Business Taxation

Here, we are going to cover the basic way that most small businesses are taxed. And while there are other tax consideration, like sales tax, we will leave those to our consultations.

Most small business entities (LLCs and S-Corps) are “flow-through” entities. That means that all profits and losses flow through the company and onto the personal tax returns of the owners. The company itself does not pay any tax (although may have to file a tax return!). Also, most small businesses have December 31 as their accounting year-end.

So, as of December 31 you must add up all the revenues you received and subtract off all your legitimate business expenses to arrive at your bottom line. If this is positive, you had profits. If it’s negative, you had losses. Profits will then become “income” to the owners and losses will become “deductions which must be included on your personal 1040 or its schedules.

TAX TIP 1: THE FIRST LESSON YOU MUST LEARN IS THAT YOU WILL PAY SOME TAX IF YOU MADE ANY PROFIT! AND UNLESS YOU PAID YOURSELF A SALARY AND WITHHELD TAXES FOR THIS, YOU WILL OWE THE IRS AT TAX TIME SO MAKE SURE YOU SET ASIDE FUNDS!

Now, if you made profits, it will normally be called “self-employment income” and you will owe three kinds of taxes on that money. First is self-employment (or, SE) tax, the second is federal income tax and the third is state income taxes.

TAX TIP 2: SINCE YOU WILL OWE TAXES ON THE MONEY YOU PROFIT IN YOUR BUSINESS, THE BEST WAY TO LOWER YOUR TAX BURDEN IS TO DECREASE YOUR PROFITS THROUGH LEGITIMATE BUSINESS DEDUCTIONS! IF YOU DIDN’T MAKE IT, IT’S NOT TAXED!

SE Taxes are essentially the employment taxes that are deducted off paychecks from an employer to contribute to social security and the medicare/medicaid funds. You probably remember this as the tax where your employer paid half and you paid half. But now, being self-employed, you owe the whole amount. This tax is around 15% (currently lower) and is taken on every dime of profit your company makes. There are ways of lowering the the SE taxes, like electing S-Status with the IRS. Please consult an attorney and accountant before making this election.

Federal Income Taxes are next. After you’ve paid the SE taxes, the profit gets added on to any other personal income you made. Hopefully you have some personal deductions (like the mortgage interest on your personal residence) to lower your overall income level. Your total taxable income is then put into an income tax bracket and taxed accordingly. Remember Tax Tip 1!

State Taxes come last. Your taxable income is then subject to whatever taxes imposed by your state. And these get paid through a separate filing.

NOTE: Quarterly Taxes: By law, you owe taxes when you EARN your money, not at April 15! Tax day is a reconciliation after all is said and done and to adjust the estimated taxes you paid all year. This is why employers are required to withhold taxes. If you are self-employed, then you must pay your taxes quarterly. Generally, you make an estimate of what your quarterly tax burden is and send that money off with a voucher. It make take some experience or consultation to estimate your tax but you can certainly do it yourself. See our Forms section.

NOTE: Salary: You can always pay yourself a salary and withhold the SE, Federal and State income taxes. You can learn to do this yourself or have your account take care of it. It is advisable for those who struggle to set aside money and might get stuck with a big bill come tax day.

TAX TIP 3: HIRE AN ACCOUNTANT. A GOOD ACCOUNTANT CAN SAVE YOU TIME, MONEY, HEADACHES, STRESS AND POSSIBLY EVEN TAXES. YOU KNOW OUR PHILOSOPHY: EMPOWER INDEPENDENT BUSINESS OWNERS TO TAKE CONTROL OF THEIR SUCCESS. BUT WE ALSO RECOMMEND THAT YOU KNOW YOUR OWN LIMITATIONS!

You will certainly have more questions, and Breglio Law Office is here to help you!

THIS INFORMATION IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE LEGAL OR TAX ADVICE. PLEASE CONSULT AN ATTORNEY AND TAX ACCOUNTANT BEFORE MAKING ANY TAX DECISIONS.

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Business Deductions

One of the benefits of setting up an business entity is to take business deductions. Here we describe some of the more common deductions that small business owners take. Please note that you should always check with your certified public accountant before taking any deductions as things can change over time.

Here are some common business deductions:

  1. AUTOMOBILE: Everybody want to write this off. But this deduction can be a red flag at the IRS and is commonly over-deducted. You can only write off that portion of car expenses that equals the portion of use of your car for business purposes versus personal use., If audited you will have to justify that use, whatever it is. Going to and from your office is not business use. Traveling to or for clients is. Keep track of miles with a travel log. This is good record keeping! It will prove invaluable.

There are two methods for calculating the deduction: by mileage or actual expenses. Usually the actual expenses method is the bigger deduction but requires keeping track. You may also be able to depreciate your car and save even more.

