Aug 282014
 
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New business owners often ask, “How do I set up my business?”  One of the choices you make when starting a business is the type of legal organization you select. This decision can affect how much you pay in taxes, the amount of bookkeeping and paperwork required, the personal liability you might be responsibility for, and your ability of borrow money.

For-profit businesses fall under one of four structures for tax purposes:

1.  Sole Proprietor – An individual who owns an unincorporated business by themselves.  Most small and home based businesses are sole proprietorships.  For tax purposes, the business activity of a sole proprietor is reported on Schedule C of Form 1040.  This is included in the business owner’s personal income tax return.

2.  Partnership – Two or more persons join together to carry on a trade or business.  Each person contributes money, property, labor or skill, and expects to share in the profits and losses of the business.  For tax purposes, a partnership doesn’t pay income tax.  Instead, Form 1065 is filed by the partnership and Schedule K-1, which shows the respective share of income and expenses for each partner, is provided to the partners for use in preparing their personal income tax return (Form 1040).

3.  Corporation – A relationship where prospective shareholders exchange money, property, or both, for the corporation’s capital stock.  Profits are taxed to the corporation when earned and then taxed to the shareholders when distributed as dividends (double taxation).  A corporation is created by filing paperwork with the secretary of state in the state of incorporation.  A corporation is an entity in itself and can sue and be sued.  Form 1120 is used to report the income and expenses for a corporation and any income tax.

Common stock issued in 1967

Common stock issued in 1967 (Photo credit: Wikipedia)

4.  S Corporation – A corporation (see item 3. above), meeting certain criteria, that elects to be treated as as S corporation.  Generally, an S corporation is exempt from income tax; the shareholders report the S corporation’s income and expenses (via Schedule K-1) on their personal income tax return (Form 1040) similar to a partnership.  There are certain tax advantages to electing S status for a corporation.  The S Corporation files an information return (Form 1120S) similar to that of a partnership.

5.  Limited Liability Company (LLC) – An entity created by statute in certain states that is characterized by limited liability for debts similar to that of a corporation.  It is managed by members or managers.  An LLC is not a taxable entity per se.  Depending on the number of members, an LLC may be taxed as a sole proprietor (see item 1.) or as a partnership (see item 2.).

For more information regarding entity selection or assistance in answering the question, “How do I set up my business,” submit your request below:

Disclosure of Material Connection: Some of the links on this blog are “affiliate links.” This means if you click on the link and purchase the item, I might receive an affiliate commission. Regardless, I only recommend products or services I use personally and believe will add value to my readers. I am disclosing this in accordance with the Federal Trade Commission’s 16 CFR, Part 255: “Guides Concerning the Use of Endorsements and Testimonials in Advertising.”

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Jul 302014
 
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I had put it on some time ago. I kept it on everywhere I had a presence. I was submissive and had a desire to be obedient.  The ramifications of not doing as the master said weren’t nearly as pleasurable as complying with my master’s commands.

Having become a creature of habit, and not wanting to displease my master, I had put it on everywhere. Having quite the presence online, I had it on in lots of places. You could see on me in my blog posts, my web page, my social media posts. Everywhere I was, I had it on.

Now, after months of making sure I’d covered my a**, I’m told to TAKE IT OFF!

Yep. In a webinar presented by the Office of Professional Responsibility, Karen Hawkins told me to take it off. I no longer have to include the Circular 230 disclaimer at the bottom of my emails, in my tax advice blog posts, or any other place where I contribute information related to the U.S. tax laws. In fact, if I keep it on, I can be reprimanded which I’m sure won’t be a pleasure.

Because I’m still seeing so many areas where the disclaimer is being worn, I want to make you aware of the rule change. As a reminder, it is your responsibility to keep up with the rules contained in Circular 230. If you haven’t complied with the rule, I encourage you to TAKE IT OFF!

You can find the Circular 230 Overview at http://www.irsvideos.gov/Circular230Overview_June_25_2014/

Disclosure of Material Connection: Some of the links on this blog are “affiliate links.” This means if you click on the link and purchase the item, I might receive an affiliate commission. Regardless, I only recommend products or services I use personally and believe will add value to my readers. I am disclosing this in accordance with the Federal Trade Commission’s 16 CFR, Part 255: “Guides Concerning the Use of Endorsements and Testimonials in Advertising.”

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Jul 232014
 
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5 Basic Tax Tips for New Businesses

If you start a business, one key to success is to know about your federal tax obligations. You may need to know not only about income taxes but also about payroll taxes. Here are five basic tax tips that can help get your business off to a good start.

1. Business Structure. Prior to start up, you’ll need to choose the structure of your business. Some common types include sole proprietorship (Form 1040), partnership (Form 1065) and corporation (Form 1120). You may also choose to be an S corporation (Form 1120-S) or Limited Liability Company. You’ll report your business activity using the IRS forms which are right for your business type. A Limited Liability Company (created by state statute) may be taxed as a sole proprietorship (single member), a partnership (multiple members), or other taxable entity.

2. Business Taxes. There are four general types of business taxes. They are income tax, self-employment tax, employment tax and excise tax. The type of taxes your business pays usually depends on which type of business you choose to set up. You may need to pay your taxes by making estimated tax payments.

3. Employer Identification Number. You may need to get an EIN for federal tax purposes. Search “do you need an EIN” on IRS.gov to find out if you need this number. If you do need one, you can apply for it online.

4. Accounting Method. An accounting method is a set of rules that determine when to report income and expenses. Your business must use a consistent method. The two that are most common are the cash method and the accrual method. Under the cash method, you normally report income in the year that you receive it and deduct expenses in the year that you pay them. Under the accrual method, you generally report income in the year that you earn it and deduct expenses in the year that you incur them. This is true even if you receive the income or pay the expenses in a future year.

