Tax Basics for Small Business

Transcription

1 Tax Basics for Small Business 19 th Edition Attorney Frederick W. Daily

2 Introduction... 1 Chapter 1 Tax Basics... 3 Learning Objectives... 3 Introduction... 3 How Tax Law Is Made and Administered: The Short Course... 3 Where to Find Tax Rules... 4 Marginal Tax Rate and Tax Brackets... 4 What Is And Isn t Income... 6 Things That Count as Taxable Income... 6 Exclusions: Things That Aren t Income... 7 A Word About Tax Shelters... 8 The Alternative Minimum Tax (AMT)... 8 Review Questions Review Answers Chapter 2 Deductible Business Expenses Learning Objectives Introduction What Is a Deductible Business Expense? Ordinary and Necessary Not Extravagant Personal Expenses Is It a Current or Future Year Expense? Top Deductions for Businesses Vehicles Equipment and Furniture Inventory Home Office Retirement Account Deposits Hiring Help Manufacturers Rent Costs of Going Into Business Accounting, Legal, and Other Professional Fees Office Supplies Entertainment and Meals: The 50% Rule Gifts to Clients and Customers Travel Moving Expenses Health Insurance Disability and Sick Pay Education Expenses Interest Bad Debts Charitable Contributions Taxes Advertising and Promotion Business Licenses and Permits Repairs and Improvements Casualty Losses Business Insurance Research and Development Credits Domestic Production... 27

3 The General Business Credit Vehicle Expenses Standard Mileage Method Actual Expense Method Commuting Costs Special C Corporation Vehicle Rules Other Vehicle-Related Deduction Opportunities How and Where to Claim Expense Deductions Review Questions Review Answers Chapter 3 Writing Off Long-Term Business Assets Learning Objectives Introduction Tax Treatment of Business Costs Current Expenses Capital Expenses Section 179: Expensing Business Assets Ineligible Assets % Business Use Requirement Listed Property Special Rules Earned Income and Carryforward Spending Cap Married Couples Multiple Owners Passive Investors Recapture Trade-Ins Combining Section 179 and Depreciation Deductions Items Bought on Credit Depreciating Business Assets What Is Depreciation? Depreciation Categories Methods of Depreciation Tax Rules for Business Vehicles First-Year Depreciation Rules How to Report Depreciation and Section 179 Deductions Inventory Tax Basis of Business Assets Purchased Items Cost Basis Items Received as a Gift Transferred Basis Items Received for Services Fair Market Value (FMV) Basis Items You Inherit Step-Up Basis Items Exchanged for Other Items Substituted Basis Items Exchanged for Items and Money Items Converted to Business Use Leasing Instead of Buying Vehicles Used for Business Leasing Your Assets to Your C Corporation When You Dispose of Business Assets: Depreciation Recapture Sale of Business Equipment Like-Kind Exchanges Destroyed or Stolen Assets Sale of Real Estate Tax Errors in Depreciation Review Questions Review Answers ii

4 Chapter 4 Bookkeeping and Accounting Learning Objectives Introduction Why You Need a Bookkeeping System Should You Hire a Bookkeeper? Bookkeeping Basics Manual Bookkeeping System Computerized Bookkeeping System What Kinds of Records to Keep Income Records Expense Records Asset Records How Long Records Should Be Kept Bookkeeping Methods of Tracking Income and Expenses Single-Entry System Double-Entry System Timing Methods of Accounting: Cash and Accrual Cash Method Accounting Accrual Method Accounting Hybrid and Special Accounting Methods Changing Accounting Methods Accounting Periods: Calendar Year or Fiscal Year Calendar Year Period Fiscal Year Period Short Tax Years Review Questions Review Answers Chapter 5 Business Losses and Failures Learning Objectives Introduction Unincorporated Business Losses Owners Operating Losses and Carryovers NOL Rules Investors and Capital Losses Additional Tax Rules for Losses Incorporated Business Losses Shareholder Losses C Corporation Operating Losses Review Questions Review Answers Chapter 6 Tax Concerns of Employers Learning Objectives Introduction Employer Identification Numbers What Are Payroll Taxes? Reporting and Depositing Payroll Taxes Payroll Tax Forms Personal Responsibility for Payroll Taxes If You Get Behind on Payroll Tax Payments Classifying Workers: Employee or Independent Contractor? Reporting Payments to Independent Contractors IRS Worker Classifications Misclassifying Employees as Independent Contractors How the IRS Finds Out Penalties for Misclassifying Workers iii

