/Tag:small business taxes

S Corporation Election Deadline Is Almost Here: What Startups And Existing Businesses Need To Know

If you’ve legally established your business as a C Corporation or Limited Liability Company (LLC) that has elected to be viewed as a corporation for tax purposes, you have the option of filing IRS Form 2553 to get S Corporation tax treatment.

Why would you want to do so, you ask? Because it could make a big impact on your business’s bottom line.

The Potential Advantage for LLCs

LLC owners who find themselves with a high self-employment tax burden might benefit from choosing the S Corp election. LLCs are normally taxed like sole proprietorships—with all business profits subject to self-employment taxes. With S Corp tax treatment, self-employment taxes are only applied to wages and salaries rather than on all business profits.

The Potential Advantage for C Corporations

C Corporations can benefit from S Corp election because it avoids the costly double taxation C Corps normally face.

As a completely separate entity from its owners, a C Corp essentially pays taxes twice on its income:

1) When the corporation makes money, it files a tax return and pays taxes on those profits, and

2) If the corporation distributes profits to shareholders, those distributions get taxed again on the shareholders’ personal tax returns.

If a C Corporation opts to be treated as an S Corp for tax purposes, however, the business itself doesn’t file its own taxes. Instead, shareholders report their individual shares of the business’s profits and losses on their own personal tax returns.

For instance, if you’re an S Corporation shareholder with 50 percent ownership of the business, you would pay taxes on 50 percent of the profits. That income would be taxed as a profit distribution, and you might get a favorable tax rate. Note that you would also pay taxes on any income you received as wages and salaries (and that portion of your income would be subject to self-employment taxes).

Ultimately, the advantage of filing for S Corporation tax treatment comes from the fact that the corporation doesn’t pay taxes on its profits—all profits flow through to the individual shareholders’ tax returns.

Heads Up: The S Corporation Election Deadline Is Approaching

To make the S Corp election, you need to file Form 2553. If you want the election to be effective in the next tax year, you can file at any time during the tax year prior. If you’re filing in the year you want it to be effective, you must do so no more than two months and 15 days after the beginning of the tax year. According to the IRS, the “2-month period begins on the day of the month the tax year begins and ends with the close of the day before the numerically corresponding day of the second calendar month following that month. If there is no corresponding day, use the close of the last day of the calendar month.”

For existing C Corporations and LLCs, you have until March 21 to take the S Corp election for 2017.

New companies have 75 days from the date of their incorporation to file Form 2553. If they meet that deadline, they’ll receive S Corp tax treatment starting in their first tax year.

IRS Form 2553 provides additional detail about the filing deadlines and other important information, including S Corporation election eligibility restrictions.

Time Is Of The Essence For 2017

If you’re considering the S Corporation election for 2017, I recommend talking with a tax advisor to determine the potential impact it will have on your businesses tax obligations. If you find it is a great fit for your business, contact CorpNet as soon as possible to take care of filing your Form 2553 so you have the peace of mind it’s completed accurately. There’s still time (but not much!) to get it done before the deadline.

By | March 2nd, 2017|Other|0 Comments

What Every Small Business Should Know About 1099s

Every year when tax time rolls around, I field questions from business owners about whether or not they need to send 1099s to their vendors. As common as 1099 forms are, they remain one of the most misunderstood Internal Revenue Service (IRS) requirements.

To make sure you understand the circumstances under which the IRS requires issuing 1099-MISC forms to vendors, I’m going to provide some basic “must-know” information here.

What Is A Form 1099-MISC?

You must issue an IRS Form 1099-MISC to each person you’ve paid $600 or more in services (including parts and materials), prizes and awards, rents or other income payments. The 1099-MISC only applies to payments you made in doing business; it does not apply to payments made for personal purposes.

To Whom Do You Need To Send A Form 1099-MISC?

If your business paid more than $600 to a vendor or sub-contractor [individual, partnership, Limited Liability Company (LLC), Limited Partnership (LP), or estate], you are required to send a Form 1099-MISC to document what you paid them throughout the year. In general, anyone who worked for you—other than your employees—will need a 1099 from you.

