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Different forms of business
Types of business classifications Married should I file married or single? Tax advantages of different forms of business Partnerships advantages/disadvantages
Claiming Business Tax DeductionsStart up Expenditures Operating Expenditures Advertising and
promotion Answering services, pagers Bank charges Club dues and
membership fees Computer expenses Educational expenses Freight and delivery Gifts Insurance Interest Lease expenses Legal and accounting Licenses and fee's Office expenses Office supplies Outside services Postage Printing
Rent Repairs and maintenance Salaries and wages Security expenses Shop supplies Small tools Taxes Telephone expenses Temporary work assignment Travel
Expense rules Assets included Depreciation rate What qualifies?
Claiming Vehicle DeductionsTransportation Mileage Mileage logging How to divide personal mileage from business Claiming standard mileage rates Claiming actual expenses methods Vehicle deductions what you can claim Qualifying for an expense method Vehicle expense write off methods and item breakdown chart
Claiming Home Office Deductions What you can claim under what conditions How to phrase expenses How to deduct Direct expenses Indirect expenses Painting Repairs Telephone bills Income generating activity Rent Deductible mortgage interest Real estate taxes Maintenance Security Cleaning Home related insurance
premiums
How to claim for where ever you are Legitimate business related travel Destination transport Interconnect transportation Shipping Vehicle Overnight Lodging Meals
Laundry and cleaning Communication
Normal expenses
Entertainment Guests Spouses Conventions Seminars Research Buying trips Sales calls Meetings
Recreation Yacht etc Renting Foreign
travel Social clubs
Family business
Legitimate job
Reasonable wages Plan Claiming family under 18 Claiming family under 21 Hiring your spouse The tax advantages
Training and Educational expense Creating child/spouse credit Claiming/Hiring parents to reduce tax liability Wages and salary
Retirement tax deductions Employee pension 401k Retirement plans
Retirement account
Money purchase Profit sharing Defined benefit
Shifting income and expenses Shifting forward Shifting backwards Delaying
Avoiding the IRSAvoiding tax compliance problems Plan IRS guidelines
IRS profit guidelines they follow
DIFFERENT FORMS OF BUSINESS ORGANIZATION
PLAN: Select a "Sole proprietorship" form of business organization initially: when you are the sole owner of the business, and you anticipate that the business will operate at a loss or near breakeven (zero profit).
1. Only one-owner businesses can operate as a Sole Proprietorship, therefore the owner will file a Schedule "C" (information only) tax form, along with their personal income tax return (Form 1040).Note: If your business has more than one owner, you will want to select the corporation form of
business organization (either an "S" corporation or a "C" corporation).
2. Under this form of organization, any business profit (or loss) is shown on the bottom line of Schedule "C" (a tax form showing the business' "Sales" (less) "Expenses"), and flows through to the owner's personal income tax return (Form 1040).
Profit is taxed at the owner's personal income tax rate.
Losses offset other income shown on the owner's personal income tax return (Form 1040) such as: interest, dividends, W-2 wages, other business income, short-term capital gains, net rental income, and farm income.
Note: Although your expectation is that your business will generate a profit, it' s nice to know that if your business does generate a loss (hopefully just a paper tax loss, and not an actual out-of-pocket dollar loss), this loss can be used to reduce other taxable income.
3. Whenever the sole proprietorship generates a profit, the owner is liable for "Self-Employment" Tax (at 15.3% of all Sole Proprietorship profit up to $61,200, and 2.95% on all profit in excess of $61,200). Self Employment Tax due is calculated on Schedule "SE".
Note: It's this liability for Self-Employment Tax that represents the major tax disadvantage for the Sole Proprietorship form of business organization.4. The owner pays himself or herself by writing a "Draw" check out of the business' checking account. Note 1: Since the Sole Proprietorship is prohibited from paying the owner W-2 wages, the only way the owner can be compensated is by receiving a Draw Check.
Note 2: This draw check is a "Non-taxable Event"--meaning that whether or not the owner receives a draw check, the owner will still be liable for taxes due on the entire profit of the Sole Proprietorship, even if the profit dollars are kept in the business' checking account. As a sole proprietor "you are the business and the business is you." Transfers of cash from the "business" to your personal funds are similar to moving dollars from your right pocket to your left pocket.
5. Although the owner cannot be paid W-2 wages by the Sole Proprietorship, the owner can have the business pay his or her spouse W-2 wages, if the spouse is active in the business.
Note 1: These W-2 wages are subject to Social Security (FICA) and Federal Income Tax Withholding plus the Employer' s matching portion of the Social Security (FICA) tax due.Note 2: This only applies when both spouses actively work in the business, and it's a sole proprietorship.
