Financial & Tax Planning for Small Businesses

By Charles Hall

Federal and state tax laws are an integral part of business ventures, whether the business is a small sole proprietorship, partnership, or corporate entity. No matter if we like it or not, government is a business partner that can be a burden, as well as a useful tool for business growth. The United States Tax Code is very complicated. It is written as the Internal Revenue Code, which is Title 26 of the United States Code. The Internal Revenue Code comprises some ten-thousand-plus pages and is further defined in the Internal Revenue Regulations, which is written in some ten-million-plus pages. The intent of this book is to provide general guidance to small businesses. The books chapters provide accounting definitions, regulations, and explanations in detail how business is created from its inception and what small businesses must do in order to be successful.
Planning techniques for ongoing business ventures as well as retirement planning vehicles are explained. The book takes the business owner from the first day he or she opens their business through the closure of the business. If the business owner is subjected to an examination by IRS, this book outlines the functions, procedures, rules, and regulations that taxpayers and the IRS must follow.

• Language: English
• Publisher: Xlibris US
• Release date: Jan 21, 2016
• ISBN: 9781514449745

Charles Hall

Charles Hall is the Financial Administrator for two churches in the Wilmington area, Treasurer of Imagine Ministry, an international ministry serving in Nicaragua, and attends Second Mile Church. Charles' first book, "Finding Treasures in the Psalms," was published in 2021 and has been an encouragement to those who have read it. Charles and his wife, Vivian, have been married for 42 years and are blessed with one daughter, Emily and her husband Joe, one son, Bren and his wife Austin, and seven grandchildren, Brynlee, Walker, Tatum, Reese, Luke, Anders, and Gracie.

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Copyright © 2016 by Charles Hall.

All rights reserved. No part of this book may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without permission in writing from the copyright owner.

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Rev. date: 01/20/2016

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CONTENTS

Acknowledgment

Preface

Chapter 1:  Business Structures

Chapter 2:  Deductible Business Expenses

Chapter 3:  Amortization

Chapter 4:  Business Use Of Your Home

Chapter 5:  Contributions To Individual Retirement Arrangements

Chapter 6:  Distributions From Individual Retirement Arrangements

Chapter 7:  Small Business Retirement Plans

Chapter 8:  Health And Employee Benefits

Chapter 9:  Installment Sales And Deferred Payments

Chapter 10:  The Social Security System

Chapter 11:  The Taxpayer Bill Of Rights

Chapter 12:  Examination Of Returns And Appeal Rights

Chapter 13:  The Irs Collection Process

Chapter 14:  Collection Appeal Rights

Acknowledgment

I will never regret or forget all the blessings I have had in my profession. If anyone should ever write my life story, my wife would be there between each line of pain and glory, because her love is the best thing that has ever happened to me.

Preface

It has been a wonderful experience watching and guiding businesses from the grandparent who started the company, transferring the business to their children and subsequently to their grandchildren. One of my greatest rewards is the knowledge that I was instrumental in providing guidance and direction to the business owners and watching the success of their families and others. At this moment in time, given the economic uncertainties and governmental regulations, small business owners have a greater chance of failing than prospering.

Federal and state tax laws are an integral part of business ventures, whether the business is a small sole proprietorship, partnership, or corporate entity. No matter if we like it or not, government is a business partner that can be a burden, as well as a useful tool for business growth. The United States Tax Code is very complicated. It is written as the Internal Revenue Code (IRC), which is Title 26 of the United States Code. The Internal Revenue Code comprises some 10,000 plus pages and is further defined in the Internal Revenue Regulations, which is written in some 10,000,000 plus pages. The intent of this book is to provide general guidance to small businesses. The following chapters provide accounting definitions, regulations, and explanations in detail how a business is created from its inception and what small businesses must do in order to be successful.

