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Small business guide to taxes 03032010

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This slideshow is to guide you through your taxes as a Small Business.

This slideshow is to guide you through your taxes as a Small Business.

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  • 1. 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
    1
    TSR Consulting, Inc. (The Snelling Report)
  • 2. Structure
    Business structure affects tax
    Things affecting decision about structure
    Exit strategy
    Succession planning
    Ease of entry and operation
    Taxes
    2
    TSR Consulting, Inc. (The Snelling Report)
  • 3. 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!
    3
    TSR Consulting, Inc. (The Snelling Report)
  • 4. 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!
    4
    TSR Consulting, Inc. (The Snelling Report)
  • 5. 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
    5
    TSR Consulting, Inc. (The Snelling Report)
  • 6. 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
    6
    TSR Consulting, Inc. (The Snelling Report)
  • 7. 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 register and file annually with Secretary of State
    Must have Board of Directors and prepare annual Board minutes
    Must file separate tax return
    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
    7
    TSR Consulting, Inc. (The Snelling Report)
  • 8. 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 register and file annually with Secretary of State
    Must have Board of Directors and prepare annual Board minutes
    Must file separate tax return
    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
    8
    TSR Consulting, Inc. (The Snelling Report)
  • 9. 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
    9
    TSR Consulting, Inc. (The Snelling Report)
  • 10. 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
    10
    TSR Consulting, Inc. (The Snelling Report)
  • 11. 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
    11
    TSR Consulting, Inc. (The Snelling Report)
  • 12. 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.
    12
    TSR Consulting, Inc. (The Snelling Report)
  • 13. 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.
    13
    TSR Consulting, Inc. (The Snelling Report)
  • 14. 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
    14
    TSR Consulting, Inc. (The Snelling Report)
  • 15. 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
    15
    TSR Consulting, Inc. (The Snelling Report)
  • 16. 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.
    16
    TSR Consulting, Inc. (The Snelling Report)
  • 17. 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)
    17
    TSR Consulting, Inc. (The Snelling Report)
  • 18. 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.
    18
    TSR Consulting, Inc. (The Snelling Report)
  • 19. 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
    19
    TSR Consulting, Inc. (The Snelling Report)
  • 20. 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
    20
    TSR Consulting, Inc. (The Snelling Report)
  • 21. 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
    21
    TSR Consulting, Inc. (The Snelling Report)
  • 22. 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!
    22
    TSR Consulting, Inc. (The Snelling Report)
  • 23. 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
    23
    TSR Consulting, Inc. (The Snelling Report)
  • 24. 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
    24
    TSR Consulting, Inc. (The Snelling Report)
  • 25. 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
    25
    TSR Consulting, Inc. (The Snelling Report)
  • 26. 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!
    26
    TSR Consulting, Inc. (The Snelling Report)
  • 27. 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.
    27
    TSR Consulting, Inc. (The Snelling Report)