From : U.S. Small Business Administration
Location : Washington , D.C.
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"A complement to this SBA Web chat is the IRS's January Tax Talk Today Web cast: "Getting Ready for the Filing Season 2008: Part 2 (Businesses)", on Tuesday, January 8, 2008 at 2 p.m. The show's panelists will discuss business tax issues including recent tax law changes, updates for the 2007 tax year, including Alternative Minimum Tax (AMT), IRS regulations, business credits, common errors, and processing issues. To access the Web cast at no charge, viewers can register online at www.TaxTalkToday.tv. If you miss the program, the January Web cast is accessible for viewing via archive for 12 months at Tax Talk Today. A transcript of the show is also available, as well as an audio podcast."
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From : Judy
Location : Lewiston , ID
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Question :
Can you explain some of the benefits of a husband and wife organizing their business as an LLC and having the spouse employed as an employee? What is the difference between member managed and manager managed LLC?
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If the husband is the sole owner of the LLC, it will be treated as a sole proprietor for ease of reporting on Schedule C of Form 1040 rather than if you both had ownership interests it would be generally treated as a partnership (but new law would allow you to elected to file two separate Schedules C as two sole proprietors). As an employee of the LLC, the LLC will deduct the wages and benefits, thus reducing the profit of the business as reported on Form 1040. The wife will pay tax on those wages also on Form 1040 and so, if a joint return, that part might even out. The real benefit of family employees is where the children (who are at a lower tax bracket and who file separate returns) are employees. That would reduce the overall family tax liability.
Member managed vs. member managed are designations that some states have and it refers to whether the members of the LLC (in this case the husband) actually makes the management decisions or whether an outside management company (or another non-owner) makes those decisions.
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From : U.S. Small Business Administration
Location : Washington , D.C.
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Thanks to everyone for participating in this year's chat. Our time is up. I've enjoyed it! Tom
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From : John Thompson
Location : Glendale , CA
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Question :
I am the sole owner of a Sub S corporation. Is it true that I could pay myself a large bonus as salary, pay the appropriate federal and state income tax withholdings and avoid penalties on estimated tax amounts that I otherwise should have paid?
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Yes
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From : J. Santos
Location : San Antonio , TX
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I'm a small business owner who made some charitable contributions to several local community organizations this year. Can I deduct those contributions on the business return I will file?
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Yes, assuming that they are charitable, religous, educational or scientific and are a 501(c)(3) organization on the IRS cumulative list of organizations (on the IRS website, www.irs.gov). If you're organized as a pass-through (partnership, S corp, etc.) these will flow onto your personal return. There are limits on high levels of charitable contributions in relation to your AGI, and you have to itemize if they flow through to your individual return, but this isn't usually a problem. Consider contributions of excess inventory, computers, books, and food, as these can give you a higher deduction than scrapping them.
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From : Sherri
Location : Tallahassee , Fl
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We pay quarterly estimated taxes but the sole proprietorship had no income for Oct. Nov. Dec. If we send no IRS pmt, will a red flag be put on our account? Should we send a small pmt to IRS to avoid a red flag?
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In general, an individual is required to pay 25 percent of his required payment amount on each of the quarterly due dates. In general, taxpayers are required to pay estimated taxes for the year equal to the lower of 90 percent of the tax shown on the 2007 return or 100 percent of the tax shown on the prior year's return. For a husband and wife with an adjusted gross income of over $150,000, the required estimated tax amount for the year might even be higher.
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From : Megan Johnson
Location : Baltimore , MD
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Tom, what's the biggest tax mistake you see small busines owners make?
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Megan - probably failure to keep adequate records. Another big problem is the co-mingling of funds. Business should have a separate bank account.
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From : Daniela Swetz
Location : St. Charles , MO
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Question :
We have had a closely held C Corp for many years and have avoided having to pay corporate level taxes by buying (and writing off) assets or funding our SEP-IRAs whenever we had net profits. We've recently expanded the Corp's activities to buying and developing real estate. Most of this real estate will be held for more than 12 months, thus generating long term capital gains. However, some of it may be held for less time and generate significant net income (or maybe short term capital gains?). Would there be any advantage to converting to an S corp and, if so, when is the deadline for election for the 2007 tax year?