5 Avoiding Trouble with the IRS Asking the IRS to Classify Your Workers Appealing a Ruling That You Misclassified Workers IRS Filing and Payment Requirements for Employers Record Keeping for Your Workers Review Questions Review Answers Chapter 7 Sole Proprietorships Solos, Freelancers, and Independent Contractors Learning Objectives Introduction What It Means to Be a Solo From a Tax Perspective To Be or Not to Be A Solo Pros Cons Solo Income and Expenses Income Expenses Business Income Minus Expenses: What s Left Gets Taxed Solos Tax Forms: Schedule C Is Your Friend Schedule C (Schedule F for Agricultural Solos) Getting Real Simple With Schedule C-EZ Other Solo Tax Forms What If My Solo Biz Loses Money? How Solos Are Taxed Figuring the Self-Employment Tax Estimated Taxes: Pay as You Go How to Make Estimated Tax Payments Solos Hiring Help Record Keeping for Solos When a Solo Closes Up Shop Death of a Solo Outgrowing the Solo Review Questions Review Answers Chapter 8 C Corporations Learning Objectives Introduction Types of Corporations How C Corporations Are Taxed Double Taxation of Profits Corporate Operating Losses Tax Reporting for C Corporations Tax on Retained Earnings Less Common Taxes Tax Benefits of C Corporations Income Splitting More Fringe Benefits Corporate Business Losses Dividends Received From Other Corporations Charitable Contributions Incorporating Your Business Putting Cash Into a New Corporation Lending Money to Your New Corporation Putting Assets Into a New Corporation The Importance of Issuing Section 1244 Stock iv

6 The Section 1244 Corporate Resolution Claiming a Section 1244 Loss Taking Money Out of a C Corporation Compensation for Services Dividends Loans to Shareholders Leasing Assets to Your Corporation Selling Your Corporate Stock Tax Pitfalls of C Corporations Personal Holding Company Tax Accumulated Earnings Tax Corporate Alternative Minimum Tax Dissolving a C Corporation Tax Issues Upon Dissolution Reporting the Dissolution to the IRS Review Questions Review Answers Chapter 9 S Corporations Learning Objectives Introduction An Overview of S Corporations Should You Choose S Corporation Status? Qualifying for S Corporation Status S Corporation Disadvantages Tax Reporting for S Corporations How S Corporation Shareholders Are Taxed Profits Losses Social Security and Medicare Taxes Electing S Corporation Status Revoking S Corporation Status Dissolving an S Corporation Review Questions Review Answers Chapter 10 Partnerships Learning Objectives Introduction Partnership Tax Status Tax Reporting Annual Partnership Tax Returns Partner s Profit or Loss Statements (K-1) Partnership Federal Identification Number Tax Obligations of Partners Self-Employment Taxes Estimated Income Taxes Calculating and Reporting a Partner s Income Partnership Losses Partnership Contributions Keeping Track of Partners Contributions: Capital Accounts Adjustments to Partners Capital Accounts Partnership Liabilities Getting Money Out of a Partnership Taxation of Withdrawals Loans to Partners Partnership Expenses v

