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99 Cards in this Set
- Front
- Back
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The most common forms of business are: |
1) Sole Proprietorships 2) Partnerships 3) Corporations 4) Subchapter S Corporations 5) Limited Liability Companies (LLC) |
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Sole Proprietorships and Corporations file |
an income tax return. |
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Partnerships and S Corporation |
file an information return |
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For an LLC with at least 2 members, except for some businesses that are automatically classified as a corporation |
it can choose to be classified for tax purposes as either a corporation or a partnership. |
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An LLC with a single member can choose |
to be classified as either a corporation or disregarded as an entity separate from its owners, that is, a "disregarded entity". As a disregarded entity the LLC will not file a separate tax return. Instead all income or loss is reported by the single member/owner on Schedule C and attached to his annual Form 1040 tax return. |
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Capital gains and losses for a Partnership and an S Corporation |
pass through to shareholders as separately stated items on Schedule K-1, Form 1120S. |
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Partnerships file |
Form 1065 - US Partnership Return of Income but pay no tax. With Form 1065 the partnership files a Schedule K-1 for each partner sand furnishes each partner a copy. The partner then reports the items From Sch k-1 on Part 2 of Schedule E. The partner's share of losses on his Schedule K-1 may not be deductible. |
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A Limited Liability Company |
is not recognized by IRS as an entity for federal tax purposes. LLCs elect which type of entity they would like to be taxed as by filing Form 8832 - Entity Classification Election. |
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LLCs that elect to be treated for tax purposes as either a C Corp, S Corp, or a partnership |
file tax returns. But only C Corporations pay any tax directly to the IRS. |
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A single member of an LLC that has elected to be taxed as sole proprietorship |
reports income and expenses on Schedule C |
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Members of an LLC that have elected to be taxed as a partneship report |
income and expenses on PArt 2 of Schedule E after receiving their Schedule K-1. |
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Members of an LLC that elect to be taxed as an S Corporation file |
Form 2553 - Election by a small Business Corporation after filing Form 8832. then the corporation files Form 1120-S - US Income Tax Return for an S Corporation but pays no tax. Shareholders receive Schedule K-1. |
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Members of an LLC that have elected to be taxed as a c Corporation have the corporation file |
Form 1120 -US Corporation Income Tax Return with which the corporation pays tax. |
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Members with an interest that is classified as a passive activity that have losses for the year have to complete |
Form 8582 - Passive Activity Loss Limitations to compute their allowable passive losses, if any. Generally passive losses are allowed only to the extent of passive income for the year. Disallowed losses are usually deductible in full in the year the activity is disposed of. |
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Sole Proprietor use the following forms for the following tax liabilities: |
1) Income tax - 1040 and Schedule C (Schedule F for Farm businesses) 2) Self-Employment tax - 1040 and Schedule SE 3) Estimated tax - 1040-ES 4) Social Security and Medicare tax withholding - 941 (943 for farm employees) 5) Federal unemployment tax (FUTA) - 940 6) Depositing employment taxes - 8109 (do not use if taxes deposited electronically) |
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Partnership use the following forms for the following tax liabilities: |
1) Annual return of income - 1065 2) employment taxes - same as sole proprietor |
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Partner in a partnership (individual) |
1) Income tax - 1040 and Schedule E 2) Self-employment tax - 1040 and Schedule SE 3) Estimated tax - 1040-ES
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Corporation or S Corporation |
1) Income tax - 1120 (C Corp) and 1120S (S Corp) 2) Estimated Tax - 1120-W (Corporation) and 8109 (do not use if taxes are deposited electronically) |
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S Corporation shareholder |
1) Income tax - 1040 and Schedule E 2) Estimated tax - 1040-ES |
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Sole propeietors file |
Schedule C or C-EZ - Profit or Loss from Business with their Form 1040 |
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Sole Proprietor farmers file |
Schedule F - profit or loss from farming |
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Sole proprietors must also pay self-employment tax |