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Daniela
One of the major benefits of the S corporation is that the business owners are only taxed once whereas with a regular corporation the company is subject to tax and then the net income is taxed again as a dividend when distributed to the shareholders. You've apparently been able to avoid this "second" tax by monitoring the income and making sure the company doesnt have net income at the end of the year. But as an S corporation you don't have the concern of having to net out the income. Could save you a lot of effort. Another major benefit of an S corportation that holds real estate is that long term capital gains are "flowed through" to the sharehodlers and taxed at a 15% rate. There is no reduced rate for long term capital gains for a regular corporation. Moreover, if the company suffers a capital loss, that loss is passed through to the shareholders who can carry it forward indefinitely, whereas, a capital loss of a corporation can only be carried forward 5 years. This might be an important difference if the real estate market continues to go south.
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From : Michelle E Stroud
Location : New Orleans , LA
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What are some year end tax savings for an LLC - 3 partners- Net income approximately $5 mill
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Consider accelerating deductions and deferring income to keep your tax money as long as possible. You might go the other way, though, if you expect your tax rate to be lower next year.
Charitable contributions, possibly including books, computers, software.
If you have exposure to at-risk loss limitations, step up your investment before year end.
If you have exposure to personal holding company status, shift income to the extent possible or distribute earnings (pay dividends) by year end to avoid the 15% tax on undistributed PHC ncome.
Place business equipment in service and take the Section 179 deduction instead of capitalizing and depreciating over several years.
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From : Cindy
Location : San Francisco , CA
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Could you elaborate more of when a LLC would be treated as Corp for Fed and State tax purposes
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As a general rule, an LLC is considered a partnership for tax purposes. However, the LLC can elect to be treated as a corporation under what is called the "check the box" federal tax rules.
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From : Jamie
Location : Roanoke , Va
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My husband and I currently have an LLC for Real Estate Holdings. WE have 27 1 BR apts and 7 rental houses. The apts are held in the LLC name and the single family houses are title to us personally as that's what the mortgage lenders require. Earlier you advised to file a Schedule c with the 1040 return. Our accountant has been preparing 2 tax returns, one for the LLC and one for us personally. Could we eliminate the one for the LLC and do everything personally?
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Yes. Your accountant has been correct to treat your LLC as a partnership in the past. A recent law change this year allows a husband and wife partnership to be treated as two separate sole proprietors, thus filing one Schedule C for the husband and a separate Schedule C for the wife, properly apportioning the income and expenses toe each. To elect this treatment, the husband and wife must be the only owners and you both must materially participate in the business. Making this election will still keep the assets in the LLC for liability protection purposes and you'll be able to more fluidly combine the business of the LLC with the business of the houses. But there is one problem with this treatment..because it is so new, the IRS has not yet issued guidance on how they will treat a partnership that makes this election. The assumed answer is that there will be a deemed liquidation of the partnership which might mean gain on appreciated assets, depreciation recapture (ordinary income recognition), a revaluation of assets in some cases, and other consequences. Hopefully, the IRS will not give this answer when they finally come out with guidance (which the AICPA has been pressing them for), but it is a distinct possibility. If that is the treatment, you will have to weigh with your accountant the pros and cons of keeping things the way they are versus waiting until guidance comes out from the IRS addressing this issue.
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From : Julia Zimmer
Location : Minneapolis , Minnesota
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What should a small S corp do at this time of year to avoid paying so much taxes? Should you buy equipment, pay bonuses, pay yourself ? Any ideas would be helpful
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Julia
Obviously you shouldn't do anything that doesn;t make business sense just to get a tax deduction. But, if you need more assets in the business and you haven't already acquired $125,000 of depreciatible assets this year, consider acquiring those assets and placing them in service this year because you can write off the full purchase price on this years return. If you are on the accrual accoutning method for tax you can pay bonuses to your employees. In fact, as long as you pay the bonuses withby March 15, 2008 months you can take the deduction on the 2007 return. If you are a shareholder of the S corp, then paying yourself will not necessarily reduce your taxes because. Although it reduces the net income of the corporation by the amount of the payment, it increases your personal income by the same amount so you don't come out ahead. This is particularly true if you don't own all the stock in which case you pick up all the income paid to you but recieve the benefit of only your pro rata (% of total shares you own) portion of the S corp's deduction.
