Dana Lee CPA LLC Team

Business structure

Your company’s business structure is how it is organized – it answers questions like who is in charge, how are profits distributed, and who is responsible for business debt. The most common business structures are:

• Sole proprietorships have one owner. The IRS taxes the sole proprietors on all profits as personal income. The owner is personally liable for any business debts.
• Partnerships are similar with sole proprietorships but can have an unlimited number of owners. Partnerships are flow through entities. This means the owners report their share of profits as personal income on their tax returns.
• C corporations have unlimited shareholders who each own part of the company. C Corporations distribute profits to owners as dividends. Owners are not personally liable for business debts.
• S corporations are flow through entities that can have up to 100 owners. Owners are taxed on their share of profits. Owners are not personally liable for business debts.

In addition to affecting how a business operates and who is responsible for business debts, the business structure impacts how much a company and/or its owners pay in taxes. The U.S. tax code is complex and includes four main tax categories:

• Income tax – paid on profits
• Employment tax – employee Social Security and Medicare contributions
• Self-employment tax – Social Security and Medicare contributions for self-employed individuals
• Excise tax – special taxes for specific goods and services like tobacco, alcohol, etc.

The state(s) in which the company operates might also impose taxes, such as: sales tax, franchise tax, state income tax, property tax on the business personal assets, real estate tax. The business structure impacts some of these taxes.

That is why it is important to choose the most beneficial business structure from the beginning. Unfavorable business structures can be very costly.

Net Earnings

Net earnings (i.e., net income or profit) is the gross business income minus business expenses. Regardless of the business, it begins with gross income (the income received from customers) and allowable expenses are deducted to arrive at net income. How you calculate this figure dependents upon business structure.

Net earnings are used to calculate business income taxes. Again, the calculation process differs slightly for different business structures. It is best to seek a professional to help with net earnings calculations for the proper calculation and maximum legal deductions.

Employ a Family Member

One of the best ways for small business owners to reduce taxes is hiring a family member. For example, suppose you hire your child, as a small business owner. In that case, you will pay a lower marginal rate or eliminate the tax on the income paid to your child. Certain business structures are not required to pay Social Security and Medicare taxes on a child’s wages, if child is under 18 years old. They can also avoid Federal Unemployment Tax Act (FUTA) tax.

Retirement contributions

Retirement plans can be a very good tool to reduce taxes, as well as saving for retirement. As a small business owner, you should look at options such as SEP IRA, solo 401(k), SIMPLE plan, or even more complex plans, depending on the business structure, what other employees the business has, the cash flow and plans for the future.

As with any tax situation, consulting your trusted accounting professional is always best. They are up to date on the latest tax laws, information, and allowable deductions. By being aware of ways your small business can reduce taxes, you can bring these topics up with your accountant, discuss the best options for you, and be prepared long before tax time rolls around.

---

When it comes to retirement, we all think of contributions to 401K plans. Many employers offer 401K plans to their employees for retirement savings. Contributions towards these plans are automatically withdrawn from your salary and invested in the funds you choose.

Many times, employers offer to match a portion of what you save, usually between 4% and 6% of your pay. This offer makes it an attractive retirement savings avenue.

Traditional 401K

In case of a traditional 401K plan, the employer takes out the contributions pre-tax, which means the amount of contribution reduces your taxable income, thereby reducing the tax amount you’ll owe at the end of the year. Just a side note here: you will still pay payroll taxes on your 401K contributions. Conversely, when you take out distributions from your 401K plan, you will have to pay income tax on the distributions at the tax rate that applies when you take the money out. The advantage is that if your current tax rate is high compared to the estimated tax rate when you retire, then you will pay less tax on the contributed amount. The disadvantage is that you will pay tax on the earnings accumulated in your traditional 401K as you take them out.

