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Getting Your Small Business Ready for the Tax Filing Season

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Expert: Edward S. Karl
Getting Your Small Business Ready for the Tax Filing Season

Edward S. Karl

Vice President of Taxation for the American Institute of Certified Public Accountants (AICPA)

Wednesday, November 28, 2012 6:00 PM

Edward S. Karl, CPA, is vice president of Taxation for the American Institute of Certified Public Accountants (AICPA). He is responsible for the review, formulation, and submission to Congress, the Treasury Department, and the Internal Revenue Service of technical and policy recommendations for improvement of the federal tax process. Karl serves as a principal liaison for the AICPA with the Internal Revenue Service. He is also responsible for tax ethical issues including management of the AICPA's tax standards, the Statements on Standards for Tax Services. Karl also oversees the Tax Division's delivery of services to members which focuses on helping AICPA members provide the highest quality professional tax services.

Karl was previously employed in the tax department of a large, national CPA firm where he established their tax department. He was a frequent contributor to The Certificate, a publication of the Greater Washington Society of CPAs, of which he was an editor for fifteen years. He has also spoken at numerous tax institutes, state CPA society meetings and IRS programs.

Karl is a member of the AICPA, the American Society of Association Executives, the Maryland Association of CPAs, and the Greater Washington Society of CPAs where he has also served on their Federal Tax Committee and Board of Governors.

Are you looking for tax savings strategies for your small business? Join SBA and the AICPA to get useful and practical information for minimizing your tax bill, and on tax provisions that my affect your business.
 
Note from the AICPA: We are providing answers in the context of a web chat, without having full knowledge of all details of the taxpayer's circumstances or the opportunity to conduct in-depth research.  The AICPA and its employees cannot assume liability for tax advice being given in this web chat. Before acting on any advice provide here, you should consult a CPA or other competent tax professional.  Also, we are required by the IRS to provide the following notice:  Any tax information in this web chat is not intended to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.

Note:  There is not an audio format for the online chat, and no broadcast capability.  SBA moderators retain editorial control over the online discussions and choose the most relevant questions for chat participants and hosts.

Chat Transcript

From:
Rick Jones
Location:
Augusta, Georgia
 

Welcome to this year’s SBA Web Chat: Getting Your Small Business Ready for the Tax Filing Season. AICPA is pleased to participate and we hope our responses will be useful to you. Tax, financial and business planning is a year round venture so we would also encourage you to seek competent advice throughout the year and not just at year end.  This year in particular, with the “fiscal cliff” looming, I truly believe that proper planning will give you a leg up on success. 
The questions we’ve already received were quite thoughtful so we’re looking forward to an interesting chat.  Again, welcome!
 
Edward Karl, CPA, AICPA VP Taxation
 

 
From:
Rick Jones
Location:
Augusta, Georgia
 
Question:
I am still in the start up phase of my business. I haven't earn any money yet, but I have incurred debt from start-up of my company. I was wonder do I file a business tax for the 2012 and how do that work? What are some tax savings strategies recommendation for me and my cleaning service business.
Reply:
I suggest you review IRS Publication 535 that discusses business expenses and start up expenses. Until you have actually begun operations all expenses are start up expenses and they must be capitalized over 15 years, or you can expenses up to $10,000 in the first 6 years. Not all expenses can be considered start up expenses, an example of that is debt. You may wish to consult a CPA or tax professional with regards to starting your business and which legal entity is best for you as well.
 
From:
PollyMcCrayPR@gmail.com
Location:
Monarch Beach, California
 
Question:
What advice would you give to an Independent Contractor in Health Care? Thank you, Polly McCray
Reply:
My first thought is that you need to make sure that you meet the requirements of being an independent contractor. The IRS has consistently cracked down on taxpayers claiming independent contractor status but don’t meet the requirements therefore, really should be employees of the companies for which you are performing your services. Here are a few questions to help you determine if you meet the requirements of being considered an independent contractor – a) Do you provide your services to more than one organization; b) do you have an occupation license; c) do you invoice for your services; d) set your own hours and protocols; e) provide your own supplies. If the answer to these questions is yes, then you most likely meet the definition of independent contractor. If the answer is no, then you are not really an independent contractor and should be employed by the company you are performing your services for. If you truly meet the requirements of independent contractor status, consider implementing a self-employed retirement plan. However, if you have employees, you need to make sure they are covered by the insurance as well.
 
From:
Angela Jackson
Location:
New Brunswick, NJ
 
Question:
I started a new business in March 2012, but haven't submitted any NJ or Federal taxes. I don't how to even begin. Could you direct me to the correct services or websites, so I can get my business in order. Thank you for your time AVJ
Reply:
Dear Angela – If you started a new business, you definitely need to consider using a CPA to help you with your taxes and financial affairs. You may want to talk with your friends and family members to get the name of their CPA. You may also want to review the IRS’s tax guide for small businesses at http://www.irs.gov/pub/irs-pdf/p334.pdf.
 
From:
Sheila Stillian
Location:
Spokane, WA
 
Question:
What are the basic necessities for tax savings strategies? I am a one-person LLC with 2012 gross earnings less than $75,000.
Reply:
It is always the correct time to consider whether you are correctly calculating your tax liability and whether you are taking advantage of all legally available tax benefits. It would be best to consult with a CPA in practice in your state as well.
 
From:
Simmie Butler
Location:
Louisville, Kentucky
 
Question:
Is turbotax for small business a good tax software to use for doing taxes for a small startup business (Home Inspection)
Reply:
Hello Simmie, thank you for your question however your question is a personal preference question. There are many tax software programs geared towards the needs of small businesses. We suggest you try a few of the different software’s on a trial basis to see which one is more user friendly to your specific needs and keeps you the most organized. Good luck with your search!
 
From:
Rory Everitt
Location:
Sunnyvale, California
 
Question:
How many small businesses file their own taxes vs use the services of a CPA or other tax professional? Last year, I filed my own taxes. Under what circumstances should I strongly consider using a CPA or other tax professional?
Reply:
Hi Rory – I generally encourage all small business owners to use CPAs. However, if you had any change in circumstances this year (started a new business, sold a business, moved, got married, had a child, etc.), you should strongly consider using one. It is difficult (or too time-consuming) for many business owners to keep up with the changes in the tax laws, calculate estimated tax payments, and file the required information on the proper forms.
 
From:
Joshua Farrell
Location:
Philadelphia, Pa.
 
Question:
I started a small business in June 2012. By November I still hadn't had a single customer. I spent about $3000 in start up costs.Come tax time will I be able to use this as a deduction on my personal taxes? ps It's a sole prop. structure. Thanks for your advice!
Reply:
Hi Joshua, Thank you for your question. There are very specific rules regarding if, when, and how business start-up expenses are deducted for tax purposes so it would be a good idea to consider engaging a CPA to help you sort through the details. Start-up costs are defined as amounts paid or incurred for creating your business as well as costs incurred for investigating the creation of a business. A general rule of thumb is that business start-up costs incurred before you actually begin your business are not deductible when incurred (since the business hasn’t yet begun) but are capitalized as an asset and amortized over a 180-month period (meaning deducted over a 180 month period versus all at once). The amortization period starts with the month you begin business operations. Be sure to keep track of all of your expenses incurred.
 
From:
John Prince
Location:
Bronx, New York
 
Question:
Colleagues, I retired from the federal government in 2011 after 31 years. In 2012, I incorporated myself as a Consultant with the State of New York.I have not and do not expect to receive any earnings in 2012 from this business entity. Do I have to file tax statements with the Federal/ and State government on my business non-earnings?
Reply:
When you say you have incorporated yourself in what form are you incorporated, Limited Liability Corp, professional Corp, S Corp? As you see there are many choices and specific reasons on why you might choose a specific one. While time remain you may want to consult a CPA in case there are elections to be made that can benefit you, such as electing to be taxed as an S Corp rather than a traditional C corp. If you elected C Corp status a return is necessary even if there is no income and you would need to consult with a CPA familiar with the rules in New York State. The IRS website at IRS.gov also has a great deal of information.
 
