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This Week in the iNews:

▲ LUNCH & LEARN SERIES PROGRAM #5 – PART 2 - YEAR END TAX PLANNING

▲ DISREGARD ENTITIES FOR PURPOSES OF EMPLOYMENT TAX

▲ FOCUS ON SOFTWARE PIRACY: SMALL BUSINESS

▲ Lunch & Learn Series Program # 5 – Part 2 - Year End Tax Planning

Please join us for the last program for 2008 of our Lunch & Learn Series at noon on Tuesday, December 16th in the Prangley Marks, LLP lunch/conference room. This is the second in our two-part programs on year end tax planning. We will also have an update on year end payroll, W-2 and 1099 issues. Bring your year end tax planning or accounting issues for discussion. Keep in mind that there will only be two weeks until the end of the year from December 16^th, but there still may be time to act!

Please contact mripley@pmcpa.com or call Michelle at (616) 774-9004 to reserve your spot.

Complimentary lunch, program and parking provided.

Seating is limited.

▲ Disregarded Entities for Purposes of Employment Tax

For wages paid on or after January 1, 2009 single member/single owner limited liability companies (LLCs) that have not elected to be treated as corporations may be required to change the way they report and pay federal employment taxes and wage payments. On August 16, 2007 changes to treasury regulations were issued. The new regulations state that the LLC, not its single owner, will be responsible for filing and paying all employment taxes on wages paid on or after January 1, 2009.

A limited liability company is an entity formed under state law. For federal tax purposes, an LLC with more than one owner may be classified as if it

were a partnership or a corporation. For federal tax purposes, an LLC with one owner is referred to as an entity disregarded as separate from its owner, or a “disregarded entity,” unless an election is made for it to be treated as a corporation. If the owner is an individual, a single member LLC is treated as a sole proprietorship for federal income tax purposes, and the owner is subject to taxes under the Self-Employment Contributions Act (SECA). If the owner is not an individual, a single member LLC is treated as a branch or division of the owner.

For wages paid before January 1, 2009, disregarded entities choose how they want to file and pay their employment taxes using either the name and EIN assigned to the LLC or the name and EIN of the single member owner. The new regulations make these options obsolete for wages paid on or after January 1, 2009; employment taxes must be reported and paid in the name and EIN of the LLC.

An LLC may secure an EIN by applying online at IRS.gov or by filing Form SS-4, Application for Employer Identification Number.

The regulations changes are not retroactive. The owner of a disregarded entity remains responsible for paying employment taxes on wages paid before January 1, 2009 and the LLC is responsible for paying employment taxes on wages paid beginning January 1, 2009.

The examples in the regulations clarify the treatment of a disregarded entity for purposes of employment tax on wages paid on or after January 1, 2009.

LLCA is an eligible entity owned by individual A and is generally disregarded as an entity separate from its owner for federal tax purposes. However, LLCA is now treated as an entity separate from its owner for purposes of employment and certain excise taxes. LLCA has employees and pays wages as defined in Internal Revenue Code (IRC) Sections 3121(a), 3306(b), and 3401(a).
LLCA is an employer and is subject to all provisions of law and regulations, including penalties that apply to employers. Thus, LLCA is liable for income tax withholding, Federal Insurance Contributions Act (FICA) taxes, and Federal Unemployment Tax Act (FUTA) taxes under IRC Sections 3402, 3403, 3102(b), 3111, and 3301, respectively. LLCA must file the applicable employment tax forms, such as Form 941, Employer’s Quarterly Employment Tax Return, Form 940, Employer’s Annual Federal Unemployment Tax Return; file Forms W-2 with the Social Security Administration and furnish them to LLCA’s employees, and make timely employment tax deposits.
A is not, however, an employee of LLCA for purposes of employment tax because LLCA is treated as A’s sole proprietorship for income tax purposes. A is self-employed for purposes of the tax on self-employment income. This means that A is subject to tax under IRC Section 1401 on his net earnings from self-employment with respect to LLCA’s activities. As a sole proprietor, A is entitled to deduct trade or business expenses paid or incurred through LLCA’s activities, including the employer’s share of employment taxes imposed under sections 3111 and 3301, on A’s Form 1040, Schedule C, Profit or Loss for Business (Sole Proprietorship).

These changes in the regulations do not change income tax treatment for a disregarded entity or other LLCs, or employment and/or excise tax treatment for LLCs classified as partnerships or corporations.

The new regulations also state that otherwise disregarded entities are treated as the responsible parties for reporting and paying certain excise taxes that accrued after January 1, 2008, including those reported on Forms 720, Quarterly Federal Excise Tax Return; 730, Monthly Tax Return for Wagers; 2290, Heavy Highway Vehicle Use Tax Return; and 11-C, Occupational Tax and Registration Return for Wagering; excise tax refunds or payments claimed on Form 8849, Claim for Refund of Excise Taxes; and excise tax registrations on Form 637, Application for Registration (For Certain Excise Tax Activities).

▲Focus on Software Piracy: Small Business

Small businesses may inadvertently become “software pirates” and consequently may face financial penalties. The following articles discuss how some businesses can avoid the risk of penalties.

Part 2 of 3 – Small Business Settlements

The Business Software Alliance (BSA) collects tens of millions of dollars in settlements from companies it accuses of software piracy, but it usually doesn’t file lawsuits to do it. Typically a law firm representing the BSA will send a letter informing company management that it is suspected of violating software copyrights, a crime that carries penalties of up to $150,000 per infringed work. The letter states that the BSA is willing to avoid court and settle amicably if the company audits its computers to see whether they contain unlicensed copies of software made by the BSA’s members. Usually, companies go along and report what they’ve found to the BSA’s attorneys. If there is unlicensed software, the BSA will demand payments, plus penalties and attorneys’ fees. At that point, it’s mainly a matter of settling on the amount and negotiating whether the BSA can publicize the crackdown in a news release.

The BSA does not distribute the money it gets from detecting user piracy to members whose copyrights were infringed. Instead the BSA uses these funds for operations.

The AP conducted an analysis which “reveals that targeting small businesses is a lucrative strategy for the BSA, the main global copyright-enforcement watchdog for such companies as Microsoft Corp., Adobe Systems Inc., and Symantec Corp.”, and that 90% of the $13 million that the BSA reaped in software violation settlements last year came from North American small business companies.

The AP recognizes that the BSA is well within its rights and they concentrate on small businesses because their illegitimate use of software is “rampant.”

Next time: Part 3 of 3 – Education Needed

If you have questions about software licensing or other computer control concerns, please call our office. We will be happy to respond.