Also, unless an exception applies to them, you need to issue a 1099 to your landlord if you are paying rent for business purposes. You must also issue a 1099-MISC to your attorney if you paid for legal services that amounted to more than $600 during the year.

Are There Any Exceptions?

There are. The list is rather long, but most commonly these types of vendors do not get 1099-MISC forms:

Also, you don’t have to send 1099-MISC forms to vendors to whom you made your payments via a credit card, debit card, gift card, or a payment network like PayPal. The onus to report vendor compensation is on those payment companies.

How Do You Figure Out If A Vendor Needs A 1099 From You?

I recommend before you request vendors to do any work for you, ask them for a completed W-9 form. The W-9 will give you all the information you need for filing taxes. It supplies a vendor’s mailing information, Tax ID numbers, and business structure (so you’ll know if the vendor is incorporated or not and does or does not need a 1099).

When Is the Deadline To Send 1099s?

By January 31, 2017, you must do two things to comply with your 2016 tax year 1099 obligations:

  • Submit Form 1099 to each vendor (reflecting what you paid that vendor in 2016).
  • Submit a copy of the Forms 1099 you sent to each vendor, along with a Form 1096 that discloses in total what you paid to all vendors who received 1099s from you.

Make sure you check on your state’s rules, too. Some states require they also receive your 1099s.

What Happens If You Miss The Deadline? 

Sending the required 1099-MISC forms late (or not at all) could cost you. The penalties vary depending on how far past the deadline you wait to issue the forms. If your business had gross receipts of $5 million or less, the amount you’re smacked with could range anywhere $50 to $260 per form (for tax years 2016 and 2017). If you’re caught intentionally not providing a payee with a correct statement for tax year 2016, you could face a fine of $520 for each form not submitted (that amount will increase to $530 for tax year 2017).

Where Can You Get 1099 Forms?

Unfortunately, you cannot download 1099 Forms from the IRS website. You can, however, order them from the IRS site and have them mailed to you, or you can pick them up at an IRS service center, post office, or another location that supplies them.

Eliminate Headaches—Do It Right From The Start!

Whether you’re in the early stages of launching a startup or already running a small business, I recommend you talk with a tax professional who can share more details about 1099s and the other aspects of filing your tax returns.

Starting a business or ready to change your current business structure? Contact us about making the registration process hassle-free and as fast as possible. We’re here to handle all of your legal document filing needs!

How a Small Business Can Avoid Being Audited

It’s true that the odds of being audited are fairly low – under 1%.  Yet this may not last long.  The IRS has been changing some of its procedures – such as allowing agents to conduct audits via mail — and has also been increasing its hiring.

Besides, the agency tends to focus more on smaller businesses.  Why?  The assumption is that the recordkeeping is not as disciplined and business owners may be doing their own tax preparation, which could increase the risk of getting things wrong.

When it comes to audits, though, there is one important thing to keep in mind:  the selection process is mostly done by a massive computer, which crunches huge amounts of data to find missing income and inconsistencies.  All this is put into something called a DIFF (Discriminate Income Function) score.  The higher it is, the higher is the chances the IRS will pick you.

No doubt, an audit is often a stressful experience as well as time-consuming and expensive (yes, the kinds of things that can be poisonous for a business). And if you lose to the IRS, the outcome could be devastating.

So what are some of the ways to help avoid the prospects of an audit?  Well, there is nothing you can do that is full-proof (hey, we are dealing with the IRS here!)  But there are some strategies that should help out:

Know The “Hot Buttons”:  There are certain types of deductions and credits that raise questions, especially with the IRS computer.  Often alarm bells go off when there are large amounts of items that appear to be personal, such as entertainment, meals and travel.  But there are other deductions that can trigger scrutiny like casualty losses, health expenses and bad debt losses.

Now this does not mean you should avoid these.  But rather you need to make sure you document the expenses and have a business purpose for each.  This is where having a solid cloud accounting system – like QuickBooks or Xero – can be a godsend.

