When you start a business, you need to choose a business structure. This choice determines the income tax return form you will file. Common business structures include sole proprietorship, partnership, corporation (C or S) and limited liability company (LLC). Each state may have different rules for ownership, liability, taxes, and filing requirements for each structure.

Your business structure affects your daily operations, taxes, and personal asset risk. You should choose a structure that offers the best balance of legal protections and benefits for you. We recommend you advise with both an attorney and a CPA before registering your company with the state.

Some Common Business Structures

Partnership

Two or more people can easily own a business together in partnerships. Partnerships suit businesses with multiple owners, professional groups like attorneys, or groups testing a business idea before forming a more formal business. With a partnership, the profits and the losses flow to the personal tax returns of the partners. The partners receive from the partnership a K-1 form every year with all the information they need to report their share of the partnership’s activity. Depending on the type of partnership, some partners may be subject to self-employment tax, that’s why it is important to advice with your accountant and determine if this is a suitable option for you.

Sole proprietorship

A sole proprietorship is very simple to set up because basically you do business under your own name. In order to protect your Social Security number, we advise you apply for an EIN to use for your sole proprietorship. In addition, you can also obtain a “doing business as” name. The disadvantage is that you do not have liability protection because you’re personally responsible for the business’s debts and obligations. Another disadvantage is that you are subject to self-employment tax on all your profits. That is why we recommend once your business becomes profitable on a consistent basis to advise with a CPA to see what other options are available to you to save on taxes.

S Corporations

An S corporation requires electing this status by filing IRS Form 2553. It is a pass-through entity that reports its profits on the owners’ personal tax returns. It can only have up to 100 shareholders, and these shareholders must be U.S. citizens or residents. In addition, this tax classification avoids the double taxation of regular C Corporations and can provide savings on the self-employment tax in some situations.

C Corporations

A C Corporation is a separate legal entity from its owners. It can earn profits, pay taxes and be legally liable. Unlike the flow through business structures mentioned above, C Corporations pay tax on their profits. C corporations have the disadvantage that they encounter double taxation:

• once, when the company makes a profit, the C corporation has to pay income tax,
• then, when dividends are paid to the shareholders, the shareholders pay dividend tax on their personal tax returns.

Other disadvantages are that they cost more to form and require more recordkeeping, operational processes, and reporting.

Limited Liability Company

An LLC is like a chameleon. It provides protection from personal liability in most cases and it is very versatile because an LLC can be treated for tax purposes as: a disregarded entity, a partnership, an S corporation or a C corporation.

We advise you to choose wisely. You can change your business structure later, but there might be restrictions and there might be unintended tax consequences associated with the change.

If you are interested in starting a new business, we recommend you to choose our “New Business Formation Consulting” service. We can help you determine what is the best tax classification for your new business and advise you on what is the most tax efficient way to setup your new business entity for federal tax purposes. Click here to schedule an appointment.

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

 

If you are an employer who operates a large food or beverage establishment, you may need to file Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips. This form is used to report the total amount of tips received by your employees, the amount of tips you paid to them, and the amount of tips you allocated to them if they did not report enough.

Do You Have To File Form 8027?

You must file Form 8027 if  you operate a large food or beverage establishment. A large food or beverage establishment means that:

• you normally employ more than 10 employees on a typical business day during the preceding calendar year,
• tipping is customary in your business,
• your business is located in the 50 states or in the District of Columbia.

You may have more than one food or beverage establishment that meets these criteria. In that case, you must file a separate Form 8027 for each establishment.

To find out if you meet the 10 employees test mentioned above, you can use this worksheet. You determine whether you have more than 10 employees based on the average number of hours your employees work on a typical business day. When filling out the worksheet, you need to keep in mind the following points:

• count employees from all your food or beverage operations, even if a single establishment has fewer than 10 employees,
• include all workers at your food or beverage operations, not just those who serve food or drinks,
• do not count employees working at fast food establishments,
• do not apply the 10-employee rule separately to each food or beverage establishment,
• anyone who owns 50% or more of a corporation’s stock is not considered an employee for the 10-employee test; if you need additional information click here.

How To File Form 8027?

