Small Business Guide to Taxes<br />TSR Consulting, Inc.<br />Debbie Snelling, CEO<br />voice 404-944-3172 ♦ e-fax 425-944-...
Structure<br />Business structure affects tax<br />Things affecting decision about structure<br />Exit strategy<br />Succe...
Sole Proprietor<br />Easiest to form<br />No state license or registration<br />Low cost of start up<br />Federal Taxpayer...
Partnership<br />Easy to form<br />No state license or registration necessary<br />Must get federal Taxpayer Identificatio...
Limited Liability Company (LLC)<br />Form by filing LLC documents with Secretary of State<br />Corporation with ability to...
Limited Liability Company (LLC)<br />Tax return filing depends on tax structure<br />Separate return required if other tha...
Corporation (C corporation)<br />Form by filing corporation documents with Secretary of State<br />Best if long term goal ...
S-Corporation<br />Form by filing corporation documents with Secretary of State<br />Corporation with limits to number and...
Business Expenses<br />All expenses related to business are deductible<br />Expenses must be documented<br />Receipts<br /...
What business expenses are deductible?	<br />Employee or contractor pay<br />Insurance<br />Interest<br />Investment inter...
What business expenses are deductible?<br />Business use of your home<br />Advertising<br />Bank fees<br />Education expen...
Expenses you cannot deduct<br />Bribes or kickbacks<br />Dues to business, social, athletic, luncheon, sporting, airline, ...
Car and truck expenses<br />Actual expenses or standard mileage rate<br />Actual expenses include depreciation, gas, insur...
What is business mileage?<br />Local transportation expenses<br />Getting from one workplace to another<br />Visiting clie...
Depreciation<br />Business assets with a life of greater than one year must be capitalized<br />It must be property you ow...
Sec 179 depreciation<br />$250,000 can be deducted in the first year as additional (Sec 179) depreciation<br />Limited to ...
Repairs, maintenance or business asset?<br />Repairs and maintenance are deducted in the current tax year<br />In order to...
When are entertainment expenses deductible?<br />General rule<br />You can deduct ordinary and necessary expenses to enter...
Entertainment expense tests<br />Directly-related test<br />Entertainment took place in a clear business setting, OR<br />...
Self employment tax<br />Net business income is subject to income tax and self employment tax<br />Net earnings subject to...
Start-up Costs<br />Start-up costs paid or incurred after October 22, 1994<br />Up to $5,000 may be deducted in the year t...
Self employment tax example(includes Sole Proprietor, Partnership (flowing to your personal return), and LLC (unless LLC i...
Self employment tax example (continued)<br />Net Income from Self Employment		$  60,000<br />½ of self employment tax ($60...
Paying taxes and underpayment penalties<br />Estimated tax payments must be made quarterly<br />Adjust withholding if you ...
Penalties for failure to file or pay<br />Penalty for failure to file<br />Individuals: 5%/month with a maximum of 25%, bu...
Tax Planning for Business is Essential<br />Every major corporation has tax professionals employed on a full time basis to...
IRS Circular 230 Disclosure<br />To ensure compliance with any requirements imposed by the IRS, we inform you that the fed...
