Small business guide to taxes 03032010

Small Business Guide to Taxes
TSR Consulting, Inc.
Debbie Snelling, CEO
voice 404-944-3172 ♦ e-fax 425-944-3178
http://thesnellingreport.com
tsrtax@gmail.com
Facebook & Twitter: SnellingReport
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TSR Consulting, Inc. (The Snelling Report)

Structure
Business structure affects tax
Things affecting decision about structure
Exit strategy
Succession planning
Ease of entry and operation
Taxes
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Sole Proprietor
Easiest to form
No state license or registration
Low cost of start up
Federal Taxpayer Identification Number (TIN) not required unless if hire employees or other limited circumstances
No separate bank account necessary
Easier record keeping if separate bank account, so it’s advisable to have one
Bank are often now requiring a business license to open account
File taxes as usual with additional forms
Unlimited liability for yourself. All your assets may be at risk.
Tax = income tax (at your tax bracket) + Self Employment tax (15.3%). Combined tax could be 40% or more!
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Partnership
Easy to form
No state license or registration necessary
Must get federal Taxpayer Identification Number (TIN)
Separate bank account for partnership
Bank will require TIN and business license
Must file separate tax return
Items of income and expense flow through to partners’ personal return
Business income is taxable to partner currently
Business losses are, generally, deductible to partner currently
Unlimited liability of partners (unless Limited Liability Partner)
Tax = income tax (at your tax bracket) + Self Employment tax (15.3%). Combined tax could be 40% or more!
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Limited Liability Company (LLC)
Form by filing LLC documents with Secretary of State
Corporation with ability to decide tax structure
Corporate entity provides limited liability for members/shareholders
Must register and file annually with Secretary of State
Must get federal Taxpayer Identification Number (TIN) if other than sole proprietor
Check the box for tax
Default for one member = sole proprietor
Default for more than one member = partnership
Check the box option to be taxed as corporation
If decide to be taxed as corporation, can elect S-corp
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Limited Liability Company (LLC)
Tax return filing depends on tax structure
Separate return required if other than sole proprietor
Limited liability for members
Tax, generally, not subject to SE tax if partnership
Recent court cases allowed deduction of business loss for LLC member
Expect IRS to try to push for SE tax on LLC members with active participation
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Corporation (C corporation)
Form by filing corporation documents with Secretary of State
Best if long term goal is to offer the share to the public
Must obtain separate bank account
Must get federal TIN and business license
Must have Board of Directors and prepare annual Board minutes
Corporation pays taxes on its net income
Dividends paid are not deductible to the corporation
Dividends reduce the equity of the corporation
Because no tax deduction is allowed, the corporation pays taxes on amounts paid as dividends
Recipients of dividend income (you), pay taxes on the dividends
Dividends, therefore, are taxed twice – corporation and you
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S-Corporation
Form by filing corporation documents with Secretary of State
Corporation with limits to number and types of shareholders
Must obtain separate bank account
Must get federal TIN and business license
Must have Board of Directors and prepare annual Board minutes
Items of income/expense pass through to shareholders
Because the shareholder (you) pays taxes on the net income (or deducts the net loss), items returned to you from profits are taxed only once
Salary must be paid to officers
Unless net income of the business is nominal, you must pay a salary to yourself
Salary requires payroll tax returns and deposits
FICA (Social Security & Medicare) tax only against amount of salary
Net income of business not subject to Self Employment tax (only the salary is)
Limited liability for shareholders
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Business Expenses
All expenses related to business are deductible
Expenses must be documented
Receipts
Mileage log
Some expenses are limited
Meals and entertainment
Club dues
Auto expenses
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What business expenses are deductible?
Employee or contractor pay
Insurance
Interest
Investment interest is not a business expense unless you are a professional trader
Legal and professional fees
Fees related to your business are deducted from business income
Fees related to your personal life may be deductible as an itemized deduction
Retirement plans
For yourself and your employees , e.g. SEP (Simplified Employee Pension) or SIMPLE (Savings Incentive Match for Employees)
Rent
Travel and entertainment, if certain conditions are met
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What business expenses are deductible?