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From : ALEJANDRO PEREZ
Location : HOSTON , TX
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Question :
QUE TIPO DE AYUDA TIENEN LA JENTE QUE TUBO INDUNDACION Y DECLARADO DESASTRE PRECIDENCIAL
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If you are damaged by flood, you can qualify for a casualty loss deduction. This deduction is the difference between the fair market value before the flood and after the flood, limited to the basis in the property. Also, you can only deduct the amount, after insurance reimbursement and $100 per casualty, that exceeds 10% of your adjusted gross income. The IRS website, www.irs.gov has guides in Spanish.
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From : Fred O'Brien
Location : Portland , OR
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Is there a rule of thumb for the amount ($ or %) of 'Reasonable Compensation' I must declare if I have a small part time service business operating as a single member LLC with an election to be taxed as a Sub-S Corporation?
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As an owner of an S corporation for federal tax purposes, you are treated as an employee of the corporation and must pay yourself a fair market value wage for the services you render to the S corp. Any other distributions you give to yourself, beyond the amount you pay yourself for wages, will be a distribution that, under current law, is not subject to self-employment tax, but is subject to income tax to the extent it exceeds the basis of your share of the S corporation stock. In order to determine an accurate wage, you must be honest in valuing your services based on numerous factors, some of which include what other owners receive for the same type of work you are performing, how successful the business is, market value differentials based on your geographic location, whether an independent person would view your wage as reasonable, etc. Basically, pretend you have another unrelated shareholder or a compensation committee where a natural tension exists so that these independent parties determine the reasonable value of your services. That is basically the answer you should come up with.
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From : Mommy's Secret Consignment
Location : Hernando , MS
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What items are you able to write-off as a deduction for small businesses? I thought that meals were, but I was recently told that you could not. And could you eleborate on what type of records should be retained and for what period of time.
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You may generally be able to deduct expenses that are both "ordinary and necessary" in relation to your particular business. "Ordinary" means it's customary or usual. "Necessay" means it's appropriate and helpful in developing and maintaining the business. They need not be essential or indispensable - just use good judgment. Various limits may apply, e.g., % limit on meals and entertainment. You should generally keep detailed records or other proof to substantiate your deductions, although you may be allowed to deduct an estimated amount under what is know as the Cohan Rule (the Cohan Rule doesn't apply to travel & entertainment, "listed" property, or business gifts). Certain expenses, like mileage, requires specific record-keeping (a "log"). Generally, you should keep records for at least 7 years (longer if you have depreciable assests with a longer useful life).
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From : Rocky Shirey
Location : Clearwater , Florida
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What is the most overlooked, yet beneficial, tax deduction(s) that small businesses overlook.
Are there any specific dedcutions that passenger ground transportation companies should look into?
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To the extent that you can give your employees tax free or tax deferred income, they may prefer that to salary, and it's all deductible to you. This would be things like education assistance, fringe benefits, tranist cards, dependent care, pre-tax spending accounts, etc.
Consider use of independent contractors instead of employees. You have to be careful that they are truly independent, so you give up some control, but you save employment taxes and benefits costs, like health insurance.
Take the 179 deduction for business equipment placed in service.
Business charitable contributions
Employ your children (or grandchildren) and take income from your higher bracket and put it into their lower bracket--earned income isn't subject to the parents' marginal rate under "kiddie tax".
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From : David Feldman
Location : Cortlandt Manor , NY
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As a single owner of an LLC, should I being paying myself salary or just using cash when needed
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As a single-member LLC, you are treated as a sole proprietor for federal (and probably state) tax purposes and report all of your business profits, expenses, etc on Schedule C of Form 1040. Therefore you are considered self-employed, and as the owner, you don't pay a salary as in W-2, but you certainly can agree in advance to withdraw a certain amount of funds on a regular basis as meets your needs in a way similar to a salary. But you are not subject to unemployment insurance requirements or other payroll taxes. All of your profits are, rather, subject to self-employment tax, and you will need to make quarterly estimated tax payments on Form 1040-ES.
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From : Debbie
Location : Seattle , WA
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Are there any new things we need to be aware of for the Section 179 deduction for 2007?