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Small business guide to taxes 03032010

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Small business guide to taxes 03032010

  1. 1. Small Business Guide to Taxes<br />TSR Consulting, Inc.<br />Debbie Snelling, CEO<br />voice 404-944-3172 ♦ e-fax 425-944-3178<br />http://thesnellingreport.com<br />tsrtax@gmail.com<br />Facebook & Twitter: SnellingReport<br />1<br />TSR Consulting, Inc. (The Snelling Report)<br />
  2. 2. Structure<br />Business structure affects tax<br />Things affecting decision about structure<br />Exit strategy<br />Succession planning<br />Ease of entry and operation<br />Taxes<br />2<br />TSR Consulting, Inc. (The Snelling Report)<br />
  3. 3. Sole Proprietor<br />Easiest to form<br />No state license or registration<br />Low cost of start up<br />Federal Taxpayer Identification Number (TIN) not required unless if hire employees or other limited circumstances<br />No separate bank account necessary<br />Easier record keeping if separate bank account, so it’s advisable to have one<br />Bank are often now requiring a business license to open account<br />File taxes as usual with additional forms<br />Unlimited liability for yourself. All your assets may be at risk.<br />Tax = income tax (at your tax bracket) + Self Employment tax (15.3%). Combined tax could be 40% or more!<br />3<br />TSR Consulting, Inc. (The Snelling Report)<br />
  4. 4. Partnership<br />Easy to form<br />No state license or registration necessary<br />Must get federal Taxpayer Identification Number (TIN)<br />Separate bank account for partnership<br />Bank will require TIN and business license<br />Must file separate tax return<br />Items of income and expense flow through to partners’ personal return<br />Business income is taxable to partner currently<br />Business losses are, generally, deductible to partner currently<br />Unlimited liability of partners (unless Limited Liability Partner)<br />Tax = income tax (at your tax bracket) + Self Employment tax (15.3%). Combined tax could be 40% or more!<br />4<br />TSR Consulting, Inc. (The Snelling Report)<br />
  5. 5. Limited Liability Company (LLC)<br />Form by filing LLC documents with Secretary of State<br />Corporation with ability to decide tax structure<br />Corporate entity provides limited liability for members/shareholders<br />Must register and file annually with Secretary of State<br />Must get federal Taxpayer Identification Number (TIN) if other than sole proprietor<br />Check the box for tax<br />Default for one member = sole proprietor<br />Default for more than one member = partnership<br />Check the box option to be taxed as corporation<br />If decide to be taxed as corporation, can elect S-corp<br />5<br />TSR Consulting, Inc. (The Snelling Report)<br />
  6. 6. Limited Liability Company (LLC)<br />Tax return filing depends on tax structure<br />Separate return required if other than sole proprietor<br />Limited liability for members<br />Tax, generally, not subject to SE tax if partnership<br />Recent court cases allowed deduction of business loss for LLC member<br />Expect IRS to try to push for SE tax on LLC members with active participation<br />6<br />TSR Consulting, Inc. (The Snelling Report)<br />
  7. 7. Corporation (C corporation)<br />Form by filing corporation documents with Secretary of State<br />Best if long term goal is to offer the share to the public<br />Must obtain separate bank account<br />Must get federal TIN and business license<br />Must register and file annually with Secretary of State<br />Must have Board of Directors and prepare annual Board minutes<br />Must file separate tax return<br />Corporation pays taxes on its net income<br />Dividends paid are not deductible to the corporation<br />Dividends reduce the equity of the corporation<br />Because no tax deduction is allowed, the corporation pays taxes on amounts paid as dividends<br />Recipients of dividend income (you), pay taxes on the dividends<br />Dividends, therefore, are taxed twice – corporation and you<br />7<br />TSR Consulting, Inc. (The Snelling Report)<br />
  8. 8. S-Corporation<br />Form by filing corporation documents with Secretary of State<br />Corporation with limits to number and types of shareholders<br />Must obtain separate bank account<br />Must get federal TIN and business license<br />Must register and file annually with Secretary of State<br />Must have Board of Directors and prepare annual Board minutes<br />Must file separate tax return<br />Items of income/expense pass through to shareholders<br />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<br />Salary must be paid to officers<br />Unless net income of the business is nominal, you must pay a salary to yourself<br />Salary requires payroll tax returns and deposits<br />FICA (Social Security & Medicare) tax only against amount of salary<br />Net income of business not subject to Self Employment tax (only the salary is)<br />Limited liability for shareholders<br />8<br />TSR Consulting, Inc. (The Snelling Report)<br />
  9. 9. Business Expenses<br />All expenses related to business are deductible<br />Expenses must be documented<br />Receipts<br />Mileage log<br />Some expenses are limited<br />Meals and entertainment<br />Club dues<br />Auto expenses<br />9<br />TSR Consulting, Inc. (The Snelling Report)<br />
