Tax laws change every year, but generally the following tips apply to any tax year and are suggestions to help maintain records of your financial history. For the most current info check out our blog or call us at (908) 725-4414 to discuss your specific tax situation.
Being self-employed, what sort of deductions can I take?
To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.
If I have a large capital gain this year, what can I do?
If you have a large capital gain this year from an investment, it may be advisable to hold onto the investment until next year to put the gain into next year’s taxes. You may also want to sell off any investments that you have that are losing value at the moment to claim your losses.
What other ways can I defer this year’s income?
If you own your business you may want to postpone sending certain invoices to ensure that you will receive payment in the following tax year. This can help greatly if some of this income would push you into a higher tax bracket. You may want to accelerate paying for expenses to cover your taxes in the current year.
What do I need to keep for tax reasons?
It is a good idea to keep all of your receipts and any other records that you may have of your income and expenses. These will come in very handy if you are audited. It is recommended that you keep these documents for three to seven years, depending on the document.
How long should I keep old tax returns?
If you are audited, it is very likely that the auditor will ask to see the last few tax returns. It is recommended to keep these tax returns forever. An added benefit of keeping your tax returns is that you can see what you claimed last year, allowing you to adjust for the current year.
For my business, what types of records are important to keep?
A crucial aspect of your business success depends on thorough and accurate financial record keeping. Accurate records help to provide information to operate efficiently as well as allow you to identify all your business assets, liabilities, income and expenses. This data will help you locate both strong and weak cycles of your business.
It is necessary to keep good records to prepare current financial statements like income statements and cash flow projections. They will also help you maintain a good relationship with your banker. The records will even ensure you don’t overpay or underpay your taxes. During an Internal Revenue Service audit, it is crucial to have good records in order to properly answer the questions and satisfy the IRS.
Financial records should demonstrate how much income you are currently making as well as what you expect to generate in the future. They will indicate the number of accounts and their balances in accounts receivable. They will also inform you of what you owe in terms of utilities, rent, merchandise, and equipment, and even expenses such as advertising, payroll, payroll taxes, equipment and facilities maintenance, and benefit plans for yourself and employees. Good records will show how much cash is being used for inventory and how much is on hand. They should also indicate which of your products are making a profit as well as your gross and net profit.
The Basic Record Keeping System
This should include a basic journal to record transactions, payroll records, accounts payable records, accounts receivable records, inventory records and petty cash records.
With the help of an accountant, you can develop an entire system that fits your business needs. They can teach you how to update these records regularly. The records will become the base for your financial statements and tax returns.
DEDUCTIONS
May I deduct meal expenses when visiting clients out of the office?
That is not common. Normally, you can only deduct the cost of a meal when away on a business-related trip or gone overnight.
Are there limits on deductible entertainment, travel and meal costs?
Although there is no specific dollar limit, expenses should be ordinary and necessary and not over-generous. For skyboxes and luxury water travel, there are other specific limitations.
May I deduct living expenses while away from home on temporary assignment?
Because temporary work site living expenses are separate from home travel expenses, they may be deducted. An assignment that is not expected to last more than a year is considered temporary. If the assignment is for more than one year than the new area becomes your tax home and you can’t deduct expenses as away-from-home travel.
Organizational and Start-Up Costs
Have you just started a new business? Did you know expenses incurred before a business begins operations are not allowed as current deductions? Generally, these start-up costs must be amortized over a period of 180 months beginning in the month in which the business begins. However, based on the current tax provisions, you may elect to deduct up to $5,000 of business start-up and $5,000 of organizational costs paid or incurred. The $5,000 deduction is reduced by any start-up or organizational costs which exceed $50,000. If you want to deduct a larger portion of your start-up cost in the first year, a new business will want to begin operations as early as possible and hold off incurring some of those expenses until after business begins. Contact us to help determine how you can maximize your deduction for start-up and/or organizational expenses. For additional information on what costs constitute start-up or organizational expenses, refer to IRS publication 535, Business Expenses.
