J.K. Lasser's Small Business Taxes 2009 E-Book

Barbara Weltman

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: J.K. Lasser
• Sprache: Englisch

Seitenzahl: 948

Veröffentlichungsjahr: 2008

Beschreibung

While many small business owners seek to improve their bottom line, few realize all the ways that tax laws can help them do so. J.K. Lasser's Small Business Taxes 2009 gives you a complete overview of small business tax planning in an accessible manner. Focusing on strategies that help you use deductions and tax credits effectively, shield business income, and maximize other aspects of small business taxes, this valuable guide will show you how your actions in business today can affect your bottom line from a tax perspective tomorrow.

Leseprobe

Table of Contents

Title Page

Dedication

Copyright Page

Preface

How to Use This Book

Introduction

Special Rules for Small Businesses

PART 1 - Organization

CHAPTER 1 - Business Organization

Sole Proprietorships

Partnerships and Limited Liability Companies

S Corporations and Their Shareholder-Employees

C Corporations and Their Shareholder-Employees

Employees

Factors in Choosing Your Form of Business Organization

Forms of Business Organization Compared

Changing Your Form of Business

Tax Identification Number

CHAPTER 2 - Tax Year and Accounting Methods

Accounting Periods

Accounting Methods

Uniform Capitalization Rules

CHAPTER 3 - Recordkeeping for Business Income and Deductions

General Recordkeeping

Specific Substantiation Requirements for Certain Expenses

Records for Depreciation, Basis, Carryovers, and Prepaid Expenses

How Long You Should Maintain Records

PART 2 - Business Income and Losses

CHAPTER 4 - Income or Loss from Business Operations

Business Income

Income for Service Businesses

Income from the Sale of Goods

Income from Farming

Investment-Type Income

Miscellaneous Business Income

State Income Taxes on Business Income

Net Operating Losses

Limitations on Business Losses

Where to Report Business Income

CHAPTER 5 - Capital Gains and Losses

What Are Capital Gains and Losses

Tax Treatment of Capital Gains and Losses for Pass-Through Entities

Tax Treatment of Capital Gains and Losses for C Corporations

Sales of Business Interests

Special Situations

Where to Report Capital Gains and Losses

CHAPTER 6 - Gains and Losses from Sales of Business Property

Section 1231 Gains and Losses

Installment Sales

Recapture

Involuntary Conversions

Abandonment, Foreclosure, and Repossession of Property

Sale of All the Assets of the Business

Where to Report Gains and Losses on Business Property

PART 3 - Business Deductions and Credits

CHAPTER 7 - Employee Compensation

Deductible Compensation

Compensation to Owners

Disallowance Repayment Agreements

Employee Benefits

Nonstatutory Fringe Benefits

Employment Tax Credits

Where to Deduct Compensation Costs

CHAPTER 8 - Travel and Entertainment Expenses

Local Transportation Costs

Travel within the United States

FOREIGN TRAVEL

Conventions

Living Away from Home on Temporary Assignments

Meal and Entertainment Expenses

Business Gifts

Reimbursement Arrangements

Recordkeeping Requirements

Where to Deduct Travel and Entertainment Expenses

CHAPTER 9 - Car and Truck Expenses

Deducting Car Expenses in General

Actual Expense Method

Standard Mileage Allowance

Leasing a Car for Business

Arranging Car Ownership

Employee Use of an Employer-Provided Car

Vehicle Trade-In

Trucks and Vans

Credit for Hybrid Vehicles

Reimbursement Arrangements

Recordkeeping for Car Expenses

Where to Deduct Car Expenses

CHAPTER 10 - Repairs, Maintenance, and Energy Improvements

Ordinary Repairs

Rehabilitation Plans

Special Rules for Improvements for the Elderly and Handicapped

Lists of Deductible Repairs and Capital Improvements

Energy Improvements

Where to Take Deductions

CHAPTER 11 - Bad Debts

Bad Debts in General

Collection of Bad Debts

Business versus Nonbusiness Bad Debts

Loans by Shareholder-Employees

Guarantees that Result in Bad Debts

Special Rules for Accrual Taxpayers

Reporting Bad Debts on the Tax Return

Where to Deduct Bad Debts

CHAPTER 12 - Rents

Deducting Rent Payments in General

The Cost of Acquiring, Modifying, or Canceling a Lease - The Cost of Acquiring ...

