Home » BUSINESS (Page 2)
Category Archives: BUSINESS
Have you over paid your corporate income tax in the form of estimated tax payments and now you need or heck – just want your money back?
Well Form 4466 Corporation Application for Quick Refund of Overpayment of Estimated Tax will help you do just that.
If you determine that you have a refund due that is at least $500 and at least 10% of the Corporations expected tax liability then here’s what you do:
Just after your year-end, file Form 4466, but not later than two and a half [2 and 1/2] months after your year end and before you file the corporate return.
The purpose of the Form is to adjust your overpayment of estimated taxes. Therefore, amounts returned are not considered income tax refunds.
The IRS claims that they will “act on” the request within 45 days from the date it was filed.
Don’t forget to also attached a copy of the completed Form4466 to your corporate tax return Form 1120.
This post is outside my norm for this blog, but I liked this article so much, I thought I would post it here as well as at my The Business Perspective Blog.
The article is about Keeping Psychopaths out of Your Accounting Firm by Michell Langbert.
This article has an interesting take on ethical lapses that I thought was compelling. In his article, Langbert talks about how the characteristics of a psychopath in the workplace can be mistaken for desirable traits.
He states: “..psychopathic charm and charisma can often be mistaken for leadership; psychopathic talk of imaginary goals can be mistaken for visionary leadership; and psychopathic lack of emotion can be mistaken for being in control.”
It occurs to me that this psychopathic personality may explain some of the behavior at AIG and other bailed out firms.
There is no doubt that Mr. Langbert’s article is a gripping and thought provoking read.
If you have qualified real property business indebtedness that is cancelled, you can elect to exclude this from income. However, the debt must meet the following criteria:
1) It must be incurred or assumed in connection with real property used in a trade or business.
2) It must be secured by such real property.
3) It must be incurred or assumed at either of the following times:
a. Before 1993
b. After 1992, if the debt is either (i) qualified acquisition indebtedness (defined below), or (ii) debt incurred to refinance qualified real property business debt incurred or assumed before 1993 ( but only to the extend the amount of such debt does not exceed the amount of debt being refinanced.)
4) It must be debt to which you elect to apply these rules
Qualified principal Residence indebtedness
What’s new for 2008
The qualified principle residence indebtedness exclusion has been extended. The extension includes debts discharged after 2006 and before 2013.
In order to claim a business deduction, you must use part of your home for one of the following two reasons:
There are special rules for qualified daycare providers and for persons storing business inventory or product samples.
For more information see IRS Publication 587, Business Use of Your Home, available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).
Do you know the difference between a hobby and a for profit business? If you don’t know the answer to this question you should take some time and familiarize yourself with the “hobby loss rules” under Internal Revenue Code Section 183. This code section explains that activities that are not engaged in for profit – are limited in the amount of deductions that can be taken.
The deductions that can be taken for a hobby activity are limited to the amount of income generated by the hobby. Therefore, hobbies cannot generate net operating losses.
Here are some factors that may help you determine if your business is really a hobby:
- Does the time and effort put into the activity indicate an intention to make a profit?
- Do you depend on income from the activity?
- If there are losses, are they due to circumstances beyond your control or did they occur in the start-up phase of the business?
- Have you changed methods of operation to improve profitability?
- Do you have the knowledge needed to carry on the activity as a successful business?
- Have you made a profit in similar activities in the past?
- Does the activity make a profit in some years?
- Do you expect to make a profit in the future from the appreciation of assets used in the activity?
Do you know how long you should keep your accounting and tax records? If the anwer is -no- you’re not alone.
The following information published by IRS GuideWire will help you know just how long to keep those important documents.
In a tax emergency, would you be ready? Well–organized records not only help you prepare your tax return, but they also help you answer questions if your return is selected for examination or prepare a response if you are billed for additional tax.
Fortunately, you don’t have to keep all tax records around forever. Normally, tax records should be kept for three years, but some documents — such as records relating to a home purchase or sale, stock transactions, IRA and business or rental property — should be kept longer.