7 Selling or Transferring a Partnership Interest Selling Your Partnership Interest When the Partnership Buys Out a Partner Relief of Debt Phantom Income Date-of-Sale Adjustment Ending a Partnership Review Questions Review Answers Chapter 11 Limited Liability Companies Learning Objectives Introduction Taxes Federal Tax Reporting State Taxes Unequal Allocations of Profit and Loss Comparing LLCs With Other Entities Operating Your LLC Forming an LLC Converting a Business to an LLC LLC Members Rights Transferring Ownership Sale or Death Terminating an LLC Review Questions Review Answers Chapter 12 Qualified Personal Service Corporations Learning Objectives Introduction Qualified Personal Service Corporations IRS Tests for a QPSC QPSCs and Taxes Accounting Method Elections Section 1244 Stock Fringe Benefits Tax-Advantaged Retirement Plans Health and Life Insurance Benefits Other Fringe Benefits Transferring Shares Dissolving a QPSC Review Questions Review Answers Chapter 13 Family Businesses Learning Objectives Introduction The Legal Structure of a Family Business Income Splitting Lowers Taxes Legality of Hiring Your Kids Tax Benefits of Hiring Your Kids Making Your Kids Co-Owners Putting Older Parents on the Payroll A Spouse in the Business Letting Your Spouse Volunteer File Taxes as Co-Sole Proprietors Preserving a Family Business After Death Death and Taxes vi

8 Installment Plans for Estate Taxes Transferring a Business Before Death Review Questions Review Answers Chapter 14 Home-Based Businesses Learning Objectives Introduction Business Expenses Incurred at Home The Home Office Deduction Rule 1. Principal Place of Business Rule 2. Separately Identifiable Space Rule 3. Regular and Exclusive Use Calculating Your Home Office Deduction Renters Owners Other Home-Related Deductible Expenses Safe Harbor Rule for the Home Office Deduction Tax When Selling the Home Office A Home Business as a Tax Shelter Business Losses at Home Hobby or Business? The Profit Motive Requirement Review Questions Review Answers Chapter 15 Fringe Benefits Learning Objectives Introduction How Fringe Benefits Save Taxes Retirement Benefits Motor Vehicles Meals Travel and Lodging Mixing Business and Pleasure Travel Business Meetings, Trade Shows, and Conventions Taking the Family Along Lodging at the Workplace Clubs and Athletic Facilities Health Benefits The Affordable Health Care Act and Small Businesses Deducting Health Insurance for Employees Health Insurance Tax Credit Health Savings Accounts (HSAs) Flexible Spending Accounts (FSAs) Group Plans Paid by Employees Solos, Partnerships, LLCs, and S Corporations C Corporations Dependent Care Assistance Plan Long-Term Care Insurance Group Term Life Insurance Education Benefits Directly Related Education Educational Assistance Program Other Education Dues and Subscriptions Driver and Bodyguard Services vii

9 Moving Expenses Retirement Planning Services Gifts, Awards, Discounts, and Free Services Small Gifts to Employees Employee Awards No-Added-Cost Services Discounts Commuter Transportation and Parking Working Condition Fringes De Minimis Benefits Adoption Assistance Job Placement Assistance Cafeteria Plans Special Benefits for C Corporation Employees Only Loans to Shareholders Entertainment and Vacation Facilities Stock Options and ESOPs Review Questions Review Answers Chapter 16 Retirement Plans Learning Objectives Introduction Advantages of Retirement Plans Overview of Retirement Plan Types Details About Each Type of Retirement Plan Individual Retirement Accounts (IRAs): Traditional and Roth IRA Plans SIMPLE IRAs Simplified Employee Pensions (SEPs) Qualified Retirement Plans (ERISA) Defined Contribution Profit-Sharing Plans (PSPs) Money Purchase Plan (MPP) Traditional 401(k) Plans Roth 401(k) Plan Defined Benefit Plans (DBPs) Where to Go for a Retirement Plan Tax Credit for Professional Help Potential Tax Problems With Retirement Plans Excess Contributions Overfunded Plans (Defined Benefit Plans Only) Affiliated Service Groups and Controlled Groups Withdrawing Money From Retirement Plans Avoiding Withdrawal Penalties Tax Withholding on Withdrawals Mixed Contribution Plan Withdrawals Loans From Some Retirement Plans Lump Sum Withdrawals Mandatory Withdrawals by 70½ What Happens at Death Closing Your Business or Leaving Your Employer Review Questions Review Answers Chapter 17 Buying a Business Learning Objectives Introduction Buying the Assets of a Business viii