Chapter 1

BUSINESS STRUCTURES

CHOOSING A BUSINESS STRUCTURE

When contemplating a new business, the owner or owners must decide what form of business entity to establish. Your form of business determines which income tax return form you have to file. The most common forms of business are sole proprietorship, partnership, corporations, and limited liability companies. Careful considerations need to be made in regards to the legal and tax issues concerning the type and nature of the business structure.

TYPES OF BUSINESS STRUCTURES

SOLE PROPRIETORSHIPS

A sole proprietor is an individual who owns an unincorporated business by himself or herself. If you are the sole member of a domestic limited liability company (LLC), you are not a sole proprietor if you elect to treat the LLC as a corporation.

PARTNERSHIPS

A partnership is the relationship existing between two or more persons who join together to conduct a trade for business. Each person contributes money, property, labor, or skill, and expects to share in the profits and losses of the business.

CORPORATIONS

When corporations are formed, prospective shareholders exchange money, property, or both for the corporation’s capital stock. A corporation generally takes the same deductions as a sole proprietorship to figure its taxable income. A corporation can also take special deductions. For federal income tax purposes, a regular corporation (commonly known as a C corp) is recognized as a separate taxpaying entity. A corporation conducts business, realizes net income or loss, pays taxes, and distributes profits to its shareholders.

The profit of a C corporation is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as dividends. This creates a double-taxation issue. The corporation does not get a tax deduction when it distributes dividends to shareholders. Shareholders cannot deduct any loss of the corporation.

S CORPORATIONS

S corporations are elected by regular corporations via IRS Form 2553, signed by all shareholders so corporate income, losses, deductions, and credits pass to its shareholders for federal income tax purposes. Generally, an election specifying an S corporation’s classification cannot take effect more than 75 days prior to the date the election is filed, nor can it take effect later than 12 months after the date the election is filed. An S corporation may be eligible for late election relief in certain circumstances by filing Revenue Procedure 2003-43.

Shareholders of S corporations report the pass-through of income and losses on their personal income tax returns and are assessed tax at their individual income tax rates. Subchapter S corporations avoid the double-taxation issues on corporate income. Sub-S corporations are responsible for tax on certain built-in gains and passive income at the entity level. Shareholders of S corporations which receive reported losses from S corporations via Form 1120S (Schedule K-1) must have sufficient basis before those losses are allowed to be reported on the individual income tax return.

For corporations to qualify for subchapter S status, the corporation must meet the following requirements:

1. Be a domestic corporation

2. Have only allowable shareholders, including individuals, certain trusts, and estates. Prohibited shareholders are partnerships, regular corporations or nonresident shareholders.

3. Have no more than 100 shareholders

4. Have only one class of stock

5. Not be an ineligible corporation

QUALIFIED PERSONAL SERVICE CORPORATIONS

A qualified personal service corporation (PSC) is one in which substantially all of the activities are in providing services in the fields of law, health, engineering, architecture, accounting, actuarial science, counseling, or performing arts. A PSC is taxed as a corporation. The PSC usually does not save taxes for the corporate entity and are taxed at a 35% flat rate on its net income. Most PSCs don’t pay taxes because all of its profits are usually paid out to shareholders as salaries, bonuses, or allowable fringe benefits.

A PSC with three or more shareholders may elect to establish a voluntary employees’ beneficiary association (VEBA). This allows the PSC to deduct the cost of health insurance and life insurance coverage to all PSC employees as a tax-free benefit. These plans are usually administered by banks or insurance companies.

LIMITED LIABILITY COMPANY

A limited liability company, otherwise known as an LLC, is a business structure allowed by state statute. Each state may use different regulations; therefore, it is imperative to check with each state if you are interested in starting a limited liability company.

The owners of LLC entities are referred to as members. Most states do not restrict ownership; therefore, members may include individuals, corporations, partnerships, other LLCs and foreign entities. There are no maximum number of members. Most states also permit LLCs to have only one member.

Depending on elections the LLC can make and the number of members, the Internal Revenue Service (IRS) will treat an LLC as either a corporation, S corporation, partnership, or, if the LLC only has one member, as disregarded entities, and the activity of those LLCs must be reported as sole-proprietorship entities for federal income tax purposes.