If you are an employer, you must keep all your employment tax records for at least 4 years after the tax becomes due or is paid, whichever is later.
If you are in business, there is no particular method of bookkeeping you must use. However, you must clearly and accurately show your gross income and expenses. The records should substantiate both your income and expenses.
Publication 552, Recordkeeping for Individuals, provides more detailed information on individual record keeping requirements.
Publication 583, Starting a Business and Keeping Records, and Publication 463, Travel, Entertainment, Gift, and Car Expenses, provide additional information on required documentation for taxpayers with business expenses.
These publications can be downloaded from IRS.gov or ordered by calling 800-TAX-FORM (800-829-3676).
Actually, there is a wealth of free tax information on the IRS Web site, IRS.gov. It’s not just about recordkeeping. Individuals and businesses can find answers to almost any question about federal taxes on the web site. Helpful links found at the top of the home page will take you directly to topics centered on Individuals, Businesses, Charities and Non-Profits, Government Entities, Tax Professionals, the Retirement Plan Community and Tax Exempt Bonds.
In addition to the latest news coming from the IRS, the homepage can lead you to statistics, news releases and tax tips, local IRS offices, the Taxpayer Advocate Service, and thousands of IRS forms and publications. Frequently asked questions and answers are available or you can use two separate search icons: one by keyword and one by answering “I need to . . .”
Remember that for the genuine IRS Web site be sure to use .gov. Don’t be confused by internet sites that end in .com, .net, .org or other designations instead of .gov. The address of the official IRS governmental Web site is http://www.irs.gov/.
I’m often asked questions about what type of business entity my clients should establish for a specific business endeavor. The following information published by the IRS is helpful in understanding the various options.
Of all the choices you make when starting a business, one of the most important is the type of legal organization you select for your company. This decision can affect how much you pay in taxes, the amount of paperwork your business is required to do, the personal liability you face and your ability to borrow money. Business formation is controlled by the law of the state where your business is organized.
This fact sheet provides a quick look at the differences between the most common forms of business entities.
The most common forms of businesses are:
Limited Liability Companies (LLC)
While state law controls the formation of your business, federal tax law controls how your business is taxed. Federal tax law recognizes an additional business form, the Subchapter S Corporation.
All businesses must file an annual return. The form you use depends on how your business is organized. Sole proprietorships and corporations file an income tax return. Partnerships and S Corporations file an information return. For an LLC with at least two members, except for some businesses that are automatically classified as a corporation, it can choose to be classified for tax purposes as either a corporation or a partnership. A business with a single member can choose to be classified as either a corporation or disregarded as an entity separate from its owner, that is, a “disregarded entity.” As a disregarded entity the LLC will not file a separate return instead all the income or loss is reported by the single member/owner on its annual return.
The answer to the question “What structure makes the most sense?” depends on the individual circumstances of each business owner.
The type of business entity you choose will depend on:
A sole proprietorship is the most common form of business organization. It’s easy to form and offers complete control to the owner. It is any unincorporated business owned entirely by one individual. In general, the owner is also personally liable for all financial obligations and debts of the business. (State law may also govern this area depending on the state.)
Sole proprietors can operate any kind of business. It must be a business, not an investment or hobby. It can be full-time or part-time work. This includes operating a:
Shop or retail trade business
Large company with employees
Home based business
One person consulting firm
Every sole proprietor is required to keep sufficient records to comply with federal tax requirements regarding business records.
Generally, sole proprietors file Schedule C or C-EZ, Profit or Loss from Business, with their Form 1040. Sole proprietor farmers file Schedule F, Profit or Loss from Farming. Your net business income or loss is combined with your other income and deductions and taxed at individual rates on your personal tax return.
Sole proprietors must also pay self-employment tax on the net income reported on Schedule C or Schedule F. You may also be able to deduct one-half of SE tax on your 1040. Use Schedule SE, Self-Employment Tax, to compute this tax.
