A potential client contacted me to ask if I would be willing to prepare her sales tax return for her. I've prepared sales tax returns for over 20 years so this should be no problem. "What have kind of product have you been collecting sales tax on?" I asked.
"Horse board".
"Are you sure about this?"
She sounded pretty sure. So I decided to investigate myself.
She lives in New York State, so I contacted the New York State Department of Taxation and Finance. Yes, I was told, horse boarding in New York State is subject to sales tax. The customer service rep there referred me to their tax regulations and several tax memos and advisories. Further digging uncovered the NY State Horse Council, which has website including an index of legal issues affecting horseman, including a list of what is and is not subject to sales tax for commercial horse boarding operations.
Sales tax is regulated by individual states, or in some cases, individual counties or cities. But there are some general concepts. Generally, all tangible personal property is taxable except with exemptions. So if you are a farrier and also sell hoof supplements to your customers, in most states you would be required to collect and remit sales tax on the supplements you sell. In many states, sales tax should be collected and remitted for sales of horses - a subject to be discussed in a future newsletter.
The difficulty sometimes becomes defining what tangible personal property is. In NY State, horse boarding is compared to leasing storage space. It's the stall itself that is considered to be the primary item in a boarding transaction, so sales tax is assessed on that tangible personal property. If in a sales tax audit, you feel that sales tax should not be assessed on a certain type of personal tangible property, the burden of proof is on you -the taxpayer- to prove this is the case. Conversely, generally only certain services are taxable. In a sales tax audit, the burden of proof is on the auditor to make the case that the services at issue are subject to sales tax.
Sales tax audits are much more common than IRS audits of income tax returns. Some states have no statute of limitations for examination of prior years' sales tax returns and penalty and interest can amount to up to 60% of the tax.
What can you do to find out more about the possibility of sales tax liability for your horse business?
1. Contact your state Department of Revenue. Ask for information regarding what goods and services are taxable in your state.
2. Contact your state Farm Bureau, Horse Council, etc. for more information. If you feel that you may have potential sales tax liability, ask them to recommend an attorney with expertise in this area.
3. Contact a CPA firm or attorney that deals only with matters of sales tax. Sometimes, this is less expensive than people fear and gets them a definitive and relatively quick answer. If you do need to collect sales tax, you will need to register with your state but speak with the attorney or CPA first. There could be serious tax consequences if you register and owe back taxes. Your attorney may be able to negotiate a settlement before you register. If you register first, the chances of negotiating a settlement is very small.
4. If you don't use one already, consider putting your financial data into an accounting software program like QuickBooks. You can create invoices with sales tax included and track and remit sales tax liabilities relatively easily using QuickBooks.
Remember that each state is different. Find someone that is familiar with the sales tax regulations that affect you. A little attention now may save you time and money in the future.
Wednesday, May 4, 2011
Wednesday, February 16, 2011
Famous Last Words... My tax situation is pretty simple
Several years ago, I met a woman who was involved in carriage driving. I remarked on how well behaved her horse was and asked who trained her. The woman said that she got the horse from a family who bought the filly as a yearling and trained her themselves. They had never owned a horse before and decided that as a family project, they would buy a horse and train it to drive. Their only resource for how to train the filly was a book that they bought on raising and training horses.
A lot of you who are reading this are probably cringing, thinking of all the ways this experience could have gone terribly wrong. 99% of the time, it wouldn't have a happy ending. Horses are complicated and some of the time most of us need assistance from professionals who know how to do the job right.
Most of us wouldn't try to do electrical wiring or writing our own legal contracts. So why do so many people do their own tax returns?
It isn't uncommon when I first meet a prospective client or speak with an attendee at a seminar that they tell me that their tax situation is pretty uncomplicated. But when we go on to discuss the situation further, it can prove to be anything but straightforward. As I start to explain the intricacies of some of their tax issues, I hear "How am I supposed to know that?" or "This is more complicated than I thought".