From:
Linda Butterworth
Location:
La Crosse, WISCONSIN
 
Question:
For charitable nonprofits, what percentage of private home expenses can be deducted? Can a portion of car for transportation R/T nonprofit be deducted?
Reply:
Dear Linda – I am not sure of your question. Are you making a charitable contribution? Are you using your personal vehicle for charitable purposes? Generally, you can deduct 14 cents per mile for use of your personal vehicle for charitable services. You can also deduct parking fees and tolls separately. I don’t see many taxpayers deduct private home expenses.
 
From:
Sonya Young
Location:
Atlanta, Georgia
 
Question:
I have a new small business - Sonya Young - Public Relations. Marketing Boutique. What is the best business structure for a public relations consulting business?
Reply:
When considering starting a business, the most common options for small businesses are sole proprietorship, LLC and Corporation. All of these entities can elect to be taxed as an S corporation. My suggestion would be for you to meet with a local CPA to review your situation. They would help sort through the rules for the different entity types and how they may be good or bad for your specific situation. When looking for a CPA, check to make sure they have has experience in taxes (not all CPAs do tax work, so ask!) to make sure you get all of your questions answered.
 
From:
Christina Hunt
Location:
Mercersburg, PA
 
Question:
If we originally elected to be a C-Corp, how soon can we switch over to be an S-Corp and is there a specific time during the year that we have to do that?
Reply:
It would be deductible in the year it is incurred. So it would be 2012. If purchases don’t have a legitimate business purpose, they are deductible obviously.
 
From:
Terry Bailey
Location:
Roseville, MN
 
Question:
If I am not taking the home office deduction on my taxes (it is a very small % or my square footage), but I have a home office Are there other deductions I could take related to this, like heat and electricity, property taxes, etc.?
Reply:
Hi Terry, thank you for your question. The tax deductions available related to your home office include mortgage interest, insurance, utilities, repairs, and depreciation. But taking any of these related to your home office are literally home office deductions (your questions states that you are not taking the home office deduction).
 
From:
carol roberts
Location:
junction city, oregon
 
Question:
what makes a small business eligible for the domestic production activities deduction? Also the health care tax credit for small businesses?
Reply:
A business (large or small) may be eligible for the domestic production activities (or section 199) deduction if it performs domestic manufacturing and certain other production activities. Domestic production activities include farming, construction, architecture, engineering and the production of software, recordings and films. Businesses can claim the deduction for products only partially (if at least 20% of the costs) produced in the U.S. Among the more common eligible categories of activities are: • Manufacture, production, growth or extraction (MPGE) of tangible personal property, in whole or in significant part within the U.S; • Construction of real property in the U.S.; and • Performance of engineering or architectural services in the U.S. in connection with real property construction projects in the U.S. For more information on this deduction, see these helpful AICPA related JofA article, Tax Insider article, The Tax Adviser article. Many small businesses may be eligible for the health care tax credit for small businesses. In general, the credit is available to small employers that pay at least half the cost of single (not family) coverage for their employees. The credit is available to small employers who have fewer than 25 full-time equivalent employees, pay an average wage of less than $50,000 a year, and pay at least half of employee health insurance premiums. Since the credit is refundable, small tax-exempt employers are eligible too, so even if you have no taxable income, you may be eligible to receive the credit as a refund so long as it does not exceed your income tax withholding and Medicare tax liability. The small employer health care credit is calculated on IRS Form 8941 and should be claimed as part of the general business credit on Form 3800, which is included on the income tax return (Form 1040 line 53 for individuals, partners and S corp shareholders; and Form 1120 if a corporation) . The IRS has a webpage on the Small Business Health Care Tax Credit for Small Employers and an IRS news release.
 
From:
Sylvia
Location:
Roseburg, OR
 
Question:
WE are wondering about what to do with ruined or rejected apparel that we have embellished. Are we able to deduct the retail cost of the items or just what we paid for the apparel? Sometimes a lot of time is put into embroidery or screenprinting and either the customer does not accept the items or the items get damaged in the process.
Reply:
Hello Sylvia, thank you for your inquiry. Unfortunately ruined apparel is something that should not be donated since people would most likely not be interested in ruined apparel. As for embellished apparel you can donate the apparel and take a deduction for the item. I understand that often times a lot of time can be put into embellishing an item, however, the deduction should be what other people would be willing to pay at thrift shop value. Below is a link with a valuation guide as to values for donated items. http://www.salvationarmyusa.org/usn/www_usn_2.nsf/0/D477340FFA28755C8525...
 
From:
Sylvia Gosline
Location:
Roseburg, OR
 
Question:
How does the expiration of Bush tax cuts affect small businesses? Does the $250,000 tax bracket affect LLC's and is it gross income, adjusted gross, or taxable income?
Reply:
The so-called “Bush tax cuts” refer to the combination of tax rate change and additional provisions passed in 2001 and 2003 by President Bush. There are several provisions that impact small business, so much so that the list is too long to recite here. The $250,000 threshold you mention refers to individual’s adjusted gross income, which is the bottom number on the 1st page of Form 1040. So, if your LLC files as a sole proprietor on Schedule C, it’s “gross income” is the first number on Schedule C. You then deduct the LLC’s operating expenses from the gross income to determine net income. It is only the net income that goes into the $250,000 adjusted gross income number. There are several issues jumbled together in your question and it is hard to provide further detail. My suggestion would be for you to meet with a local CPA to review your situation. They could explain how these changes directly impact you and also be able to help you plan on both a business level and a personal level. When looking for a CPA, check to make sure they have has experience in taxes (not all CPAs do tax work, so ask!) to make sure you get all of your questions answered.
 
From:
Christina Hunt
Location:
Mercersburg, PA
 
Question:
If we buy something on a personal credit card during the end of 2012, and we don't submit an expense report until January of 2013, which tax year would the company have to include the expense report in? Would it be according to the year dated on the receipt?
Reply:
If the nature of the expense, which you are trying to get reimbursed for, is a legitimate business expenditure, it can be reimbursed. You should keep copies of receipts and document the nature of the expenditure.
 
From:
willisa
Location:
norfolk, virginia
 
Question:
What tax deduction can I claim on my taxes?
Reply:
It will depend on your personal situation. You will likely be able to take the standard deduction and a personal exemption (if nobody else is eligible to claim you). You may also be able to claim a wide variety of other deductions and credits if you qualify.
 
From:
Darnell Stewart
Location:
Indianapolis, Indiana
 
Question:
1) Which Entity would be best for holding real estate & why? 2) Do taxes have to be paid yearly, or can we skip a year?
Reply:
It is difficult to suggest the “best” entity for holding real estate since it depends entirely on your reason for buying the real estate, what you plan to do with it once you purchase it, how long you plan to hold it and several other considerations. Regarding the tax filing requirement, income tax returns are required to be filed annually. My suggestion would be for you to meet with a local CPA to review your situation. They would help sort through the rules for the different entity types and how they may be good or bad for your specific situation. When looking for a CPA, check to make sure they have has experience in taxes (not all CPAs do tax work, so ask!) to make sure you get all of your questions answered.
 
From:
Terrie
Location:
Palmdale, Ca
 
Question:
How do I submit an offer and compromise for payroll taxes
Reply:
A business owner can try to settle payroll taxes and penalties through an offer in compromise. If neither the business nor the business owners have the ability to pay the taxes in full, the IRS may accept an offer in compromise. You should follow the normal OIC procedures - review of the IRS instructions and all the forms for submitting an offer in the Offer in Compromise Booklet, Form 656-B (PDF). You can also view the "Complete Form 656" video. Your completed offer package should include: • Form 433-A (OIC) (individuals) or 433-B (OIC) (businesses) and all required documentation as specified on the forms; • Form 656(s) - individual and business tax debt (Corporation/ LLC/ Partnership) must be submitted on separate Form 656; • $150 application fee (non-refundable); and • Initial payment (non-refundable) for each Form 656. You will need to select a payment option. Your initial payment will vary based on your offer and the payment option you choose: • Lump Sum Cash: Submit an initial payment of 20 percent of the total offer amount with your application. Wait for written acceptance, then pay the remaining balance of the offer in five or fewer payments. • Periodic Payment: Submit your initial payment with your application. Continue to pay the remaining balance in monthly installments while the IRS considers your offer. If accepted, continue to pay monthly until it is paid in full. If you meet the Low Income Certification guidelines, you do not have to send the application fee or the initial payment and you will not need to make monthly installments during the evaluation of your offer. See your application package for details. For more information, see the IRS website http://www.irs.gov/Individuals/Offer-in-Compromise-1 and http://www.irscompromisehelp.com/offer-in-compromise-for-payroll-taxes-n..., and http://www.ctctax.com/TP_backpayrolltaxes.asp.
 