Deductible Home Offices
Whether you are self-employed or an employee, if you use a portion of your home exclusively and regularly for business purposes, you may be able to take a home office deduction.
You can deduct certain expenses if your home office is the principal place where your trade or business is conducted or where you meet and deal with clients or patients in the course of your business. If you use a separate structure not attached to your home for an exclusive and regular part of your business, you can deduct expenses related to it.
Your home office will qualify as your principal place of business if you use it exclusively and regularly for the administrative or management activities associated with your trade or business. There must be no other fixed place where you conduct substantial administrative or management activities. If you use both your home and other locations regularly in your business, you must determine which location is your principle place of business, based on the relative importance of the activities performed at each location. If the relative importance factor doesn’t determine your principle place of business, you can also consider the time spent at each location.
If you are an employee, you have additional requirements to meet. You cannot take the home office deduction unless the business use of your home is for the convenience of your employer. Also, you cannot take deductions for space you are renting to your employer.
Generally, the amount you can deduct depends on the percentage of your home used for business. Your deduction will be limited if your gross income from your business is less than your total business expenses. Please contact us for more!
Charitable Contributions
When preparing to file your federal tax return, don’t forget your contributions to charitable organizations. Your donations (up to 10% of taxable income) can add up to a nice tax deduction for your corporation. Here are a few tips to help make sure your contributions pay off on your tax return:
You cannot deduct contributions made to specific individuals, political organizations and candidates, the value of your time or services and the cost of raffles, bingo, or other games of chance. To be deductible, contributions must be made to qualified organizations. Cash contributions must be substantiated by a bank record, or a receipt, letter or other written communication from the donee organization indicating the name of the organization, the date of the contribution, and the amount of the contribution. In addition, if the contribution is $250 or more, a written acknowledgement showing the amount of cash contributed, any property contributed, and a description and a good faith estimate of the value of any goods or services provided in return for the contribution or statement that no goods or services were provided in return for the contribution, is required. Non-cash contributions over $500 must be supported by an attachment to the return which states the kind of property contributed, along with the method used to determine its fair market value. Form 8283, Non-cash Charitable Contributions is required for contributions with a claimed value of more than $5,000. Contributions which exceed the 10% limitation can be carried over for five years.
Organizations can tell you if they are qualified and if donations to them are deductible. IRS.gov has an Exempt Organizations Select Check online tool to help you see if an organization is qualified. In addition, taxpayers can call IRS Tax Exempt/Government Entities Customer Service at 1-877-829-5500. Be sure to have the organization’s correct name and its headquarters location, if possible. Churches, synagogues, temples, mosques and governments are not required to apply for this exemption in order to be qualified. Alternatively, contact us for more information!
TYPE OF CORPORATION
How can I avoid the “corporate double tax” and what exactly is it?
A “corporate double tax” happens when a business corporation (or an entity that is treated as a business corporation for tax purposes) pays a federal tax on its income, and then its owners pay another tax as they collect corporate profits. The “entity level tax” is the tax on the corporation and so an entity taxed in this way is called a “C corporation” or C corp.
Here are ways to avoid the double tax:
- Become an S corporation, which doesn’t change the nature of the business under state business law but rather eliminates federal tax at the corporate level.
- The second tax, which is on the owners, can be deferred by suspending profit distributions to corporate owners.
For tax purposes, what type of business entity is best?
Each business is different, although to save on overall taxes a “pass-through” entity is generally best, as it eliminates tax at the entity level. Owners of pass-through entities are taxed on the profits of the entity that they own. Owners are able to make tax deductions for startup and operating losses, against the income from other businesses or investments.
The leading “pass-through” forms are limited partnerships, LLCs, LLPs, S corps, sole proprietorships and general partnerships. You have a lot of power over whether or not your entity is treated as a pass-through for federal tax purposes.
If you have a partnership of any type or a limited liability company, it is possible to choose if your business functions as a corporation or partnership for tax purposes. This is called the “check-the-box” system by tax and business advisors. You can qualify to have it treated as a pass-through by choosing S corp. status if your entity is incorporated or if you elect to be treated as a corporation.