Quoting U.S. Representative Spencer Bachus from AL:
"With its 6,000 pages and 500 million words, the complexity of our tax code is the prime source of frustration and anger felt by millions of Americans toward their government."
CPAs and Enrolled Agents spend a significant portion of time staying informed about current tax law. How can someone who only prepares one tax return once a year be aware of all of the issues that can affect their tax situation?
Here is a sample of questions that I've heard recently:
Personal:
1. Is the scholarship I received taxable?
2. How much of my Social Security benefits are taxable?
3. I surrendered my life insurance policy for cash. Does that affect my taxes?
Business:
1. If I give my employees gifts for Christmas, is the cost deductible?
2. If I am a one person S Corporation, can I set up a health insurance plan for myself that is non-taxable to me and deductible for the corporation?
3. What is a Section 179 deduction?
If something is wrong on your tax return, it may be a red flag to the IRS which can trigger an audit or it may increase the amount of taxes you pay or decrease the amount of your refund. But it's not something you realize at the time. It can take years to discover the problem which could translate into amending the tax returns for all the years involved.
There are certainly people other than CPAs and Enrolled Agents who can correctly prepare a return. And there are tax returns that are fairly simple and straightforward for the average taxpayer to prepare. How do you know if that's your situation?
1. You can hire a tax preparer to review your prior year return to see if you have any potential problems.
2. You can hire a tax preparer to prepare your return this year. Compare it to what you did last year (assuming your situation has not changed significantly) and see what the differences are.
3. Schedule a consultation with a tax preparer and explain your business or personal situation. They may be willing to point you toward tax issues specific to your situation.
Tax returns done wrong can be a costly problem to remedy. Get expert advice and then decide whether preparing your tax return yourself is the best alternative for you.
A lot of you who are reading this are probably cringing, thinking of all the ways this experience could have gone terribly wrong. 99% of the time, it wouldn't have a happy ending. Horses are complicated and some of the time most of us need assistance from professionals who know how to do the job right.
Most of us wouldn't try to do electrical wiring or writing our own legal contracts. So why do so many people do their own tax returns?
It isn't uncommon when I first meet a prospective client or speak with an attendee at a seminar that they tell me that their tax situation is pretty uncomplicated. But when we go on to discuss the situation further, it can prove to be anything but straightforward. As I start to explain the intricacies of some of their tax issues, I hear "How am I supposed to know that?" or "This is more complicated than I thought".
Quoting U.S. Representative Spencer Bachus from AL:
"With its 6,000 pages and 500 million words, the complexity of our tax code is the prime source of frustration and anger felt by millions of Americans toward their government."
CPAs and Enrolled Agents spend a significant portion of time staying informed about current tax law. How can someone who only prepares one tax return once a year be aware of all of the issues that can affect their tax situation?
Here is a sample of questions that I've heard recently:
Personal:
1. Is the scholarship I received taxable?
2. How much of my Social Security benefits are taxable?
3. I surrendered my life insurance policy for cash. Does that affect my taxes?
Business:
1. If I give my employees gifts for Christmas, is the cost deductible?
2. If I am a one person S Corporation, can I set up a health insurance plan for myself that is non-taxable to me and deductible for the corporation?
3. What is a Section 179 deduction?
If something is wrong on your tax return, it may be a red flag to the IRS which can trigger an audit or it may increase the amount of taxes you pay or decrease the amount of your refund. But it's not something you realize at the time. It can take years to discover the problem which could translate into amending the tax returns for all the years involved.
There are certainly people other than CPAs and Enrolled Agents who can correctly prepare a return. And there are tax returns that are fairly simple and straightforward for the average taxpayer to prepare. How do you know if that's your situation?
1. You can hire a tax preparer to review your prior year return to see if you have any potential problems.
2. You can hire a tax preparer to prepare your return this year. Compare it to what you did last year (assuming your situation has not changed significantly) and see what the differences are.