From:
Steve C
Location:
Little Falls, NJ
 
Question:
As a home remodeling contractor how do I determine what jobs to charge sales tax for and which jobs that no sales tax is charged
Reply:
Hello Steve, you should contact your local taxing authority as ask which jobs should have sales tax applied. Sales tax is very specific to each locality.
 
From:
Katherine Dimas
Location:
Burbank, CA
 
Question:
If the LLC is only 6 months old by the time tax season rolls around and has not generated any income can it be reported as a DBA to avoid the $800 tax?
Reply:
Not sure what $800 tax you are referring to. It sounds like a local tax that I am not familiar with. In terms of federal returns, generally speaking, a tax return should be filed every year, even if you have little or minimal activity. You can only claim expenses in the year they are paid so you would have to file a return this year if you wanted to claim the expense that year. Otherwise you cannot carry over costs to claim in a later year. My suggestion would be for you to meet with a local CPA to review your situation. They would help sort through these rules for your specific situation. When looking for a CPA, check to make sure they have has experience in taxes (not all CPAs do tax work, so ask!) to make sure you get all of your questions answered.
 
From:
Bridgett Harbaugh
Location:
Pittsburgh, PA
 
Question:
I recently went full-time in running a still photography business, but have continued to do other video freelance work on the side. Because I am an LLC, and elect to be treated as a sole proprietor, is every penny I make considered business money, or just jobs within the realm of the business's photography services? Not sure if I should be keep it separate, or if it even matters since all my earnings for the year will be taxed the same.
Reply:
Each income producing activity should be reported separately including related expenses. As a sole proprietor, all your business income and expense will be reported separately then combined when filing your return. You should also maintain supporting documents separately.
 
From:
Thomas Friday
Location:
San Antonio, Texas
 
Question:
I want to record my business transactions with software. Can you recommend a product that IRS would be amenable to?
Reply:
Hello Thomas. We do not endorse any one software over another software nor does the IRS. As you probably know, there are many different software products available to small businesses. We recommend you test the different products to see which product suits your needs (user friendly, more logical sense) to be able to be organized for when you prepare your tax return.
 
From:
Amanda
Location:
Brooklyn, NY
 
Question:
Where do I go to find the deduction rates for both employer and employee for SS, Medicate, State and Federal taxes. Im getting ready to hire my first employee.
Reply:
On the Internal Revenue Service website search for Publication 15 and Circular E. Each year the IRS publishes the information you are looking for in these documents. Just one warning that the 2013 information has not yet been published but should be shortly.
 
From:
Lisa Duffy
Location:
Vallejo, CA
 
Question:
I currently use an Excel spreadsheet to keep track of my expenses. It has been simple but time consuming process as I run an online service-based business. Can you provide suggestions on other more efficient programs to use?
Reply:
Hello Lisa, as you are aware, there are many tax software options for small businesses. We do not endorse one over the other since it is a personal preference decision. We recommend you look at the different software’s on a trial basis and see which product is most user friendly and makes logical sense when organizing your data.
 
From:
Mary
Location:
Sarasota, Florida
 
Question:
Are there any tax credits for small start up businesses without any employees? If not is there any way to deduct start up costs if the business has not yet produced income in 2012?
Reply:
There are a variety of credits that are available for small businesses, too many to list here. In terms of start-up costs, they are a special type of expenses and there are special rules on how and when you get to deduct them. I’m guessing you are asking because you have spent some money this year but not generated any revenue. My suggestion would be for you to meet with a local CPA to review your situation. They would help sort through the start-up cost rules and also help determine which credits you may qualify for.
 
From:
MRubins
Location:
Amarillo, TEXAS
 
Question:
I Just started my business in july, (a Motor Carrier) and was thinking about filing as a C corp. I understand that as a sole business owner of a LLC I will be taxed as a Sole Proprietor, and I am trying to separate my finances from my company. I need the business to pay me as a normal employee with with-holdings and what not. In order to do that what is the best tax structure? Also I am trying to grow this company to operate 20+ trucks and I want to start with a strong foundation. Any Opinions are greatly Appreciated.
Reply:
It makes sense to consider a C corporation for your business, but you may also want to consider an S corporation. You should have separate finances regardless of your business entity type. This can be done by using a separate checking account and credit cards for the business. Having separate accounts in one of the things the IRS looks at to determine if a sole proprietorship is a valid business. If you convert to a C corporation, it will be required since a corporation is a separate legal entity from its owner(s). As for being paid as a “normal” employee, that is something that can be done by way of regularly scheduled transfers from your separate business account. As a sole proprietor, remember that you will need to make estimated tax payments since you cannot “withhold” taxes on these types of transfers. A single-member LLC owner cannot be put on payroll. However, if you convert to a C corporation, you can set up payroll (which would be at an additional expense to process payroll + required quarterly and annual filings plus regular tax deposits for the withholdings) and then add yourself as an employee. My suggestion would be for you to meet with a local CPA to review your situation. They would help figure out when might be the right time to convert from the current LLC to a C corp (or possible S corp), depending on your situation, growth trajectory, business plans, etc. When looking for a CPA, check to make sure they have has experience in taxes (not all CPAs do tax work, so ask!) to make sure you get all of your questions answered.
 
From:
Jeffrey Foley
Location:
Alvin, TX
 
Question:
I own a number of cars and trucks through my business. They are all on my books at the purchase price. When I sell the older vehicles, can I take the difference between my purchase price and the sales price as a loss? I have not depreciated the vehicles over the years I've owned them, but rather written off the actual fuel and maintenance costs.
Reply:
Hello Jeffrey, you cannot take a loss on the sale of the vehicles as you describe. Regardless of your taking depreciation or not, the basis of your vehicle would be determined as if you had taken depreciation. The difference between the sales price and the basis would then be your loss or gain. We recommend you discuss vehicle depreciation with a cpa to see if you can catch up your depreciation. The rules are complex but it may be worth the effort and money to do so.
 
From:
Calvin
Location:
Augusta, GA
 
Question:
What should be done if my business doesn't make enough to pay quarterly taxes?
Reply:
If your annual tax liability is below the threshhold for making quarterly payments you can simply pay your tax liability when you file your return. For specific information go to the IRS website and review the instructions for filing the business form you are using and make sure you are below the applicale threshhold amount.
 
From:
Dave Sauerbeck
Location:
LaGrange, KY
 
Question:
My wife and I have a vacation rental property that we have donated weekends for charitable organizations to auction off. We have never claimed these donations as a charitable expense, but wonder if we are cheating ourselves. We have heard opposing opinions....but not from tax pros. Tx
Reply:
Generally, if you contribute less than your entire interest in your property you cannot take a charitable deduction. In your case, you are donating time and not the entire property so you would not be entitled to the charitable contribution deduction.
 
From:
Lillian
Location:
Palo Alto, CA
 
Question:
Hello, I set up a website under Sole proprietorship at the beginning of 2012, but didn't sell anything successfully. How should I prepare for tax filing. I do have expense such as domain registration fee, web hosting fee. Thanks, Lillian
Reply:
Generally speaking, a tax return should be filed every year. If you have no activity, then the filing should be very simple. It sounds like you have had some income but a lot of expenses, which means you have a loss. You can only claim expenses in the year they are paid so you would have to file a return this year if you wanted to claim them. As a sole proprietor, a loss on a Schedule C is generally deductible against other income. So, for example, if you had $100 in sales but $600 in expenses, then you would have a $500 loss. Then say you had W-2 wages of $1,400, then the $500 loss would be deductible from the wages, leaving you $900 in adjusted gross income (which is your income before personal exemptions and itemized or standard deductions). Expenses incurred after the business is open, up and running, are the types of expenses I included in my example. However, it sounds like this may be your first year in business based on the types of expenses you described. In that case, expenses incurred to set up the business and get started (called “start up costs”) have special rules. My suggestion would be for you to meet with a local CPA to review your situation. They would help sort through these how rules apply to your specific situation. When looking for a CPA, check to make sure they have has experience in taxes (not all CPAs do tax work, so ask!) to make sure you get all of your questions answered.
 
