small business guide to taxes

Small Business Guide to Taxes : 

Small Business Guide to Taxes Debbie Snelling thesnellingreport@bellsouth.net voice 404-944-3172 e-fax 425-944-3178 thesnellingreport.com

Structure : 

Structure Business structure affects tax Things affecting decision about structure Exit strategy Succession planning Ease of entry and operation Taxes

Sole Proprietor : 

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, so it’s advisable Bank are often now requiring a business license to open account File taxes as usual with additional forms Unlimited liability for yourself Tax = income tax (at your tax bracket) + SE tax (15.3%)

Partnership : 

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 Unlimited liability of partners (unless Limited Liability Partner) Tax = income tax (at your tax bracket) + SE tax (15.3%)

Limited Liability Company (LLC) : 

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 > one member = partnership Check the box option to be taxed as corporation If decide to be taxed as corporation, can elect S-corp 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 case allowed deduction of business loss for LLC member, so expect IRS to try to push for SE tax on LLC members with active participation

S-Corporation : 

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 file separate tax return Items of income/expense pass through to shareholders Unless limited net income, must pay 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 SE tax Limited liability for shareholders

Business Expenses : 

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

What business expenses are deductible? : 

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 personal life may be deductible as an itemized deduction Fees related to your business are deducted from business income 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

What business expenses are deductible? : 

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

Expenses you cannot deduct : 

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.

Car and truck expenses : 

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.

What is business mileage? : 

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

Depreciation : 

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

Sec 179 depreciation : 

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.

Repairs, maintenance or business asset? : 

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

When are entertainment expenses deductible? : 

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.

Entertainment expense tests to be met : 

Entertainment expense tests to be met 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.

Self employment tax : 

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

Self employment tax example(includes Sole Proprietor, Partnership (flowing to your personal return), and LLC (unless LLC is taxed as a corporation)) : 

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!

Self employment tax example (continued) : 

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

Paying taxes : 

Paying taxes Adjust withholding if you or spouse have a job Make estimated tax payments 4/15, 6/15, 9/15, 1/15 Penalty for late payment (5% per month or fraction thereof) Penalty for underpayment (5% per month or fraction thereof)

Tax Planning for Business is Essential : 

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!

IRS Circular 230 Disclosure : 

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.