3. Schedule a consultation with a tax preparer and explain your business or personal situation. They may be willing to point you toward tax issues specific to your situation.
Tax returns done wrong can be a costly problem to remedy. Get expert advice and then decide whether preparing your tax return yourself is the best alternative for you.
Tuesday, January 18, 2011
Equine Accounting: Qualified Joint Venture for Husband and Wife Operations
At many horse farms, the revenue from the farm represents the primary source of income for both the husband and the wife. In order to receive credit for their income for purposes of calculating future Social Security benefits, many couples have resorted to changing their form of taxable entity from sole proprietorship to a partnership or S corporation. This results in an initial expense for legal costs as well as additional fees for preparation of more complication partnership or S corporation returns each year. However, there is another less expensive and less complicated option: the qualified joint venture.
Beginning in 2007, an unincorporated business that is jointly owned by a married couple may elect to be treated as a qualified joint venture. The couple must file a joint tax return. Each spouse must "materially" participate in the business and the business may not be owned in the name of a "state law entity" - an LLC or LLP.
Each spouse must report their share of the all of the business income and deductions and each will receive credit for purposes of Social Security benefits calculation. The division of income and deductions between the couple should be based on each spouse's interest in the business. Generally, this can be calculated based on time and/or funds invested in the business. So each spouse would include in their jointly filed Form 1040 a separate Schedule C or Schedule F, with their share of income and expense as well as a separate Schedule SE to report self-employment tax. In most cases, this division of income does not increase the amount of tax due.
If, however; Spouse 1 substantially controls the management of the business and Spouse 2 is under the "direction and control" of Spouse 1, an employment type of relationship exists and would not meet the criteria of a qualified joint venture. Spouse 2 should be considered an employee and is subject to income tax and FICA (Social Security and Medicare) withholding. As the employer, Spouse 1 is responsible for FICA taxes but not Federal Unemployment Tax.
Why is this important to know? If you and your spouse are planning to spend a considerable percentage of your working life on the farm, you need to be sure that each spouse is accumulating wages that are included in calculating future Social Security benefits. We don't like to think about the possibility of losing our spouse but especially in the case of a family with children, it's important to plan in advance to minimize the economic impact of the death of a spouse.
Beginning in 2007, an unincorporated business that is jointly owned by a married couple may elect to be treated as a qualified joint venture. The couple must file a joint tax return. Each spouse must "materially" participate in the business and the business may not be owned in the name of a "state law entity" - an LLC or LLP.
Each spouse must report their share of the all of the business income and deductions and each will receive credit for purposes of Social Security benefits calculation. The division of income and deductions between the couple should be based on each spouse's interest in the business. Generally, this can be calculated based on time and/or funds invested in the business. So each spouse would include in their jointly filed Form 1040 a separate Schedule C or Schedule F, with their share of income and expense as well as a separate Schedule SE to report self-employment tax. In most cases, this division of income does not increase the amount of tax due.
If, however; Spouse 1 substantially controls the management of the business and Spouse 2 is under the "direction and control" of Spouse 1, an employment type of relationship exists and would not meet the criteria of a qualified joint venture. Spouse 2 should be considered an employee and is subject to income tax and FICA (Social Security and Medicare) withholding. As the employer, Spouse 1 is responsible for FICA taxes but not Federal Unemployment Tax.
Why is this important to know? If you and your spouse are planning to spend a considerable percentage of your working life on the farm, you need to be sure that each spouse is accumulating wages that are included in calculating future Social Security benefits. We don't like to think about the possibility of losing our spouse but especially in the case of a family with children, it's important to plan in advance to minimize the economic impact of the death of a spouse.
