If enacted, Congressman Lloyd Doggett’s proposed H.R. 5890, the Long-term Care Insurance Reform Act of 2010 (Long-Term Care Act), would have a drastic impact on insurers and producers who sell long-term care insurance.

Today’s analysis by our Experts Robert Bloink and William Byrnes is located at AdvisorFX Journal Long-term Care Insurance Reform Act of 2010

After reading the analysis, we invite your questions and comments about indexed annuities by posting them below, or by calling the Panel of Experts.

The Private Fund Investment Advisers Registration Act of 2010, part of the Wall Street Reform Act, will require registration of many hedge fund manager who previously escaped registration with the SEC. Hedge fund, and other private fund, managers who do not fit into one of the Act’s exemptions will be required to register with either the SEC or a state regulatory agency. Advisers to larger funds will be required to register with the Securities and Exchange Commission (SEC), while advisers to smaller funds will be required by the Act to register at the state level.

Today’s analysis by our Experts Robert Bloink and William Byrnes is located at AdvisorFX Journal Hedge Fund Must Now Register with the SEC Under the New Wall Street Reform Act (CC 10-45)

After reading the analysis, we invite your questions and comments about indexed annuities by posting them below, or by calling the Panel of Experts.

As of January 1, 2011, the Securities and Exchange Commission will require advisers to make plain-English disclosures to their clients, laying out the adviser’s business practices, conflicts of interest, and the background of the firm and its personnel.  The requirement is designed to drag information out of the fine print on client disclosures and present it in easily understandable language. Although innocuous sounding on its face, the requirement will carry a significant cost in time and resources.

Today’s analysis by our Experts Robert Bloink and William Byrnes is located at AdvisorFX Journal SEC’s Plain English Requirement Equals Expensive Client Disclosures

For previous commentary, see AdvisorFX Journal What You Don’t Know Yet Might Hurt You: A Broker’s Duties under the Financial Reform Act

After reading the analysis, we invite your questions and comments about indexed annuities by posting them below, or by calling the Panel of Experts.

Why is this Topic Important to Financial Professionals? Many small business owners are faced with issues surrounding Form 1099 and how the rules apply to their businesses.  New regulations passed as part of Health Care Reform will change the past Form 1099 standard, requiring its applicability to many more situations and persons. 

What are some distinctions of the employees versus independent contractors?

An independent contractor, in general, has a majority of control over the details of his job function and only the end result is dictated by the company or individual who hires.  This is what is commonly known as “the degree of behavioral control.”  Another category used by the IRS and the courts to determine the status of an individual as either an employee or independent contractor is “financial control”.  Financial control involves examining the financial relationship between the parties such as reimbursement, and/or if any materials or space has been provided to accomplish the job.  Other relationship factors such as having a contract or agreement between the parties, as well as the terms of any contract, must also be examined in determining the employment status of the individual.

One of the issues that is often overlooked in the area of an employee relationship instead of an independent contractor relationship is that employees have X number of hours to dedicate to employment each week, whether that number is 40, 50, or anything else that an employment agreement might state.  Independent contracts are often not required to expend a set number of hours to accomplish a task, but instead enough hours to accomplish the task.

Another relevant issue to be considered in determining which of the two employment relations exist is that of termination.  An “At-Will” employee can normally be terminated and generally has no cause for a breach of contract and cannot sue for damages.  An independent contractor cannot usually be terminated without a breach of contract.

Tax Distinctions

Taxation of the two dissimilar positions is significantly different.  Independent contractors essentially work for themselves, and the business that pays them is, in effect, a client.  Generally, and independent contractor will file a tax return as a sole proprietor or closely held corporation, such as a Subchapter S Corporation.  An employee is subject to federal income tax withholding and the employer is subject to payroll taxes, included in the general W-2 process.

Independent contractors, like other businesses, recognize revenue and expenses. The independent contractor usually receives a Form 1099 from the source that pays him.  The Code and Regulations state that when a trade or business pays an individual for certain “services” over $600 that a Form 1099 is required to be filed with the Secretary of the Treasury.[1] And just as other businesses realize “legislative graces of Congress,” such as Section 162 deductions, the sole proprietor too may have expenses that generally qualify as trade or business expenses.

New 1099 Filing Requirements

The subject is further complicated by the new 1099 reporting requirements that will take effect in 2012.  All business transactions resulting in payments of over $600 will be subject to Form 1099 issuing requirements.  Neil deMause, a contributing writer for a CNN, has stated, the new rules could create significant changes to taxation of independent contractors.[2] DeMause notes that while some independent contractors, “typically write off stacks of business expenses; having to issue tax paperwork documenting each of them could cut down on fraudulent deductions.”