Roth 401K

However, in the case of a Roth 401K though, the contributions are not pretax, so they do not reduce your taxable income. But conversely, when you take the money out of your Roth 401K you will not pay tax on the amount contributed and you will not pay tax on any earnings in your Roth 401K. But you will pay tax on any employer matching contributions, which will go into a separate traditional 401K account.

401K Contribution Limits

It is important to note that these contributions do have limits. There is a limit on how much you, as an employee can contribute and there is an overall limit on contributions towards your account that includes contribution by you, your employer matching and elective deferrals. The IRS taxes any excess contributions not withdrawn by April 15th at a rate of 6% per year for each year the excess contribution amount remains in the account.

 In a recent news release, IRS announced an increase to these limits. For 2022 you, as an employee can contribute up to $20,500 while keeping the combined contribution limit towards your 401K plan to the lesser of 100% of your compensation or $61,000. It is important to note that the IRS has not announced any change in the catchup contribution amount available to you if you are 50 years and above. It remains at $6,500 for 2022.

If you need help with your federal or state taxes, give us a call or schedule an appointment.

This material is for informational purposes only. It does not constitute tax, legal or accounting advice.

All of us have hobbies and some of us can even generate income from a hobby. In recent times with the popularity of e commerce, selling a product, like handmade jewelries is within the reach of everyone. Even though you might engage in such hobbies not with an intention to run a business, but to generate some side income, remember you have to report your hobby income on your income tax return.

Hobbies Are Not Tax Efficient

Hobbies are fun, but do cost money and they are not tax efficient. Why?

• You cannot claim a loss
• You cannot claim the operating expenses. But you can claim the cost of goods sold, which is allowed to be deducted from the hobby income.
• You have to report gross hobby income less cost of goods sold

You might be able to use the operating expenses after 2025, but generally only as a miscellaneous deduction subject to 2% adjusted gross income limitation and only if you have enough itemized deductions to be able to itemize on schedule A of your personal tax return.

For these reasons you have to understand if you can report your hobby as a business and claim ALL your expenses as a reduction to income.

When Can You Report Your Hobby As a Business?

To consider a hobby as a business you need to answer questions like:

• Do you maintain complete income and expense records of your hobby just like a business would?
• Do you make a profit or intend to make changes to your method of operation so as to make a profit?
• Are you trained or do you have the knowledge necessary to carry out the activity as a business?
• Do you depend on this activity to generate income for your livelihood?
• Do you put necessary time and effort to make the activity profitable?

If you find yourself answering YES to these questions then you might qualify to report your activity on schedule C of your personal income tax return, reporting this way only the net income (after ALL expenses). One other tax advantage of having a business instead of a hobby is that you can use the qualified income deduction (generally 20% of your business net income, with some limitations).

To see all the 9 factors the IRS looks at when determining if an activity is a hobby or a business, click here.

On the other hand, the disadvantage of reporting your activity as a business is that you have to pay self-employment tax (approximately 15.3%) on the net income, while the hobby income is not subject to self-employment tax.

If you need help on how to report your hobby or business activity, click here to schedule an appointment.

This material is for informational purposes only. It does not constitute tax, legal or accounting advice.

The IRS announced today a new way to access the IRS online services. Starting today accessing the IRS online account, obtaining transcripts online, updating child tax credit information, obtaining an installment agreement or obtaining an IP PIN is a lot more user friendly and a lot more secure.

IRS is using ID.me

IRS is outsourcing the identity verification process to a well known technology provider, ID.me. ID.me is a Virginia based technology company that provides services to multiple government agencies and health care providers. This will make the process of accessing the IRS online services a lot simpler. And, in addition, if you encounter any issues with the identity verification process, you can get help a lot easier. ID.me comes with increased help desk assistance.

Tax Professional Applications Will Also Use ID.me

Tax professionals will benefit from this change as well. IRS will use ID.me to allow access to the “Tax Pro Account”. As well as for submitting Forms 2448 and 8821.

How Will your Identity Be Verified?

ID.me will request that you provide them with an identity document, like a driver’s license, state ID or passport and for a selfie that you can take with a computer webcam or a smartphone.