If you are "married filing jointly," put the business in the name of the spouse who is the highest wage earner. This spouse is more likely to "max out" on a portion of Social Security (Self-Employment) taxes.
If you are "married filing separately" you should follow the following guidelines:If the business is anticipated to make a profit, put the business in the name of the lowest wage earner--this spouse may be in a lower tax bracket (for example, 15%, as opposed to 28%).
If the business is anticipated to generate a loss, put the business in the name of the highest wage earner--so that this business loss can offset potentially higher tax bracket income (for example, 28%, as opposed to 15%).
1. You can elect to be an "S" Corporation even if your business only has one owner, or, if more than one owner, up to a maximum of 75 shareholders. An "S" Corporation is a separate legal entity where the individual shareholders (owners) elect to be personally responsible for the income taxes due on the pro-rata share of any corporate profits. "S" Corporation shareholders, by making this election, also receive the benefit of any tax losses generated by the corporation--all profits and losses of an "S" Corporation flow through to its owner(s)' personal income tax return(s). (Remember, an "S" Corporation is a separate legal entity, but not a separate taxable entity.) The owner(s)' pro-rata share of the corporate profit or loss is reported on a Schedule K-1. If there is only one owner, all profit or loss is shown on only one Schedule K-l--theirs.
2. Under this form of organization, corporate business profit or loss is shown at the bottom of "Form 1120-S"--an information only business tax form showing the business' "Sales" (less) "Expenses", and flows through to the owner(s)' personal income tax remms (Form 1040). Just as in the instance of the Sole Proprietorship:
. Profit is taxed at the owner(s)' personal income tax rate(s).
. Losses offset their other income shown on the owner(s)' personal income tax return (Form 1040) such as: interest, dividends, W-2 wages, other business income, short-term capital gains, net rental income, and farm income.
Note: The goal is that your business, even initially, will not actually lose money but will at worst, experience "Paper Losses" that are created by non-cash business expenses (such as vehicle mileage, depreciation, and Section "179" asset expensing).
3. The big distinguishing tax advantage of an "S" Corporation (over a Sole Proprietorship) is that"S" Corporation profits (after shareholder(s)' salaries) are exempt from self-employment taxes. The profit of an "S" Corporation is considered a Return on Investment (ROI) to its owner(s), not earned income, and therefore is not subject to Self-Employment tax.
4. The owner(s) can compensate themselves in two distinct ways: (a) W-2 Wages, and/or (b) Distribution of Profit.a. W-2 Wages: Any owner(s) of an "S" Corporation, and/or their respective spouse(s) can receive W-2 wages from the business; in fact, any owner(s) who actively work in the business are obliged to pay themselves W-2 wages for the fair market value of the work they perform for the business. This amount can be estimated by paying the owner(s) an amount that the business would have to pay someone else to do the task(s) the owner(s) performs for the business.
Note: These W-2 wages are subject to Social Security (FICA) and Federal Income Tax withholding, plus the employer's matching portion of Social Security Tax (FICA).b. Distribution of Profit: Owner(s) can also compensate themselves by issuing Distribution of Profit check(s), made payable to the owner(s), written out of the business' checking account.
Note: This Distribution check(s) is considered a "Non Taxable Event"--meaning that whether or not the owner(s) receives a Distribution of Profit check, the owner(sO will be liable for taxes due on each owner(s)' pro-rata share of the entire profit of the "S" Corporation--even if the profit dollars are kept in the business' checking account.
All corporations are "C" Corporations initially. You, as the owner, must file an IRS Form 2553 electing to have your business become an "S" Corporation.Note 1: Your business is not allowed to become an "S" Corporation if it has more than 35 stockholders, who are U.S. citizens,
and
Note 2: This Form 2553 must be filed within 2 months and 15 days of either:
(1) the date of incorporation, or
(2) the beginning of the corporation's current fiscal tax year.
PLAN: Select a "C" Corporation Form of Business Organization When You Have Both a Strong Desire and Opportunity to "Grow" the Business (Increase Sales) by Keeping Dollars in the Business, and are Liable for Higher Personal Income Tax Rates as the Business' Owner(s).
1. Any number (one or more) of individuals can be the owner(s) of a "C" Corporation. The owner(s) can take compensation out of a "C" Corporation in the form of W-2 wages, paid to themselves and/or their spouse.
2. Owners may wish to keep the dollars of profit in the business to "Grow" the business' sales. This type of growth may require additional funding, particularly in one or more of the following areas: cash flow reserves, accounts receivables, inventory, and equipment. Dollars that are kept in a "C" Corporation are taxed at "C" (regular) Corporation rates.