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Debbie, the key points to remember are that the property has to be placed in service this year, the deduction is limited to $125,000 of assets, the $125,000 amount is phased out as you acquire more than $500,000 of assets in a given year. To qualify the assets must be tangible property but ot real estate. Perhaps the most important planning point is to remember that, if you acquire more than $125,000 in assest this year, elect the 179 benefit for those with the longest lived assets. for instance, computer software is eliglbe for the election (even tho you might argue it's not tangible property) but you can depreciate that over 3 years. So you'd be better off chosing office furniture for the 179 property becuase that is generally depreciated over 7 years.
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From : Heidi
Location : West Haven , CT
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Businesses are supposed to pay estimated taxes 4 times a year to avoid underpayment penalties. Are there any problems with writing a check to the IRS around December 15 for the total years' estimated tax? That way the cash is earning interest in my account all year.
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Sorry Heidi, you generally can't do that. When you file your tax return, the IRS will automatically calculate penalties (which will likely be as much, or more, as you earn). An exception, however, would be if your income in the business all came in at the end of the year, say a seasonable business, in which case the estimated tax would not have to be paid earlier. Look to Form 2210 (if you file a Schedule C with your Form 1040; or Form 2220 if you are incorporated, for more information.
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From : Samuel Pines
Location : Buffalo , NY
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I am a self-employed small business owner. How can I take advantage of pension/IRA contributions that Ive made.
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The pension/IRA contributions would be generally deductible, but are subject to limitations against adjusted gross income which are beyond the scope of this webcast.
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From : David Feldman
Location : Cortlandt Manor , NY
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As a single owner of an LLC, should I being paying myself salary or just using cash when needed
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As a single-member LLC, you are treated as a sole proprietor for federal (and probably state) tax purposes and report all of your business profits, expenses, etc on Schedule C of Form 1040. Therefore you are considered self-employed, and as the owner, you don't pay a salary as in W-2, but you certainly can agree in advance to withdraw a certain amount of funds on a regular basis as meets your needs in a way similar to a salary. But you are not subject to unemployment insurance requirements or other payroll taxes. All of your profits are, rather, subject to self-employment tax, and you will need to make quarterly estimated tax payments on Form 1040-ES.
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From : Julie Hollander
Location : Fresno , Calif.
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What are some last-minute tax moves that I can do before the end of the year that will help to cut my business tax bill for 2007?
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If you place business equipment in service before year end, you can take a Section 179 deduction assuming that you don't place more than around $500,000 of equipment in service. This will give you a discount on the equipment purchased to the extent of your marginal tax rate.
The normal strategy is to defer income and accelerate deductions to keep your tax money as long as possible. This might be overridden if you expect to be in a lower tax bracket next year.
You may want to step up your investment if you're at risk of losing deductions because you don't have enough "at-risk" in the business.
Accrue bonuses by year-end and take a deduction, even if they aren't paid until 2008.
Charitable contributions, possibly including inventory, books, computers, or food. S corps get favorable treatment for contributing appreciated assets.
Employ a child or grandchild--this shifts income from the owner to the owner's child at a lower tax rate--earned income isn't subject to the "kiddie tax". The child can then contribute to an IRA too!
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From : mel gelman
Location : washington , DC
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In 2007 I began sole proprietor consulting to NOAA. I earned approx $10K, with approx $ 2K expenses. I would like to shelter from tax as much as possible by funding an IRA (SEP?). In 2008 I could earn up to $60, all of which I would like to add to the retirement accouint I set up. I would begin taking money from this account only when I must at age 70.
What kind of accounts should I consider.
What is the maximum I could contribute to each of these alternatives.
Thank you.
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Mel, each type of retirement account has different contribution limits and restrictions. For information about your specific situation, I suggest you visit the IRS web site, www.irs.gov/retirement, and click on FAQs.
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From : Faber Salazar
Location : Central Falls , RHODE ISLAND
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For the tax year ended 12/31/06 We paid to much money in taxes. For 2007 we are trying to fund a 401K With a profit sharing plan but are afraid the market is in such turbulence that might end up losing money or paying to much in fees instead of saving for retirement and avoiding the tax bill.
We are 14 people in small minority family owned service business with an estimated net profit for 2007 of about 40-80k. Right now we just sign a plan with Meryl linch and ADP. Your suggestions will be appreciated
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Faber, I am sorry, but we cannot advise you whether to keep your current plan, nor can we make recommendations about other plans.
