Tag Archive for Small Business

Beware! Your Hobby Business Could Land You In Tax Court

Your hobby business could land you in Tax Court – avoid IRS pitfalls by how you structure your small business.

Many people successfully develop a hobby into a going concern and actually receive income from it. That income must always be reported and taxes paid on that money regardless of your situation. If you leave that hobby as a hobby, under the tax law, you are not allowed to deduct any of the losses incurred by activity in that hobby. That is the reason most people turn their hobbies into businesses once they start making money.

When Are Hobby Losses Deductible?

By showing that your pursuit of your “hobby” is an activity engaged in for profit, you may be Read More

Written by | Posted in Small Business • Tax Tips

5 Payroll Tax Mistakes To Avoid

If you have at least one employee, you are responsible for payroll taxes. These include withholding federal (and, where appropriate, state) income taxes and FICA tax from employees’ wages as well as paying the employer share of FICA tax and federal and state unemployment taxes. The responsibility is great and the penalties for missteps make it essential that you do things right.

1. Misclassifying workers

Perhaps the hottest audit issue today is misclassifying workers. There’s incentive to treat workers as independent contractors rather than employees because payroll taxes and employee benefit costs are high; a company’s only tax responsibility for an independent is Read More

Written by | Posted in Small Business • Tax Tips

Premium Credits Under The Affordable Health Care Act

Under the Affordable Health Care Act (ACA), individuals who purchase health care coverage through an exchange and whose income is under certain amounts will be eligible for tax credits. Form 8962 will be used to enter any advance credits received and amounts entitled to for the current tax year. The net amount (credit entitled to less the advance credit) is then entered on a separate line on the back of Form 1040 or 1040A. Taxpayers who claim the credit cannot file Form 1040 EZ (for AGI less than $100,000 and do not itemize and don’t have any dependents) but must file Form 1040 or 1040A. If you are eligible for the credit, you can choose to:

• Get it now: have some or all of the estimated credit paid in advance directly to your insurance company to lower what you pay out-of-pocket for your monthly premiums. Read More

Written by | Posted in Affordable Healthcare Act • Small Business

Good Accounting Habits For Small Business Owners

The biggest headache for small business owners is getting and staying organized. If running your own business sucks up your day, being successful is going to be that much harder for you.

Here are a few tips for you to form good accounting habits so your small business will run like a well-oiled machine:

• Keep It Separate. Sometimes your business credit card comes in handy when paying for personal expenses. One may pay it back to the business but you actually have to record an accounting transaction. It is important to keep separate bank accounts and credit cards for personal and business expenses; by doing this you will better track your Read More

Written by | Posted in Small Business

LIFO Repeal – Tax Savings For The Small Business?

LIFO REPEAL – TAX SAVINGS FOR THE SMALL BUSINESS?

The Tax reform Act, 2014 calls for a repeal of the Last in First Out (LIFO) method of inventory valuation. Despite the promise of reduced tax rates associated with LIFO repeal and other proposed changes, there has been strong opposition to the proposed repeal particularly from a group of over 120 companies coming together to form the LIFO Coalition in 2006. (LIFO Coalition, 2014)

The group contends that getting rid of LIFO would cause severe economic hardship to businesses and lead to loss of jobs. (Whitehouse, 2009).

WHAT IS LIFO?

Read More

Written by | Posted in Corporate • Federal • Income Tax • IRS • Small Business • Tax Policy

5 Basic Tax Tips For New Businesses

If you start a business, one key to success is to know about your federal tax obligations. You may need to know not only about income taxes but also about payroll taxes. Here are five basic tax tips that can help get your business off to a good start.

1. Business Structure. Prior to start up, you’ll need to choose the structure of your business. Some common types include sole proprietorship (Form 1040), partnership (Form 1065) and corporation (Form 1120). You may also choose to be an S corporation (Form 1120-S) or Limited Liability Company. You’ll report your business activity using the IRS forms which are right for your business type. A Limited Liability Company (created by state statute) may be taxed as a sole proprietorship (single member), a partnership (multiple members), or other taxable entity. Read More

Written by | Posted in Small Business • Tax Tips

Cash Method For Small Businesses

On July 10, 2014, the House Small Business Committee’s Subcommittee on Economic Growth, Tax and Capital Access, held a hearing – Cash Accounting: A Simpler Method for Small Firms? Congressman Tom Rice opened the hearing noting that he is a former tax attorney and CPA. The purpose of the hearing seems to be how use of the cash method for some businesses (such as small ones) can simplify tax compliance. He did not mention Congressman Camp’s proposal to deny use of the cash method for businesses with over $10 million of gross receipts (unless they are a sole proprietor or farming business) (see Camp’s summary of the Tax Reform Act of 2014, page 87-88).

What did the subcommittee learn from the witnesses?