Tuesday, December 21, 2010
Equine Accounting: Assistance from the IRS to pay for Child Care
Whether you work for yourself or someone else, worrying about care of your children while you are at work can cause both financial and emotional stress. Well relax; the IRS is here to help. The Child and Dependent Care Credit is available to many taxpayers for care incurred during vacations and throughout the year. For parents who are working (or looking for work) and arrange for day care for their children under thirteen years of age, this credit may provide some reimbursement toward the cost of this care.
What you need to know:
•You may use up to $3,000 of the unreimbursed expenses paid in a year for one qualifying individual or $6,000 for two or more qualifying individuals to calculate the credit.
•The range of the actual credit is between 20 and 35 percent of your qualifying expenses, depending upon your income. Unlike many other deductions and credits, there is no upper limit on the amount of your adjusted gross income.
•You (and your spouse if filing jointly) must have earned income during the year.
•Both in-home sitters and daycare facilities outside the home qualify you for some tax benefit if you are eligible for the credit.
•The cost of day camp may count as an expense towards the credit. However, expenses for overnight camps do not qualify.
•When you submit your tax return, you must complete IRS Form 2441 and provide the name and tax identification number for the individual providing the care.
•This is a tax CREDIT, which directly reduces the amount of tax due on your return. However, it is a nonrefundable tax credit - which means that it cannot reduce the amount of tax due to less than zero.
Please see IRS Publication 503 (http://www.irs.gov/pub/irs-pdf/p503.pdf) for more information.
What you need to know:
•You may use up to $3,000 of the unreimbursed expenses paid in a year for one qualifying individual or $6,000 for two or more qualifying individuals to calculate the credit.
•The range of the actual credit is between 20 and 35 percent of your qualifying expenses, depending upon your income. Unlike many other deductions and credits, there is no upper limit on the amount of your adjusted gross income.
•You (and your spouse if filing jointly) must have earned income during the year.
•Both in-home sitters and daycare facilities outside the home qualify you for some tax benefit if you are eligible for the credit.
•The cost of day camp may count as an expense towards the credit. However, expenses for overnight camps do not qualify.
•When you submit your tax return, you must complete IRS Form 2441 and provide the name and tax identification number for the individual providing the care.
•This is a tax CREDIT, which directly reduces the amount of tax due on your return. However, it is a nonrefundable tax credit - which means that it cannot reduce the amount of tax due to less than zero.
Please see IRS Publication 503 (http://www.irs.gov/pub/irs-pdf/p503.pdf) for more information.
Reflections on Equine Affaire MA
In my opinion, this year Equine Affaire attracted an even bigger crowd than in recent past years - this in a time when the sentences in many news broadcasts start with phrases such as "Due to the recession", "As a result of the poor economy", etc. And people weren't just there - they were buying! How did they do it? What is it about Equine Affaire that attracted you to attend?
This month, rather than discussing an accounting or tax topic related to horse businesses, I want to get down to basics. Equine Affaire has found a way to attract vendors, presenters and consumers in droves. Rather than accept the premise that a poor economy is an insurmountable obstacle to a successful event, they just "made it work".
Do you view the current economy as an opportunity? Demand still exists in the horse industry but it might no longer be for the goods or services upon which your business is currently focused. Has your business kept pace with the changing economy? Is there something you can do to meet these new demands?
There will be a wide variety of options available to you, based on your individual situation. But you need to evaluate which ones are best for you. Do some research. Talk to your customers to find out what they need, not what you think they need. Do they have an unmet need that you can satisfy? Look at businesses that are successful now. What are they doing right?
Identify your target market? Who is your ideal customer and how can you market to reach them?
When you have a defined concept of what needs to be done in your business in order to change to adapt to current conditions, create a business plan. Be as detailed as possible with benchmarks that you hope to reach within a specific timeframe so you have a method to evaluate your progress. Keep detailed financial records so you have solid numbers, rather than using impressions and feelings as guideposts.