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From : Deborah Akers
Location : Little Rock , AR
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I am an independent marketing representative for Team National, a direct makreting company. Can I take the deduction of office in the home?
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Deborah--To qualify for an office in your home, you have to use a dedicated space exclusively and on a regular basis as a place for meeting or dealing with clieents or customers in the normal course of business or as your principal place of business. If you are an employee, the office in home must be for the convenience of the employer. Deductions are limited to the amount of income derived from the home office use, and for that you have to back out expenses, such as real estate taxes, that you would get otherwise, even if you didn't have an office in home.
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From : Naomaru Itoi
Location : Menlo Park , CA
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Hi, like Ray in a previous post, I am a solo owner of LLC which started business this year. I am wondering if I should hire an accountant to file tax for the LLC. What benefit does an accountant bring to a small LLC, in terms of saving tax? If I decide to hire one, when is the right time to talk to them? Right before the deadline, sometime in March, when I have all the income documents ready, or as early as possible?
Thank you,
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We recommend that you consult with an accountant at the time that you conceive of the idea for your business, or at the start of the business. At this time, since you are operating your business, you should go ahead and consult one now.
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From : Sherri Daume
Location : Tallahassee , FL
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In August I left my job where I had a Health Savings Account and went to work for my husband's small business - software development for government agencies. We bought a new High Deductible Health Policy. Should we now open an Archer MSA? If so, what do we do with our old HSA? Can we roll it over? What are the benefits of an Archer MSA as opposed to an HSA?
Thank you, Sherri
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Sherri, HSAs have replaced the more restrictive MSAs as a vehicle to pay for unreimbursed medical expenses. I suggest you talk with a health plan specialist to determine what is right for you. Another option is to visit the Treasury Dept. web site for their FAQs on HSAs. The URL is www.treas.gov/offices/public-affairs/hsa/faq/.shtml.
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From : Don Ericksen
Location : arroyo Grande , Ca.
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3 acres- a horse[mare-possible breeding]-fruit trees[12]-does this qualify as farm business
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Don--To qualify as a business and be able to deduct losses, you have to be able to show the subjective intent to make a profit. Otherwise, the IRS could decide that you're just farming as a hobby and only allow deductions to the extent of income, but not allow a net loss. To evaluate the intent to make a profit, the IRS will look at a number of factors, including your success in this an other enterprises, the amount of profits earned occasionally, your financial status, the personal pleasure elements of the undertaking, the assets you use, the time and effort you put into it, your expertise, etc. To protect yourself, you need to do htings in a business-like way, possibly with a separate checking account, business plan, tax ID number, financial statements, business orgnization, etc. There's a "safe harbor" that shifts the presumption to your side, and that is when you make a profit in any three of five years (it's two out of seven for raising horses)--then you are presumed to have the intent to make a profit and the IRS would have to prove otherwise. If you aren't int he sfe harbor, the IRS just has to say you're engaged in hobby and deny the deductions and then you would have to prove the intent to make a profit.
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From : Burley Owen
Location : Lubbock , Tx
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Question :
For tax purposes how detailed to milage reports be?
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Burley--If you use your personal vehicle for business, you have to keep a contemporaneous record of all your business mileage. This should show where you went and for what business purpose, along with the mileage. The tax form asks for your mileage, commuting mileage, and personal mileage. The tax form also asks you to affirm that you have the contemporaneously maintained vehicle log. The better your log, the more bullet-proof your deductions will be.
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From : Paul Fitzgerald
Location : Melbourne , FL
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Question :
I am a manufactuers representative. What is the optimum busineess organization for tax benifits (S-Corp, LLC etc) ?
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As a representative, I assume you are treated as an independent contractor and that you receive a Form 1099 from the manufacturer at the end of the year showing the total amount of nonemployee earnings and/or commissions. You have several options: sole proprietor on Schedule C (easiest, no liability protection); single-member LLC treated as a sole proprietor but with liability protection for your personal assets, or S corporation which has separate filing requirement for the corporation. The LLC is probably your best bet if you don't mind filing the organizational papers, annual filing fees and any other requirements mandated by your state.
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From : Gary
Location : Albuquerque , NM
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Question :
Is it too late to file a Subchapter S tax filing election for the 2007 tax year for an LLC formed in February of 2007?