The new reporting burden is likened, by some, as carrying around a book of Form 1099s and issuing them with every purchase a business makes, that is if the amount is, in total, over $600.

For a detailed analysis regarding independent contractors, see Tax Facts Q 814. How are business expenses reported for income tax purposes?

Tomorrow’s blogticle will address independent contractors’ tax and reporting issues.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

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[1] Internal Revenue Code Section (IRC) 6041, Treasury Regulations (TR) 1.6041-1(a)(1)(i), TR 1.6041-1(a)(2).

[2]Neil Demuse.  “Health Care Law’s Massive, Hidden Tax Change”.  CNN Money, Small Business.  May 5,2010. http://money.cnn.com/2010/05/05/smallbusiness/1099_health_care_tax_ change/index.htm?postversion=2010050523.  Last accessed 8/18/2010.

A recent Tax Court case makes up for some of the ground lost by FLPs in recent cases reining in more aggressive valuation discounts. In Jensen v. Commissioner (T.C. Memo 2010-182), an estate holding an interest in a closely-held corporation that owned fairly significant real estate won its case against the IRS.

Today’s analysis by our Experts Robert Bloink and William Byrnes is located at AdvisorFX Journal Capital Gains Increasing Importance for Valuation Discounts: Jensen v. Commissioner

For a detailed analysis of Valuation For Gift Tax Purposes, see AdvisorFX Main Library Section 7. Gift Taxes D—Valuation For Gift Tax Purposes.

After reading the analysis, we invite your questions and comments about indexed annuities by posting them below, or by calling the Panel of Experts.

Why is this Topic Important to Financial Professionals? Accounting is like a road map of the company’s financial operations.  It is essential to understand the accounting basics and how they relate to small businesses and insurance. 

Accrual or Cash Accounting Methods

Now that the business has been incorporated and is operating, what is required to keep the business accounted for?  The first determination a company must make is determining if the business will account using an accrual or cash system.  An accrual accounting method recognizes revenues and expenses in the period in which they occur whereas a cash accounting method recognizes transactions as they occur.

For example, an accrual taxpayer that performs services will account for income earned when the service is actually provided and not when the actual cash or payment is received.  A cash method of accounting is concerned only when cash is paid out and when paid in.  Expenses follow the same logic.  For example, if a service company that uses the accrual method incurs 500 dollars of phone expenses in December 2010 and the payment is not due until January 2011, the company will still account for the phone expense on its books in 2010 for December’s usage.

Accounting System

Once the business has determined its accounting method, it is ready to keep track of the transactions.  Every accounting system should provide a basic financial statement, income statement, cash flow statement, balance sheet, and statement of owner equity.  Each statement provides a view through a different window into the financial operation of the business.

The income statement is easy to understand.  The top item is revenues and beneath that line expense are deducted to determine the net income.

The cash flow statement is essentially a variation of the income statement.  However the cash flow statement will show the ability of the business to operate on a periodic basis given the ins and outs of cash payments.

The balance sheet will tell the financial planner what the business is comprised of.  Most accountants refer to the balance sheet as a snapshot of the business at any particular moment of time.  From it we can see what assets the business holds and how much money it owes others.

Lastly, the statement of owner’s equity shows how the business is owned and financed.

Financial Statements and Insurance

Properly kept financial statement can help ensure easier access to capital as well as give a truer understanding of the business’ financial position.  The financial statements are commonly used in the risk management processes including when insurance is purchased on a key man.  Small businesses are especially sensitive to this risk and keeping accurate books can help insurance agents and underwriters determine among other factors the insurance needs of the operation.

Key man insurance and buy-sell agreements are generally based on some total dollar amount that represents the value of the business.  This figure is usually based on some number that is related to the financial statements and accounting of the business.  Whether it’s the total assets, a factor of revenue or income, or some other determination, the need for a basic knowledge of financial accounting for small business is essential.

For a detailed analysis on business valuation and how it relates to buy sell agreements see AUS Main Libraries, Section 11 F—Insurance Needs Revealed In Financial Statements.

Tomorrow’s blogticle will address employees, independent contactors, 1099s and new legislation that your clients should know about.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

The Dodd-Frank Wall Street Reform and Consumer Protection Act conclusively excludes indexed annuities from regulation as securities by the Securities and Exchange Commission (SEC).

Today’s analysis by our Experts Robert Bloink and William Byrnes is located at AdvisorFX Journal Indexed Annuities: Still Insurance

After reading the analysis, we invite your questions and comments about indexed annuities by posting them below, or by calling the Panel of Experts.

Why is this Topic Important to Financial Professionals?  Look in most local business journals that report on the formation of new business entities and you will see 95% of new businesses are formed as an “L.L.C.”  This company structure is the primary one for entrepreneurs, professionals, and small businesses.  However, after twenty years of significant usage, many questions about this form of entity are still novel.  The financial professional should be able to explain to a client the basics of the Limited Liability Company.

