The downside of C Corporations is that they are subject to “double taxation.” The corporation is taxed on entity level profits and then shareholders are taxed again on dividend distributions. The dividend distributions are not deductible to the entity, hence the double taxation issue.
The new tax law lowered the top corporate tax rate to 21 percent, so for high earners the double taxation issue is not as much of a consideration as it used to be. Also, Section 1202 allows shareholders of start-ups to sell their stock without any taxes on the first $10 million in gain after five years.
Limited Liability Company (LLCs)
LLCs are generally the preferred entity structure for certain professionals and landlords. LLCs have flexibility as the owners can file as a partnership, S Corporation or even sole proprietor since the LLC is really a legal and not tax designation. LLCs benefit from the 20 percent pass-through deduction if the owner elects to be taxed as a pass-through, depending on the income level and nature of the business.
Many states do charge annual fees or minimum taxes on LLCs, but it’s usually insignificant. California is one of the most onerous with an $800 minimum fee per year.
Conclusion
Tax savings are often the main motivator in selecting a corporate entity, with asset protection right behind it. The new tax law’s 20 percent pass-through deduction and corporation tax rate reductions make the choice a little tougher than in the past, but generally unless a company wants to go public most businesses will either choose an LLC or S Corporation structure. Every situation is unique, so make sure to consult a professional that can help you choose the right entity type for your situation.
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Financial Planning December 2018
Financial Planning Advice for Women
The path for women is a little like two steps forward, one step back. For example, almost 40 percent of all privately held firms in the United States today are owned by women. Furthermore, the 2018 midterm elections yielded 23 female senators and more than 100 in the House of Representatives.
And yet, despite the fact that women comprise 51 percent of the U.S. population, their ranks account for less than one-quarter of Congress. And women hold only 10 percent of chief executive and chief financial officer positions in S&P 1500 companies.
What is most unfortunate about the lack of women in powerful positions is that they continue to trail men in terms of income and investment assets. When it comes to managing money, this means women are at a disadvantage because they tend to live longer than men, often are financially responsible caregivers – both as single moms of dependent children and elderly parents – and tend to have higher health and long-term care expenses as they age.
Earning Discrepancy
While younger, well-educated professional women are starting to level the playing field when it comes to earning salaries on par with male counterparts, this does nothing to help the mid-career, near-retirement or retiree with long-term financial security. Women still earn an average of 20 percent less than men in the same positions despite the fact that women have earned the majority of master’s degrees in the United States since as far back as 1981.
To add insult to injury, women’s earnings tend to peak at an earlier age and their income level drops at a faster rate than men as they grow older.
The income component of the financial picture has far-reaching impacts, such as:
- Less disposable income than men
- Less savings
- Less money invested
- Lower Social Security benefits during retirement
One of the oft-cited reasons for women earning less is because they tend leave the workforce for extended periods of time to raise children. Not only does career interruption leave them with fewer opportunities for promotion, but it reinforces the perception that women are less reliable and easily distracted by home-life responsibilities. However, the opposite is true of men. Employer surveys have revealed that when a man starts a family, he is perceived as more reliable and dedicated.
Lifestyle Benefits
While the financial scenario appears bleak for women, there are ways that they can take advantage of inherent lifestyle benefits to improve long-term security. Consider the following tips:
- Firsthand knowledge – Because women are often in charge of the household budget, they are in a position to know where and how to cut costs.
- Diligent – When it comes to saving money, studies show that at every salary level women consistently save a higher percentage of their income than men.
- Communication skills – women tend to ask lots of questions, especially about things they don’t understand. When working with a financial advisor, they are more likely than men to ask about fees and expenses.
- Practical – Women tend to value money in terms of what it can provide, thus they are not just interested in accruing money for the sake of wealth – and less inclined to chase investment performance.
- Conservative – Women tend to be more conservative investors than men. They prefer lower-risk, conservative growth and are more focused on asset preservation.