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Gary - Unfortuneately, it may be too late. Elections are normally required to be filed by the 15th day of the third month (2 1/2 months) after you formed the entity. Sometimes, however, the IRS may determine that there was reasonable cause for the delay or may provide automatic relief under certain circumstances. I would check with your CPA or other tax adviser to be sure.
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From : David Curtin
Location : Niagara-Lockport SBDC , NY
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Question :
Please explain a bit about Section 1244 stock and when the determination of "worthlessness" is triggered (i.e., is this an end-of-tax-year election and so forth?).
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Excellent question. Individual shareholders will find ยง 1244 stock attractive because,if the companydoes not do well, it enables the shareholder to take an ordinary loss on disposition. There are limitations, on what qualifies as Sec. 1244 stock,however. It is limited to stock issued upon organization of a "small business corporation", basically a corporation whose capitalization is $1M or less. Ordinary loss treatment is limited to $50K ($100K for a joint return). Any excess loss over $50K is treated as a capital loss. I should quickly add that ordinary loss treatment is almost always better than capital loss treatment because your ordinary income is taxed at a higher rate than your capital gains and capital losses generally can only be used against capital gains. (If cap losses exceed cap gains you do get to offst up to $3,000 of ordinary income.) It's kind of a no brainer to use the 1244 provisions for a new company because your investors may get some comfort out of the fact that, in the unlikely event the company does not work out, at least they get a portion of their investemnt back in the form of a tax benefit.
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From : Richard F Beardsley
Location : Minneapolis , Minnesota
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Question :
I am an LLC organized in the state of Minn. I hold a position in my company and if not for the position I hold would have to hire; ?? Must I pay myself from profits and pay estimated tax, or can I take a regular paycheck with standard withholding and then declare profits?
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If the LLC is treated as a partnership for federal and state purposes, and if you hold an ownership interest in that LLC, than you are treated as a partner and may not also be treated as an employee for payroll purposes. Therefore, in that situation, yes, you must negotiate a guaranteed payment for services with the LLC which will be reported to you on your Schedule K-1 as such (and also as self-employment earnings) and you must pay estimated tax on such payments. Note that you may also be subject to self-employment tax on your distributive share of profits depending on how aggressive you and the LLC are in treating members of the LLC as "limited partners" for purpose of section 1402 of the tax code. If the LLC is treated as a corporation for federal and state tax purposes (not the normal situation), then you would be permitted to be treated as an employee.
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From : U.S. Small Business Administration
Location : Washington , D.C.
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Question :
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Hello, and welcome everyone. I'm glad to be able to join you again this year for the SBA's Web chat series. Let's get started! Tom
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From : Ray Imamura
Location : Honolulu , HI
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Question :
I am a single owner and operator of a LLC. This will be my first year filling taxes. What taxes must I pay as an LLC. and what federal and state forms must I fill out.
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The LLC is treated as a sole proprietor for federal (and most state) tax purposes which means you file a schedule C with your Form 1040 income tax return. The state, if you are in a state with an income tax, will likely have a similar requirement. Often the income on the federal schedule C is automatically included in the State level gross income and so no additional state income tax form is required. If you have employees, there are a host of federal and state filing requirements, but I will assume you have no employees since you said you were the sole operator of the business. Even without employees, you need to check with your state for general liability insurance and other requirements.