• The cash method is simpler than accrual. It could be even simpler if reporting was Read More

Written by | Posted in Small Business

States Turn to Technology to Narrow Tax Gap by Targeting Small Business

Each year, the IRS and states alike, estimate the difference between taxes owed and taxes collected. This difference, known as the “tax gap,” has been steadily growing at both the federal and state level over the past several years. For example, the IRS estimates that the federal “tax gap” is about $385 billion. While it sounds like a large number, the IRS is able to boast about an 86% compliance rate. On the state side, similar problems exists. For instance, large states, such as California have a “tax gap” of about $10 billion. In response, the states are launching large and expensive “campaigns” in order to attempt to narrow the tax gap and generate revenue. Small businesses will undoubtedly feel the crack-down of the compliance efforts across the country.

Many states have leveraged technology to begin new automated collection systems. In Read More

Written by | Posted in IRS • Small Business

Attacking Small Businesses that Receive Too Much in Credit Cards – IRS Letter 5043

Attempt to get “Cash” businesses

The IRS has been pushing for many years to capture cash income of small businesses and force him to pay taxes. That is one of the reasons that the IRS is requiring credit card merchant service companies to report a 1099-K for businesses to the IRS. This form lists the amount of credit card payments made to the business by its customers. The IRS then takes this information, comparing it to the gross sales of the business. If the business has too high of a percentage of credit card sales, the IRS issues a letter 5043.

This letter starts out that “your gross receipts may be underreported.” This is the beginning of a long series of letters and correspondence which could eventually lead Read More

Written by | Posted in Audit • IRS • Small Business

Small Business Payroll: Mistakes And How To Avoid Them

Payroll Compliance is a challenge that many small businesses struggle with. Payroll done by business owners themselves mean that they need to have the know-how to comply with the Internal Revenue Service’s strict rules regarding accurate reporting & deposits. Moreover, federal, state & local tax regulations change & many times without notice. Small business owners need to follow such changes keenly as well.

Having a professional as a trusted guide & advisor helps small business owners (SBO) navigate these dangerous waters. It also saves them time and costly errors. Errors which are due to late filing or deposit of taxes increase the risk of steep penalties & scrutiny from the Internal Revenue Service. Read More

Written by | Posted in Small Business

General Rules For S-Corp. Distributions – A Random Walk Down IRC 1368

TaxConnections Blogger postUnless you elect different treatment, for shareholder income tax purposes S corporation distributions are applied in the following order:

1. To reduce the Accumulated Adjustment Account (AAA) determined without regard to any net negative adjustment for the tax year but not below zero.

According to IRC 1368 if distributions during the tax year exceed the AAA at the close of the tax year determined without regard to any net negative adjustment for the tax year the AAA is allocated pro rata to each distribution made during the tax year.

2. If applicable – as in pre 1983 – to reduce shareholders’ Previously Taxed Income (PTI) account for any IRC section 1375(d) distributions associated with tax imposed when passive investment income of the corporation has accumulated earnings and profits in excess of 25% of the gross receipts.

A distribution from the PTI account is tax free to the extent of a shareholder’s basis in his or her stock in the corporation. This is rarely seen any more as there are few S Corps with pre 1983 PTI remaining. Read More

Written by | Posted in Corporate • IRS

Self Employed And Worried About Retirement Plans? Read On…

Manasa Nadig, EA
Manasa Nadig, EA

You did it! You quit your job and started that small business that had always been your dream! Exciting times, thrilling ups & downs, you are your own boss–but wait, you do miss the paychecks that arrived regularly every other week. You also miss the medical benefits that the company paid for & that retirement plan you contributed to. What’s more, you also miss that extra oomph on your paycheck-the employer contribution to the company 401(k).

In this post on Employer Retirement Plans for Small Businesses, let’s closely examine the Individual 401(k). This is also known as the Solo 401(k). Unlike other retirement plans, a solo 401(k) is only for sole proprietors or S Corps who have no employees. A spouse can contribute if he or she earns income from the business.
It comes in both the Traditional & Roth version. Just like IRA’s, Traditional is money put away pretax & is taxable when withdrawn. The Roth 401(k) is funded with after-tax dollars & is tax free when withdrawn. One can also split the contributions between the two. Loans can also be taken against savings in 401(k)’s.

Why I like these plans?

•They are ideal to sock away large amounts of money in the good years.

•It helps you save both as an employer & an employee. Here’s how for 2013 – you can contribute a maximum of $33500 (Up from $33000 in 2012) as an employer AND $17500 (Up from $17000 in 2012) as an employee- not to exceed a maximum of $51000 (Up from $50000 in 2012) or 100% of the employee’s compensation, whichever is lesser. Read More

Written by | Posted in Individual • North America • Partnership • Small Business
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