From:
Jamie Hubbard
Location:
Atlanta, GA
 
Question:
I opened a Real Estate Company in Feb of this year. I'm not quite sure of EVERYTHING I need to keep, make copies of, payroll, etc. Can you make any suggestions or help? Thanks, Jamie Bricks and STicks Realty
Reply:
Hello Jamie, the IRS has a webpage with FAQs regarding record keeping for small businesses. Please visit the website for suggestions and help: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Recordkee...
 
From:
Sonja Sullivan
Location:
San Diego, CA
 
Question:
Please talk about Roth Ira conversions.
Reply:
When talking about Roth IRA conversions its usually a question of converting a traditional IRA (including rollovers from qualified plans such as a 401(k) plan) to a Roth IRA. The main difference is that amounts put into traditional IRAs are put in pre-tax. The funds are taxed as they are taken out of a traditional IRA. Roth IRAs are the opposite. The amounts put into the Roth IRA are taxed when put in and tax-free (subject to certain restrictions) when the funds are withdrawn. The main catch of a conversion is that there is a tax on the conversion. For example, if you are in a 40% tax bracket and you convert a $1M IRA to a Roth IRA you will have to pay $400,000 in additional tax at the time of conversion.
 
From:
Lorraine
Location:
Baltimore, MD
 
Question:
Most businesses do not make money in the first year or two. Is there a grace period for reporting sales tax that is given to small businesses?
Reply:
If no sales were made then no sales tax is due, however, in most states you must still file a sales tax return and report zero sales even if no sales tax is due.
 
From:
Georgia M Inskeep
Location:
Troy, NC
 
Question:
What about accounting programs...Do you recommend QuikBooks or another program....primarily wholesale to the DOD, DOE, and state entities.
Reply:
There are several accounting software programs commercially available, whether they are installed software or web-based or hosted programs. We cannot recommend a particular program here, but strongly encourage that you work with an CPA who can help you find the program that makes the most sense for you. They may also be able to recommend a bookkeeper to assist in getting the system setup and configured for your needs.
 
From:
Pauline Young
Location:
Houston, TX
 
Question:
If an business owner does not want to us their SS# can they get a EIN# by completing the SS4 Form?
Reply:
Yes, you can get an EIN# for your business by completing the SS-4 Form. You will be able to use the EIN in the Schedule C for the Form 1040 if your business is not a corporation. http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Apply-for...(EIN)-Online and http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/How-to-Ap....
 
From:
Ong, Chee Hock
Location:
Lafayette, Louisiana
 
Question:
Is it taxable for Small Business going to Charitable Organisation
Reply:
What do you mean?
 
From:
Justin Nixon
Location:
,
 
Question:
How could a newly filed corporation get business credit for transactions taken place prior to filing?
Reply:
There are very specific rules regarding if, when, and how business start-up expenses are deducted for tax purposes. The answer will depend on when the cost was incurred as well as the type of expense. Start-up costs are defined as amounts paid or incurred for a) creating an active trade or business; or b) investigating the creation or acquisition of a business. A general rule of thumb is that business start-up costs incurred before the start of the business are not deducted when incurred but should be capitalized as an asset and amortized ratably over a 180-month period. The amortization period starts with the month you begin operating your active trade or business.
 
From:
Luis G Huertas
Location:
Frederiksted, St Croix, Virgin Islands
 
Question:
How to identify expenses in a home business?
Reply:
If you regularly use a part of your home to conduct business, you may be eligible to deduct certain of those expenses. Generally, the type of expenses that are deductible include mortgage interest, insurance, utilities, repairs, and depreciation. The amount of the expenses that can be claimed as deductions is based on the percentage of your home devoted to business use. So, if you use a whole room or part of a room for conducting your business, you need to figure out the percentage of your home devoted to your business activities.
 
From:
Guild
Location:
Easley, Sc, Sc
 
Question:
I'm a licensed freelance hairbraider working from home. I haven't obtained a business license, however I do posses an EIN number. This year will be my first time attempting to report my earnings to the IRS. Since I am a sole proprieter is it appropriate that I report my earnings as well as my dependents for tax exemptions? In essence, how can I ensure that I report my transactions accurately and cut down on having to owe the IRS?
Reply:
Thank you for your question! Basically, all of your income will be reported on your 1040. However, you should report your business income and deductions on a Schedule C and attach it to your 1040. Your dependents, if eligible, can also be claimed on the appropriate line of your 1040.
 
From:
Suzanne Somers
Location:
Salt Lake City, Utah
 
Question:
We are an S Corp and purchased 2 new cars for employees use this year. I am facing a large tax bill and looking to expense out as much as we can. I wonder if we should pay off one or more of the cars or can we take maximum depreciation on them?
Reply:
The amount of depreciation you can take is based on how the vehicles are being used assuming all vehicle use is business usage. You can take all the depreciation you are entitled to but before making any decision you should have your CPA do some projections based on actual experience and usage.
 
From:
Zenet Negron
Location:
Stockton, CA
 
Question:
What to prepare now for reporting info. returns - 1099s (1099B) on schedule C? What are the limits? Who reports it and when?
Reply:
Amounts related to Forms 1099B “Proceeds from Broker and Barter Exchange Transactions” are generally reported on your 1040, Schedule D and not on Schedule C. Schedule C is for reporting business income and loss. Form 1099-Misc often shows (business) income to be reported on Schedule C. Report all amounts from 1099-Misc on your schedule C when you file your Form 1040. Also, if you receive a Form 1099B, follow the instructions on that form to show where to report the amounts (generally on Schedule D).
 
From:
Shelly
Location:
Casper, Wy
 
Question:
What is the best eay to keep track of business mileage. Any time saving tips
Reply:
You should keep a log book. It should have the date, nature of the travel purpose, and actual mileage driven.
 
From:
Bettie Biehn
Location:
Alexandria, Virginia
 
Question:
While I own my (very) small business and will pay self employment tax for it, I also may do some contract work for additinal income (as an independent contractor). Will I have to pay a second self employment tax for this work?
Reply:
You pay self-employment tax only once on the total self-employment income earned from all sources. So, if you have two separate sources of self-employment income, you would file two separate Schedule C’s (one for each) but you would combine the two incomes to determine your self-employment tax.
 
From:
Ashley Jenkins
Location:
Mesa, Arizona
 
Question:
This is my first year running my own business and I'd like to get information on business deductions and 1099 forms to send to my sub-contractors.
Reply:
You did not mention what type of business entity you created for your business. Initially I would start with the Internal Revenue Service website, IRS.gov. You shoould be able to find much of the information however, you may also wish to consult with a CPA to ensure your record keeping is being done properly.
 
From:
donna
Location:
charlotte, nc
 
Question:
Should small businesses not incorporated file there taxes with there personal taxes or separate?
Reply:
A small business that is a sole proprietorship should file taxes with your Form 1040 with a Schedule C attached for the business. If the small business is a partnership, a Form 1065 needs to be filed for the business, and aif the small business is an S-corporation, a Form 1120-S needs to be filed for the business.
 
From:
Derek Davis
Location:
Jacksonville, Florida
 
Question:
I purchase a concession trialer in february 2011. but I still haven't not yet started selling stuff out of it because I've been trying to buy equipment. I'm financing this whole operation my self. How can this help me doing tax time?
Reply:
Hi Derek, Thank you for your question. There are very specific rules regarding if, when, and how business start-up expenses are deducted for tax purposes so it would be a good idea to consider engaging a CPA to help you sort through the details. Start-up costs are defined as amounts paid or incurred for creating your business as well as costs incurred for investigating the creation of a business. A general rule of thumb is that business start-up costs incurred before you actually begin your business are not deductible when incurred (since the business hasn’t yet begun) but are capitalized as an asset and amortized over a 180-month period (meaning deducted over a 180 month period versus all at once). The amortization period starts with the month you begin business operations. Be sure to keep track of all of your expenses incurred.
 