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From : John
Location : ,
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Question :
What structure would be appropriate for a one owner business with no employees, where the owner is in their fifties, to maximize tax savings while providing maximum benefits for the owner and their family( med.reimburse., health, dental, retirement, etc.). It should be one in which the owner can maintain their own nonaccounting records, whether incorporated on unincorporated. Would your recommendation change if an unrelated employee is hired on a part time basis less than 30 hours? Thanks! John
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The type of entity you choose always depends on the type of business you are conducting - a question which you didn't answer. It also depends on whether the business will be ongoing after you retire or pass away. And it depends on the likelihood as to whether additional owners will eventually join you. Putting those and other questions aside for the moment, as a one-owner business, you say you want to keep the nonaccounting records yourself and, again, without knowing your type of business, I am not sure what this means. Are you are talking about legal documents, vendor information, customer lists, advertising programs and even tax filings? A true sole proprietorship is still available to those who are not concerned about creditors accessing their personal assets and who want to keep away from the state requirements of incorporation or organization as a limited liability company (LLC), such as annual filing fees, minutes of meetings, written organizational documents, etc. If you are willing to get professional help with the initial organizational process, tax filings and accounting and non-accounting software needs, then an S corporation will probably be fine in your current situation. If you want to keep it the absolute simplest, a sole proprietorship is fine. But be sure to separate personal from business expenses by having separate bank accounts and separate credit cards. Don't co-mingle funds. Be aware that a single-member LLC will be treated for federal (and probably state) tax purposes as a sole proprietorship, but by filing the LLC organizational documents you obtain the limited liability traditionally associate with an corporation. Whether you operate as an S Corporation, a sole proprietorship, or a single-member LLC, there is only one level of tax. The former requires a separate corporate filing, but generally the tax is imposed at the 1040 level. The latter two require only the filing of a Schedule C with your Form 1040. Medical insurance will be treated the same in all three cases.
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From : Laurie
Location : Grand Rapids , MN
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Question :
How many years can you claim a loss in a direct sales business, such as an Avon representative.
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Laurie--If you have a business that loses money, you can deduct the losses indefinitely. However, you have to be able to show the subjective intent to make a profit, and that becomes difficult if you never make aprofit. To protect yourself, youneed to do things in a business-like way, possibly with a separate checking account, business plan, tax ID number, financial statements, business organization, etc. If you don't have that subjective intent, the IRS may contend that you are just doing this as a hobby that you enjoy. If the IRS takes that positoin you would only be able to deduct expenses to the extent of revenue and not show a net loss. To evaluate the intent to make a profit, the IRS will look at a number of factors, including your success in this or similar businesses, the amount of profits earned occasionally, your financial status, the personal pleasure elements of the undertaking, the assets you use, the time and effort you put into it, your expertise, etc. There's a "safe harbor" that shifts the presumption to your favo--if you mke a profit any three of five years, you will be presumed to have the intent to make a profit, and the IRS would have to prove otherwise. If you aren't in the safe harbor, the IRS just has to disallow the deductions and it's up to you to prove that you had the intent to make a profit.
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From : Katie
Location : sea cliff , ny
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Question :
1.When an American citizen cells his house in a foreign country (Ukraine and paid all taxes there) and then gets the rest of money here in USA. Does he have to pay taxes on it? What documents are needed?
2.In a Checklist for starting a small business , page 6 it states that one has to register with state employment department or similar agency for payment of unemployment compensation. Why and where we have to do it, since we have to provide FUTA to IRS anyway?
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Katie, U.S. taxpayers are taxed on their worldwide income. I am not aware of any restrictions on the tax free gain of up to $250,000 per spouse for the sale of a principal residence that is located outside the U.S., so a married filing jointly American citizen would probably be able to exclude up to $500,000 of gain on sale of residence, but would need to report any gain in excess of $500,000. The typical documents needed for U.S. home sales would be required - sales price, basis, etc.
I note that there are restrictions and rules on residence sales for an expatriate (former citizen/green card holder) and for homes where the spouse is non-resident alien. Details are available at
http://www.irs.gov/pub/irs-pdf/p523.pdf and http://www.irs.gov/newsroom/article/0,,id=105042,00.html
2.In a Checklist for starting a small business , page 6 it states that one has to register with state employment department or similar agency for payment of unemployment compensation. Why and where we have to do it, since we have to provide FUTA to IRS anyway?
Unemployment taxes for U.S. employees are administered by the states. The Futa tax is merely to pay for transferring benefits for employees who move from state to state. Unemployment taxes are only required for U.S. employees working within one of the 50 states or some of the territories.
For more information on FUTA - see http://www.workforcesecurity.doleta.gov/unemploy/uitaxtopic.asp - pasted below.
Unemployment Insurance Tax Topic
Unemployment Insurance Taxes
Unemployment Insurance (UI) is a federal-state program jointly financed through federal and state employer payroll taxes (federal/state UI tax). Generally, employers must pay both state and federal unemployment taxes if: (1) they pay wages to employees totaling $1500, or more, in any quarter of a calendar year; or, (2) they had at least one employee during any day of a week during 20 weeks in a calendar year, regardless of whether or not the weeks were consecutive. However, some state laws differ from the federal law and employers should contact their state workforce agencies to learn the exact requirements.