5. Employee Health Care. The Small Business Health Care Tax Credit helps small businesses and tax-exempt organizations pay for health care coverage they offer their employees. A small employer is eligible for the credit if it has fewer than 25 employees who work full-time, or a combination of full-time and part-time. Beginning in 2014, the maximum credit is 50 percent of premiums paid for small business employers and 35 percent of premiums paid for small tax-exempt employers, such as charities.

For 2015 and after, employers employing at least a certain number of employees (generally 50 full-time employees or a combination of full-time and part-time employees that is equivalent to 50 full-time employees) will be subject to the Employer Shared Responsibility provision.

For assistance with starting a business, feel free to contact me via the form below.

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Credit: irs.gov

 

Disclosure of Material Connection: Some of the links on this blog are “affiliate links.” This means if you click on the link and purchase the item, I might receive an affiliate commission. Regardless, I only recommend products or services I use personally and believe will add value to my readers. I am disclosing this in accordance with the Federal Trade Commission’s 16 CFR, Part 255: “Guides Concerning the Use of Endorsements and Testimonials in Advertising.”

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Apr 042014
 
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Four Things to Know about Net Investment Income Tax

Starting in 2013, some taxpayers may be subject to the Net Investment Income Tax. You may owe this tax if you have income from investments and your income for the year is more than certain limits. Here are four things from the IRS that you should know about this tax:

1. Net Investment Income Tax. The law requires a tax of 3.8 percent on the lesser of either your net investment income or the amount by which your modified adjusted gross income exceeds a threshold amount based on your filing status.

2. Net investment income. This amount generally includes income such as:

  • interest
  • dividends
  • capital gains
  • rental and royalty income
  • non-qualified annuities

This list is not all-inclusive. Net investment income normally does not include wages and most self-employment income. It does not include unemployment compensation, Social Security benefits or alimony. Net investment income also does not include any gain on the sale of your main home that you exclude from your income.

After you add up your total investment income, you then subtract your deductions that are properly allocable to this income. The result is your net investment income. Refer to the instructions for Form 8960, Net Investment Income Tax for more on how to figure your net investment income or MAGI.

3. Income threshold amounts. You may owe the tax if you have net investment income and your modified adjusted gross income is more than the following amount for your filing status:

Filing Status Threshold Amount
Single or Head of household:  $200,000
Married filing jointly:  $250,000
Married filing separately:  $125,000
Qualifying widow(er) with a child:  $250,000

4. How to report. If you owe this tax, you must file Form 8960 with your federal tax return. If you had too little tax withheld or did not pay enough estimated taxes, you may have to pay an estimated tax penalty.

Investment

Investment (Photo credit: LendingMemo)

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Disclosure of Material Connection: Some of the links on this blog are “affiliate links.” This means if you click on the link and purchase the item, I might receive an affiliate commission. Regardless, I only recommend products or services I use personally and believe will add value to my readers. I am disclosing this in accordance with the Federal Trade Commission’s 16 CFR, Part 255: “Guides Concerning the Use of Endorsements and Testimonials in Advertising.”

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Feb 022013
 
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Do you use the internet in your home based business?  Be sure to maintain records substantiating your business use.  Otherwise, you might end up in the same situation as this couple.


A husband and wife were both university professors who collaborated on research projects and jointly published numerous books, chapters, and articles for publication.  While both were employed as professors at educational institutions in New Jersey, they also made trips to Sweden for research.


During the year in question, the taxpayers paid $2,198.39 for home internet service in their New Jersey residence and $683.15 for home internet service in their Stockholm residence.  The IRS denied the deduction, claiming they were not deductible under IRC Section 162 as a business expense.  In the alternative, the IRS denied the deduction claiming the taxpayers failed to substantiate the deduction under IRC Section 274.

The Court said that to the extent the taxpayer’s home internet service is used for business, the cost is deductible under IRC Section 162 as a business expense.  Contrary to the IRS claim, the Court said home internet expenses are not subject to the strict substantiation rules of IRC Section 274 because home internet service is a utility expense, not an entertainment or travel expense.

The Court also said that under the Cohan rule, if a taxpayer establishes that a deductible expense has been incurred, but cannot substantiate the expense, the Court should estimate the amount, and allow the estimate as a deduction.  However, the Court is not required to estimate a deductible expense unless the taxpayer presents a sufficient amount of evidence upon which an estimate can be made.

In this case, the taxpayers conducted academic research in collaboration with each other and other colleagues in other parts of the world.  The taxpayers testified credibly that home internet service was used in their collaborations.  The taxpayers were not reimbursed by their employers for the costs of the home internet service, nor were they entitled to reimbursement for such costs.  The taxpayers thus established that they did in fact incur deductible business expenses for the home internet services attributable to business use.

However, the taxpayers provided no evidence or testimony regarding the percentage of home internet service that was devoted to business purposes.  Because any estimate made by the Court would be wholly arbitrary, the Court refused to make an estimate for the taxpayers and ruled that none of the expense for home internet service was deductible.

IRS Circular 230 Disclosure:  In compliance with U.S. Treasury Regulations, the information included herein (or in any attachment) is not intended or written to be used, and it cannot be used, by any taxpayer for the purpose of i) avoiding penalties the IRS and others may impose on the taxpayer or ii) promoting, marketing, or recommending to another party any tax related matters.

Disclosure of Material Connection: Some of the links on this blog are “affiliate links.” This means if you click on the link and purchase the item, I might receive an affiliate commission. Regardless, I only recommend products or services I use personally and believe will add value to my readers. I am disclosing this in accordance with the Federal Trade Commission’s 16 CFR, Part 255: “Guides Concerning the Use of Endorsements and Testimonials in Advertising.”

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