From:
Esmeal Sheriff
Location:
Charlotte, NC
 
Question:
If you have a small business that you invest money into but have not yet raise revenue, can I still file tax for my business. My business is register and has an EIN or tax ID number. Thanks allot.
Reply:
You should still file tax returns and claim an operating loss. From the date your income producing activity is opened for business, all the revenue, if any, and expense, if any, related to operating your business should be reported.
 
From:
willisa
Location:
norfolk, virginia
 
Question:
Does my tax exemption go toward my earned income credit?
Reply:
For 2012 taxes, each person has a personal exemption of $3,800 that is subtracted in arriving at taxable income. Your tax is then calculated based on your total taxable income. The earned income credit is then subtracted from the calculated tax liability to arrive at the amount of tax that is owed or refunded. When you are calculating your earned income credit, the amount of your personal exemption is not used; only your earned income amount matters. For more information, see http://www.irs.gov/Individuals/EITC,-Earned-Income-Tax-Credit,-Questions..., and the IRS EITC Assistant Tool, or Chapter 4, Figuring and Claiming the EITC, in Publication 596.
 
From:
Rachel
Location:
Dayton, Ohio
 
Question:
Our business began in Dec 2011. We were not required to make estimated tax payments throughout 2012. Although no payments have been made for 2012, would it be beneficial to make a federal and/or state estimated tax payment by Dec 31, 2012?
Reply:
Yes, it would be beneficial (assuming you have the money available now) to make a Federal and/or state estimated tax payment by December 31, 2012 as it will help to offset the tax liability that is owed when you file your tax return later in 2013. If your business is not a corporation, any state income tax payment you make in 2012 may also be deductible as an itemized tax deduction for 2012. For more information, see Publication 505, Tax Withholding and Estimated Tax or http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Estimated....
 
From:
Karen
Location:
adair, Ok
 
Question:
if your and s corp do you have to do your tax return on a 1120s can you do it on a schedule c
Reply:
No, an S corporation is must file a separate tax return. Any net income flows through to the s corporation shareholder’s personal returns in proportion to their ownership (e.g., 50/50 or 70/30, etc.). A net loss may only flow through if the owner has “basis” in their stock. Basis is a complicated formula, so if you have losses from an S corporation, I strongly suggest you to meet with a local CPA to review your situation. They would help sort through these rules for your specific situation. When looking for a CPA, check to make sure they have has experience in taxes (not all CPAs do tax work, so ask!) to make sure you get all of your questions answered.
 
From:
Frances Regalado
Location:
Whittier, California
 
Question:
I want to pay a friend in the U.K. to design/maintain my website; however, since my friend does not have an entity such as an LLC or Ltd. set up, I would literally pay him with some type of check or wire. Since I am not paying an entity, can I still deduct this as a business expense or do I have to pay a proper business entity?
Reply:
Yes, you can deduct business expenses even if they are not paid to a “proper” business entity. Be sure to get and keep a receipt from the service provider so that you can prove the deduction.
 
From:
Joe LaBenne
Location:
O Fallon, IL, IL
 
Question:
Small businesses need to be able to “team” with other small businesses or groups on health insurance to remain competitive. Currently a small company cannot even get health insurance for employees in some cases. Please address How To get competitively priced heath insurance, particularly where only a limited number of employees in the company want to participate and also advise on how to maximize tax breaks on health insurance.
Reply:
Hello Joe, we can not help you with how to get competitively priced health care insurance, however, you may be able to take advantage of the small business healthcare tax credit if you qualify - if you have fewer than 25 full time equivalents.
 
From:
Patricia Heartland
Location:
Woodbridge, Virginia
 
Question:
Our small business had to close on 1/2012. We were left without any cash and equipment which we couldn't sold yet. We had to use part of our SEP accounts savings in order to survive. We know that we are going to have to pay a penalty on the withdrawing of the SEP funds but is there a provision that helps business owners pay the penalty of the SEP account in a few years instead of having to pay the penalty all at once due to loss of income? Also, we were left with equipment that has not been sold yet. Besides taking depreciation, can we claim losses? At this point I do not think that we are going to sell the equipment. Thank you. Patricia Heartland
Reply:
Generally speaking, there is no exception to the penalty when you make an early withdrawal because business is down. However, you can set up terms with IRS to pay down the resulting tax and penalty. To minimize the penalties, you would want to file your return without an extension then immediately contact them once they send you the first notice of the balance with interest and penalties and request an installment agreement. If you don’t feel comfortable doing that part on your own, I suggest you contact local CPA to assist. When looking for a CPA, check to make sure they have experience with taxes. Not all CPAs provide tax services, so be sure to ask! You will also want to ask to see what their experience is working with IRS collections matters.
 
From:
Polly McCray
Location:
Monarch Beach, California
 
Question:
What advice would you an Independent Contractor in HealthCare? Thank you, Polly
Reply:
My first thought is that you need to make sure that you meet the requirements of being an independent contractor. The IRS has consistently cracked down on taxpayers claiming independent contractor status but don’t meet the requirements therefore, really should be employees of the companies for which you are performing your services. Here are a few questions to help you determine if you meet the requirements of being considered an independent contractor – a) Do you provide your services to more than one organization; b) do you have an occupation license; c) do you invoice for your services; d) set your own hours and protocols; e) provide your own supplies. If the answer to these questions is yes, then you most likely meet the definition of independent contractor. If the answer is no, then you are not really an independent contractor and should be employed by the company you are performing your services for. If you truly meet the requirements of independent contractor status, consider implementing a self-employed retirement plan. However, if you have employees, you need to make sure they are covered by the insurance as well.
 
From:
Nikkia Carter
Location:
King George, VA
 
Question:
Hi! I started an another company in March of this year and am a sole proprietor for both companies. I am therefore using the same Federal EIN as for my other company and it is licensed, registered with Local, State, and Federal as a contractor/Vendor, is a Microsoft Partner, and I have paid VA quarterly taxes on it (and the other company which was in operation for almost 3 years and recently
Reply:
I am not certain what your questions is. It seems you are working hard but finding road blocks on your businesses. If you are uncertain if you are doing your business taxes correctly I would recommend you consult with a CPA.
 
From:
Kathy
Location:
Reno, NV
 
Question:
My mom and i started a business in Feb this year ,unfortunately the businees,was only funded on a shoestring. we incorporated as a llc,but made no profits,just expenses that came from our out of pocket.We request counseling several times with sba,but only get that they don't have enought counselors and someone will get in contact,which never happen.I know it tax time,i feel totally lost.
Reply:
First, take a deep breath! You are not alone. I can help you with the basics but since you started a business, the best advice I can give you is to find yourself a really good CPA to be there for you and guide you through many years of success in your new business. Let’s get back to the basics. Generally, for federal income tax purposes, LLCs are not taxable entities. Any profit or loss incurred by an LLC will flow through to each member’s personal tax return. For example, if the LLC had $100 of income and $10 of expenses, there would be a resulting profit of $90. The LLC will not be taxed on the $90 profit but instead the $90 will be split up among the members of the LLC and each member’s portion of the $90 profit will be included on that members personal 1040 and taxed at their personal income tax rate. The same holds true if the LLC shows a loss for any given tax year. You indicate your LLC has no income yet, just some expenses. Let’s use this scenario as our next example. If the LLC shows $0 profit and $100 of deductions there is a net loss of $100. Each member’s share of the $100 loss will be reported on their personal income tax return and reduce their taxable income. Since you stated that you started the business with your mom, I will assume you are both owners/members of the LLC. If this is the case, the LLC will still have to file a tax return (Form 1065) but like I stated above, the income or loss will not be taxed at the LLC level, but will be passed through to you and your mom. States may treat LLCs differently depending on the state of incorporation as well as where the LLC does business. You should be sure to keep receipts for all of your business expenses so that you can take the proper deductions on your tax return.
 