  1. HOME OFFICE: You can write-off a portion of your home expenses, like utility bills, if you use a part of your home as an office. As long as you can justify that part of your home is a principal place of business, separate from other parts of the house and you use it regularly and exclusively for business, it’s a deduction. Again, keep all records of your home expenses and give them to your accountant.
  1. EQUIPMENT AND FURNTITURE: Office computers, fax machines, desks and etcetera can be depreciated and deducted. Keep receipts of these purchases and tell your account about them.
  1. RETIREMENT PLANS: Contributions to some retirement plans are tax deductible. LLCs and S-Corps are more limited in the kinds of plans you can contribute to than C-Corporations. But, you can still start retirement! Talk to a financial planner for what is right for you and your type of entity.
  1. START-UP COSTS: You can take deductions for the cost of setting up your business, like legal and accounting fees. There are rules, however.
  1. PROFESSIONAL FEES: Fees paid to accountants, lawyers, consultants or for professional licensing (like the board of realtors) are deductible. So are expenses to keep a professional license (like continuing education).
  1. SUPPLIES: Duh, all office and professional supplies are deductible.
  1. ENTERTAINMENT and MEALS: This is no longer a deduction for most small businesses.
  1. GIFTS: This is another biggie for many small business owners and the IRS. Gifts to clients are 100% deductible. BUT, only up to $25! That’s a big catch! Don’t exceed it!
  1. TRAVEL: Everyone loves this one! Transportation, baggage & shipping, lodging, laundry and things like internet or telephone charges are 100% deductible. Meals are only 50% deductible!—same as entertaining. The IRS assumes you’d have to eat if you were at home, and home-cooked meals are not deductible. You can use the Actual Expense method or the Per Diem method. The Per Diem rates change so make sure you check as you will probably save more with actual expenses. Travel must be for a business purpose! If you’re mixing business and pleasure, then the “primary” purpose of travel must be business (not political, investment or social). If you bring the family, you cannot deduct more than if you had traveled alone! But remember, the family still only needs one car and maybe one room, which you needed anyway! The key here is to legitimize the travel, keep receipts and not be extravagant. You can’t always write off “all of it” so always check with us or your accountant.
  1. HEALTH INSURANCE: Many people forget this one. Health insurance premiums can be 100% deductible. But, the deduction can’t be greater than the businesses net profit AND, if you “could” be covered by a spouse’s insurance program, you cannot claim your own expense. Out of pocket expenses (like your co-pay) are not deductible.
  1. CHARITABLE CONTRIBUTIONS: Well, here the answer is NO. These are not business expenses. Only C-Corporations can donate to charity. BUT, you can deduct these contributions off your PERSONAL income. So, give to charity!
  1. TAXES: Many types of taxes at one level are deductible on another. Make sure your accountant knows what taxes you are paying (like for employees!).
  1. ADVERTISING: Marketing costs are fully deductible. Some types are immediately deductible, others are deducted over years. Even sponsoring a sports team can be deducted! All you need is a “clear business connection” to the advertising.
  2. GENERAL BUSINESS EXPENSE: This is the catch-all. Anything that is ordinary, necessary and primarily for business is a legitimate business expense. Don’t forget things like internet service providers and cell-phones if you need them for business.

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THIS INFORMATION IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE LEGAL OR TAX ADVICE. PLEASE CONSULT AN ATTORNEY AND TAX ACCOUNTANT BEFORE MAKING ANY TAX DECISIONS.

The Real Estate Business

The 2-hour VIDEO of a live class explores the business side of being in real estate. It covers from the different ways of making money in real estate and their taxation to their corporate structure to payroll to marketing and branding. This is “must-see” video for anyone thinking about getting into real estate investment.

PART 1

PART 2

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LLCs and Money

Keeping proper books for your company is paramount to not only a successful business but also for legal protection. Whether you are being audited by the IRS or being sues, well-kept accounts is one of the most important aspects of running your business. As most of Breglio Law Office’s clients have LLCs, the discussion below is tailored to them. However, the general points are applicable to all types of businesses.

TRANSFERRING MONEY: The first thing you should remember when putting money in or taking money out of a business is WHO is the owner. The second thing to remember is to JUMP through the right hoops. And the final thing is to keep a detailed RECORD of the transaction.

Putting Money In. When you, as an owner, want to put money in a business, it’s typically called a contribution. This is a way of funding, or making an investment, in your company to pay for start up costs, purchasing equipment or property, maintenance and etc. You, or any third party (like a non-owner or a bank), can also make a loan to the company if you draft the right loan documents. They method you choose, a contribution or loan, will depend on how you want to fund the company, where/who the money is coming from and possibly tax considerations. If you want borrow the money, please consult an attorney first to make sure you have the proper documents. But if you just want to make a contribution, you can do that yourself so that’s what we will focus on here.