on the net income reported on Schedule C or Schedule F on Schedule SE - Self-Employment Tax. They may be able to deduct one-half of Self-employment tax on Form 1040. |
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Sole proprietors do not have taxes withheld from their business income so |
they will usually need to make quarterly estimated tax payments if they expect to make a profit. These estimated payments include both income tax and self-employment taxes for Social Security and Medicare. |
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Starting a business |
1) Obtain a federal EIN by filing IRS Form SS-4 2) Register with the state employment department to make payments of state unemployment compensation tax (SUTA) 3) Have each employee fill out IRS Form W4, Employee's Withholding Allowance Certificate, and keep them on file 4) Set up a payroll system for withholding taxes and making regular payroll tax deposits or hire someone to do this 5) File IRS Form 941, Employer's Quarterly Federal Tax Return after the end of each quarter. 6) File IRS Form 940 or 940-EZ to report federal unemployment compensation tax (FUTA) after the end of each year. 7) File a Form W-2 for each employee annually to report wages to the IRS and state 8) File a Form 1099-MISC to report payments to each independent contractor paid over $600 per year. |
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Use Form SS-4 |
if the applicant does not yet have an EIN but is required to show it on any return, statement, or other document. |
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Among many steps that may be taken when starting a new business are: |
1) Obtain federal EIN by filing Form SS-4 2) Register with the state department to make payments of SUTA (State Unemployment Compensation Tax) 3) Have each employee fill our IRS Form W-4, Employee's Withholding Allowance Certificate, and keep them on file 4) Set up a payroll system for withholding taxes and making regular payroll tax deposits or hire someone to do this 5) file IRS Form 941, Employer's Quarterly Federal Tax Return, after the end of each quarter 6) File IRS Form 940 or 940-EZ to report federal unemployment compensation tax (FUTA) after the end of each year 7) File a Form W-2 for each employee annually to report wages to the IRS and state 8) File a Form 1099-MISC to report payments to reach independent contractor paid over $600 per year. |
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The earnings of a person who is working as an independent contractor are subject to |
Self-Employment (SE) tax payable by the independent contractor. |
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The employer may be required to file |
information return to report certain types of payments made to independent contractors during the year. |
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The employer must file |
Form 1099-MISC - Miscellaneous Income to report payments of $600 or more to persons not treated as employees for services performed for the trade or business. |
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If the employer classifies an employee as an independent contractor and has no reasonable basis for doing so |
the employer may be liable for employment taxes for that worker. |
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Those who need help deciding help deciding if their workers are employees or independent contractors can submit |
Form SS-8 - Determination of Employee Work Status for Purposes of Federal Employment Tax and Income Tax Withholding to the IRS. IRS will tell them how to classify their workers. |
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Due date for Small Business - Income Tax |
1040 and Schedule C or C-EZ - 15th day of the 4th month after end of the tax year |
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Due date for Small Business - Self Employment tax |
Schedule SE - File with 1040 |
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Due date for Small Business - Estimated Tax |
1040-ES - 15th day of 4th, 6th, and 9th months of the tax year, and 15th day of 1st month after the end of the tax year. |
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Social Security and Medicare taxes and income tax withholding |
941 or 944 (use 8109 to make deposits if not electronically) - April 30, July 31, October 31, and January 31 |
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Providing information on Social Security and Medicare taxes and income tax withholding |
W-2 (to employee) - January 31st, W-2 and W-3 (To the Social Security Administration) - Last day of February (March 31st if filing electronically) |
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Federal Unemployment Tax (FUTA) |
940 (use 8109 to make deposits if not electronically) - January 31st. April 30, July 31, October 31, and January 31, but only if the liability for unpaid tax is more than $500. |
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Filing information returns for payments to non-employees and transactions with other persons |
Form 1099 - to the recipient by January 31 and to the IRS by Feb 28 (March 31 if filing electronically) |
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Expenses. Almost any expenditure that is ordinary and necessary for the production of business income |