Sole proprietors do not have taxes withheld from their business income so you will generally need to make quarterly estimated tax payments if you expect to make a profit. These estimated payments include both income tax and self-employment taxes for Social Security and Medicare.
A partnership is the relationship existing between two or more persons who join to carry on a trade or business. Each person contributes money, property, labor or skill, and expects to share in the profits and losses of the business.
A partnership does not pay any income tax at the partnership level. Partnerships file Form 1065, U.S. Return of Partnership Income, to report income and expenses. This is an information return. The partnership passes the information to the individual partners on Schedule K-1, Partner’s Share of Income, Credits, and Deductions. Partnerships are often referred to as pass-through or flow-through entities for this reason.
Each partner reports his share of the partnership net profit or loss on his personal Form 1040 tax return. Partners must report their share of partnership income even if a distribution is not made.
Partners are not employees of the partnership and so taxes are not withheld from any distributions. Like sole proprietors, partners generally need to make quarterly estimated tax payments if they expect to make a profit. General partners must pay self-employment tax on their net earnings from self employment assigned to them from the partnership. Net earnings from self- employment include an individual’s share, distributed or not, of income or loss from any trade or business carried on by a partnership. Limited partners are subject to self-employment tax only on guaranteed payments, such as professional fees for services rendered.
A corporate structure is more complex than other business structures. It requires complying with more regulations and tax requirements. It may require more tax preparation services than the sole proprietorship or the partnership.
Corporations are formed under the laws of each state and are subject to corporate income tax at the federal and generally at the state level. In addition, any earnings distributed to shareholders in the form of dividends are taxed at individual tax rates on their personal tax returns.
The corporation is an entity that handles the responsibilities of the business. Like a person, the corporation can be taxed and can be held legally liable for its actions. If you organize your business as a corporation, you are generally not personally liable for the debts of the corporation. (Exceptions my exist under state law.) When you form a corporation, you create a separate tax-paying entity. Unlike sole proprietors and partnerships, income earned by a corporation is taxed at the corporate level using corporate tax rates. Regular corporations are called C corporations because Subchapter C of Chapter 1 of the Internal Revenue Code is where you find general tax rules affecting corporations and their shareholders. A corporation files Form 1120 or 1120-A, U.S. Corporation Income Tax Return. If a shareholder is an employee, he pays income tax on his wages, and the corporation and the employee each pay one half of the social security and Medicare taxes and the corporation can deduct its half. A corporate shareholder pays only income tax for any dividends received, which may be subject to a dividends-received deduction.
Subchapter S Corporation
The Subchapter S corporation is a variation of the standard corporation. The S corporation allows income or losses to be passed through to individual tax returns, similar to a partnership. The rules for Subchapter S corporations are found in Subchapter S of Chapter 1 of the Internal Revenue Code.
An S corporation has the same corporate structure as a standard corporation. It is a legal entity, chartered under state law, and is separate from its shareholders and officers. There is generally limited liability for corporate shareholders. The difference is that the corporation files an election on Form 2553, Election by a Small Business Corporation, to be treated differently for federal tax purposes.
Generally, an S corporation is exempt from federal income tax other than tax on certain capital gains and passive income. It is treated in the same way as a partnership, in that generally taxes are not paid at the corporate level.
An S corporation files Form 1120S, U.S. Corporation Income Tax Return for an S Corporation. The income flows through to be reported on the shareholders’ individual returns. Schedule K-1, Shareholder’s Share of Income, Credits and Deductions, is completed with Form 1120S for each shareholder. The Schedule K-1 tells shareholders their allocable share of corporate income and deductions. Shareholders must pay tax on their share of corporate income, regardless of whether it is actually distributed.
Limited Liability Company
A Limited Liability Company (LLC) is a relatively new business structure allowed by state statute.
LLCs are popular because, similar to a corporation, owners generally have limited personal liability for the debts and actions of the LLC. Other features of LLCs are more like a partnership, providing management flexibility and the benefit of pass-through taxation.