Something else:  If there is a large amount of a certain type of deduction, then you might want to attach a statement that explains it and also provide copies of supporting documents (like receipts and checks).  This may be enough to stop an audit when someone from the IRS reviews your return.

Don’t Miss Deadlines:  A great way to help increase the odds of an audit is to not file your tax return.  In fact, the penalties can be onerous.  So even if you cannot pay your tax, you still should file your return.  Period.

Report Your Income:  I know there are times when it seems like it would be impossible for the IRS to know if a payment was for business or not.  But keep in mind that the agency has spent years developing systems to detect unreported income.

Avoid Round Numbers:  Yes, it seems the IRS computer will take this into account.  Let’s face it, there would be understandable skepticism if you put $2,000 for meals and entertainment.  It simply looks too contrived.

Self-Prepared Returns:  Granted, applications like TurboTax are excellent.  They use sophisticated analytics to check for errors and even provide you with the chances of an audit.

But software is never full-proof.  If you provide the wrong information, then you may be get the attention of the IRS.

Instead, if your return has been prepared by a tax professional, then this should give the agency less confidence in pursuing an audit.

Hobby or Business:  If your business looses money year after year, then the IRS will likely target you.  The reason is that the agency may consider your operation a hobby, not a business.  If this situation, you may have a large tax bill as you will lose plenty of deductions.

Then what do you have to do to be considered a business?  First of all, the IRS will presume this if you report a profit for three out of the five past years, then you should have no problem.  But if not, then you will need to provide convincing proof that your operation is not really just a way to reduce income from other sources.  And this can be pretty tough to do.

Incorporate:  The audit rate for those who file Schedule C’s is much higher than the average (at over 2%).  Because of this, you might want to consider incorporating, such converting your business to an LLC, S Corporation or C Corporation.

The CorpNet team can help you incorporate or Form an LLC. Call for a free business consultation at 888.449.2638

 Image: Adobe Stock
By | August 16th, 2016|Running A Small Business, Taxes|0 Comments

One Month Left: 5 Last-Minute Tax-Filing Tips

Filing TaxesIf you haven’t yet filed your personal taxes, time’s a’ ticking. Here are some last-minute tips to ensure that your taxes get filed correctly.

1. Bone Up on Your Tax Deductions

Before you get knee-deep in filing your own taxes or head to a tax preparer to help, it’s wise to know what tax deductions you qualify for. For example, if you work from home, you may be able to deduct your home office expenses. If you travel for work, your travel expenses may be a writeoff.

2. Know How You’ll Pay

If you haven’t been paying your estimated taxes quarterly (a practice you may want to consider so you don’t have a hefty bill in April), you will need a strategy for paying your taxes come Tax Day.

If you’ve got the funds in your bank account, pay the entire amount at once. If that’s not an option, apply for a payment plan that will allow you to spread a monthly payment out over several months to ease the burden.

While it’s a last resort, you can also consider paying your taxes on an interest-free credit card (especially one that accumulates airline points or other rewards). Just make a plan for paying it off promptly.

3. Gather What You’ll Need

Hopefully you’ve been organized throughout the year and have all your W-2s, 1099s, and receipts, and you’ve properly categorized all your expenses in your accounting software. Being organized will make it easier for either you to DIY your taxes or for a professional to process them.

If you found it stressful to gather all of this paperwork this time around, make sure to be ready next year. Set up a folder for each tax year and put all the necessary paperwork there so it’s ready when you need it.

4. Ask for a Referral

If you plan to hire a tax preparer or accountant to file your taxes for you this year (a good idea if you’re overwhelmed with other things, or if your tax situation is complicated), ask people in your network for a referral to a good tax professional. Ideally the individual or company has experience with small businesses like yours. Now’s a good time to call for an appointment, since a lot of people wait until the last minute, and you’ll be in a long line to get your taxes done.

5. Apply for an Extension

If there’s no way you can get your stuff together in time to meet the April 18 deadline for taxes to be filed, consider applying for an extension. This will give you an additional 6 months to file your taxes. Keep in mind, however, this does not give you an extension on paying what you owe. You’ll need to pay your estimated tax by April 18 if you don’t apply for a payment plan as well.