Improvements You Make to Leased Property

Rental of a Portion of Your Home for Business

Leasing a Car

Leveraged Leases

Where to Deduct Rent Payments

CHAPTER 13 - Taxes and Interest

Deductible Taxes - General Rules

Nondeductible Taxes

Deductible Interest - General Rules

Nondeductible Interest and Other Limitations on Deductibility

Where to Deduct Taxes and Interest

CHAPTER 14 - First-Year Expensing, Depreciation, Amortization, and Depletion

First-Year Expensing

Other Expensing Opportunities

General Rules for Depreciation - Depreciable Property

Modified Accelerated Cost Recovery System

Bonus Depreciation

Limitations on Listed Property

Rebuilding Incentives for Certain Storm Victims

Putting Personal Property to Business Use

Amortization

Depletion

Where to Claim Depreciation, Amortization, and Depletion

CHAPTER 15 - Advertising Expenses

Ordinary Advertising Expenses

Promotion of Goodwill

Prizes, Contests, and Other Promotional Activities

Help-Wanted Ads

Where to Deduct Expenses

CHAPTER 16 - Retirement Plans

Qualified Retirement Plans

Added Costs for Retirement Plans

Retirement Plans for Self-Employed Individuals

Regular 401(k)s and Roth 401(k)s

Individual Retirement Accounts

When to Take Action

Comparison of Qualified Retirement Plans

Nonqualified Retirement Plans

Glossary of Terms for Retirement Plans

Where to Claim Deductions for Retirement Plans

CHAPTER 17 - Casualty and Theft Losses

Casualty and Theft

Condemnations and Threats of Condemnation

Disaster Losses

Deducting Property Insurance and Other Casualty/Theft-Related Items

Where to Deduct Casualty and Theft Losses and Related Items

CHAPTER 18 - Home Office Deductions

Home Office Deductions in General

Special Requirements for Employees

Allocating the Business Part of Home Expenses

Special Business Uses of a Home

Ancillary Benefits of Claiming Home Office Deductions

Impact of Home Office Deductions on Home Sales

Where to Deduct Home Office Expenses

CHAPTER 19 - Medical Coverage

Deducting Medical Insurance

Deducting Health Coverage by Self-Employed Persons and More-Than-2-Percent S ...

Using Medical Reimbursement Plans

Shifting the Cost of Coverage to Employees

Setting Up Health Savings Accounts (HSAs)

Archer Medical Savings Accounts (MSAs)

