2020 Guide to Small Business Tax Planning

By Dr. Charles E. Hall PhD

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 which 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 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 business. The books chapters provide accounting definitions, regulations and explanation in detail how business is created from its inception and what small business 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: Jul 23, 2020
• ISBN: 9781664119338

Dr. Charles E. Hall PhD

Charles Hall has practiced accounting since 1972. During his career he worked with the Internal Revenue Service as a Revenue Officer for 15 years. Dr. Hall left IRS in 1987 and established his private practice in Saint Augustine, Florida. Dr. Hall’s practice is focused on small business financial and tax planning where he is engaged in over 1,400 clients. Charles Hall has earned his Bachelor of Arts in Accounting, Bachelor of Business Administration, Master of Business Administration and PhD in Economics. Dr. Hall is also a certified paralegal and certified in Advanced Estate Planning. Dr. Hall is a member of the National Certification Board for Tax Professionals, National Association of Tax Professionals, National Society of Public Accountants, Accreditation Council of Accountancy & Taxation, and the Institute for Business Financial & Estate Planning

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Copyright © 2020 by Dr. Charles Hall, PhD.

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Rev. date: 07/23/2020

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CONTENTS

Disclaimer

Acknowledgment

Preface

Business Structures

Deductible Business Expenses

Qualified Business Income Deductions

Amortization

Business Use Of Your Home

Ira Contributions

Distributions From Iras

Small Business Retirement Plans

Health And Employee Benefits

Fringe Benefits

Ffcra And Cares Act

Installment Sales And Deferred Payments

The Social Security System

Offers In Compromise

The Taxpayer Bill Of Rights

Examination Of Returns And Appeal Rights

The Irs Collection Process

Collection Appeal Rights

Innocent Spouse Relief

DISCLAIMER

This book has been prepared with due diligence and is based on current tax law as of January 1, 2020. The author is not providing any accounting, legal, or other professional advice and assumes no liability whatsoever in connection with its use. The author has used diligent efforts to provide quality information and material to its readers but does not warrant or guarantee the accuracy, timeliness, completeness, or currency of the information contained herein.

Ultimately, the responsibility to comply with applicable legal requirements falls solely on the individual reader/taxpayer. The author encourages you to contact a licensed tax professional with regard to your duties and/or obligations.

ACKNOWLEDGMENT

I thank all of my present and former clients for trusting me and teaching me how tax laws affect each and every individual situation.

PREFACE

In the course of over forty-six years of practicing accounting, I have had the distinct pleasure of working with various small business ventures and the opportunity to consult with professionals in almost every aspect of the business world. My career has encompassed providing accounting services, tax advice, tax preparation, estate planning, and estate administration. Professionally, I have had great times learning from others, as well as helping small businesses and individuals achieve their respective goals.

It has been a wonderful experience watching and guiding businesses from the grandparent who started the company to their children and subsequently to their grandchildren. One of my greatest rewards is the fact that I was instrumental in providing guidance and direction to 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 failure than success. Federal and state tax laws are an integral part of business ventures, whether the business is a small sole proprietorship, a partnership, or a corporate entity. Whether we like it or not, the government is a business partner, which can be a burden as well as a useful tool for business growth. The United States Tax Code is very complicated. It is officially called as the Internal Revenue Code, which is Title 26 of the United States Code. It 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 and regulations and explain in detail how a business is created from its inception and what small businesses must do 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 enterprises are sole proprietorship, partnership, corporation, and limited liability company. Careful considerations need to be made with regard 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. It 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 via dividends.

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 are passed to their 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 2013-30. 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. They are responsible for tax on certain built-in gains and passive income at the entity level. Shareholders of S corporations that receive reported losses from S corporations via Schedule K1 (Form 1120-S) 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. It usually does not save taxes for the corporate entity and is taxed at a 21% flat rate on its net income. Most PSCs don’t pay taxes because all of their 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, Internal Revenue Service will treat an LLC as either a corporation, S corporation, or partnership, or if the LLC only has one member, the Internal Revenue Service classifies it as a disregarded entity, and its activities 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.

Certain tests must be made to determine 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 which consist primarily of breeding, showing, training, or racing horses are considered a business venture if they make 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 when 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 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 gross income for the activity is more than the deductions taken in the first two categories.

EMPLOYER IDENTIFICATION NUMBERS

An Employer Identification Number, also known as a Federal Tax Identification Number, 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 by applying online at www.irs.gov. This is a free service offered by the Internal Revenue Service, and you can get your EIN immediately. You should also 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 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 any tax due when you file your return. The due date for payment of taxes is March 15 for corporations and April 15 for individuals.

ESTIMATED TAXES

Estimated tax is the method used to pay tax on income that is not subject to withholding. This includes income from self-employment, interest, dividends, alimony, rents, gains from the sale of assets, prizes, and awards. You also may have to pay estimated tax if the amount of income tax being withheld from your salary, pension, or other income is insufficient. If you do not pay enough taxes through withholding or estimated tax payments, you may be charged a penalty for failure to pay. If you do not pay enough by the due date of each payment period, you may be charged a penalty even if you are due a refund when you file your tax return.

If you are filing as a sole proprietor, partner, S corporation shareholder, and/or self-employed individual, you generally have to make estimated tax payments if you expect to owe tax of $1,000 or more when you file your tax return.

GENERAL RULE

In most cases, you must pay estimated tax if both of the following apply:

1. You expect to owe at least $1,000 in tax after subtracting your withholding and refundable credits.

2. You expect your withholding and refundable credits to be less than the smaller of

a. 90% of the tax to be shown on your current year income tax return or

b. 100% of the tax shown on your prior-year tax return.

You do not have to pay estimated tax for the current year if you were a U.S. citizen or resident alien for all of the prior tax year and you had no tax liability for the full 12-month prior tax year. If you are filing as a corporation, you generally have to make estimated tax payments for your corporation if you expect it to owe tax of $500 or more when you file its return.

If you are filing as a sole proprietor, partner, S corporation shareholder, and/or self-employed individual, you should use IRS Form 1040-ES (Estimated Tax for Individuals) to figure and pay your estimated tax.

If you are filing as a corporation, you should use IRS Form 1120-W (Estimated Tax for Corporations) to figure the estimated tax. You must deposit the payments using the Electronic Federal Tax Payment System.

SELF-EMPLOYMENT TAXES

Self-employment tax (SE tax) is a Social Security and Medicare tax primarily for individuals who work for themselves. Your payments of SE tax contribute to your coverage under the Social Security system. Social Security coverage provides you with retirement benefits, disability benefits, survivor benefits, and hospital insurance benefits.

Self-employment taxes are computed and filed in conjunction with IRS Form 1040 (Schedule SE) if either of the following