As long as the "C" Corporation's marginal tax rate (Marginal meaning the rate that applies to the last taxable dollars earned) is lower than the owner(s)' marginal personal income tax rate (your business' form of organization should remain a "C" Corporation--a separate legal tax entity.
If the owner(s)' marginal income tax rate is 28%, but the applicable "C" Corporation marginal tax rate is 15%, the owners are better off leaving the dollars in the "C" Corporation where the business will pay tax at a rate of 15%, rather than taking the dollars out of the business as either...
a) A "Distribution of Profit" from an "S" Corporation, where the owner(s) would pay tax at a marginal tax rate of 28% (13% higher than the applicable "C" Corporation tax rate),or
b) (Worse yet), W-2 wages paid to the owner(s) from an "S" Corporation--creating a 28% Federal Income Tax Liability plus the potential for a 7.65% employer's matching portion of Social Security (FICA) tax due; (28% + 7.65% = 35.65%, 20.65% higher than the applicable "C" Corporation tax rate).
...and then reaming these same dollars (that the owner(s) took out of the "C" Corporation) back to the business in the form of a return of capital or a loan to the business.PLAN: If You Have a Business Partner(s), You May Not Want to Consider Selecting the "Partnership" Form of Business Organization.
1. The Partnership form of business organization is reserved for multiple owners (more than one owner) of the business. The owners will receive both a Form 1065 and a K- 1 form indicating their pro-rata share of profit and or losses.
2. Under this form of business organization, any business profit or loss is shown at the bottom of an information only tax Form 1065 (a tax form showing the business' "Sales" (less) "Expenses") and flows through to the owners' personal income tax returns.
. Profit is taxed at the owner(s)' personal income tax rates.
. Losses offset other income shown on the owner(s)' personal income tax return(s) (Form 1040) such as: interest, dividends, W-2 wages, other business income, short-term capital gains, net rental income, and farm income.
Note: The goal is that your business, even initially, will not actually lose money, but will, at worst, experience "Paper Losses" that are created by non-cash business expenses (such as vehicle mileage, depreciation, and Section "179" asset expensing).
1. The big disadvantage of a "Partnership" (as compared to an "S" Corporation) is that if the business generates a profit, the owners will also be liable for "Self-Employment Tax" (at 15.3% of each owner's pro-rata share of total partnership profit up to $61,200, and 2.9% on each owner's pro-rata share of total partnership profit in excess of $61,200).
2. The owners pay themselves by writing a check out to each partner reflecting (a) their profit/loss sharing percentage (often reflecting their percentage of ownership), and (b) the amount of time and
effort the owner puts into the day-to-day business operations of the partnership.
Note 1: Since a Partnership is prohibited from paying its owners W-2 wages, the only way the owners can be compensated is by receiving these distribution of profit checks (or in the form of "Guaranteed Payments," in which case the partners receive predetermined dollar amounts of profit distribution on a regular basis).
Note 2: These profit distribution checks are a "NonTaxable Event", meaning that whether or not the owners receive any checks, the owners will still be liable for taxes due on the pro-rata share of the partnership' s entire profit, even if the profit dollars are kept in the business' checking account.
5. Although the owners cannot be paid W-2 wages by the partnership, the owners can have the business pay their spouses W-2 wages, if the spouse is active in the business.Note: These W-2 wages are subject to Social Security (FICA) tax and Federal Income Tax withholding plus the employer's matching portion of Social Security (FICA) tax due.
BUSINESS TAX DEDUCTIONS PLAN: Select the Proper Method of Writing Off Your Business' Initial Expenditures.
Your business' initial expenditures can include the following: market surveys, research in the areas of facilities, labor and supplies, grand opening advertising, employee salaries--wages during training plus training instructors' salaries, travel to secure distributors, suppliers and/or customers, salaries for consultants or other professionals--such as lawyers and accountants, business cards, separate telephone lines, commissioned sales representatives, lists of customer leads contacted, direct mail, rental of business space, yellow pages ads, newspaper ads, radio/TV ads, printed fliers, or any other legitimate efforts to market your business.
These initial expenditures your business incurs can be divided into two general categories: (1) Start up, and (2) Operating.1. Start Up Expenditures consist of items that are generally incurred during the first year of your business' existence--the ordinary and necessary expenditures required by your business in its initial time period; they occur during a period of time when your business is making no real effort to generate any income (because it's not ready to do so). These expenditures are deducted by amortizing them over a 60 month period--beginning with the month in which your business actually begins operations--the month in which your business becomes ready, willing, and able to actively and materially offer its products and/or services to the marketplace.