Health Reimbursement Arrangements

COBRA Coverage

Where to Deduct Health Insurance Costs

CHAPTER 20 - Deductions for Farmers

Farm Expenses

Farm Losses

Farm-Related Tax Credits

Nondeductible Farm-Related Expenses

Where to Claim Farming Expenses

CHAPTER 21 - Domestic Production Activities Deduction

Background

Qualified Producers

Figuring the Deduction

Where to Claim the Deduction

CHAPTER 22 - Miscellaneous Business Deductions

Other Business Expenses in General

Job-Seeking Expenses

Moving Expenses

Educational Expenses

Charitable Contributions Made by Your Business

Licenses and Permits

Dues and Subscriptions - Dues

Legal and Professional Fees

Bank and Merchant Fees

Supplies, Materials, and Office Expenses

Uniforms and Clothing

Commissions

Payments to Directors and Independent Contractors

Penalties, Fines, and Damages

Meal Costs for Day-Care Providers

Expenses of Disabled Persons

The Dividends-Received Deduction

Other Expenses

Where to Deduct Miscellaneous Business Expenses

CHAPTER 23 - Roundup of Tax Credits

Employment-Related Credits

Capital Construction-Related Credits

Other Tax Credits

General Business Credit

Where to Claim Tax Credits

PART 4 - Tax Planning For Your Small Business

CHAPTER 24 - Income and Deduction Strategies

Tax-Saving Tips - Tax-Planning Decisions

Common Errors and How to Avoid Them

Tax Assistance

CHAPTER 25 - Tax Strategies for Opening or Closing a Business

Initial Tax Decisions to Make

Tax Identification Numbers

Tax Reporting for the First Year

How to Write Off Start-Up Costs

Setting Up a Business Bank Account and Credit Card

Aborted Business Ventures

Expenses of Winding Up a Small Business

Tax Reporting in the Final Year

CHAPTER 26 - Tax Strategies for a Sideline Business

Reporting Sideline Business Income

Hobby Losses

Business Expenses

Where to Report Hobby Income and Expenses

CHAPTER 27 - Tax Strategies for Multiple Businesses

Advantages and Disadvantages of Multiple Entities

When to Run Multiple Activities within One Business

Treatment of Multiple Corporations

Tax Rules for Owners of Multiple Businesses

CHAPTER 28 - Alternative Minimum Tax

Alternative Minimum Tax Basics

Deduction Limits for Alternative Minimum Tax

Credit Offsets

Minimum Tax Credit

Where to Figure Alternative Minimum Tax

CHAPTER 29 - Other Taxes

State Income Taxes

Employment Taxes

Sales and Use Taxes

Excise Taxes

CHAPTER 30 - Filing Income Tax Returns and Paying Taxes

Filing Deadlines and Extensions

Online Filing of Business Income Tax Returns

Paying Taxes

Online Filing of Other Business Returns

APPENDIX A - Information Returns

APPENDIX B - Checklist of Tax-Related Corporate Resolutions

Index

This book is dedicated with love to myunderstanding husband, Malcolm Katt.

Copyright © 2009 by Barbara Weltman. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

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eISBN : 978-0-470-43939-5

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Preface

According to Discover® Small Business WatchSM, 73 percent of small businesses use paid professionals to handle their tax returns. So why do you need to read up on taxes? The answer is simple: You, and not your accountant or other financial adviser, run the business, so you can’t rely on someone else to make decisions critical to your activities. You need to be informed about tax-saving opportunities that continually arise so you can strategically plan to take advantage of them. Being knowledgeable about tax matters also saves you money; the more you know, the better able you are to ask your accountant key tax and financial questions that can advance your business, as well as to meet your tax responsibilities.

This is a great time to be a small business. Not only is small business the major force in our economy but it also is the benefactor of new tax rules that make it easier to write off expenses and minimize the taxes you owe. This edition of the book has been revised to include all of the new rules taking effect for 2008 returns. It also provides information about future changes scheduled to take effect in order to give you an overall view of business tax planning. Most importantly, it addresses the many tax questions I have received from readers as well as visitors to my web site, <www.barbaraweltman.com>.

This book focuses primarily on federal income taxes. Federal taxes rank as the fifth biggest problem to running a small business (NFIB Research Foundation). Businesses may be required to pay and report many other taxes, including state income taxes, employment taxes, sales and use taxes, and excise taxes. Some information about these taxes is included in this book to alert you to your possible obligations so that you can then obtain further assistance if necessary.

It is important to stay alert to future changes. Pending or possible changes are noted in this book. Be sure to check on any final action before you complete your tax return or take any steps that could be affected by these changes. Changes can be found at my web site.

For a free update on tax developments affecting small businesses and a free download of the Supplement to this book (available February 1, 2009), go to <www.jklasser.com>.

How to Use This Book

The purpose of this book is to make you acutely aware of how your actions in business can affect your bottom line from a tax perspective. The way you organize your business, the accounting method you select, and the types of payments you make all have an impact on when you report income and the extent to which you can take deductions. This book is not designed to make you a tax expert. It is strongly suggested that you consult with a tax adviser before making certain important decisions that will affect your ability to minimize your taxes. I hope that the insight you gain from this book will allow you to ask your adviser key questions to benefit your business.