You can file Form 8027 electronically or on paper. You must file Form 8027 by February 28 of the year after the calendar year for which you’re filing the return. However, if you’re filing electronically, the deadline extends to March 31. For example, if you are filing Form 8027 for the tax year 2023, the due date is February 29, 2024 (or March 31, 2024 if you file electronically). You can request an extension of time by filling Form 8809. You should file an extension as soon as you realize you’ll need one, but not sooner than January 1, 2024, and no later than February 29, 2024.

Gross Receipts

You must report your establishment’s total income from food and drinks, also known as gross receipts, on Form 8027. These gross receipts help calculate other amounts that you need to report. They include all income from the provision of food or drinks, encompassing cash sales, credit card receipts, charges to a hotel room (without the tips charged to the hotel room), and the retail value of complimentary food or drinks served to customers.

Usually, tips are not included in gross receipts. But, if you have deducted any cash paid to tipped employees from your cash sales, then you need to include those charged tips in your gross receipts.

You can find out all the rules regarding tip income reporting on Form 8027 by going to the IRS website.

Form 8027 is used by the IRS to verify that your employees are reporting their tip income accurately. It is important to file it correctly, completely and on time so that you do not encounter penalties and other IRS complications. Especially that the tip income is subject to federal income tax, social security tax, and Medicare tax. In addition, if your employees do not report all of their tips to you or to the IRS, they too will face penalties and interest.

As an employer you are entitled to tips credit. See our blog about this subject.

Check out our YouTube channel for more interesting subjects.

In the meantime, if you encounter any issues or have any questions, we are here to help you with your accounting, QuickBooks, and tax needs. Click here to schedule an appointment.

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

If you use your vehicle for business purposes, you may be eligible to claim a deduction for the expenses related to your business use. However, to do so, you need to keep a contemporaneous auto mileage log book when you claim a business deduction for the business use of your vehicle.

In this blog post, we will explain you the importance of maintaining a contemporaneous mileage log book and how it can help you avoid tax problems.

Mileage Log Book

A mileage log book is essential for substantiating your claim for the business use of your vehicle, as it provides evidence of the amount and nature of your driving.

Under the substantiation requirements, no deduction is allowed unless you, as a taxpayer, substantiate:

• the amount of each expense,
• the mileage for each business use of your vehicle and the total mileage for all use of the vehicle during the tax year,
• the date of each business use of the vehicle, and
• the purpose of each business use.

The IRS requires that you keep a mileage log book if you want to deduct your vehicle expenses using the standard mileage rate or the actual expenses method. The standard mileage rate is a fixed amount per mile that covers the costs of operating your vehicle, such as gas, maintenance, depreciation, and insurance. The actual expenses method allows you to deduct the actual costs of using your vehicle for business, such as gas, repairs, tires, registration fees, and depreciation. However, regardless of which method you choose, you still need to keep a mileage log book to prove your business use.

Fail on Keeping Records

If you fail to keep a mileage log book or if your log book is incomplete or inaccurate, you may face serious consequences from the IRS. The IRS may disallow your deduction for the business use of your vehicle or it may limit it to a lower percentage, which could result in a higher tax bill, penalties and interest. The IRS may also audit your tax return and ask for additional documentation to support your claim.

Therefore, it is important that you maintain a contemporaneous mileage log book that reflects your actual driving habits and business activities. A contemporaneous mileage log book is one that is created at or near the time of each trip, rather than at a later date based on memory or estimates. A contemporaneous mileage log book is more reliable and credible than a reconstructed one, as it reduces the risk of errors and omissions.

Court Case

An example that illustrates the importance of keeping an auto mileage log is the court case Wolpert, T.C. Memo. 2022-070. In this case, the taxpayer traveled for his consulting business and deducted car and truck expenses on his Schedule C, Profit or Loss from Business. The IRS disallowed the $7,528 in car and truck expenses for taxable year 2016 because the taxpayer failed to substantiate the mileage under the substantiation rules mentioned above.

Conclusion

By maintaining a contemporaneous mileage log book, you can ensure that you claim the correct amount of deduction for the business use of your vehicle and avoid any potential problems with the IRS. A mileage log book is not only a tax requirement but also a good business practice that can help you track your expenses and optimize your profitability.