10 Unincorporated Businesses Small Business Corporations Buying Shares of Stock Investigation Indemnification Holdbacks and Offsets Assigning a Price to Business Assets Classifying Assets for the IRS Allocation to Seven IRS Classes Assigning Dollar Values to the Classes State and Local Transfer Taxes Review Questions Review Answers Chapter 18 Selling or Closing a Sole Proprietorship Learning Objectives Introduction Reporting the Sale of a Sole Proprietorship Figuring Your Gain or Loss How Your Gain or Loss Is Taxed The Importance of an Arm s-length Deal How to Protect Yourself From IRS Challenges Set Reasonable Price and Terms Observe the Formalities Allocate Asset Values Fairly Keep Your Records After the Sale Review Questions Review Answers Chapter 19 When You Can t Pay Your Taxes Learning Objectives Introduction Low IRS Priority Less Than $50, Getting More Time to Pay Paying in Installments Interest and Penalties Keep Running Under $10,000 Payment Plans $10,000 to $50,000 Payment Plans Over $50,000 Payment Plans If You Fall Behind on Your Payments What to Expect When the IRS Gets Serious The Sneak Attack Meeting With the Collector Actions the Tax Collector Can Take Cooperating With the Collector Dealing With a Monster Tax Bill The Offer in Compromise Bankruptcy When the IRS Can Take Your Assets Federal Tax Liens Federal Tax Levies: Seizing Assets Getting Liens and Levies Released Review Questions Review Answers Chapter 20 Audits Learning Objectives ix

11 Introduction Who Gets Audited? Computer Picks Market Segment Specialization Programs Informants Tips Follow-Up Audits Prior Audits Criminal Investigations Amended Returns and Refund Claims Filing Extensions How Long Do You Have to Worry About an Audit? How the IRS Audits Small Businesses Office and Correspondence Audits Field Audits The Auditor s Powers Inspecting Business Premises Viewing Home Offices Scrutinizing Your Records Summoning Records Held by Others Should You Get Audit Help? Preparing for Your Audit What to Bring to an Audit Don t Rush a Field Audit What an Auditor Looks for When Examining a Business The Income Probe Bank Deposit Analysis Is It a Legitimate Business Expense? How to Behave at an Audit Keep Chitchat to a Minimum Answer Questions Concisely Don t Be Hostile or Phony Complain If the Auditor Is Abusive How to Negotiate With an Auditor Don t Just Sit There Talk Percentages, Not Dollars Arguing Issues Adjustments in Your Favor Taking the Offensive Don t Try to Negotiate Based on Inability to Pay Your Options After Getting an Audit Report Agree Argue Do Nothing When Your Audit Is Final Review Questions Review Answers Chapter 21 Appealing IRS Audits Learning Objectives Introduction IRS Appeals Writing an Appeal Letter Settling Without a Hearing The Appeals Hearing Payment After an Appeals Settlement Contesting an Audit in Court About Tax Court Can You Do It Yourself in Tax Court? x

12 Filing Your Petition in Tax Court Tax Court Pretrial Procedure Settling Before Trial Your Tax Court Trial Tax Court Decisions Review Questions Review Answers Chapter 22 Penalties and Interest Learning Objectives Introduction Common Reasons for Penalties Inaccuracies Civil Fraud Late Payment Late Filing Filing and Paying Late Underpaying Estimated Taxes Interest on Tax Bills Understanding Penalty and Interest Notices How to Get Penalties Reduced or Eliminated How to Request a Penalty Abatement If Your Abatement Request Is Rejected How to Get Interest Charges Removed Designating Payments on Delinquent Tax Bills Review Questions Review Answers Chapter 23 Help Beyond the Book Learning Objectives Introduction Finding Answers to Tax Questions IRS Publications Free IRS and Social Security Telephone Information Free IRS Programs IRS Written Advice Internal Revenue Code IRS Interpretations of the Tax Code Court Cases Federal Small Business Programs Private Tax Guides and Software Trade Association Publications Tax Info Online Review Questions Review Answers Appendix A Answers to Frequently Asked Questions Appendix B Forms Checklist and Due Dates Glossary Index xi