For example:
Amortization deduction per month = start up expenses (divided by) 60 months.
2. Operating Expenditures are those items that your business incurs--in pursuit of income--after the business is already "in business". These expenditures become expenses of your business in their entirety--100%. In fact, even if your business attempts marketing and does not generate any sales revenue, your business can still deduct all these expenditures as operating expenses, provided you can substantiate the claim that your business did attempt to generate sales revenue.
Note: Additionally, deductible interest, taxes, and research and development costs can also be fully expensed during the business' start up period.
PLAN: Claim Any and All Appropriate Business Tax Deductions.
As a business owner, you must be aware of the tax deductibility of your business expenses.
Listed below are some of the more common business tax deductions. They are in alphabetical order to allow easy access. Some will be obvious in their applicability, while others will require the application of specific strategies to afford your business maximum tax advantage.
ADVERTISING AND PROMOTIONWrite off gifts that your business purchases and gives away as "Advertising and Promotion" expenses, when appropriate, to avoid the $25 maximum on the amount of each gift your business can deduct. ANSWERING SERVICE OR PAGERS
If you use an answering service and/or a pager for business and personal use, you must differentiate between this business and personal use--developing a percentage for business usage, the balance for personal. Then you can pro-rate the dollar costs of these services between (1) tax deductible business usage, and (2) nondeductible personal usage.
BANK CHARGESBank charges relate to charges that appear on your business' checking account bank statement. These include charges for the cost of ordering new checks, check binders, and sometimes-incidental services that the bank provides. These charges are all tax deductible to the business.
CLUB DUES AND MEMBERSHIP FEESClub dues and membership fees can no longer be deducted for business purposes. Specific examples of the types of groups included in "Club Dues and Membership Fees" include, but are not limited to the following: airline and hotel clubs, health and fitness clubs, country club membership costs, as well as sporting arena/stadium sky boxes, which have been specifically made non-tax-deductible.
COMPUTER EXPENSESClassify computer expenses under, for example $100, and with a useful life under one year, as operating expenses.
Any computer purchases in excess of this $100 figure, with a useful life in excess of one year, should be treated as capital assets and depreciated over five (5) years. The expense associated with these capital asset costs will show up under the general operating expense category of "Depreciation
Secret Tax Deductions Laws411.com Instant Publications Copyright (c)Expense". EDUCATIONAL EXPENSES Your business is allowed to deduct the cost of educational items, such as books, consulting, seminars,
and other specifically identified activities and/or items that are purely educational in nature.
FREIGHT AND DELIVERY
Deduct "incoming" freight and delivery expenditures as a part of your business' "Cost of Sales" expenses. Deduct "outbound" freight and delivery expenditures as one of your business' "Operating" expenses.
vehicles, liability, employee life and health (subject to some restrictions), business interruption, fire
and theft, bonding, and workers' compensation. Note: You may be able to exempt
owners/officers of your business from workers' compensation, depending on your local State laws.
INTEREST All business-related interest expenditures are fully tax deductible--unlike personal interest, which is no longer tax deductible for individuals.
LEASE EXPENSE
If your business lease is a "Straight Lease," this means that your business is not accumulating equity throughout the term of the lease; the lease payment is no more than a payment for the use of the asset. This form of lease payment is fully tax deductible.
If, on the other hand, a portion of your business' lease payment includes "equity" so that the "buy out" at the end of the lease period is considerably less than the fair market value at the end of the lease (for example, a $1.00 or $10.00 buy out amount), this type of lease is referred to as a "Capital Lease" in that it accumulates equity and should be treated as an "Asset Purchase" for tax purposes.
LEGAL AND ACCOUNTING
LICENSES AND FEES
OFFICE EXPENSES
Your business is entitled to deduct the cost of any and all office expenses and supplies that relate directly to the operation of your business. These costs should be deducted fully in the year in which they are incurred.
Note: Your business may also purchase "Sample Products." If these samples are for display purposes only (never to be sold), their cost will remain in a non-deductible Balance Sheet account, until such time as they are no longer used as samples. They will at that time be expenses--taken as a business tax deduction. In some cases, however, a business' sample products are continuously for sale, and their dollar costs will remain in inventory, along with the rest of your business' unsold products until they are sold.
OFFICE SUPPLIES
OUTSIDE SERVICES
1. Not required that often, and/or
2. Your business doesn't have the capability to perform them.
Be careful not to pay individuals who would otherwise be classified as employees as "Outside Service Providers" or Contract Labor. If an individual performs the functions of an employee, they must be treated as an employee.
Outside Service providers ideally will have their own business entities to which all checks in payment for services rendered should be made out.POSTAGE
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