accounting and tax issues for small business 1 andrew zhu, manager, china service group deloitte...

Accounting and Tax Issues for Small Business

1

Andrew Zhu, manager, Andrew Zhu, manager,

China Service groupChina Service groupDeloitte Touche LLPDeloitte Touche LLP May 31, 2003May 31, 2003

© Deloitte & Touche 2003 2

Outline of the Presentation

Accounting and Internal Control

Tax Compliance and Planning

Financial Planning

Jobs and Growth Tax Relief Reconciliation Act 2003



Understand the financial statements Balance Sheets Statements of operations Statements of shareholders’ equity Statements of cash flows Notes to financial statements



Interpretation of financial statements Current Ratio:

Current assets /Current liabilities Quick Ratio:

Quick assets (excl. inventories) / Current liabilities Accounts Receivables Turnover

Net revenue/Avg. Accounts receivables Working Capital Turnover

Net revenue/(current assets – current liabilities)



Interpretation of financial statements Gross profit margin

Gross profit/Net revenue Operating profit margin

Operating income/Net revenue Net profit margin

Net income before tax/Net revenue Total debt to equity

Total debt/Total equity Total debt to tangible net worth

Total debt/Total tangible net worth (equity-intangibles)


Common Control and Management

Accounting team: Small Segregation of duties Outsourcing (e.g. payroll) Importance



Policy and Procedures: Formalization Completeness Communications



Reporting to Board of Directors (“BOD”): BOD – Representatives of Shareholders Periodic BOD Meetings Reporting includes but not limited to:

Actual vs Budget Results Ratio Analysis Stock based compensation activities Headcount Significant events


Internal Financial Control

The cycles of internal financial control Revenue cycle Expenditure cycle Treasury cycle Payroll cycle Inventory cycle Fixed assets cycle


Tax Compliance

Federal and State income tax Sales / Uses Tax Property Tax Payroll Tax 1099 Reporting

Interest Dividend Others

Withholding Tax Backup withholding Foreign withholding


Tax Planning: Formation

C Corp S Corp LLC Partnership Sole Proprietorship Qualified Small Business Stock


Tax Structure

C corporation Most common used Limited liability No limitation on class of shares and shareholders Qualified for IPO Flexible exchange of ownership But double taxation


Tax Structure

S corporation Eligible domestic corporation Limited liability Limitations on class of share and shareholders Not qualified for IPO Must be calendar year No double taxation


Tax Structure

Limited Liability Company (“LLC”) Can check the box Limited liability No limitations on class of share and shareholders Not qualified for IPO Taxed as partnership No double taxation


Tax Structure

Partnership Genera and limited partners Flexible in allocation of tax attributes and income Not qualified for IPO No double taxation

Sole Proprietorship Must be an individual Unlimited liability Taxable income included in proprietor’s return


Tax Planning

Eligible depreciation deduction and other deductions Sales and Use Tax Planning Basic State Tax Planning (Capital-Based Taxes) Gifting Stock Options and Early-Stage Estate Tax

Planning Planning for Stock Issuances or for an IPO Federal and State Research and Development Tax

Credits Analyzing the Economic Costs of Foreign Withholding

Taxes Tax incentives: Manufacturer’s Investment Credit


Financial Planning

Equity vs. Loans Audit financial reports – Cash vs. Accrual method Thin Capitalization

Collaterals Account receivable Inventory Fixed assets

Factoring – Interest rate, points

Cash Flow Management


Jobs and Growth Tax Relief Reconciliation Act

2003


Dividend Tax Relief

Taxes dividends at rates of 15% and 5% Applies to dividends received in taxable years

beginning after 2002 and before 2009 Applies to dividends from domestic and “qualified

foreign corporations” 5% rate eliminated in 2008

Some dividends are not eligible for reduced rates


Reduced Capital Gains Rate

Reduces rates on capital gains to 15% and 5%

Effective for sales, exchanges, and payments received on or after May 6, 2003, and before January 1, 2009

5% rate eliminated in 2008 New rates apply to both the regular tax and the

AMT, and to assets held more than one year

Some capital gains are ineligible


Depreciation & Expensing

Increase in bonus depreciation for businesses to 50 percent

For property acquired after May 5, 2003 Property with binding contract prior to May 6 does not

qualify

Increase small business expensing from $25,000 to $100,000 through 2005

Increase in the phaseout threshold amount for small business expensing from $200,000 to $400,000


Individual Tax Cuts

Acceleration of Individual Income Tax Rate Reductions in 2001 Tax ActNew rates: 35%, 33%, 28%, 25%, 15% and 10%

Expansion of 10% Bracket For 2003, the taxable income level for the 10% regular

income tax rate bracket for single individuals is increased from $6,000 to $7,000, and for married taxpayers filing a joint return from $12,000 to $14,000

For 2004, these amounts are indexed for inflation. In 2005, the taxable income levels for the 10% rate bracket

revert to the levels provided under present law


Individual Tax Cuts (continued)

Accelerates Marriage Penalty Relief Basic standard deduction for married taxpayers filing

jointly is twice that of singles (2003-2004) 15% rate bracket for married taxpayers filing jointly is twice

that of singles (2003-2004)

Increases Child Tax Credit $1,000 in 2003-2004 $700 in 2005

Increases Individual AMT Exemption $58,000 for joint filers $40,250 for single filers


Comparison of Tax Liabilities


Corporate Estimated Tax

Changes the Corporate Estimated Tax Payment Schedule

Twenty-five percent of tax payments due on 9/15/03 is instead required to be paid by 10/01/03


Questions?Andrew Zhu

(408)704-4388

[email protected]

accounting and tax issues for small business 1 andrew zhu, manager, china service group deloitte...

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