I know that when times are tough, it feels pretty overwhelming to consider making big changes that involve a lot more commitment and energy on your part. But the payoff will make it all worthwhile. You know owners of horse-related businesses who were "making it work" for them so it is possible. We can't all be Equine Affaires. But maybe you can be.
This month, rather than discussing an accounting or tax topic related to horse businesses, I want to get down to basics. Equine Affaire has found a way to attract vendors, presenters and consumers in droves. Rather than accept the premise that a poor economy is an insurmountable obstacle to a successful event, they just "made it work".
Do you view the current economy as an opportunity? Demand still exists in the horse industry but it might no longer be for the goods or services upon which your business is currently focused. Has your business kept pace with the changing economy? Is there something you can do to meet these new demands?
There will be a wide variety of options available to you, based on your individual situation. But you need to evaluate which ones are best for you. Do some research. Talk to your customers to find out what they need, not what you think they need. Do they have an unmet need that you can satisfy? Look at businesses that are successful now. What are they doing right?
Identify your target market? Who is your ideal customer and how can you market to reach them?
When you have a defined concept of what needs to be done in your business in order to change to adapt to current conditions, create a business plan. Be as detailed as possible with benchmarks that you hope to reach within a specific timeframe so you have a method to evaluate your progress. Keep detailed financial records so you have solid numbers, rather than using impressions and feelings as guideposts.
I know that when times are tough, it feels pretty overwhelming to consider making big changes that involve a lot more commitment and energy on your part. But the payoff will make it all worthwhile. You know owners of horse-related businesses who were "making it work" for them so it is possible. We can't all be Equine Affaires. But maybe you can be.
Friday, November 12, 2010
Equine Accounting: On the road again...deductible expenses from horse show travel
With show season behind us for most parts of the country, it's a good time to discuss which expenses which are incurred while you are showing "away from home" are deductible. This will help you when getting information together for your current year tax return as well as preparing for next season's expenses.
In general travel expenses are deductible if they are directly related to conducting your business. "Ordinary and necessary" (as defined by the IRS: an ordinary expense is an expense that is common or accepted in the taxpayer's trade or business; a necessary expense is one that is appropriate for the business) travel expenses such as transportation, lodging and incidental travel costs, such as laundry, tips etc. would be deductible if supported by documentation such as receipts. Be sure to document the business purpose of each expense.
The cost of meals consumed on a business trip are deductible, subject to a 50% limit. Again,only the ordinary and necessary costs of meals are deductible. Facts and circumstances dictate what is considered ordinary and necessary but keep in mind the ultimate determination is made by the IRS (if your are audited).
If you engage in both personal and business activities while on your trip, be sure to document in detail which costs are associated with your business. If you travel to a location for primarily personal purposes and while there, transact business, the costs of travelling to and from the location would NOT be deductible. But if you travel for primarily business purposes, then your costs of travelling to and from the location would be deductible. You would allocate the costs incurred while there between personal and business and only the business portion would be deductible. If your transportation costs for showing are significant, the tax savings of determining those costs to be deductible could b substantial.
If anyone else (including your spouse) accompanies you on your business trip, in order for those expenses to be deductible, the person accompanying you must work for your business, their presence must serve a bona fide business purpose and the costs would have been deductible had they been incurred by someone who was not accompanying you.
There MUST be a business purpose for showing, in order for the related expenses to be tax deductible. Don't rely on theory and generalities to prove your point to the IRS if you are audited. At every show, keep a record of who you coached, what potential clients you met, the sales horses you rode, etc. If you need to accumulate certain scores or ribbons in order to be certified as a judge/instructor/etc., document which shows and which classes you entered in order to fulfill your requirement. You can use this information not just in case of an audit but in planning for the same show next year, to send out marketing materials and to track fulfillment of any continuing education requirements.
Showing can be a great marketing tool and a legitimate tax deduction. Keep detailed records and follow IRS regulations. Best wishes at the show!