From:
chris cotton
Location:
Mayfield Heights, Ohio
 
Question:
how do I go about filing a 1099 for a worker I hired?I have the 1099 forms,I have the workers w-9 i had them fill out,however when I get paid do I subtract what I paid them when I file my taxes?example job for 2500 paid to me, I hired a guy paid him 1800. do I put down my income as 700?
Reply:
The easiest way to explain this is that you should look at these as separate transactions. First, you should fill out the 1099 for the gross amount that you paid the worker. If you paid him a total of $1,800 then you will show $1,800 as the amount on the 1099. If the $1,800 represented a deductible business expense and not a personal expense then you can also claim the $1,800 as a tax deduction. Second, the income (if it is taxable income) in the amount of $2,500 should be shown as a gross number on your tax return. The net result of showing the full $2,500 income and $1,800 deduction will be $700 income – but be sure to show both amounts as gross numbers on your return as long as the $1,800 is a deductible business expense and the $2,500 is taxable income.
 
From:
Matthew Timian
Location:
Prescott Valley, AZ
 
Question:
Can I write of my clothing? (I'm a 1099 marketer in Arizona)
Reply:
Generally, work clothing that can be used as street or evening clothes cannot be taken as a tax deduction. Items such as theatrical costumes or hard hats can be taken as deductions since these items are not normally worn other than for their intended “work” purpose
 
From:
Wallace Cody
Location:
Asbury Park, NJ
 
Question:
I do not have a tax liability for this year according to my rough draft calculation for 2012 tax year. Should I take my disaster relief credit anyway?
Reply:
I am not aware of a disaster relief credit but you can deduct casualty losses. If you don't have taxable income to deduct the losses from this year, you can go backward one year to 2011 and consider deducting it there.
 
From:
Gayle Scroggs
Location:
Stevensville, Maryland
 
Question:
Where can I find a good list of likely deductions for my small coaching business which I run from my home?
Reply:
A good list of possible deductions for your small business that you run from your home can be found at the IRS website - http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Deducting.... Some of the expenses to consider as possible tax deductions are: rent expense, home office (utilities), expenses of going into business, website expensesadvertising and marketing, taxes, repairs, office supplies, furniture, other equipment, software and subscriptions, auto expenses such as mileage, business travel/meals/ entertainment/gifts, insurance premiums, retirement contribution, books and education expenses, legal and professional charges, bad debts, interest, moving expenses, charitable contributions, and telephone charges. For more information, see http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed, http://www.sba.gov/content/business-structure-and-tax-implications, http://www.bankrate.com/finance/money-guides/a-dozen-deductions-for-your..., http://www.nolo.com/legal-encyclopedia/top-tax-deductions-small-business..., http://upandrunning.bplans.com/2012/02/07/7-overlooked-tax-deductions-fo..., http://www.goodfinancialcents.com/irs-tax-deductions-credits-small-busin...,
 
From:
Tara Martinson
Location:
Cherry Hill, NJ
 
Question:
I just started a company this year and I still work full time. I was wondering if I would still be getting tax money back for 2012.
Reply:
It depends. If your new company does not make money and you continue to be overwithheld on your paycheck, you may still get a refund for 2012. However, if your business is profitable, you may owe money this year.
 
From:
Perlita Furlani
Location:
Hayward, California
 
Question:
How can i do the W2 tax to my employer because right now im doing1099?
Reply:
The Form W-2 is for wages as an employee. The Form 1099 is generally used for independent contractors. You need to talk to the person who you are working for to discuss and consider the reasons or a Form 1099 or Form W-2 should be used. Generally, an employer must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. With Form 1099, there generally is no withholding and the employer is not paying any taxes on payments to independent contractors. In determining whether the person providing service is an employee or an independent contractor, all information that provides evidence of the degree of control and independence must be considered, including financial, behavioral, and type of relationship. For more information, see http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Independe...(Self-Employed)-or-Employee%3F
 
From:
ELIANE - ALIEN TACTICAL ENTERPRISES
Location:
DALLAS, GA
 
Question:
ALIEN TACTICAL ENTERPRISES LLC WAS OPEN IN MAY/2012 IT DIDN'T HAVE MUCH BUSINESS BUT A $25.00 TRANSACTION DO WE HAVE TO FILE TAXES WITH SUCH LITTLE THAT HAPPENED IN THE BUSINESS? WE DON'T HAVE A CPA YET. THANK YOU
Reply:
Generally speaking, a tax return should be filed every year, even if you have little or minimal activity. You can only claim expenses in the year they are paid so you would have to file a return this year if you wanted to claim this expense. Not sure if you are a single owner LLC or multiple owner LLC, so it is difficult to guess whether the resulting loss would be tax-deductible, since it depends on the type of entity you have (sole proprietorship, C corporation, S corporation, partnership, etc.). My suggestion would be for you to meet with a local CPA to review your situation. They would help sort through these rules for your specific situation. When looking for a CPA, check to make sure they have has experience in taxes (not all CPAs do tax work, so ask!) to make sure you get all of your questions answered.
 
From:
Susan Fakhouri
Location:
Santee, California
 
Question:
When can mileage be taken as an income tax deduction?
Reply:
Hi Susan - Generally, you can deduct income taxes for business purposes, unreimbursed employee expenses, moving expenses, medical reasons and charitable purposes.
 
From:
Sara Arjmand
Location:
San Diego, CA
 
Question:
Are medical expenses tax deductable for business owners? Eye exams being one! Sara@dowfin.com
Reply:
Answer: Medical expenses are considered a personal expense and are possibly tax deductible (if the total medical expenses exceed 7.5% of your income) on the individual income tax return (of the business owner). Medical expenses are not considered a business expense and are not deducted as part of the business taxable income on the Schedule C of the business. Rather, medical expenses are put on the Schedule A as possibly part of deductible itemized deductions of the individual.
 
From:
Judy Ford
Location:
Eminence, Kentucky
 
Question:
How much should I be setting aside for taxes?
Reply:
It depends on your situation and type of income. A good rule of thumb for a self-employed individual would be to set aside 20% of your gross income for taxes – more if you don’t have a lot of expenses, a little less if your business has a lot of operating costs. This many not cover your full tax bill, but should generally provide enough for you to make estimated tax payments to IRS that would cover your income tax and your self-employment tax on your net taxable self-employment income. You may need to reserve more to cover your state income taxes. My suggestion would be for you to meet with a local CPA to review your situation. They would help sort through these rules for your specific situation. When looking for a CPA, check to make sure they have has experience in taxes (not all CPAs do tax work, so ask!) to make sure you get all of your questions answered.
 
From:
Judy Ford
Location:
Eminence, Kentucky
 
Question:
I have a home business. I would like to know how to separate my home bills from my business expenses. For example, we use water and electricity in our detail business.
Reply:
Start by measuring the square footage of your entire home and also your home office. This should be used to determine your home office percentage. For example, if your office is 9 x 12 and you have a 1,800 sq. ft. home, then your home office is 6% of your house (108 / 1800). You will need to separately track expenses that are for the entire house (such as utilities, real estate taxes, insurance, etc.) then use IRS Form 8829 to calculate the amount that is deductible at the end of each year.
 
From:
Rhonda Antell
Location:
Portland, OR
 
Question:
Year End Tax Planning Strategies for Inventory? We contrat for the manufacture of a small clothing line. Our cash flow is erratic and we supplement the low cash flow times with the use of credit card financing. We are an S Corp. Tax liability extremely limits our ability to do anything extra with our business. We hear much about the fiscal cliff. Any impacts on credit cards, debt financing or inventory management?
Reply:
The fiscal cliff is referring to the combination of budget cuts and expiring tax provisions that are all scheduled to take effect at the same time. It doesn’t specifically refer to changes to credit cards, debt financing or inventory management rules, policies, systems or strategies. It sounds like yours is more of an issue of cash flow. You may want to find a local CPA who can help assess your business cycle and cash flow to identify strategies to manage the ebbs and flows. They would be able to consider the tax consequences of major transactions as well as the interplay between your S corp income and taxes as they pass through to your personal returns. When looking for a CPA, check to make sure they have experience with taxes. Not all CPAs do tax work, so be sure to ask!
 