When Do You Need to Make the Change?

If you already have an IRS username, you may continue to use it until summer 2022, but you will be prompted to create and ID.me account as soon as possible. If you need help with this process the IRS provided a help site, ID.me IRS Help Site.

It is good to see these improvements to the way IRS provides online services, in the context of so many cases of identity theft. 

Remember to always protect your information. We recommend all our clients to try to take as many steps as possible to protect their identity, such as: obtaining an IRS IP PIN, freezing your credit score with the 3 credit bureau agencies, using secure portals for exchanging sensitive documentation, avoiding emailing sensitive information.

If you need help with your federal or state taxes, give us a call or schedule an appointment.

This material is for informational purposes only. It does not constitute tax, legal or accounting advice.

Identity theft is a serious threat, not just to you, but to your businesses as well. Partnerships, trusts, estates, non-profit organizations and all other entities that are EIN (Employer Identification Number) holders are vulnerable.

If you encounter some of the issues below, this might be a signs of tax related identity theft:

• You get an IRS rejection notice when trying to file the business federal extension stating an extension for your EIN has already been filed
• You can’t e-file the federal tax return because the return was already filed with the same EIN
• Your IRS tax transcript does not match anything you submitted
• You receive a notice from the State that an employee applied for unemployment, although you did not lay off any employees recently.

It is important for you to be alert and take strong security measures to protect your business and its data. Communicating any business information changes to the IRS and your State is one such step you can take towards protection against identity theft.

Update Business Information With The IRS

The business is required to report any change in the responsible parties and/or address with the IRS within 60 days of change. You can update your business information using Form 8822 B-Change of Mailing Address or Responsible Party:

https://www.irs.gov/pub/irs-pdf/f8822b.pdf

Update Business Information With The State

You also want to make sure that you business information is current with the state.

Make sure the registered agent information is up to date with the Secretary of State. In Texas, you can update this information using Form 401:

https://www.sos.state.tx.us/corp/forms/401_boc.pdf

One other institution you want to have current information with, is the State Comptroller. Use the following link to update the business information with the Texas State Comptroller:

https://comptroller.texas.gov/web-forms/manage-account/change-address/

If you need help with your federal or state taxes, give us a call or schedule an appointment.

This material is for informational purposes only. It does not constitute tax, legal or accounting advice.

As digitization continues to be more common than ever, IRS launched a new feature for the IRS Online Account to improve and facilitate better services for taxpayers.

How the IRS Processed Power Of Attorney Forms In The Past

Until recently taxpayers could not connect online with their tax professional for approving the power of attorney or tax information authorization. The taxpayers and the tax professionals had to physically sign Form 2848 – Power of attorney and/or Form 8821 – Tax information authorization. Then the tax professionals had to submit the form(s) to the IRS either through their e-Services account or fax it to the IRS to get the requested information.

We Can Now Submit The IRS Power Of Attorney Form Online

This new IRS feature reduces the time in which your tax professional can get access to the requested information from weeks to a couple of days.

You, the individual taxpayer will now be able to connect with your tax professional by opening an online account on the IRS website. You can click here to access the IRS website and start creating your IRS Online Account. Your identity as a taxpayer will be verified during the login process and would then enable you to see in your online account the authorizations requested by your tax professional. You can verify and approve these authorization requests by simply checking a box as your signature for approval.

This IRS online account would not only let you access your tax records, but you will also be able to make a payment, check the status of your economic stimulus payments and see key information from your recent tax return.

There Are Instances When You Cannot Submit Online the IRS Power Of Attorney Form

Unfortunately, for those of you who cannot validate their identities for opening an online account, you will not be able to take advantage of this newly introduced feature.

The same applies for businesses or other entities. This online process is only available for individual taxpayers.

If you need help with your taxes, give us a call or schedule an appointment.

This material is for informational purposes only. It does not constitute tax, legal or accounting advice.