In general travel expenses are deductible if they are directly related to conducting your business. "Ordinary and necessary" (as defined by the IRS: an ordinary expense is an expense that is common or accepted in the taxpayer's trade or business; a necessary expense is one that is appropriate for the business) travel expenses such as transportation, lodging and incidental travel costs, such as laundry, tips etc. would be deductible if supported by documentation such as receipts. Be sure to document the business purpose of each expense.
The cost of meals consumed on a business trip are deductible, subject to a 50% limit. Again,only the ordinary and necessary costs of meals are deductible. Facts and circumstances dictate what is considered ordinary and necessary but keep in mind the ultimate determination is made by the IRS (if your are audited).
If you engage in both personal and business activities while on your trip, be sure to document in detail which costs are associated with your business. If you travel to a location for primarily personal purposes and while there, transact business, the costs of travelling to and from the location would NOT be deductible. But if you travel for primarily business purposes, then your costs of travelling to and from the location would be deductible. You would allocate the costs incurred while there between personal and business and only the business portion would be deductible. If your transportation costs for showing are significant, the tax savings of determining those costs to be deductible could b substantial.
If anyone else (including your spouse) accompanies you on your business trip, in order for those expenses to be deductible, the person accompanying you must work for your business, their presence must serve a bona fide business purpose and the costs would have been deductible had they been incurred by someone who was not accompanying you.
There MUST be a business purpose for showing, in order for the related expenses to be tax deductible. Don't rely on theory and generalities to prove your point to the IRS if you are audited. At every show, keep a record of who you coached, what potential clients you met, the sales horses you rode, etc. If you need to accumulate certain scores or ribbons in order to be certified as a judge/instructor/etc., document which shows and which classes you entered in order to fulfill your requirement. You can use this information not just in case of an audit but in planning for the same show next year, to send out marketing materials and to track fulfillment of any continuing education requirements.
Showing can be a great marketing tool and a legitimate tax deduction. Keep detailed records and follow IRS regulations. Best wishes at the show!
Equine Accounting: Entity ABCs
SP, LLC and Subchapter S - what does it all mean and why do you need to know? These are several of the different types of legal entities that businesses adopt, which allow the business to take on an existence apart from it's owners - though the owners still control the business.
The type of entity that you choose will affect your personal responsibility for the liabilities of the business. A lawyer can best advise you as to which entity would be the optimum solution for your personal situation.
But the choice of legal entity also affects your personal income tax liability. In order to best utilize the tax advantages of each type of entity, you need to understand how the incomes goes from your business cash register through your tax return and into your pocket.
Flow through entity types: An entity is considered a "Flow through" type because the income of the entity is treated as the income of the owners. For Federal tax purposes, a flow through entity avoids double taxation because only owners themselves are taxed on the revenue. Net Income is divided among the owners and each owner pays taxes on that income as part of their personal income tax return. Generally, losses from the business can be applied against income from other sources (investment income, salary of spouse, etc), which will decrease the individual tax liability. Whether these losses can be applied against other income is subject to regulations on hobby loss, tax shelters and material participation, among others.
Types of flow through entities include:
1. Sole Proprietorship: This is the simplest form of doing business for tax purposes. a business operated by one individual owner (or married couple who jointly own and operate a business may elect for each spouse to be treated as a sole proprietor) is a sole proprietorship. You file a Schedule C or F (Farm income) as a schedule of your personal Form 1040 and the business is not required to file a separate tax return.
2. Partnership: When a business is operated by two or more owners (in this type of entity, owners are known as "partners"), with each owner contributing to the business and each sharing in the profits and losses of the business, the owners may elect the partnership as the legal form of entity for that business. The partnership is required to file a tax return (Form 1065) but the form is informational only. There is no tax liability for the business itself.
3. Subchapter S Corporation: A business with 100 or fewer ownrs (in this type of entity, owners are known as "Shareholders") may elect to be a Subchapter S Corporation. As a type of flow through entity, income or loss of the business is included as part of the personal income of each shareholder and except for under very limited circumstances, the business has no income tax liability. The corporation is required to file a tax return (Form 1120S) but the form is for informational purposes only.