Even if you’re a procrastinator, being organized and doing a little planning now will make filing your taxes a bit easier.

Make paying taxes next year a breeze by letting CorpNet convert your business to a corporation. We can tell you all about the tax benefits of doing so.

Image: Photo Dollar Club

Should You Convert Your Business Structure to an S Corp?

Question Mark for Making Decisions

You’ve been chugging along as a sole proprietorship for a while now, but you’re beginning to realize that might not be the best idea to protect your business. So you’re considering converting your sole proprietorship to another structure, specifically the S Corporation.

Ask yourself the following questions to determine if now is the right time to convert your business structure.

1. Do You Want to Bring on Investors?

Maybe you bootstrapped your business, but now you’re ready to take the company to the next level, and to do that, you need investors. This is an automatic reason to convert to an S Corp because investors rarely want to invest in a sole proprietorship (it puts their assets at risk).

If you want potential investors to take you seriously, change your structure to an S Corp. That way, they aren’t liable for your company’s debts or legal fees, and they’re more likely to give you the money you need.

2. Are You Worried About Protecting Your Personal Assets?

Did you realize that as a sole proprietor, the law sees you as an individual as the same as your business? That means if you are ever sued, you may have to shell out from your personal savings to cover legal fees if your business doesn’t have the funds.

Incorporating, on the other hand, separates you from your business, providing a legal shield around you that protects your assets and finances from being taken for the business.

3. Are You Looking for Some Tax Relief?

While incorporating won’t magically eliminate your taxes, there are some pretty great tax perks, like only being taxed once (versus twice like with the C Corporation) and being able to report your business profit and loss on your personal income tax forms.

4. Do You Want to Reduce Your Likelihood of an Audit?

Sole proprietors are nine times more likely to get audited than corporations. What does that tell you? It’s time to change your business structure! Being audited can be a paperwork nightmare that can eat up precious time you’re better off spending running your business, so if a simple switch of business structure could reduce your chances, go for it.

5. Do You Plan to Sell Your Business?

Whether you want to sell in a year or 10, the S Corp is the ideal business structure to make that transition a breeze. Because you can’t transfer ownership of a sole proprietorship (it’s tied to you and only you), the S Corp is a better entity to package up and hand over to the new owners.

If these questions made you realize that, yes, you do need to convert your sole proprietorship to an S Corp, now’s the time to do it. As long as you file File Form 2553 by March 15, 2016 (or let CorpNet do it for you), your business will be treated as an S Corp for the 2016 tax year.

Don’t delay! Get your S Corp Election order processed now with CorpNet so you can reap the tax benefits for 2016.

Image: Dollar Photo Club

Small Business Taxes and How Incorporating Affects Them

705_3546205This time of year, most business owners are thinking about their small business taxes: how much they owe, what they need to do to file them, whether they have enough to pay what they owe.

But did you realize that if you incorporate a business, how you file your small business taxes and how much you pay can sway in your favor (depending on the corporate structure you choose)? Let’s take a look at how incorporating affects your taxes.

Small Business Taxes and the C Corporation

As I said, being incorporated can be better for you taxwise, but not always. If you incorporate as a C Corp, there’s actually some drawback to your tax situation. Essentially, you’re taxed twice on profits: first you’re taxed on the profits of the corporation, then you as a shareholder are taxed on your dividends that you receive from the company. And the tax rate for a corporation can be higher than what it is for a sole proprietor. Continue reading “Small Business Taxes and How Incorporating Affects Them” »

By | April 6th, 2015|Taxes|0 Comments

Can a Side Business Help Reduce Your Taxes?

775_4602083In the digital era, it’s never been easier to start a business on the side, whether as a freelance social media consultant, mobile game developer or Etsy shop owner.

But let’s say you started a business and it didn’t make any money. That might be bad news for your wallet, but could potentially help you come tax time.

The IRS lets you write off the loss from a business on your personal tax return. For example, if you have a regular “day” job, you can use the loss from a side business to offset your W2 or other income (and thus, lower your overall tax bill for the year).