What is an LLC?

Limited Liability Companies (commonly called “LLCs”) are state statute sanctioned legal business entities.  The business entity is similar to a limited liability partnership except that it has members and not partners (no need for general partners).  Moreover, some states allow for only one member, known as a single-member LLC, an option not available in partnership entities that require at least two partners.  The members can be persons but may be other business entities, such that an LLC can be a member of another LLC.

The LLC can be established and managed so as to offer the benefits of a corporation such as limited liability and continuation after a member’s death, but without the impact of corporate taxation.

What is the benefit of an LLC?

The LLC properly managed provides for the protection of personal financially liability in connection with the business liability.  Proper management generally includes following the annual requirements of corporation law, such as holding an annual directors and members meeting, and recording corporate minute (this will be discussed in future blogticles).

Additionally, the LLC avoids double taxation because of it can elect to be a “pass-through” entity for federal and state tax purposes – like a partnership or a sole-proprietorship is treated.

Also, most LLCs do not have a restriction on the number of members as S-Corps have (albeit rarely will the number of members or shareholders be an issue for a financial professional’s client).  To learn more details and nuances of each business structure see the AUS Main Section 10. Basics Of Business Insurance, A—Forms Of Business Organization.  More detail on LLCs specifically is provided in AUS Main Section 14.1, I—The Limited Liability Company (LLC).

What are some limitations of the LLC?

Aside from the fact that LLCs have essentially developed as a hybrid of older forms of business organizations, and are relatively new in the history of corporation law.  The LLC is not a corporation in the traditional sense of the word.

Sometimes businesses start as an LLC but expand to a point of eventually considering receiving outside equity with the goal of a public offering such as listing on a stock exchange.  The LLC is not suitable for “going public”.  Thus at the stage of soliciting equity investment for a business a client may have outgrown the LLC and should convert into a C-Corporation (a topic that will be addressed in a future blogticle).

The Federal Government allows the business owner(s) of the LLC to choose how the LLC will be characterized for tax purposes.  The LLC may be taxed as a Corporation (both Subchapter C and S), partnership or sole-proprietorship. This process is generally referred to as “Check the Box”.[1] The IRS Check the Box Form is Number 8832[2] and the business owners literally check one of the included boxes on that form and then file the corresponding tax returns.

What are some other uses of LLCs?

LLCs are used in many transactions by high-net worth client.  Sometimes clients use an LLC in place of a trust in the irrevocable life insurance trust (commonly called an “ILIT”) structure.  By example, in a situation where a client wants less restriction on the direction of the assets of the vehicle, the LLC is a more popular choice than the ILIT.  As a result, the LLC has become a common tool for the financial planner.  A detailed discussion of one of these transactions is examined in the AUS Main Section 14.1, I-The Limited Liability Company (LLC). “LLC as an Alternative to a Life Insurance Trust”.

For a detailed analysis of the tax and non-tax Advantages of a Close Corporation see AdvisorFX Main Library Section 14. Close Corporations I—The Limited Liability Company (LLC) http://www.advisorfx.com/articles/f14_1_2_2080.aspx?action=13

Tomorrow’s blogticle will address Accounting for Corporations and Limited Liability Companies and How it Relates to Insurance.

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[1] Treasury Regulations Section §301.7701-3.

[2] Internal Revenue Service Form 8832, http://www.irs.gov/pub/irs-pdf/f8832.pdf.  Last Accessed 7/1/2010.

As STOLI (stranger originated life insurance) transactions have receded due to nearly unanimous condemnation of the practice, a wave of Stranger Originated Annuities (STOAs) is growing.

Today’s analysis by our Experts Robert Bloink and William Byrnes is located at AdvisorFX Journal STOLI to STOA: First Drops in a Gathering Storm

After reading the analysis, we invite your questions and comments about STOLIs and STOAs by posting them below, or by calling the Panel of Experts.

The Wall Street Reform Act—signed into law by President Obama on July 21, 2010—significantly alters the relationship between broker-dealers and their retail customers, potentially expanding brokers’ exposure to lawsuits, decreasing their revenue, and constraining the range of products they are permitted to offer to their clients.

Today’s analysis by our Experts Robert Bloink and William Byrnes is located at AdvisorFX Journal What You Don’t Know Yet Might Hurt You: A Broker’s Duties under the Financial Reform Act

For previous commentary, see AdvisorFX Journal Dodd-Frank Wall Street Reform and Consumer Protection Act

After reading the analysis, we invite your questions and comments about new duties imposed on brokers by the Financial Reform Act by posting them below, or by calling the Panel of Experts.