4. LLC: The LLC (Limited Liability Company) is a legal entity but is not recognized by the IRS for tax purposes. So a business organized as an LLC would be required to elet to be taxed otherwise - as a Sole Proprietorship, Partnership or C Corporation. Owners in an LLC are known as "Members".
Non flow through entity type:
C Corporation: This probably the most complex form of doing business. A C Corporation is a separate taxable entity from its owners. It not only files a separate tax return but has its own tax liability. Profits by the business are taxed on a corporate level and if distributed to the owners, taxed again on an individual level.
Some important considerations when determining the best type of entity for your business would be the extent to which you need to limit legal liability and the future plans for your business in years and generations to come. In some cases, relief from personal legal liability has more value to the owner than simplicity of operation or tax benefits. Seek the advice of an attorney when making this important decision. Be sure you understand not only the benefits but the future responsibilities involved in your choice.
The type of entity that you choose will affect your personal responsibility for the liabilities of the business. A lawyer can best advise you as to which entity would be the optimum solution for your personal situation.
But the choice of legal entity also affects your personal income tax liability. In order to best utilize the tax advantages of each type of entity, you need to understand how the incomes goes from your business cash register through your tax return and into your pocket.
Flow through entity types: An entity is considered a "Flow through" type because the income of the entity is treated as the income of the owners. For Federal tax purposes, a flow through entity avoids double taxation because only owners themselves are taxed on the revenue. Net Income is divided among the owners and each owner pays taxes on that income as part of their personal income tax return. Generally, losses from the business can be applied against income from other sources (investment income, salary of spouse, etc), which will decrease the individual tax liability. Whether these losses can be applied against other income is subject to regulations on hobby loss, tax shelters and material participation, among others.
Types of flow through entities include:
1. Sole Proprietorship: This is the simplest form of doing business for tax purposes. a business operated by one individual owner (or married couple who jointly own and operate a business may elect for each spouse to be treated as a sole proprietor) is a sole proprietorship. You file a Schedule C or F (Farm income) as a schedule of your personal Form 1040 and the business is not required to file a separate tax return.
2. Partnership: When a business is operated by two or more owners (in this type of entity, owners are known as "partners"), with each owner contributing to the business and each sharing in the profits and losses of the business, the owners may elect the partnership as the legal form of entity for that business. The partnership is required to file a tax return (Form 1065) but the form is informational only. There is no tax liability for the business itself.
3. Subchapter S Corporation: A business with 100 or fewer ownrs (in this type of entity, owners are known as "Shareholders") may elect to be a Subchapter S Corporation. As a type of flow through entity, income or loss of the business is included as part of the personal income of each shareholder and except for under very limited circumstances, the business has no income tax liability. The corporation is required to file a tax return (Form 1120S) but the form is for informational purposes only.
4. LLC: The LLC (Limited Liability Company) is a legal entity but is not recognized by the IRS for tax purposes. So a business organized as an LLC would be required to elet to be taxed otherwise - as a Sole Proprietorship, Partnership or C Corporation. Owners in an LLC are known as "Members".
Non flow through entity type:
C Corporation: This probably the most complex form of doing business. A C Corporation is a separate taxable entity from its owners. It not only files a separate tax return but has its own tax liability. Profits by the business are taxed on a corporate level and if distributed to the owners, taxed again on an individual level.
Some important considerations when determining the best type of entity for your business would be the extent to which you need to limit legal liability and the future plans for your business in years and generations to come. In some cases, relief from personal legal liability has more value to the owner than simplicity of operation or tax benefits. Seek the advice of an attorney when making this important decision. Be sure you understand not only the benefits but the future responsibilities involved in your choice.
Subscribe to:
Posts (Atom)