Does this mean you should go through the effort of creating a business just so you can take $10,000 (or whatever figure) from your personal earnings? Probably not. And does that mean you can get away with creating a shell of a company just to get a deduction? No. But if you have an entrepreneurial inkling, then starting a side business is not just exciting; it could also be advantageous tax-wise. And who knows, maybe your side business will turn into a full-time gig some day. Continue reading “Can a Side Business Help Reduce Your Taxes?” »

By | July 17th, 2013|Starting a Business, Taxes|0 Comments

6 Questions to Ask Yourself Before Filing Your Taxes

257_3094518This is a guest post from Jason Sager of  Corporate Tax Network.

Filing taxes with the IRS is something we all have to do. Before moving forward with this process, however, it’s important to ask yourself some simple questions to ensure you enjoy a stress-free tax-filing experience. Corporate Tax Network recommends that you consider the following questions:

1) What is your tax-filing status?

Your filing status should be easy to determine, unless you’ve had a recent life-changing event. If you are single with no children, you should file your taxes individually. If you are married, you can file either jointly or separately. Another option is the head-of-household status, which can apply to single parents or married couples with one or more dependents. On the other hand, a divorce or the birth of a child could change your status, so make sure you know what it is prior to filing your returns. Continue reading “6 Questions to Ask Yourself Before Filing Your Taxes” »

By | March 29th, 2013|Legal Tips For Small Businesses, Taxes|0 Comments

7 Tax Tips Your Startup Should Consider Before 2013

834_3805892As the looming “fiscal cliff” dominates the post-election news cycle, it’s hard to know what tax and financial moves make sense this time of year. Pundits are talking in circles, and experts don’t possess a crystal ball. In this environment, it’s understandable that startups and self-employed professionals are confused about the next steps.

However, when it comes to tax planning, paralysis isn’t an option. Here are seven tax-saving ideas to consider before the calendar flips to 2013. Of course, these tips represent general advice — you should always consult with a tax planner/CPA for insight into your own personal situation.

1. Assess Your Profitability

Before making any strategic moves, you need to know if you’ll be in the black or the red for 2012. If you haven’t done so already, take charge of your books to get a full picture of what you’ve made and what you’ve spent for 2012.

2. Meet With a Tax Advisor

Many tax credits and incentives are set to expire Jan. 1, 2013. According to Bert Seither, director of operations at Corporate Tax Network, the top thing a startup can do between now and the end of the year is to schedule an appointment with an accountant.

SEE ALSO: 6 Steps to Starting a Business From Your Home Continue reading “7 Tax Tips Your Startup Should Consider Before 2013” »

By | December 21st, 2012|Startups, Taxes|0 Comments

Mars Cafe and the ultimate small business marketing compliment

 

430_3119396This is a true story about a local coffee shop in my neighborhood called Mars Cafe. Mars Cafe was a wildly successful local coffee shop and hangout for creative types in the Dog Town district of Des Moines. It was in business for 6 years and everyone loved it – it became a friendly local institution and an anchor of a part of town that used to be struggling economically.

Back in July, the owner of Mars Cafe suddenly announced that he was going to close the business. Even though the business was successful, he decided that he was too busy with other commitments and didn’t want to run the cafe any more. Everyone was shocked to hear that Mars Cafe was going to close. This was a beloved local cafe with a devoted following. Facebook lit up with people begging the owner to reconsider, saying, “Please don’t close, we love your cafe,” and so on. People even openly pleaded on Facebook, “Can’t someone else buy Mars Cafe instead?”

Then in August, after the cafe closed, it was announced that it was coming back. The café had new owners and re-opened on September 15, 2012. The new owners are 4 former longtime customers (now owners) who love Mars Cafe and want it to continue.

Here are a few questions to consider about why the rebirth of Mars Cafe is an amazing story, with some inspiring lessons for other small business owners: Continue reading “Mars Cafe and the ultimate small business marketing compliment” »

By | October 26th, 2012|Marketing Your Business|0 Comments