How Do Small Businesses Impact the Economy? November, 2009 Most of us already know that small businesses are an essential Moreover, data show that seven out of 10 businesses last at component of the U.S. economy. They account for massive least two years and about half survive five years or more. Spe- amounts of tax revenues, employment and help to generate a cifically, 69 percent of small busi- great deal of wealth for those individuals who are lucky enough nesses formed in the year 2000 to run one. But what exactly is a small business and how does lasted at least two years while 51 its impact on the economy really measure up? percent lasted five or more years. The Small Business Association’s Office of Advocacy recently According to the most recent published a report that answers those exact questions and census data, in 2006, there were many more. The SBA considers any business with fewer than 29.9 million businesses in the 500 employees to be a small business, a broader definition United States. Small businesses, including employers and non- than some people are used to employers, made up 99.9 percent of that number, with large hearing. This survey, therefore, businesses numbering only about 18,000. Large firms spend obviously includes more than your significantly less per employee to comply with federal regula- average “Mom-and-Pop” stores. tions, while the average firm under 20 employees spends about Small businesses account for 45 percent more per employee to comply. Furthermore, these a whopping 99.7 percent of all firms spend four-and-a-half times as much per employee to employer firms. More than half comply with environmental regulations and 67 percent more per of the 119.9 million non-farm, employee on tax compliance than their larger counterparts. private sector employees work for a business with fewer than 500 employees. That’s more than We specialize in working with small business owners to help 60 million employees working for small businesses. Of those them achieve their goals. If you would like to learn more about employees, firms that employ fewer than 20 individuals account our services, please call us today. for 21.6 million jobs. Compensation & Insurance Issues Not only does more than half of the private sector work for small businesses, but also, small businesses are responsible for S Corporations for about 64 percent of the new job growth over the past 15 If you are operating an S Corporation, you already may be years. The role of the small business is expanding in our na- aware of the various issues that develop when calculating tional economy. compensation to the corporation’s employees. The benefits that small businesses provide in jobs are much Reasonable Compensation larger than some people may think. The raw data confirms S corporations must pay reasonable compensation to a this. There were 22.5 million new jobs created between 1993 shareholder-employee in return for services that the employee and the third quarter of 2008. Businesses with fewer than 500 provides to the corporation before non-wage employees created 14.5 million of them. distributions may be made to the shareholder/ employee. The amount of reasonable compen- Some critics have said that small businesses may have an im- sation will never exceed the amount received pact on the economy but are volatile as they are more likely to bythe shareholder either directly or indirectly. close than other businesses. While non-employer firms have a higher rate of turnover than employer firms, the rate of turnover Distributions and other payments by an S corporation to a for employer firms is about 10 percent for entry and 10 percent corporate officer must be treated as wages to the extent the for exit. The higher rate of turnover for non-employer firms, amounts are reasonable compensation for the service rendered however, may be due to the fact that entry and exit conditions to the corporation. for these businesses are much easier. (800) 924-6891 www.hscompanies.com Health and accident insurance premiums paid on behalf of the You may also want to review your stock positions and deter- greater than two percent S corporation shareholder-employees mine whether selling a stock, on which you sustained a loss, are deductible and reportable by the S corporation as wages before December 31 can assist you further in reducing your for income tax withholding purposes on the shareholder/em- taxable income. Conversely, you may want to sell some stocks ployee’s Form W-2. that rose in value if you believe that your tax rates will rise sig- nificantly next year. If you do sell stocks, you must do it before A two percent shareholder/employee is eligible for an Adjusted December 31 for any losses or gains to be reflected in your Gross Income (AGI) deduction for amounts paid during the 2009 tax returns. year for medical care premiums if the medical care coverage is established by the S corporation and the shareholder meets the If you are interested in long-term estate planning, you may other self-employed medical insurance deduction requirements. want to consider giving to your children or If, however, the shareholder or the shareholder’s spouse is eli- grandchildren. This year, you can gift up gible to participate in any subsidized health care plan, then the to $13,000 per donor per recipient without shareholder is not entitled to the AGI deduction. triggering gift taxes. Furthermore, you may want to consider contributing to an A medical plan can be considered established by the S Corpo- education savings plan, or a 529 plan, as ration if the S corporation paid or reimbursed the shareholder/ it allows you to give up to $13,000 free per employee for premiums and reported: donor per recipient. You may even be able to take advantage of a rule that allows you to contribute up to 5 years worth of • The premium payment savings in a single contribution: $65,000 per donor per recipi- • Reimbursement as wages on the shareholder’s W-2 ent. • Health insurance purchased in the name of the shareholder If you are on the fence regarding the purchase a new vehicle, The insurance laws in some states do the stimulus act passed earlier this year provides some incen- not allow a corporation to purchase tives to make a new vehicle purchase as you can deduct any group health insurance when the sales or excise taxes on the vehicle. The deduction is available corporation has only one employee. to itemizers and non-itemizers, but does begin to phase out Therefore, if the shareholder was the based on income. sole corporate employee, the share- If you are a business owner, you should meet with your tax pro- holder had to purchase his health fessional to ensure that you are taking advantage of the many insurance in his own name. tax changes that took place over the course of the last year. For example, you may be entitled to accelerated depreciation You should be aware that there are a number of changes that on some items; or your business may be able to take advan- may occur due to healthcare reform bills under discussion in tage of a new limit on its Section 179 deduction. The current Congress, and the passage of those bills could change signifi- limit set by recent legislation is $250,000 - considerably higher cantly the way in which S corporations purchase health insur- than the approximately $130,000 to which it is scheduled to be ance. reduced next year. This deduction allows some businesses to claim first-year depreciation write-offs for the entire cost of new If you would like more information about reasonable compensa- equipment and software. tion and health insurance premium deductions for S corpora- tions, please contact H&S Companies today. You may also want to consider taking advantage of a longer carryback period for net operating losses as the 2009 stimulus Year-end Tax Planning bill has changed the rules regarding this. The legislation al- lows businesses who had net operating losses in the 2008 tax This year brought with it a number of tax year to carry back those losses for up to five years. Normally, changes and incentives that may have businesses are allowed only a two-year carryback. If you have significantly altered the effectiveness of a fiscal year-end, you may still have time to take advantage of your tax strategy. A year-end tax plan- this provision. ning session can be vital to ensuring your tax bill is minimized and your refund is Finally, your business may benefit by deferring income until maximized. 2010. Speak with your tax professional about whether you will reap any benefits by postponing your late-December invoices Some of the tax strategies you may discuss will have to deal until January. If you are a higher-income taxpayer, it may not with maximizing your deductions, reducing your taxable in- be advisable to defer income again in 2010 as it is widely ex- come, and planning strategies for retirement and charitable pected that the two highest tax-rate tiers will increase in 2011. giving. When speaking with your advisor about your individual tax planning strategy you will most likely take advantage of one Please contact your H&S Companies tax professional before of the most common ways to reduce your taxable income: de- implementing any of these ideas, and watch for our 2009 Tax ducting the mortgage interest you paid on your home through- Letter coming soon! out the year. This may impact significantly your tax strategy if you took advantage of 2009’s historically low interest rates and refinanced your loan.