The contribution is the standard way of putting money into a business. You can do so at any time and for any legitimate business reason. Usually, you don’t need to have an official meeting to make this decision (unless your operating agreement stipulates). You can make a decision, put a note of it in your company records and transfer the money to the business bank account. But here, you need to pay attention. Remember our three points above. First, an “owner” must make the contribution. This isn’t always as easy as it sounds. The owners are the persons or entities named as owners on company documents. Many people “own” a company by way of “another” entity. This is the case if you have a holding company or a trust that owns the company you want to put money into. If you have a holding company, then the holding company has to make the contribution. If you need to fund your holding company first, then you must contribute to the holding company, then it contributes to the final company. This is what we mean when we say you must “jump” through the right hoops! If you skip the “hoop” and put your personal money directly into a company that is owned by another entity, you’ve comingled funds and could lose your protection!

So, as long as you know who the actual owners are, jump through the right hoops and keep a record, you’ll be fine. If you have multiple layers for your business, please ask us to create a diagram to help you remember. We’re glad to do this for you.

Taking Money Out. There are two main way of taking money out of a company as an owner: Salary or Draw. A salary is just that, a wage you pay yourself. This can be done as an employee where you deduct taxes or as a contractor where you don’t. For LLCs you don’t have to pay someone according to their percentage ownership. One person can own 10% but receive a wage when the 90% owner doesn’t. This can also be used as a way to adjust allocating money among the owners rather than by sharing ratios. There are tax implications so please discuss with us or your accountant. A draw is when the owners simply take money out as a profit for being an owner of the company.

When you pay one of the owners (or anyone for that matter) a salary, make sure you have the appropriate employment or contractor agreements and then you can pay them accordingly.

When taking money out as a draw, remember the same three pieces of advice we stated above–the same rules apply! Only OWNERS can take a draw, so money must go from the company account to the owner’s account. If you have an intermediary entity, the money must go through that entity! And, as always, keep a record!

NOTE: Electronic transfers are acceptable as long as you jump through all the right hoops. But don’t let you bank statement be the only record. Keep a note of your contribution or draw in your company books!

BOOKKEEPING: This is simple. DO IT! It’s not that difficult. But if you really hate it, then you can hire professional bookkeepers rather inexpensively to keep your books for you. But either way, do it.

QUARTERLY TAXES: Even if you take out some money as salary with withholdings, you should still do quarterly taxes as a small business owner, even if it’s zero. You can file the forms yourself and find the forms HERE. See, Taxation, for more information about taxes.

RAISING INVESTMENT MONEY: If you are seeking “outside” money to fund your business, you may have to comply with SEC and state regulations. Please contact us if this is the case or even if you think it might be the case!

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THIS INFORMATION IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE LEGAL ADVICE. PLEASE CONSULT AN ATTORNEY.

The “S-Election”

The “S” comes from a filing that the corporation or LLC submits to the IRS under Subchapter S of the Tax Code. This does change some of the rules of the business entity so make sure you check with an attorney before filing for it. NOT ALL LLCs AND CORPORATIONS QUALIFY! It does, however, provide some tax benefits when the owners file their taxes.

First, the S-Entity files its own tax return. It doesn’t pay any taxes, it just files the return indicating how the profits were divided among the owners. The owners then claim those profits on their personal tax return as income. Without filing the form with the IRS for the “S” status, those profits would be taxed as Self-Employment (SE) Income and it’s subject to the self employment tax  (SE tax) which is about 15% (for more information, see Taxes). This is not income tax! It is a salary tax. This is essentially the FICA and medicare tax that comes out of your paycheck if you had an employer. This is the tax where you paid half and your employer paid half. But since you are the employer and the employed, you pay BOTH parts.

 

By filing under Subchapter S, you can decide how to take out the profits. You can take part out as “salary” which is, as above, subject to the SE tax and part out as “dividends” which is not subject to the SE tax (because it is a dividend or return on investment and not income). So, you can save approximately 15% on the part of the profits you claim as “dividends.”

THERE ARE RULES REGARDING HOW YOU TAKE OUT THE PROFITS. THE IRS REQUIRES THAT YOU PAY YOURSELF A REASONABLE SALARY, SO YOU CANNOT TAKE IT ALL OUT AS DIVIDENDS. THERE ARE ALSO RULES ABOUT WHO CAN BE AN OWNER OF AN S-ENTITY. ALSO NOTE THAT YOU WILL STILL OWE INCOME TAXES (FEDERAL AND STATE) AS THOSE ARE CALCULATED SEPARATELY FROM THE SE TAX.

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THIS INFORMATION IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE LEGAL OR TAX ADVICE. PLEASE CONSULT AN ATTORNEY AND TAX ACCOUNTANT BEFORE MAKING ANY TAX ELECTIONS.

LLC Members

This is a short VIDEO describing who the MEMBERS are of a Limited Liability Company. It covers single-member and multi-member LLCs, husbands & wives, and non-related partners and why it’s important to know the difference and how they are taxed.

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