- Longevity – Women tend to have a longer time period for their investments to grow because, demographically speaking, they live longer than men. This means women benefit from their conservative style of investing slow and steady for the long game.
- Outperformance – Despite their penchant for lower-risk investing, on average women’s investments have performed better than men by 0.4 percent, according to research by Fidelity Investments. While the variance is small, it can have a substantial impact over their longer lifespan.
By utilizing inherent lifestyle, disposition and life expectancy advantages, women can work toward long-term financial savings and investment earnings to help secure their future.
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What’s New in Technology December 2018
Online Home Appraisal Tools
Real estate appraisal and land valuation is the process of putting a price on the value of property. Buy and sell transactions generally require an up-to-date appraisal because each property is unique and values are based on the current economic landscape.
In the past, it was necessary to hire a professional real estate appraiser to conduct an onsite property visit to make this assessment. Granted, an onsite appraisal is still considered the most accurate because it involves a thorough review of the home, including the roof, siding, foundation, windows and doors, flooring, walls, plumbing, electrical, kitchen and bath updates.
However, it is also possible to get a relatively accurate appraisal using automated valuation models. Fortunately, there are a variety of websites that can provide this valuation for free. In addition to basic criteria such as square footage and the number of bedrooms and baths, online appraisals rely substantially on a comparative market analysis (CMA). This is basically a calculation of data from similar homes that have recently sold (within six months to a year) in the same geographical proximity. Online appraiser tools generally utilize publicly available data to estimate a home’s value without having to consult an appraiser or real estate professional.
The following is an overview of some of the most popular websites for establishing a home’s value. By comparing the estimates of several sites, you might be able to establish a reliable value or value range.
The real estate website Zillow offers a tool called “Zestimate,” which basically compiles an appraisal based on comparable homes in the same general locale. For most homes where public data is accessible, Zillow provides an automatic home value evaluation based on comparable home sales, local tax assessments, and market appreciation of local home values over 1-, 5- and 10-year periods.
A homeowner also has the opportunity to adjust his own real estate appraisal. To use this function, he should set up a free user account. This will require an email-based verification process to ensure that he is the actual owner of the property. Once he is logged into his Zillow account, he should enter his home address to get started.
Zillow automatically uses public data in its proprietary formula to estimate the value of a home. The formula looks at factors such as number of bedrooms, number of baths, square footage and location, and assigns a weight to each factor. However, the website also enables a homeowner to edit the home’s information, such as upgrades like a new bath, deck, swimming pool, renovated kitchen, new roof or HVAC. Next, the homeowner can choose comparable homes in the area that have sold recently. This means if one home sold way under market price for the neighborhood because it was a fixer upper or private sale, he can exclude that home from the CMA calculation. Comparables also can be viewed on a map to determine if they are in a similar neighborhood from a value perspective. Once the owner has selected comparable homes, his Zestimate will be updated as a Private Estimate.
RealtyTrac works similarly to Zillow, using publicly available data to generate an online appraisal tool called Home ValueTrac. Enter the street address, city and state or zip code to receive an estimate of median value as well as an estimated change in value over the last month.
Chase Bank offers a free home property value tool for online users. Enter the property address to receive a price range rather than an exact number. This tool also provides an estimate value for surrounding homes in the neighborhood.
Not only can you list your home for sale at this website, but it offers a simple tool to help establish your home value. Simply enter your address and the Pricing Scout instantly estimates your home’s value based on nearby comparables. The tool provides an exhaustive list of the most recent sales of comparable homes in the area, detailing their address, bed/baths, square footage and sales price. The property valuation tool illustrates where your home value lies on a scale of nearby properties.
While online tools can provide a general estimate, they do not necessarily dictate the price you would receive at sale. In addition to using a home appraiser, you will want to meet with two or three real estate agents for their market value estimate, as they probably have better insights into your local market. Clearly, home appraisals are not an exact science. Whether using an online tool or personalized estimates from professionals, your estimates will almost always vary within a range.