From:
Julie Thompson
Location:
,
 
Question:
If I have used my Social Security Number as my tax number, and I obtain an EIN number, can I use it on my next year's tax form without any problem? Do I need to submit a Change of Tax number form?
Reply:
As an individual, you should file your Form 1040 (individual income tax return) with your social security number as your tax number. If you own a business and obtained an EIN for that business, you should continue to use the EIN that you obtained last year for that business for this year’s and all future years’ business income tax return (i.e., for Line D of the Schedule C of the Form 1040 if you are a sole proprietor, or on the appropriate business tax return if not a sole proprietor business). You do not need to submit a change of tax number form. For more information, see http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Sole-Prop..., http://www.irs.gov/pub/irs-pdf/i1040.pdf (p. 12), http://www.irs.gov/pub/irs-pdf/p1635.pdf, http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Employer-...(EINs), and http://www.irs.gov/Individuals/International-Taxpayers/Taxpayer-Identifi...(TIN).
 
From:
Chelsea Nienaber
Location:
Nevada City, CA
 
Question:
Is sale of a retirement plan (non-qualified type)/insurance product/consulting service a) defined as a product or a service?, b) taxed by the state/location of the C Corp or the customer's company location or the salesman's W-2 address. If the C Corp is 50/50 for owned by two owners and one is the salesperson, does California tax the commission on that sale to the corporate location or to the W-2 of the owner? If we move our home to another state are we still taxed in California because of the closely held corporation? How do football players tax their earnings in different states?
Reply:
If you are in the trade or business of selling insurance and investment products it is a product and your net business income is taxable to state and federal purposes. For California you will need to consult with a California CPA. If you move to another state than your tax liability will sift to that state once you are a resident.
 
From:
Daniel France
Location:
Merced, CA
 
Question:
What are current limitations on assets, depreciation, and Sect. 179 elections? What are current hiring credits available?
Reply:
As of now, unless Congress retroactively extends this provision, for the 2012 tax year, the accelerated (100% for 2011) bonus first year depreciation option for certain new fixed asset purchases has decreased to 50% in 2012 and the Section 179 expensing limits have decreased from $500,000 in 2011 to $139,000 in 2012. As you are probably aware, there are certain limitations that apply to the Section 179 deduction including a cap on total equipment purchases ($560,000 for 2012). Therefore, the 179 expensing is not available in 2012 if qualifying expenditures exceed $699,000. Other special depreciation limits have also not been extended by Congress as of now. You should continue to keep informed of Congressional action over the next few months to see if Congress retroactively extends any of these special depreciation and section 179 expensing expired provisions. For more information, see http://www.irs.gov/pub/irs-pdf/p946.pdf and http://www.padgett-cpa.com/insights/articles/depreciation-changes-2012 and check to see if the IRS Pub 946 is updated in the next month or two for 2012 returns. Regarding hiring tax credits, the expanded work opportunity tax credit can be as high as $9,600 per qualified veteran for for-profit employers or up to $6,240 for qualified tax-exempt organizations, but the amount of the credit will also depend on a number of factors, including the length of the veteran’s unemployment before hire, the number of hours the veteran works, and the veteran’s first-year wages. The Work Opportunity Credit provides eligible employers with a tax credit up to 40 percent of the first $6,000 of first-year wages of a new employee if the employee is part of a “targeted group.” For more information, see http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Expanded-..., and for information on tax benefits of hiring employees with disabilities see http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Tax-Benef....
 
From:
Christina Hunt
Location:
Mercersburg, PA
 
Question:
If we purchase something for the company out of our own funds, can we fill out an expense report and have the company reimburse us? If so, would this count as not being a co-mingling of funds and what would we need to maintain for our records to show such?
Reply:
If the nature of the expense, which you are trying to get reimbursed for, is a legitimate business expenditure, it can be reimbursed. You should keep copies of receipts and document the nature of the expenditure.
 
From:
Laura Solano
Location:
Fayetteville, NC
 
Question:
Can you please point out the main things to consider when getting ready for tax season as a first time business owner without any experience in Taxing procedures for a start up Business.
Reply:
If you started a new business, you may want to consider using a CPA to help you with your taxes and financial affairs. You may also want to review the IRS’s tax guide for small businesses at http://www.irs.gov/pub/irs-pdf/p334.pdf.
 
From:
Jeff French
Location:
Austin, Texas
 
Question:
I work out of a home office and have deducted a percentage of expenses such as utility bills. What about: 1. A new roof? Can I also deduct a percentage of the cost (outside of what insurance paid) for the replacement? 2. The bathroom next to my office is in need of repair. It is also used by other house members during the day. Since that's the restroom available to me while working, can I deduct those repair costs? If so, is it a direct deduction of the full amount, or also a percentage based on my office size?
Reply:
Home office deductions are based on the percentage of your home that is used regularly and exclusively for your business. So the bathroom likely does not qualify. As for the roof, it will either be treated as a repair or improvement, depending on the nature of the fix. In either case, the portion allocable to the business would be deductible as part of thee calculations using Form 8829.
 
From:
Padraic O'Gawain
Location:
Chicago, Illinois
 
Question:
Hello: Just incorporated as an S-Corp in Illinois. Haven't even pulled a license or got insurance yet for my business (a medical based personal training service). Don't have a single client or have made a RED CENT yet. What - if any - tax filing do I have to do for 2012 if it is unlikely that I shall have any revenue prior to 2013? Sounds obvious but I'm so used to having my pockets picked by IL, Cook Co., and the City of Chicago (a.k.a. Rahmistan).
Reply:
Generally speaking, a tax return should be filed every year. If you have no activity, then the filing should be very simple. When you said you haven’t made a “red cent” it could mean several things: (1) you have had some income but a lot of expenses, which means you have a loss; (2) you have had no income but you did have some expenses, which means you have a loss; or (3)you have had no income and you haven’t spent any money (in cash or on credit cards), so your business is essentially “inactive” for the year. Since there are usually expenses related to just getting setup and started (these are called “start up costs” and there are special rules on how and when you get to deduct them), I’m going to guess that you have spent some money this year, such as the filing fees to form the entity, fees to file the S Corporation election with IRS, possibly the cost of printing business cards, maybe a few other things here and there, but nothing major. These would likely all be considered “start up” costs and would be eligible to claim on this year’s return. You can only claim expenses in the year you paid them, so you would have to file a return this year if you wanted to claim them. They may or may not result in a tax-deductible loss, depending on your situation. My suggestion would be for you to meet with a local CPA to review your situation. They would help sort through these rules for you but also determine what other elections you need to make on your “initial” return (which is the first return filed by your business). An initial return is important because, depending on your accounting system and long-term plans, your initial return establishes how you will be filing each year going forward for purposes of certain tax accounting and reporting rules. It all sounds complicated because it is. You can find the instructions for Form 1120S online here: http://www.irs.gov/pub/irs-pdf/i1120s.pdf. Consider printing them and spending some time (an hour or two) reviewing them. It will give you a sense of the complexity of filing as an S corporation and (hopefully) encourage you to seek professional help from a CPA that has experience in taxes (not all CPAs do tax work, so ask!) to make sure you get all of your questions answered.
 
From:
Maurice L. Threatt
Location:
Atlanta, Georgia,
 
Question:
Will there be a special filing for first time business owners?
Reply:
Maurice - You may want to review the IRS’s tax guide for small businesses at http://www.irs.gov/pub/irs-pdf/p334.pdf. You should also considering contacting your state about registration, taxes, etc.
 
From:
Linda M Martin
Location:
Washington, D.C.,
 
Question:
How should a new business owner file if no profit was made for the tax year. Business was started in September 2012.
Reply:
Well, it depends what type of a business you have. If you are a sole proprietor or disregarded entity, you should file a Schedule C with your Form 1040.
 
From:
Carolyn Murray
Location:
Gilroy, CA
 
Question:
This year my small business had expenditures for emergency equipment repair, replacement and industry standard calibration. The preventive maintenance and calibration were planned expenses, the emergency repair and replacement were not and exceeded the planned budget. Can I roll-over some of these expenses to the 2013 tax year?
Reply:
Business expenditures are deductible in the year they are incurred. Certain capital expenditures are not deducted - written off - but will be depreciated over their useful lives. Please consult with your tax advisor.
 