A domestic LLC with at least two members is initially classified as a partnership for federal income tax purposes. If the LLC wants to be taxed other than a partnership, it must file IRS Form 8832 and elect to be treated as a corporation. Generally, an election specifying an LLC’s classification cannot take effect more than 75 days prior to the date the election is filed, nor can it take effect later than 12 months after the date the election is filed. An LLC may be eligible for late election relief in certain circumstances by filing Revenue Procedure 2009-41.

BUSINESS OR HOBBY?

The Internal Revenue Service has created guidelines for taxpayers to follow when determining whether an activity is a business or a hobby, which is an activity not engaged in for profit.

In general, taxpayers are authorized to deduct ordinary and necessary expenses for conducting a trade or business. Ordinary expenses are those that are common and accepted in the taxpayer’s trade or business. Necessary expenses are those that are appropriate for the business to conduct its operations. Generally, an activity qualifies as a business if it is conducted with the reasonable expectation of earning a profit.

There are certain tests which must be made to make the determination if the activity is a business or hobby enterprise:

1. Does the time and effort put into the activity indicate an intention to make a profit?

2. Does the taxpayer depend on income from the activity?

3. If there are losses, are they due to circumstances beyond the taxpayer’s control or did they occur in the start-up phase of the business?

4. Has the taxpayer changed methods of operation to improve profitability?

5. Does the taxpayer or his/her advisors have the knowledge needed to carry on the activity as a successful business?

6. Has the taxpayer made a profit in similar activities in the past?

7. Does the activity make a profit in some years?

8. Can the taxpayer expect to make a profit in the future from the appreciation of assets used in the activity?

The Internal Revenue Service presumes that an activity is carried on for profit during at least three of the last five years, including the current year. Activities involved which consist primarily of breeding, showing, training, or racing horses is considered a business venture if it makes a profit at least two of the last seven years.

If a business venture is not for profit, losses from that activity may not be used to offset other income. An activity produces a loss, then related expenses exceed income. The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corporations. It does not apply to corporations other than S corporations.

Deductions for a hobby-type business are claimed as itemized deductions on Schedule A (Form 1040). The deductions must be taken in the following order and only to the extent stated in each of the following three categories:

1. Deductions that a taxpayer may take for personal as well as business activities, such as home mortgage interest and taxes, may be taken in full.

2. Deductions that don’t result in an adjustment to basis, such as advertising, insurance premiums, and wages, may be taken next, to the extent that gross income for the activity is more than the deductions from the first category.

3. Business deductions that reduce the basis of property, such as depreciation and amortization, are taken last, but only to the extent that gross income for the activity is more than the deductions taken in the first two categories.

EMPLOYER IDENTIFICATION NUMBERS

An Employer Identification Number is also known as a Federal Tax Identification Number and is issued to identify a business entity. Generally, all businesses need an Employer Identification Number, otherwise known as an EIN. Application may be made for an EIN either by paper filing via IRS Form SS-4, or you may apply online at www.IRS.gov. This is a free service offered by the Internal Revenue Service, and you can get your EIN immediately. You also should check with your state to determine if you need a state registration number or charter.

BUSINESS TAXES

There are typically five types of business taxes. The form of business you operate determines what taxes you may be required to pay and how you pay them. The following are the general types of taxes:

1. Income tax

2. Estimated taxes

3. Self-employment taxes

4. Employment taxes

5. Excise taxes

INCOME TAXES

All businesses except partnerships must file an annual income tax return. Partnerships are required to file an annual information return. The form you use depends on how your business is organized.

The federal income tax system is a pay-as-you-go tax. You must pay the tax as you earn or receive income during the year. Employees usually have income tax withheld from his or her pay each time they receive their paycheck. If you do not pay enough tax through federal withholding, you may have to pay estimated taxes. If you are not required to make estimated tax payments, you may pay