Check here our video about this case. We also have other videos on our YouTube channel that you might find useful.

In the meantime, if you encounter any issues with your taxes or have any questions, we are here to help you with your accounting, QuickBooks, and tax needs. Click here to schedule an appointment.

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

If you give a small gift or service to your employee that doesn’t cost much and you do it infrequently, you don’t have to include its value in the employee’s wages. The IRS refers to this is as a “de minimis” benefit. It is so small that it would be unreasonable or too difficult to account for it.

However, this doesn’t apply to cash or cash-like gifts (like gift certificates, gift cards, or use of a credit card), no matter how small they are. The IRS never considers these as “de minimis” and you should always include them in the employee’s wages.

If you occasionally provide meal money or local transportation fare to your employees due to overtime work, you may exclude these from their wages.

Examples of “De Minimis” Fringe Benefits

Here are some examples of minimal fringe benefits:

• you give to your employee a cell phone mainly for business purposes, and he or she occasionally uses it for personal reasons,
• when a copying machine that is mostly used for business purposes (at least 85% of the time), is used occasionally by employees for personal reasons,
• you give to your employee non-cash gifts for holidays or birthdays that aren’t worth much,
• you give items like flowers or fruit during special circumstances (like illness, a family crisis, or to recognize outstanding performance),
• you provide your employee with group-term life insurance payable on the death of his or her spouse or dependent, and the payout is not more than $2,000,
• some meals,
• occasionally thrown parties or picnics for your employees and their guests,
• occasional tickets for theater or sporting events,
• certain transportation fare.

Examples of Non-Minimal Fringe Benefits

Here are some examples of benefits that you must include in your employees’ wages:

• season tickets to sporting or theatrical events,
• using an employer-provided car or other vehicle for commuting more than once a month,
• membership in a private country club or athletic facility, no matter how often your employee uses it,
• using employer-owned or leased facilities (like an apartment, hunting lodge, boat, etc.) for a weekend.

If a benefit doesn’t qualify as a small or infrequent benefit (for example, if it’s provided too often), then the entire value of the benefit must be included in the employee’s income.

In the meantime, if you encounter any issues or have any questions, we are here to help you with your accounting, QuickBooks, and tax needs. Click here to schedule an appointment.

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

If you are thinking of buying a new car in 2023 or later and you are considering a clean vehicle that runs on electricity, hydrogen, or natural gas, you should know that you may be eligible for a federal tax credit that could save you money.

The tax credit for new clean vehicles was introduced in 2021 as part of the American Clean Energy and Security Act and can be claimed for a clean vehicle placed in service on or after January 1st, 2023 and that you aquired for original use (meaning that nobody else used the car for any purposes). The credit is designed to encourage consumers to switch to more environmentally friendly modes of transportation and reduce greenhouse gas emissions.

How Do I Know If My Car Qualifies For The Credit?

Before purchasing a vehicle you should ask the dealer if the car you are interested in qualifies for the new clean vehicle credit and for what amount. The maximum credit amount that can be claimed for a clean vehicle is $7,500. Depending on the specifications of the vehicles, there might be some cars that qualify for less. Thus, you might want to look for a vehicle that qualifies for the maximum amount of the credit. Furthermore, when a dealer sells you a new clean vehicle, they need to provide you and the IRS a report; this report should include:

• • the buyer’s name and taxpayer identification number,
  • the dealer’s name and identification number,
  • date of the sale and the sales price,
  • the Vehicle Identification Number (VIN) of the vehicle, unless the vehicle doesn’t have a VIN according to U.S. Department of Transportation rules,
  • the battery capacity of the vehicle,
  • confirmation that the buyer is the first user of the vehicle,
  • the maximum clean vehicle credit that the buyer can claim for this vehicle,
  • a declaration under penalties of perjury from the seller,
  • the credit that the dealer provided to the buyer (this starts in 2024).

It Is Important To Know

• the credit is available for both individuals and businesses,
• you can not buy the vehicle for resale purposes,
• if you order a new clean vehicle in one year, but you receive it next year, you claim the credit when you place the vehicle in service, meaning in the year you receive it,
• the credit is not avilable for vehicles exceeding certain price levels (for example for vans, SUVs, pick-up trucks the MSRP of the vehicle can not exceed $80,000), make sure to check with your dealer if the car qualifies for the credit and for how much,
• the vehicle must be used primarily in the U.S.