  10. 10. What business expenses are deductible? <br />Employee or contractor pay<br />Insurance<br />Interest<br />Investment interest is not a business expense unless you are a professional trader<br />Legal and professional fees<br />Fees related to your business are deducted from business income<br />Fees related to your personal life may be deductible as an itemized deduction<br />Retirement plans<br />For yourself and your employees , e.g. SEP (Simplified Employee Pension) or SIMPLE (Savings Incentive Match for Employees)<br />Rent<br />Travel and entertainment, if certain conditions are met<br />10<br />TSR Consulting, Inc. (The Snelling Report)<br />
  11. 11. What business expenses are deductible?<br />Business use of your home<br />Advertising<br />Bank fees<br />Education expenses<br />Internet access<br />Cell phone service<br />Penalties or fines you pay for late performance or nonperformance of a contract<br />Licenses and regulatory fees<br />Repairs that keep your business property in normal operating condition<br />Professional dues <br />Subscriptions for professional journals and publications<br />11<br />TSR Consulting, Inc. (The Snelling Report)<br />
  12. 12. Expenses you cannot deduct<br />Bribes or kickbacks<br />Dues to business, social, athletic, luncheon, sporting, airline, and hotel clubs<br />Lobbying expenses<br />Penalties or fines you pay to a government agency or instrumentality because you broke (or failed to comply with) the law<br />Personal, living and family expenses<br />Political contributions<br />Repairs that add to the value of your property or significantly increase its life.<br />12<br />TSR Consulting, Inc. (The Snelling Report)<br />
  13. 13. Car and truck expenses<br />Actual expenses or standard mileage rate<br />Actual expenses include depreciation, gas, insurance, repairs and maintenance, parking and tolls, etc.<br />Standard mileage rate includes all items in actual expense<br />2009 standard mileage rate = $0.55/mile for business<br />Parking and tolls still deductible separately<br />Mileage log must be maintained whether using actual expense method or standard mileage method<br />Business use of your car is deductible. Personal use is not deductible.<br />13<br />TSR Consulting, Inc. (The Snelling Report)<br />
  14. 14. What is business mileage?<br />Local transportation expenses<br />Getting from one workplace to another<br />Visiting clients or customers<br />Going to tradeshows, meetings or conventions away from your regular workplace<br />Out of town travel for business in your vehicle<br />14<br />TSR Consulting, Inc. (The Snelling Report)<br />
  15. 15. Depreciation<br />Business assets with a life of greater than one year must be capitalized<br />It must be property you own<br />It must be used in your trade or business<br />Deduction is taken for depreciation over the life of the property<br />Life is generally prescribed by IRS<br />Additional first year depreciation may be taken in certain circumstances<br />Inventory is not depreciable because it is for resale, not for use in your business<br />When items are sold from inventory, they are deductible as a cost of selling<br />Items withdrawn from inventory for personal use are not deductible<br />15<br />TSR Consulting, Inc. (The Snelling Report)<br />
  16. 16. Sec 179 depreciation<br />$250,000 can be deducted in the first year as additional (Sec 179) depreciation<br />Limited to the amount of net income of your business<br />Sec 179 depreciation cannot create a business loss<br />Reduction in the amount by the cost amount which exceeds $800,000<br />Limitation for passenger automobiles ($2,960 in 2008)<br />Sec 179 depreciation deduction scheduled to go to $125,000 after 2009.<br />16<br />TSR Consulting, Inc. (The Snelling Report)<br />
  17. 17. Repairs, maintenance or business asset?<br />Repairs and maintenance are deducted in the current tax year<br />In order to require capitalization, the expense must<br />increase the value of your property,<br />make it more useful,<br />or lengthen its useful life<br />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)<br />17<br />TSR Consulting, Inc. (The Snelling Report)<br />
  18. 18. When are entertainment expenses deductible?<br />General rule<br />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.<br />Entertainment includes any activity generally considered to provide entertainment, amusement, or recreation, and includes meals provided to a customer or client.<br />An ordinary expense is one that is common and accepted in your field of business, trade, or profession.<br />A necessary expense is one that is helpful and appropriate, although not necessarily required, for your business.<br />18<br />TSR Consulting, Inc. (The Snelling Report)<br />
