Business Taxes: Keep your small business out of trouble ... · Business Taxes: Keep your small...

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Business Taxes: Keep your small business

out of trouble with IRS

2020

Ruth Ann Michnay CPA, MBT, EA, USTCP

(HO 1) SCORE Volunteer

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“Keep Out of Trouble” Topics

• My business:–Identification number–Books and records–Structure/Entity–Tax return preparation–Income–Expenses

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Lesson 1

What You Need to Know About Federal Taxes and

Your Business

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• Explain the purpose of the EIN• Describe basic recordkeeping requirements for

tax purposes• Define basic bookkeeping and accounting

methods• Explain the forms of business organizations• Suggest how to select a paid tax preparer

Objectives

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• Employer Identification Number required:– Pay wages– Self-employed retirement plan– Partnership or corporation– Employment, excise, fiduciary or ATF returns– Banks or other business may require an EIN

• Apply online for an EIN at www.IRS.gov: keyword “EIN”(HO 2) Blank form SS-4

Identification Number

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• Keep all documents verifying income, purchases, deductions and credits

• Timeframes:– Minimum three years– Employment tax – four years (Pub 15)– Business property – life of the asset

• Publication 583, Starting a Business and Keeping Records

Recordkeeping

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• Single entry – easiest (HO 3)– Daily and monthly record of income and

expenses– Focus on profit and loss statement– Sufficient for tax purposes

• Double entry – more accurate– Built-in checks and balances– Self-balancing

Bookkeeping

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• Cash (Pub 538)– Report income in year received– Deduct expenses in year paid

• Accrual (Pub 538)– Report income in year earned– Deduct expenses in year incurred– Inventory for sale

Accounting Method

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• Sole proprietor• Partnership • Limited liability company or partnership • S corporation and corporation

Business Structures

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• Unincorporated • Owned by one individual

– EIN or SSN can be used– Owner assumes the risks to extent of all

personal and business assets– Capital limited to what owner can raise

• Files 1040 with Schedules C and SE• Qualified joint ventures

Sole Proprietor

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• Easy to organize• Members contributes money, property, labor or

skills• Members share in profits or losses• Decisional authority divided• Liability of partners is usually unlimited• Form 1065, Schedule K-1• Pub 541, Partnerships

Partnerships

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• Owner(s) can have limited personal liability• Like a partnership, provides management

flexibility and flow-through taxation• LLC or LLP treated as a sole proprietorship, a

partnership or a corporation• Form 8832, Entity Classification Election

Limited Liability Company

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• Shareholders elect to have S corporationincome taxed like a partnership

• File Form 2553, Election by a Small Business Corporation

• S corporation does not pay tax on income from daily operations – income flows through to shareholders

• Shareholders report income on their personal tax returns

S Corporation

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• Legal entity – separate from its owner(s)• Rights and duties of its own • Owner(s) are stockholder(s) / shareholder(s)• Limited liability to shareholders• Easy transfer of ownership (sell stock)• Expand business with selling of stock (raise

capital)• Subject to its own tax

Corporations

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• Income distributed as dividends• Apply for a charter through the state government

– Usually in the state where the principal business activity occurs

– Charter permits corp to sell stock to shareholders

– Empowers corp to create debts separate from shareholders

• Files Form 1120 tax return

Corporations

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• Avoid preparers who claim to get larger refunds • Avoid preparers who base fees on refund

amounts • Look for a preparer who signs the tax return and

gives you a copy • Never sign a blank tax return / review before

signing• Consider availability of the preparer months or

even years after filing the returns

Choosing a Paid Preparer

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• Enrolled agents– Earn the privilege of representing taxpayers

before the IRS – Passed a three-part IRS test

• CPAs and attorneys – have their own professional requirements and have unlimited rights before the IRS

Choosing a Paid Preparer

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Lesson 2

What You Need to Know about Schedule C and Other Small Business Taxes and

Tax Forms

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• Form 1040, Schedule C and C-EZ• Define new terms• Calculate Gross Profit and Gross Income• Identify and deduct expenses• Calculate Net Profit or Loss• Self-employment Tax (Schedule SE)• Estimated Tax

(HO 4 – 7)

Overview

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Part I — Entity Information

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Business Terms — Schedule C

• Gross Receipts, Gross Profit, Gross Income• Returns and Allowances, Cost of Goods Sold• Bartering• Expenses–Car and Truck, Depreciation–Legal, Professional and Office–Travel, Meals and Entertainment–Supplies

• Net Profit or Loss

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Depreciation (Form 4562 and Pub 946)

• Deduction is used to recover the cost of business property• Depreciation versus expense• Depreciation starts when property first used

for business• Ends when no longer used, or cost fully

recovered

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Net Profit or Loss

• The amount by which the gross income is more, or less than the expenses for the same period

Gross Income (Part I)– Total Expenses (Part II)– Business use of Home (Form 8829)= Net Profit or Loss

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Additional Information

• Not all sole proprietors need Schedule C• Schedule C EZ, Net Profit from Business• Possible deductions on Form 1040–Health Insurance premiums (Pub 535)–Self-employed SEP, SIMPLE, or qualified

plans (Publication 560)• Start-up costs (Publication 535)

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Self-Employment Tax

• Self-employment tax consists of Social Security and Medicare taxes• Sole proprietor or partner, you pay all• Net profit from self-employment is $400 or

more • Form 1040, Schedule SE

(HO 6 – 7)

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Estimated Tax (Pub 505)

• Method to pay tax instead of withholding from an employer• Includes SE tax and federal income tax• Required if owe taxes of $1,000 or more• Form 1040 ES to calculate• Make estimated tax payments through the

Electronic Federal Tax Payment System online or over the phone: DIRECT Pay on irs.gov (free and timely)

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Review

• Basics of Schedule C• Schedule C-EZ, and areas on Form 1040 that

may be of interest to small business owners • Common expenses• Self-employment and estimated tax • IRS Publication 334 and at the Small

Business and Self-Employed Tax Center at IRS.gov• HO 8 – 9 IRS Resources

New Business Developments

• Net Operating Loss changes

• Bonus Depreciation – Qualified Improvement Property

• Delay of Employer Payroll Taxes

• Employee Retention Credit

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Thank you!

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