Business use of your home
Advertising
Bank fees
Education expenses
Internet access
Cell phone service
Penalties or fines you pay for late performance or nonperformance of a contract
Licenses and regulatory fees
Repairs that keep your business property in normal operating condition
Professional dues
Subscriptions for professional journals and publications
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Expenses you cannot deduct
Bribes or kickbacks
Dues to business, social, athletic, luncheon, sporting, airline, and hotel clubs
Lobbying expenses
Penalties or fines you pay to a government agency or instrumentality because you broke (or failed to comply with) the law
Personal, living and family expenses
Political contributions
Repairs that add to the value of your property or significantly increase its life.
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Car and truck expenses
Actual expenses or standard mileage rate
Actual expenses include depreciation, gas, insurance, repairs and maintenance, parking and tolls, etc.
Standard mileage rate includes all items in actual expense
2009 standard mileage rate = $0.55/mile for business
Parking and tolls still deductible separately
Mileage log must be maintained whether using actual expense method or standard mileage method
Business use of your car is deductible. Personal use is not deductible.
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What is business mileage?
Local transportation expenses
Getting from one workplace to another
Visiting clients or customers
Going to tradeshows, meetings or conventions away from your regular workplace
Out of town travel for business in your vehicle
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Depreciation
Business assets with a life of greater than one year must be capitalized
It must be property you own
It must be used in your trade or business
Deduction is taken for depreciation over the life of the property
Life is generally prescribed by IRS
Additional first year depreciation may be taken in certain circumstances
Inventory is not depreciable because it is for resale, not for use in your business
When items are sold from inventory, they are deductible as a cost of selling
Items withdrawn from inventory for personal use are not deductible
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Sec 179 depreciation
$250,000 can be deducted in the first year as additional (Sec 179) depreciation
Limited to the amount of net income of your business
Sec 179 depreciation cannot create a business loss
Reduction in the amount by the cost amount which exceeds $800,000
Limitation for passenger automobiles ($2,960 in 2008)
Sec 179 depreciation deduction scheduled to go to $125,000 after 2009.
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Repairs, maintenance or business asset?
Repairs and maintenance are deducted in the current tax year
In order to require capitalization, the expense must
increase the value of your property,
make it more useful,
or lengthen its useful life
Capitalization requires that you depreciate the asset over the prescribed life, e.g. 5 years for a computer , 7 years for a desk (see the Depreciation section)
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When are entertainment expenses deductible?
General rule
You can deduct ordinary and necessary expenses to entertain a client, customer, or employee if the expenses meet the directly-related test or the associated test.
Entertainment includes any activity generally considered to provide entertainment, amusement, or recreation, and includes meals provided to a customer or client.
An ordinary expense is one that is common and accepted in your field of business, trade, or profession.
A necessary expense is one that is helpful and appropriate, although not necessarily required, for your business.