Federal Unemployment Tax Act
The Federal Unemployment Tax Act (FUTA), authorizes the Internal Revenue Service to collect a federal employer tax used to fund state workforce agencies. Employers pay this tax annually by filing IRS Form 940. FUTA covers the costs of administering the UI and Job Service programs in all states. In addition, FUTA pays one-half of the cost of extended unemployment benefits (during periods of high unemployment) and provides for a fund from which states may borrow, if necessary, to pay benefits.
Federal Tax Rate
The FUTA tax rate is 6.2% of taxable wages. The taxable wage base is the first $7,000 paid in wages to each employee during a calendar year. Employers who pay the state unemployment tax, on a timely basis, will receive an offset credit of up to 5.4% regardless of the rate of tax they pay the state. Therefore, the net FUTA tax rate is generally 0.8% (6.2% - 5.4%), for a maximum FUTA tax of $56.00 per employee, per year (.008 X $7,000. = $56.00). State law determines individual state unemployment insurance tax rates. For a table of current tax rates and taxable wage base information for individual states, Click here and select Significant Provisions of State UI Laws: Benefit and Tax.
State Unemployment Tax
The state Unemployment Tax, paid to state workforce agencies, is used solely for the payment of benefits to eligible unemployed workers.
Domestic Employers Coverage
Employers of domestic employees must pay state and federal unemployment taxes if they pay cash wages to household workers totaling $1,000, or more, in any calendar quarter of the current or preceding year. A household worker is an employee who performs domestic services in a private home. Examples of household employees are: babysitters, caretakers, cleaning people, drivers, nannies, health aides, yard workers and private nurses.
Employers of Agricultural Employees
Employers must pay federal unemployment taxes if: (1) they pay cash wages to employees of $20,000, or more, in any calendar quarter; or, (2) in each of 20 different calendar weeks in the current or preceding calendar year, there was at least 1 day in which they had 10 or more employees performing service in agricultural labor. The 20 weeks do not have to be consecutive weeks, nor must they be the same 10 employees, nor must all employees be working at the same time of the day.
Generally, agricultural employers are also subject to state unemployment taxes, and employers should contact their state workforce agencies to learn the exact requirements.
Regarding state unemployment insurance, see - http://workforcesecurity.doleta.gov/unemploy/uifactsheet.asp - pasted below.
The Federal-State Unemployment Insurance Program provides unemployment benefits to eligible workers who are unemployed through no fault of their own (as determined under state law), and meet other eligibility requirements of state law.
Unemployment insurance payments (benefits) are intended to provide temporary financial assistance to unemployed workers who meet the requirements of State law.
Each State administers a separate unemployment insurance program within guidelines established by Federal law.
Eligibility for unemployment insurance, benefit amounts and the length of time benefits are available are determined by the State law under which unemployment insurance claims are established.
In the majority of States, benefit funding is based solely on a tax imposed on employers. (Three (3) States require minimal employee contributions.)
For additional information, see here.
Benefits are subject to Federal income taxes and must be reported on your Federal income tax return. You may elect to have the tax withheld by the State Unemployment Insurance agency.
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From : Fred Lane
Location : San Francisco , CA
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Question :
Please comment: Tax advantage for C corp vs S corp for a small and old family owned wholesale business, annual sales 2 million and has only one stock holder (the parent). What changes do you recommand.
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Basically, none. But what type of retirement plan do you have? Be sure it is a permitted plan for an S corp. And who is the parent? Are you talking about an individual, another corporation, or an LLC? Anyhow, make an S election. Have you been paying corporate level taxes? Does the C corp have any assets on the books that have appreciated in value? If so, you will need to hold them in the S corp for 10 years otherwise you will pay tax on their appreciation just as if they were still in the C corp. Also, it helps to know what type of business you are running. S corps certainly have their limits. If the shares will be effectively distributed to family members, remember that you can't have more than one class of share, i.e. can't give preferred returns to parents, grandparents, managers, etc. (unless you give them more stock), any trusts that are set up must qualify as S corporation shareholders, etc. If your business is not profitable and you don't have appreciated assets, you might also consider converting to an LLC.
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