is deductible. Some expenses are immediately deductible and others must be spread out over future years. |
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To be deductible, a business expense must be |
both ordinary and necessary |
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Ordinary expense |
is the one that is helpful and appropriate for the taxpayer's trade or business |
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It is important to distinguish business expenses from: |
1) Expenses used to figure cost of goods sold 2) Capital expenses and 3) Personal expenses |
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Deductible expenses |
advertising, automobile expenses, bad debts (if accrual method), bank charges and fees, clothing, uniforms, and protective equipment that can't be worn during non-working hours, commissions and fees, cost of goods sold, depreciation, dues for trade associations, employee benefits, gifts to customers, insurance premiums for liability and casualty insurance, interest, legal and professional fees, meals and entertainment, office expenses, payments to independent contractors, pension and profit-sharing plans, publications, rent or lease payments, repair and maintenance, supplies and materials if not included in the cost of goods sold, travel expenses, utilities, wages paid to employees, etc. |
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Non-deductible expenses |
capital expenditures, charitable contributions by a business that's not a C Corporation, clothing, uniforms, and protective equipment that can be worn during non-working hours, commuting to work expenses, country, athletic, and social club dues, family expenses, federal estate tax, federal gift tax, federal income tax, fines and penalties incurred for violations of law, gifts to employees of more than $25, gifts to individuals unless they are business related, ordinary and necessary, hobby losses in excess of hobby income, job hunting expenses for a new business, life insurance premiums if the business or business owner is a direct or indirect beneficiary, lobbying expenses, personal expenses, political contributions, state inheritance tax, tax penalties, transfer taxes on business property. |
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If a taxpayer has an expense for something that is used partly for business and partly for personal purposes |
divide the total cost between the business and personal parts and deduct the business part. |
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The following are the type of expenses that go into the Cost of Goods Sold computation: |
1) The cost of products or raw materials, including freight 2) Storage 3) Factory overhead 4) Direct labor |
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Capital Expenses |
must be capitalized rather than deducted. Capital expenses are considered assets in the business. |
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There are, in general, 3 types of costs you'll capitalize: |
1) Business start-up costs 2) Business assets 3) Improvements |
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Recovery method |
allows taxpayers to recover their capital expenditures through depreciation, amortization, or depletion. These recovery methods allow taxpayers to deduct part of their cost each year. |
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The cost of making improvements to a business asset are capital expenses if |
the improvements add to the value of the asset, appreciably lengthen the time the taxpayer can use it, or adapt it to a different use. Improvements are usually major expenditures. |
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Repairs (that keep the property in a normal efficient operating condition) |
can be currently deducted by the taxpayer as a business expense. |
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The cost of getting set up in business, before the taxpayer begins the operations |
is capital expenses |
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Start-up costs and Organization costs that can be treated as capital expenses are |
1) Start-up: advertising, travel, wages for training employees, market research, finding the right location, determining the appropriate licenses - and obtaining them, recruiting staff, setting up the office or store, issuing initial press releases or announcements, and setting up books. 2) Organizational: setting up an LLC or Corporation, issuing stock, getting investors, and more.
Treat all costs to get the business "up and running" as capital expenses. |
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Start-up and organization costs are normally deducted over |
15 years. Businesses can however, currently deduct the first $10,000 worth of start-up costs, providing total start-up costs are under $60,000. Organization costs are limited to $5,000. |
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If your client wants to claim start-up cost deductions make sure: |
1) Opens his doors and starts selling in the year he wants to take the deduction 2) Document his efforts to generate sales that year. Take important steps to sell something that year and document those steps.