  19. 19. Entertainment expense tests<br />Directly-related test<br />Entertainment took place in a clear business setting, OR<br />Main purpose of entertainment was the active conduct of business, <br />AND<br />You did engage in business with the person during the entertainment period and<br />You had more than a general expectation of getting income or some other specific business benefit<br />Associated test<br />Entertainment is associated with your trade or business, and<br />Entertainment directly precedes or follows a substantial business discussion<br />Other rules<br />You cannot deduct the cost of your meal as an entertainment expense if you are claiming the meal as a travel expense<br />You cannot deduct expenses that are lavish or extravagant under the circumstances<br />You generally can deduct only 50% of your unreimbursed entertainment expenses<br />19<br />TSR Consulting, Inc. (The Snelling Report)<br />
  20. 20. Self employment tax<br />Net business income is subject to income tax and self employment tax<br />Net earnings subject to self employment is net business income x 92.35% (100% less 7.65%)<br />Income tax rate depends upon your tax bracket<br />Self employment tax is 15.3% (7.65% x 2)<br />12.4% Social Security (6.2% x 2)<br />2.9% Medicare (1.45% x 2)<br />Note that this is both the employee and employer side of what would be FICA tax on your paycheck from your employer<br />Maximum earnings subject to self employment tax<br />Social Security portion 2009: $106,800<br />Medicare portion unlimited<br />20<br />TSR Consulting, Inc. (The Snelling Report)<br />
  21. 21. Start-up Costs<br />Start-up costs paid or incurred after October 22, 1994<br />Up to $5,000 may be deducted in the year the business begins<br />A special election was required to be attached to be attached to the tax return<br />Regulations finalized on July 8, 2008 eliminated this requirement for start-up costs incurred after September 8, 2008<br />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<br />The $5,000 is reduced by the amount by which total start-up costs exceed $50,000<br />Amounts not deductible currently must be amortized over 15 years<br />Start-up costs prior to October 22, 1994 were not deductible<br />21<br />TSR Consulting, Inc. (The Snelling Report)<br />
  22. 22. Self employment tax example(includes Sole Proprietor, Partnership (flowing to your personal return), and LLC (unless LLC is taxed as a corporation))<br />Self Employment (SE Tax) 15.3%<br />Social Security 6.20%<br />Medicare 1.45%<br />Subtotal 7.65%<br />Employer Match x2 (you are the employer)<br />Total 15.30%<br />Net Business Income $ 60,000<br />SE Tax Rate 15.3%<br />SE Tax $ 9,180<br /> You still have to pay Income Tax!<br />22<br />TSR Consulting, Inc. (The Snelling Report)<br />
  23. 23. Self employment tax example (continued)<br />Net Income from Self Employment $ 60,000<br />½ of self employment tax ($60,000 x 15.3% x ½) ( 4,590)<br />Adjusted Gross Income (AGI) $ 55,410<br /> examples uses 2009 tax rates, standard deduction and personal exemption<br />Standard Deduction (single taxpayer) ( 5,700)<br />Personal Exemption (no dependents) ( 3,650)<br />Taxable Income $ 46,060<br />Income Tax (25% tax bracket) $ 7,703<br />SE Tax ($60,000 x 15.3%) 9,190<br />Total Federal Tax $ 16,883<br />28.14% of $60K!! YOU STILL HAVE TO PAY STATE INCOME TAX<br />23<br />TSR Consulting, Inc. (The Snelling Report)<br />
  24. 24. Paying taxes and underpayment penalties<br />Estimated tax payments must be made quarterly<br />Adjust withholding if you or spouse have a job<br />Make estimated tax payments<br />4/15, 6/15, 9/15, 1/15<br />Federal and state estimated payments<br />Penalty for underpayment of estimated tax<br />Penalty is calculated like interest - rates change monthly<br />Usually, 25% is due each quarter<br />An annualized method may be used<br />Must pay 90% of current year tax or 100% or prior year tax<br />If pay less than required minimum estimates, penalty is calculated on daily underpayment<br />24<br />TSR Consulting, Inc. (The Snelling Report)<br />
  25. 25. Penalties for failure to file or pay<br />Penalty for failure to file<br />Individuals: 5%/month with a maximum of 25%, but not less than the minimum<br />Partnerships and S-corporations: $50/partner or shareholder /month with a $250 maximum, but not less than the minimum<br />Minimum penalty was revised for returns required to be filed after 2008<br />If not filed within 60 days of the due date (including extensions)<br />Individuals<br />lesser of $135 or the amount of tax required to be shown on the return<br />Partnerships and S-corporations<br />$89/partner or shareholder /month for 12 months<br />Penalty for failure to pay<br />0.5%/month with no maximum<br />Penalties may be waived or abated if due to reasonable cause<br />25<br />TSR Consulting, Inc. (The Snelling Report)<br />
  26. 26. Tax Planning for Business is Essential<br />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.<br />Big 4 accounting firms charge a minimum of $150/hour for fresh college graduates with no experience.<br />Corporate structure pays a key role in tax planning.<br />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!<br />26<br />TSR Consulting, Inc. (The Snelling Report)<br />
  27. 27. IRS Circular 230 Disclosure<br />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.<br />27<br />TSR Consulting, Inc. (The Snelling Report)<br />

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