7 Tips From the IRS For Business Owners

The IRS just released some important tips for business owners. Read the 7 tips below so you know all you need about business taxes.

Anyone starting a new business this summer should be aware of their federal tax responsibilities. Here are the top seven things the IRS wants you to know if you plan on opening a new business this year.

1. First, you must decide what type of business entity you are going to establish. The type your business takes will determine which tax form you have to file. The most common types of business are the sole proprietorship, partnership, corporation and S corporation.
   
   
2. The type of business you operate determines what taxes you must pay and how you pay them. The four general types of business taxes are income tax, self-employment tax, employment tax and excise tax.
   
   
3. An Employer Identification Number is used to identify a business entity. Generally, businesses need an EIN. Visit IRS.gov for more information about whether you will need an EIN. You can also apply for an EIN online at IRS.gov.
   
   
4. Good records will help you ensure successful operation of your new business. You may choose any recordkeeping system suited to your business that clearly shows your income and expenses. Except in a few cases, the law does not require any special kind of records. However, the business you are in affects the type of records you need to keep for federal tax purposes.
   
   
5. Every business taxpayer must figure taxable income on an annual accounting period called a tax year. The calendar year and the fiscal year are the most common tax years used.
   
   
6. Each taxpayer must also use a consistent accounting method, which is a set of rules for determining when to report income and expenses. The most commonly used accounting methods are the cash method and an accrual method. Under the cash method, you generally report income in the tax year you receive it and deduct expenses in the tax year you pay them. Under an accrual method, you generally report income in the tax year you earn it and deduct expenses in the tax year you incur them.
   
   
7. Visit the Business section of IRS.gov for resources to assist entrepreneurs with starting and operating a new business.
   

Links:

• Starting A Business
• Operating A Business
• Closing A Business
• Publication 4591, Small Business Federal Tax Responsibilities (PDF 470.1K)
• Publication 334, Tax Guide for Small Business (PDF 286.2K)
• Order Publication 1066C, A Virtual Small Business Tax Workshop DVD

What Everyone Needs To Know About Filing S Corporation Taxes

If you are owner or part owner in a S corp, you need to file the Corporation's taxes on the Form 1120s. My best advice to you is, do not attempt to file this form yourself. You need a tax professional such as an Enrolled Agent or CPA. The rules for filing an 1120s are complex and require knowledge as to what expenses can and cannot be taken by an S corp.

When you incorporate your company, you must file for the S corp election by filing the IRS Form 2553. If you do not file this election timely, you will have to file the form 1120 and the company will pay taxes at the corporate tax rate. If you file the S corp election and it is approved by the IRS, you will be taxed at your individual tax rate.

Your 1120s is due on March 15th if you are a calendar year company and 2 1/2 months after the end of your fiscal year, if you are a fiscal year corporation. You may file for an extension just as you can for your personal income tax.

Once the 1120s is completed, each owner will receive a K-1 that they will file with their own 1040 return. Your percentage of the company's profit or loss depends on your percentage of ownership of the corporation.

You may have received a salary during the year, so you may have both a W2 which reflects your salary paid throughout the year and the K-1 which shows your portion of the corporate income or loss.(regardless of whether or not you actually received this money, it is still your portion of the income earned or the loss incurred)

S corps can take most reasonable business expenses, including the owners' reasonable salary. You will need your previous years tax return(if you have filed before) and your companies profit and loss statements as well as your balance sheet, for your tax preparer to be able to prepare your return. They will also need to know the date your company was incorporated.

Hopefully you consulted with a tax professional when you set your corporation up. You have to make decisions about your accounting method and many other business decisions. Being sure you make good decisions up front and knowing about record keeping requirements will make tax time go much more smoothly for both you and your tax preparer.

Do your homework and find a competent tax professional who can help you make good business decisions and help you file your tax returns correctly and on time.

The Secrets To Running a Cash Business

If your business is primarily cash, you need to take several precautions. You need to be very scrupulous in keeping records in case you are ever audited by the IRS. Here are some hints:

• Give each customer a receipt or invoice for payment.
• Attach your receipt/invoice to your deposit slip receipt you get from the bank.
• Keep your deposit slip with your receipt/invoice attached to your bank statement.
• Keep your receipts for all cash purchases you make as well and keep them with the bank statement too so both income and expense records are together.
• NEVER pay personal expenses out of your business bank account.
• If you take cash out before you make a deposit, be sure you account with a receipt for what you spent it on. Better yet, make the deposit and then write a check for the expense.
  

Remember, if you cannot prove an expense, you may not be allowed to claim it on your tax return. There are some exceptions like taxi rides, tolls...etc. For those, just list them on a piece of paper and attach to the bank statement.

If you are audited and have your records well organized and your income and expenses substantiated, you should sail through an audit with flying colors. If not, your expenses you cannot prove may be disallowed and than can make assumptions about your income from prior year that may not be close to what you are making now. Keeping good records protects your hard earned money and your business.

If you have questions and need assistance contact a tax professional such as an Enrolled Agent or a CPA.

Top Ten Facts About Dependents

Many taxpayers have questions about who qualifies as a dependent for tax purposes. Here are 10 facts to help you out. Your dependent:

1. Can never be your spouse
2. Must be a U.S. citizen
3. Cannot claim the exemption on their tax return
4. Must meet relationship test
5. Must meet the age test if your child(under 19 or under 24 if full time student unless disabled)
6. Must meet the support test
7. Is not being claimed on another taxpayers tax return
8. Must meet the residency test( lived with you for more than half the year except for temporary absences--like away at college)
9. Meets special test if child can be claimed by more than one parent
10. Meets the income test
For more details and examples of situations see IRS Publication 501.

The Secret To Penalty Abatement With the IRS

Owe the IRS? Have penalties and interest accrued and seriously increased the amount you owe? You can never abate interest. You can, in some cases, have the penalties abated. Here are a couple of options.
1. If you only owe for one or two years you can ask for "first time penalty abatement" on the first year only.
2. If you owe for many years, you will need to write a letter to the IRS requesting that they abate the penalties due to reasonable cause and not willful neglect. You will need to provide documents that substantiate what went wrong and why you did not file and or pay your taxes. It will need to be a situation that affected your entire life, not just your taxes.

I forgot or I was busy and didn't have time are not considered reasonable cause. Write up a compelling argument, provide documentation to show why your taxes and your entire life fell apart.

If you need assistance preparing your letter contact a tax professional such as an Enrolled Agent.