From:
donna
Location:
charlotte, nc
 
Question:
What are the most common deductions overlooked by most small businesses?
Reply:
Hello Donna, this question is difficult to answer since each deduction is specific to the facts and circumstances to each small businesses. There is no way to gauge which deduction is overlooked.
 
From:
James Kardelis
Location:
Tinley Park, Illinois
 
Question:
Can a business buy a 6,000 GVW truck and still take a 100% deduction for 2012?
Reply:
No, you can expense up to $25,000 in the year of purchase assuming that the usage of the vehicle is 100% business usage.
 
From:
Diana
Location:
Easton, PA
 
Question:
What tax write offs are often over looked for small business.
Reply:
Hello Diana, this question is difficult to answer since each deduction is specific to the facts and circumstances to each small businesses. Therefore, there is no way to gauge which deduction is overlooked most often.
 
From:
Guild
Location:
Easley, SC
 
Question:
Thank you for your advice on my previous question. The information was very helpful. I have and additional question regarding tax audits. My braiding transactions are very informal and I often recieve cash upon service, and reciepts are non-existent. I often make notes of my clients' fees and service rendered. Would these informal notes stand in the event of an audit? Furthermore, what do you suggest I do to account for my transactions more formally in the future?
Reply:
You can invest in the purchase of a cash register to track your sales. Another option is to go to a “ticket” type system. You may be able to purchase tickets at office supply stores.
 
From:
Elizabeth Donley
Location:
Tampa, Florida
 
Question:
Depreciation of vehicles for a dealership when the vehicle have not been sold and it is going to have to be sale at a loss. How to record that depreciation for the current year.
Reply:
vehicles for sale are considered inventory. As a result, they are not depreciable.
 
From:
Tanya Scott
Location:
San Diego, CA
 
Question:
Many of my business owner clients are very concerned regarding the requirements from the new health care laws. What are some of the best strategies for helping them reduce taxes, retain employees, and make money with regard to these laws?
Reply:
Hi Tanya, I can only address the tax issues. There is a small business health care tax credit that you should make your client aware of. There are also planning opportunities around the new 3.8% Medicare tax on investment income. My best advice is to make them aware of the new requirements and encourage them to talk with their CPA about tax planning opportunities.
 
From:
Mike Brown
Location:
,
 
Question:
I paid a $3000 penalty for filing Forms 941 two years late. I appealed it by supplying [what I considered to be] a statement of reasonable cause. The appeal was denied. Now I received form letter 1382C inviting me to
Reply:
As the original appeal was denied did something change in the law that might permit your appeal to get a new hearing? Also did you consider working with the taxpayer advocate? It would seem that you could resubmit your original paperowkr and see what happens.
 
From:
Christina Hunt
Location:
Mercersburg, PA
 
Question:
If we purchased items for our business (a C Corp) out of our own personal funds, can we expense those items to be reimbursed by the company? If we can and there were items we purchased close to year end do we need to expense them according to the receipt date of the item or could they be expensed in the upcoming year?
Reply:
Business expenditures are deductible in the year they are incurred.
 
From:
Chelsea Nienaber
Location:
Sacramento, CA
 
Question:
We are restarting a business and doing very well this year for the first time. The business is a C Corp and we would like to know if there are advantages to being an S Corp that we didn't consider in the beginning. Revenue will be over $500,000 this year so we are now understanding the extra 3% state tax that was voted in for California too. Thanks
Reply:
Without additional details, I can only provide a general answer. Since your situation has changed, it is a good idea to revisit your original considerations. There are additonal considerations if you are electing S status after operating as a C corporation (vs. a business that elects S status from the very beginning). S corp rules are tricky so you may also want to seek out a CPA who is well versed in S corporations and consult with them to see what may be different from before.
 
From:
Kathy
Location:
Chicago, Illinois
 
Question:
We are still in start up mode, building a website, finalizing our plans, writing contracts, looking for sponsors, etc...so there is no revenue yet, just expenses. My husband and I have an LLC opened in June of 2012. We have no idea what to expect. How are taxes handled in this type of situation?
Reply:
Generally, an LLC does not pay federal income taxes. Instead the profits and losses of the LLC are passed through to the owners/members. Each owner/member will be responsible for reporting their share of income or loss of the LLC on their personal income tax return. In this instance the profits of the LLC are only taxed once (on your personal income tax return). This means there is no double taxation (once at corporate level and once at owner level). However, an LLC can file an election to be taxed as a corporation. If you have made this election, the profits of the LLC will be subject to federal income tax. The benefit of going this route is the LLC may be subject to a lower tax rate than its members. Since your company is still in start-up mode and no income has been earned yet, there will be no income to report. You may have deductions to claim, however, there are very specific rules for when and how to deduct business start-up costs. States do not all have uniform rules regarding how LLCs are taxed. Your state filings will be based on where the entity was created and where it does business.
 
From:
Elena Rizzo
Location:
Saratoga Springs, NY
 
Question:
I just changed from sole proprietor to single member LLC...I can't get a straight answer from the NYS Dept of Tax and finance regarding specific services we have to charge our customers sales tax on. We are a nuisance wildlife control company, so we trap and remove animals and also do a lot of
Reply:
We can not help with state issues buut have you considered talking to other people in your business or to your trade association.
 
From:
Bob Aukerman
Location:
,
 
Question:
If corporate tax rates increase in 2013 and individual rates rise, will there be conversions to corporations, and are there tax costs to doing so?
Reply:
In order to incorporate, they are additional fees and they vary by states.
 
From:
Hayleigh Colombo
Location:
Lafayette, IND
 
Question:
How can small businesses prepare for the fiscal cliff situation, regardless of its outcome?
Reply:
Small businesses need to be aware of the tax provisions that are expiring at the end of the year. This knowledge may influence their business decisions this year. For example, tax rates are expected to rise, the bonus depreciation rules will expire and the Section 179 limits drop dramatically. Small businesses should have a plan in place NOW to make business decisions. I suggest that they determine what action they will take, if any, if Congress extends certain provisions. They should also decide what action they plan to take if Congress does not pass any legislation by the end of the year.
 
From:
Christina Hunt
Location:
Mercersburg, PA
 
Question:
What percentage do employers pay towards Federal and State employment taxes for 2012?
Reply:
You need to check with the state employment tax board.
 
From:
Tammy
Location:
Rapid City, SD
 
Question:
I have an S Corp and no health insurance at this time (due to a job loss). What do I need to do to have my business provide my health insurance (now that it's a IRS thing)?
Reply:
You will need to be an employee of the S corporation and establish a health care plan for the company, then elect to participate in the plan as an employee. You will need to be paying yourself a salary as well, so that you have a basis for deducting the employee share of the health insurance premium. From the employee perspective, it will end up looking the exact same as when you had your former job. The difference is that you will also see the employer side as well.
 
From:
Rick Jones
Location:
Augusta, Georgia
 

What great questions you sent us!  Thank you.  And thanks to the SBA for providing this service.  By the way, some questions were very similar in nature so if you don’t see your question answered, please take a look at the others posed.

As I mentioned in my opening, tax, financial and business planning is a year round venture so we would also encourage you to seek competent advice throughout the year and not just at year end.  One resource you might find useful is 360 Degrees of Taxes, a national volunteer effort of the nation’s Certified Public Accountants to help consumers understand their taxes.  Try it out at http://www.360taxes.org/.  Another one you might find useful is our Total Tax InsightsTM calculator. It’s an easy-to-use tool that gives you a clearer picture of the types of taxes you pay—including many you may not even know exist—and their estimated amounts.  Try that one out at http://www.totaltaxinsights.org/.  Finally, our 360 Degrees of Financial Literacy site provides a volunteer panel of qualified CPAs that have attained the Personal Financial Specialists (PFS) credential for comprehensive financial planning to act as Money Doctors and answer questions at http://www.360financialliteracy.org/Ask-the-Money-Doctor.

Thanks again and I wish you a happy holiday season, good health in the new year and success in all of your business ventures. 
 
Edward Karl, CPA, AICPA VP Taxation