If these steps are not taken, IRS may classify his business as a mere hobby. |
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If the taxpayer provides services to pay a business expense, the amount he can deduct |
is limited to his actual out-of-pocket costs. |
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If the expense is paid in goods or other property |
he can deduct only what the goods or property actually costed. If the cost is included in the cost of goods sold, do not deduct them as business expense. |
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Business income or loss is first reported on either: |
1) Schedule C-EZ - Net profit from business, or 2) Schedule C - Profit from Business |
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A business owner can save taxes by hiring his or her own children. |
Even child under 16 may be hired to work in Mom's or Pop's business. Be sure to check with the local labor lawyer as the laws vary from state to state. Any child can earn up to $5,700 tax free. If the owner's child is under 18 years old, the business owner doesn't have to pay any Ss taxes or medicare taxes on the child's wages. But he may be required to pay state payroll taxes. |
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Schedule C-EZ can be used only if they: |
- had business expenses of $5,000 or less - Used the cash method of accounting - did not have an inventory at any time during the year - did not have a net loss from their business - were the sole proprietor for only one business - had no employees during the year - were not required to file Form 4562 - Depreciation and Amortization - did not deduct expenses for business use of their home - did not have prior-year un-allowed passive activity losses from their business |
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If business expenses total more than $5,000 |
the taxpayer must use Schedule C |
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Deductions for business bad debts are only allowed if |
they were previously included in income - which they ordinarily wouldn't be for a cash basis taxpayer. |
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A fringe benefit is |
tax deductible to the business and either wholly or partly tax free to the business owner or employee. There are strict rules and limitations on fringe benefits. |
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General rule for deducting business entertainment expenses: |
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. |
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Ordinary expense is |
one that is common in your field of business |
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Necessary expense is |
one that is helpful and appropriate, although not necessarily required for the business. |
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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. |
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Associated test |
Entertainment is associated with your trade or business, and Entertainment directly precedes or follows a substantial business descussion. |
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You cannot deduct |
the cost of your meal as an entertainment expense if you are claiming the meal as a travel expense; expenses that are lavish or extravagant under the circumstances. You generally can deduct only 50% of your unreimbursed entertainment expenses. |
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Expenses for leasing and renting property used in business |
may be deducted as ordinary and necessary. Rented or leased property includes real estate, machinery, and other that a taxpayer in his or her business and does not own. As long as the expenses are reasonable, they can be deducted. Special rules and limitations apply to business use of the taxpayer's rented personal residence and leased automobiles. |
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Payments (or partial payments for purchase of the property under "Conditional Sales Contracts") |
qualify for depreciation expense over the useful life of the asset. |
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If a taxpayer has both business and personal use of rented or leased property |
he or she may deduct only the amount used for business. To compute the business percentage, compare the size of the property used for business to the entire size of the property. |
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Deductible travel expenses while away from home include, but are not limited to, the cost of: |
Airplane travel, train, bus, or car between the taxpayer's home and business destination, using car while at the business destination, fares for taxis and other types of transportation between the airport or train station and hotel, the hotel and the business work location, and from one customer to another, from one place of business to another, meals and lodging, tips paid for services related to any of these expenses, dry cleaning and laundry, business calls and faxes while on the business trip and other expenses. |
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Tax home is |
the entire city or general area where the taxpayer's main place of business is located, regardless of where he maintains his family home. If tax home and family home are located in different cities the travel home on weekends is not deductible. |
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Travel expenses for conventions are deductible if |
the taxpayer can show that his attendance benefits his business. |
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Foreign conventions |
have a variety of rules that must be met before the expenses are deducted. Conventions held on the cruise ships are subject to a limit of $2,000 per year. |
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Instead of keeping records of meal expenses and deducting the actual cost |
taxpayers can generally use a standard meal allowance, which varies depending on where they travel. |