What Are the Limits?

Before buying the vehicle it is important to review your tax return information. That is because you can claim the credit only if your modified adjusted gross income (AGI) is not more than:

• • $300,000 if you’re married and filing jointly or if you are filing as qualifying surviving spouse or qualifying widow(er),
  • $225,000 if you are filling as head of a household,
  • $150,000 for everyone else.

You can use your modified AGI from either the year you get the vehicle or the previous year, whichever is lower. If your modified AGI is below the limit in one of these two years, you can claim the credit. However, the credit is nonrefundable. This means you can’t get back more in credit than you owe in taxes. As an individual, you can’t carry over any excess credit to future tax years. If the credit is claimed for a business on Form 3800 General Business Credit, it follows the carry back and carry forward rules of this form.

You should check the IRS’ website for any updates or changes to the rules for the new clean vehicle credit.

Taxes are complicated, especially if you have a business. If you need help with your business books, tax planning and filing your taxes, we are here to help. Click here to schedule an appointment.

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

If you run a business that sells goods or services, you may need to collect and pay sales tax to your local tax authorities. Sales tax is a percentage of the price of the goods or services that you charge to your customers. In this blog post, we will show you how to manage sales tax payments in QuickBooks Online.

Set Up Automated Sales Tax in QuickBooks Online

To use the sales tax feature, you need to turn it on in the settings and enter some basic information about your business, such as your tax agency, filing frequency, and start date.

• QuickBooks calculates the total sales tax for each transaction based on three factors:
• the tax exemption status of your customer,
• the locations where you sell and ship your products or services,
• the sales tax category of your product or service.

In other words, it takes into account who you’re selling to, where you’re selling and shipping to, and what kind of product or service you’re providing. This ensures that the correct amount of sales tax is applied to each sale. In some states sellers are required to charge tax depending on their business location, but QuickBooks should be able to handle this situation as well.

• QuickBooks Online is a tool that helps you manage sales tax in accordance with your state’s tax laws. It can also handle sales tax for transactions outside your state by allowing you to add other tax agencies. There are two methods to configure the locations where you collect sales tax:
  • if you’re new to QuickBooks, you can set up the locations where you charge sales tax for the first time,
  • if you’re currently using manual sales tax, you can check if it’s possible to switch to the new automated sales tax system.
• When you are ready, you have the option to set up sales tax categories for the items you sell. This feature in QuickBooks helps determine the appropriate amount of sales tax to apply based on the nature of the item or the location of the sale.
• If you’re delivering goods or providing services at your customer’s location, the tax rates might vary. Some customers, such as churches, schools, and non-profit organizations, may not need to pay sales tax. It’s important to keep accurate records of your customers’ tax status, billing address, and delivery address. You can verify this information in QuickBooks.

Sales Tax Feature

First, review your taxes in detail to understand what you owe and why. This ensures everything is correct before you submit and pay your sales tax return.

Once you have set up the sales tax feature, you can start recording sales tax on your invoices and receipts. QuickBooks Online will automatically apply the correct sales tax rate to each transaction, based on the information you entered in the settings, in the costumer details and the details of the transaction. You can also adjust the sales tax amount manually if needed.

To pay your sales tax to your tax agency, you need to file a sales tax return in QuickBooks Online. This is a summary of your sales tax activity for a specific period, such as a month or a quarter. You can view your sales tax return in the Sales Tax Center, which shows you how much sales tax you have collected, how much you owe, and when your next payment is due. You can also see a breakdown of your sales tax by jurisdiction, product category, and customer.

To file your sales tax return, you need to review the information in the Sales Tax Center and make sure it matches your records. You can also make any adjustments or corrections if needed.

By using QuickBooks Online to manage your sales tax payments, you can save time and avoid errors. QuickBooks Online will do the math for you and keep track of your sales tax obligations. You can also access your sales tax data anytime, anywhere, from any device.

We hope this blog helped you to understand how this feature works.

In the meantime, we are here to help you with your accounting, QuickBooks, and tax needs. Click here to schedule an appointment.

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