This decision is binding. This means if you select one entity one year and a different one the next, you will have to pay the taxes as though last year’s entity was sold and use those profits towards this year.
To avoid double tax and limit my liability, which entity should I choose?
Assuming you don’t select to have them function as corporations, the following types will avoid double tax and limit liability: LLPs, LLCs, and limited partnerships (only for the limited partners). An S Corporation is usually another option. If you are a sole owner, the only option is an S Corp (or in certain states, LLCs).
Why are limited liability companies (LLCs) so great?
Limited liability and pass-through tax treatment are both combined in LLCs. This provides benefits that are unavailable from S Corps. The main benefits are:
- The possibility of greater loss deductions.
- Tax benefits can be disproportionately distributed among owners.
- When a new owner becomes a member of the business, or when allocations are given to owners in business liquidation, taxes are avoided or reduced.
LLCs are sometimes permitted to have a single owner – laws vary by state. If permitted, the owner has the opportunity to elect to be under the check-the-box rules.
A good alternative where sole ownership LLCs aren’t permitted is an S Corp. This structure will also defer tax, in comparison to LLCs, when a corporate giant is buying out the business.
If my business is a professional practice, what are the special conditions?
A major concern is the limitation of liability, especially malpractice liability. Against the liability of your own malpractice, there is no entity that will protect you. For protection against liability for malpractice of co-owner professionals in the firm and possibly for other debts, Professional Limited Liability Companies (PLLCs), LLCs, and LLPs, when accessible for professional practices, should be used. Depending on the state law, Professionals Corporations (PCs) might not offer protection from liability for a co-owner’s malpractice. LLPs, PLLCs, and LLCs all have about the same tax rules that govern them while those for PCs are a little more liberal.
If I change my form of business organization, what are the federal tax consequences?
A change of entity is an event that may need to be carefully planned and implemented to avoid a taxable event. It also may have significant future tax implications. You should consult with a professional before making any changes or decisions to your business organization.
Is it necessary for state business entity rules to follow federal tax rules?
Bear in mind the differences between state tax law and state business law. Whatever tax status you select for your entity beneath the federal check-the-box system, keep in mind that you may be considered a different type of entity for state business law purposes. This means that if you choose corporate tax treatment for a partnership, it will not necessarily bring corporate limited liability.
A state normally treats the entity selected under federal check-the-box as the entity acknowledged for state tax purposes, but this is not always the case. The law of a state may agree to pass-through status for an entity like an S Corp or an LLC, but still enforce some sort of tax on the entity.
There is a difference between an “S” corporation and a “C” corporation, what is it?
Every corporation begins as a “C” corporation and must pay income tax on the taxable income made by the corporation. After filing federal form 2553 with the IRS, a “C” corporation becomes an S corporation. The net income or loss of an “S” corporation is included in their personal tax returns and are “passed-through” to the shareholders. There is no double taxation as with “C” corporations because income tax is not taxed at the corporate level. Also known as Subchapter “S” corporations, they are limited to 100 shareholders.
What does EIN stand for and what is a Federal Tax Identification Number?
A Federal Tax Identification Number, which is also known as an Employer Identification Number (EIN) is required for each corporation so the IRS may track payroll and income taxes paid by the corporation. Just as a Social Security number, an EIN is used for almost every function of the business.
Is an LLC or an S corporation better?
Even though the special tax status of the S corporation does away with double taxation, it doesn’t have the elasticity of an LLC in distributing income to the owners. Various classes of membership interests are offered with an LLC, whereas you can only have one type of stock with an S corporation. In an LLC, a variety of individuals or entities may have interests, although the number of shareholders who can have ownership interest is restricted to no more than 100. C corporations, many trusts, LLCs, nonresident aliens, partnerships, or other S corporations may not have ownership of S corporations. It is also important to note that LLCs are permitted to have subsidiaries without limitations.