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Entertainment expense tests
Directly-related test
Entertainment took place in a clear business setting, OR
Main purpose of entertainment was the active conduct of business,
AND
You did engage in business with the person during the entertainment period and
You had more than a general expectation of getting income or some other specific business benefit
Associated test
Entertainment is associated with your trade or business, and
Entertainment directly precedes or follows a substantial business discussion
Other rules
You cannot deduct the cost of your meal as an entertainment expense if you are claiming the meal as a travel expense
You cannot deduct expenses that are lavish or extravagant under the circumstances
You generally can deduct only 50% of your unreimbursed entertainment expenses
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Self employment tax
Net business income is subject to income tax and self employment tax
Net earnings subject to self employment is net business income x 92.35% (100% less 7.65%)
Income tax rate depends upon your tax bracket
Self employment tax is 15.3% (7.65% x 2)
12.4% Social Security (6.2% x 2)
2.9% Medicare (1.45% x 2)
Note that this is both the employee and employer side of what would be FICA tax on your paycheck from your employer
Maximum earnings subject to self employment tax
Social Security portion 2009: $106,800
Medicare portion unlimited
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Start-up Costs
Start-up costs paid or incurred after October 22, 1994
Up to $5,000 may be deducted in the year the business begins
A special election was required to be attached to be attached to the tax return
Regulations finalized on July 8, 2008 eliminated this requirement for start-up costs incurred after September 8, 2008
These regulations also put in place a “deemed made” election standard for start-up costs paid or incurred after October 22, 1994 provided that the period of limitations on assessment of tax has not expired for the year the election is deemed made
The $5,000 is reduced by the amount by which total start-up costs exceed $50,000
Amounts not deductible currently must be amortized over 15 years
Start-up costs prior to October 22, 1994 were not deductible
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Self employment tax example(includes Sole Proprietor, Partnership (flowing to your personal return), and LLC (unless LLC is taxed as a corporation))
Self Employment (SE Tax) 15.3%
Social Security 6.20%
Medicare 1.45%
Subtotal 7.65%
Employer Match x2 (you are the employer)
Total 15.30%
Net Business Income $ 60,000
SE Tax Rate 15.3%
SE Tax $ 9,180
You still have to pay Income Tax!
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Self employment tax example (continued)
Net Income from Self Employment $ 60,000
½ of self employment tax ($60,000 x 15.3% x ½) ( 4,590)
Adjusted Gross Income (AGI) $ 55,410
examples uses 2009 tax rates, standard deduction and personal exemption
Standard Deduction (single taxpayer) ( 5,700)
Personal Exemption (no dependents) ( 3,650)
Taxable Income $ 46,060
Income Tax (25% tax bracket) $ 7,703
SE Tax ($60,000 x 15.3%) 9,190
Total Federal Tax $ 16,883
28.14% of $60K!! YOU STILL HAVE TO PAY STATE INCOME TAX
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Paying taxes and underpayment penalties
Estimated tax payments must be made quarterly
Adjust withholding if you or spouse have a job
Make estimated tax payments
4/15, 6/15, 9/15, 1/15
Federal and state estimated payments
Penalty for underpayment of estimated tax
Penalty is calculated like interest - rates change monthly
Usually, 25% is due each quarter
An annualized method may be used
Must pay 90% of current year tax or 100% or prior year tax
If pay less than required minimum estimates, penalty is calculated on daily underpayment
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Penalties for failure to file or pay
Penalty for failure to file
Individuals: 5%/month with a maximum of 25%, but not less than the minimum
Partnerships and S-corporations: $50/partner or shareholder /month with a $250 maximum, but not less than the minimum
Minimum penalty was revised for returns required to be filed after 2008
If not filed within 60 days of the due date (including extensions)
Individuals
lesser of $135 or the amount of tax required to be shown on the return
Partnerships and S-corporations
$89/partner or shareholder /month for 12 months
Penalty for failure to pay
0.5%/month with no maximum
Penalties may be waived or abated if due to reasonable cause
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Tax Planning for Business is Essential
Every major corporation has tax professionals employed on a full time basis to do tax planning and to comply with tax rules, regulations, and deadlines.
Big 4 accounting firms charge a minimum of $150/hour for fresh college graduates with no experience.
Corporate structure pays a key role in tax planning.
In the example above, every dollar of deduction or every dollar of revenue deferred will save over 40% in taxes (25% tax bracket + 15.3% SE Tax). This is still before paying state income tax!
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IRS Circular 230 Disclosure
To ensure compliance with any requirements imposed by the IRS, we inform you that the federal tax advice (if any) contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.
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Small business guide to taxes 03032010

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Small business guide to taxes 03032010 — Presentation Transcript