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Car Expenses |
you can deduct actual car expenses, which include depreciation (or lease payments), gas and oil, tires, repairs, tune-ups, insurance and registration fees. |
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If the taxpayer uses his car or truck for both business and personal purposes, |
you must divide his expenses based on actual mileage. |
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There are two methods to determine the amount of truck and car expense that can be included in total business expenses: |
1) Standard Mileage Rate Method 2) Actual Car Expenses Method
You must select one of the two methods. |
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If the taxpayer is self-employed, he can also deduct |
the business part of interest on his car loan, state and local personal property tax on the car, parking fees, and tolls, whether or not he claims the standard mileage rate. |
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To use the Standard Mileage Rate Method |
1) Multiply the business miles by the applicable mileage rate 2) Add that amount to the business-related parking and tolls |
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Under the actual car expense method the cost of operating a vehicle includes these tax deductible expenses: |
1) Auto club membership 2) Automobile insurance 3) Cleaning and waxing 4) Depreciation, if the taxpayer owns the vehicle 5) gas and oil 6) interest on a car loan 7) lease payments 8) licence fees if substantially based on the value of the vehicle 9) parking fees and garage rental fees 10) personal property taxes 11) repairs and maintenance 12) tires and supplies 13) tolls |
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If the taxpayer leases a vehicle for his business he can deduct |
each lease payment as a rental expense and use the actual car expense method of computing his other vehicle expenses. |
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When the use of a leased vehicle is less than 100% for business the tax deduction is reduced |
in proportion to the personal use. If an automobile with a fair market value greater than $19,000 is leased the taxpayer must subtract the excess from the otherwise deductible amount to offset a portion of the lease payments. |
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Limits on losses |
if the taxpayer's deduction for a business activity are more than the income it brings in, he has a loss. There may be limits on how much of the loss he can deduct. |
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If the taxpayer is claiming car expenses, he should provide information about |
how the vehicle was used, its mileage, who drove it, and other data, as well as whether the taxpayer has written records to validate the data. |
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The Self-Employment contributions Act tax |
is the same as the FICA tax that employees pay, but it's paid by self-employed business owners. |
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What income is taxed for SECA |
only the net income is taxes for SECA, unless interest, dividends, sale of business property and rental income is a part of business core venture. |
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Business partners include their distributions from the partnership and any guaranteed payments |
as net self-employment income subject to SECA tax. |
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S Corporation loophole |
S corp shareholders who work for the company can receive wages just like any other employee. FICA tax is withheld on the wages. Non-wage distributions from the S Corporation generally do not count as self-employment income and are not subject to either FICA or SECA tax. |
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Taxpayers must file Schedule SE if |
they have net earnings from self-employment of $400 or more, other than church income, or church employee income of $108.28 or more. |
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Taxpayers who would otherwise have to file Schedule SE are exempt from doing so if: |
1) Their only self-employment income was from earnings as a minister, member of a religious order, or Christian Science practitioner 2) They have filed Form 4361 - Application for Exemption from Self-Employment tax for use by ministers, members of religious orders and christian science practitioners, and 3) They have received IRS approval not to be taxed on these earnings |
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Maximum wages subject to social security tax |
$117,000 |
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Self-employed people may claim an adjustment to income of |
one-half (1/2) of their Self-Employment tax |
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Home Office Deductions |
many home based business owners can deduct depreciation for part of their home or deduct part or their rent. |
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Form 8829 - Expenses for business us of your home |
must be used to claim home office expenses. Expenses incurred at home for business are deductible even if the home office doesn't qualify for a deduction. |
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To qualify for a home office deduction, taxpayers must show that they use their home office exclusively and regularly as: |
1) Their principal place of business. or 2) the place where they meet with patients, clients, or customers in the normal course of business. |
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Homeowners can deduct their real estate taxes and qualified mortgage interest as itemized deduction or on Form 8829 |
An advantage to shifting these expense to Form 8829 is that by claiming these expenses as business deductions taxpayer can reduce the net income on which they must pay Self-Employment taxes. Also, the AGI will be lowered and it may improve taxpayer's eligibility for some tax benefits. |
