Business Tax Questions

 You can claim startup tax deductions for eligible expenses

• Startup costs are amounts you have paid or incurred while creating your business or even in investigating the creation your business. 

Your income is taxable even if you reinvest it into your business

• Any profit your business makes each year will be taxable regardless of whether you withdraw it or reinvest it into growing your business. 
• However, you will want to keep this startup business tax tip in mind — any deductible business expenses can be used to directly offset that income.

You will be subject to self-employment tax

• Another tax consideration when starting a business is self-employment tax. Your net profit from your business will be subject to this additional tax. Self-employement tax pays for contributions to both social security and Medicare. 
• Self-employment tax is imposed in addition to income tax, but you can deduct half of your self-employment tax as an adjustment to income.
• If you choose to put your small business into a corporation you will not be subject to self-employment tax on your earnings. However, you will then be subject to payroll taxes as shareholders who perform services for their corporations are required to be paid Form W-2 wages subject to social security and Medicare withholding.

You will be required to make quarterly estimated payments

• When you are self-employed and starting a business, taxes are 100% on your own. Most self-employed taxpayers satisfy their tax payment requirements by making estimated tax payments quarterly online or via the mail.
• Those that process payroll will usually satisfy their tax liability through payroll deductions.

You will be subject to new business tax scrutiny

• Unfortunately, being self-employed will be in one of the IRS’ favorite audit target groups. 
• Though being audited does not mean you’re in trouble unless you’ve actually done something wrong, it is best for you to always be prepared for the possibility. 
• In particular, you should carefully record your income and expenses in order to claim the full amount of the deductions to which you are entitled.
• Certain types of expenses, such as automobile, travel, entertainment, meals, and office-at-home expenses, require special attention because they are subject to special record keeping requirements and/or limitations on deductibility.

Based on the future you envision for your company, you’ll want to choose the business structure that provides you with the best legal protection and least amount of tax responsibilities for your business type. d

Most small businesses start as a sole proprietorship or limited liability company (LLC).

• Sole proprietorship, simplest option and most popular is owned entirely by you with no distinction between yourself and the business, so you’re taxed at the personal level. That makes you responsible for all debts and liabilities of the company.
• Limited liability company (LLC) gives owners the legal protection that comes with a corporation, while also offering the attractive tax regulations of a partnership. All profits and losses are attributed to each owner-member of the company, and you will report all income on your personal tax return.
• Corporations are more complex with greater reporting and tax implications; however, it operates as an independent entity, which gives you the greatest amount of personal protection for debts, liabilities, and actions of the business.
• S corporation (S corp) offers you all the same liability protection, but you will only be taxed on personal income you elect to take out of the business. 

You can deduct part of the self-employment tax you paid as an adjustment to income. So, you can claim the deduction even if you do not itemize deductions. 

• Self-employed health insurance deduction: This applies to health insurance premiums paid by self-employed individuals. If you are self-employed, you can deduct 100% of health insurance costs as an adjustment to your income for these people: Yourself, Your spouse, Your dependents, Your children under age 27 at the end of the tax year
• Self-employment retirement deductions You can deduct your contributions to a retirement plan as an adjustment to income. Plans include: SEPs, SIMPLEs,  Qualified plan — defined-contribution plan or defined-benefit plan

• SEP: Are one option for funding future retirement benefits for you and your employees. 

               You will own and control the SEP-IRA. You can then deduct allowable contributions

               as an adjustment to your gross income. 

• SEP-IRA account must be set up by or for each eligible employee. 
• SEP contributions

              You can make contributions to a SEP at any time up to the due date of your return,     

              including extensions. 

• SEP deductions You can deduct contributions you make to a SEP-IRA for your employees up to the deduction limit.
• SIMPLE plans It is available to employers or self-employed taxpayers who do not have a qualified retirement plan. You can set up a SIMPLE plan if you have 100 or fewer employees. 

              SIMPLE can be set up as a SIMPLE IRA or a SIMPLE 401k.

              Employers who sponsor a SIMPLE IRA plan must match or make a required 

              contribution each year. 

• SIMPLE contributions You must make matching contributions by your return’s due date, including extensions.

              You must match 1% to 3% of the employee’s compensation. The matching       

              contribution percentage paid by you also applies to your own contribution. 

• The determination is based on whether the person for whom the services are performed has the right to control how the worker performs the services. It is not based merely on how the worker is paid, how often the worker is paid, or whether the work is part-time or full-time.
• There are three basic categories of factors that are relevant to determining a worker's classification:

            · Behavioral control (whether there is a right to direct or control how the worker 

              does the work),

            · Financial control (whether there is a right to direct or control the business part of 

              the work), and

            · Relationship of the parties (how the business and worker perceive the     

              relationship).

In general, if you receive income from the rental of a dwelling unit, such as a house, apartment, or duplex, you can deduct certain expenses.

There are several types of limitations that may apply.

Rental of a dwelling unit (for profit):

• Renting to relatives may be considered personal use even if they are paying you rent unless the family member uses the dwelling unit as his or her main home and pays rent equivalent to the fair rental value.

Passive activity losses:

• In general, you can deduct passive activity losses to the extent of passive activity income (a limit on loss deductions).
• You carry any excess loss forward to the following year or years until used.

Simplified Option:

• Qualifying taxpayers may use a rate ($5 per square foot limited to 300 square feet) to compute the business-use-of-the-home deduction. 
• This option, used instead of determining actual expenses, has the advantage of reducing your recordkeeping burden. 
• In addition, under this optional method, you can still deduct business expenses unrelated to qualified business use of the home for that taxable year, such as advertising, wages and supplies.