Owners of an LLC are called members. Since most states do not restrict ownership, members may include individuals, corporations, other LLCs and foreign entities. Most states also permit “single member” LLCs, those having only one owner.
A few types of businesses generally cannot be LLCs, such as banks and insurance companies. Check your state’s requirements and the federal tax regulations for further information. There are special rules for foreign LLCs.
For additional information on the kinds of tax returns to file, how to handle employment taxes and possible pitfalls, refer to Publication 3402, Tax Issues for Limited Liability Companies.
Which structure best suits your business?
One form is not necessarily better than any other. Each business owner must asses his or her own needs. It may be important to seek advice from business experts and professionals when considering the advantages and disadvantages of a business entity.
S Corporations that pay accident or health insurance premiums on behalf of a 2-percent employee-shareholder must include those payments as wages for income tax withholding purposes on the Shareholder’s Form W-2.
What if the shareholder’s ownership percentage is less than 2%?
IRS Notice 2008-1 indicates that only 2-percent shareholder-employees include these premiums on Form W-2. The term “2-percent shareholder” is any person who owns on any day during the taxable year of the S corporation more than 2 percent of the stock of the corporation.
What if the shareholder does not receive a Form W-2?
Accident and health insurance premiums paid or furnished by an S corporation on behalf of its 2-percent shareholders are considered fringe benefits generally furnished in consideration for services rendered. However, a 2-percent shareholder is not an employee for purposes of Sec 106. Accordingly, the premiums are not excludable from the 2-percent shareholders gross income under Sec 106. Therefore, these payments should be included on the 2-percent shareholder employees Form W-2. An S-corporation is entitled to deduct the cost of such employee fringe benefits on its income tax return.
Are the accident or health insurance premiums included on the 2-percent shareholders W-2 subject to Social Security and Medicare taxes?
The wages are not subject to Social Security and Medicare taxes.
Can the shareholder deduct the accident or health insurance premiums included on his or her Form W-2 on his or her Individual Income Tax Return Form 1040?
The 2-percent shareholder-employee may claim the premiums that constitute medical care for the taxpayer, his or her spouse, and dependents as a deduction from the taxpayers adjusted gross income.
How is the deduction taken?
The deduction is usually taken on page one of the shareholders Form 1040.
Are there any restrictions to the deduction by the shareholder on his or her Form 1040?
The deduction is not allowed to the extent that the amount of the deduction exceeds the earned income derived by the taxpayer from the trade or business with respect to which the plan providing the medical coverage is established. Also, the deduction is not allowed for amounts during a month in which the taxpayer is eligible to participate in any subsidized health plan maintained by an employer of the taxpayer or the spouse of the taxpayer.
Can the S corporation reimburse the shareholder for accident or health insurance premiums paid by the shareholder?
Yes. If the 2-percent shareholder makes the premium payments and furnishes proof of premium payments to the S corporation and then the S corporation reimburses the 2-percent shareholder-employee for the premium payments in the current tax year.
If the S corporation does not include the accident or health insurance premiums on the 2-percent shareholder’s Form W-2 can the S corporation still deduct the premium payments?
An S corporation is entitled to deduct the cost of employee fringe benefits under Section 162(a). However, the requirement to include the premium amounts paid on behalf of 2-percent shareholder employees is not optional. Therefore, amounts paid and deducted by the S corporation must be included on the 2-percent shareholders W-2. The Notice 2008-1 indicates that timely filed amended returns to claim the deduction under Section 162(l) may be filed if the taxpayer satisfies the requirements of the Notice.
Remember to always consult with your tax advisor regarding your income tax needs.
IRS Strengthens Withholding Compliance Program
The IRS has stepped up its withholding compliance program by making more effective use of information reported on W-2 wage statements to ensure that employees have enough federal income tax withheld from their paychecks. At the same time, employers are no longer required to submit potentially questionable Forms W-4 to the IRS.
For more information:
Withholding Compliance Questions & Answers
IRS Strengthens Withholding Compliance Program; Reduces Paperwork for Employers