In Part 1, you will find topics of interest to all businesses. First, there is an overview of the various forms of business organization and an explanation of how these forms of organization affect reporting of income and claiming tax deductions. The most common forms of business organization include independent contractors, sole proprietors, and sole practitioners—individuals who work for themselves and do not have any partners. If self-employed individuals join with others to form a business, they become partners in a partnership. Sometimes businesses incorporate. A business can be incorporated with only one owner or with many owners. A corporation can be a regular corporation (C corporation ), or it can be a small business corporation (S corporation). The difference between the C and S corporations is the way in which income of the business is taxed to the owner (which is explained in detail in Part 1). There is also a relatively new form of business organization called a limited liability company (LLC). Limited liability companies with two or more owners generally are taxed like partnerships even though their owners enjoy protection from personal liability. The important thing to note is that each form of business organization will affect what deductions can be claimed and where to claim them. Part 1 also explains tax years and accounting methods that businesses can select.

Part 1 contains another topic of general interest to all businesses. It covers important recordkeeping requirements and suggestions to help you audit-proof your return and protect your deductions and tax credits. In the course of business you may incur certain expenses, but unless you have specific proof of those expenses, you may not be able to claim a deduction or credit. Learn how to keep the necessary records to back up your write-offs in the event your return is questioned by the IRS.

Part 2 details how to report various types of income your business may receive. In addition to fees and sales receipts—the bread-and-butter of your business—you may receive other types of ordinary income such as interest income, royalties, and rents. You may have capital gain transactions as well as sales of business assets. But you may also have losses—from operations or the sale of assets. Special rules govern the tax treatment of these losses. The first part of each chapter discusses the types of income to report and special rules that affect them. Then scan the second part of each chapter, which explains where on the tax return to report the income or claim the loss.

Part 3 focuses on specific deductions and tax credits. It will provide you with guidance on the various types of deductions you can use to reduce your business income. Each type of deduction is explained in detail. Related tax credits are also explained in each deduction chapter. In the first part of each chapter, you will learn what the deduction is all about and any dollar limits or other special requirements that may apply. As with the income chapters, the second part of each deduction chapter explains where on the tax return you can claim the write-off. The answer depends on your form of business organization. You simply look for your form of business organization to learn where on the return to claim the deduction. The portion of the appropriate tax form or schedule is highlighted in certain instances. For your convenience, key tax forms for claiming these deductions have been included. While the forms and schedules are designed for the 2008 returns, they serve as an example for future years. Also, in Chapter 22, Miscellaneous Business Deductions, you will find checklists that serve as handy reference guides on all business deductions. The checklists are organized according to your status: self-employed, employee, or small corporation. You will also find a checklist of deductions that have not been allowed.

Part 4 contains planning ideas for your business. You will learn about strategies for deferring income, boosting deductions, starting up or winding down a business, running a sideline business, running multiple businesses, and avoiding audits. It also highlights the most common mistakes that business owners make in their returns. This information will help you avoid making the same mistakes and losing out on tax-saving opportunities. You will also find helpful information about electronic filing of business tax forms and how to use the Internet for tax assistance and planning purposes. And you will find information about other taxes on your business, including state income taxes, employment taxes, sales and use taxes, and excise taxes.

In Appendix A, you will see a listing of information returns you may be required to file with the IRS or other government agencies in conjunction with your tax obligations. These returns enable the federal government to crosscheck tax reporting and other financial information.

Several forms and excerpts from forms have been included throughout the book to illustrate reporting rules. These forms are not to be used to file your return. (In many cases, the appropriate forms were not available when this book was published, and older or draft versions of the forms were included.) You can obtain the forms you need from the IRS’s web site at <www.irs.gov> or where otherwise indicated.

Another way to stay abreast of tax and other small business developments that can affect your business throughout the year is by subscribing to Barbara Weltman’s Big Ideas for Small Business®, a free online newsletter geared for small business owners and their professional advisers, and my Small Business Idea of the DaySM (via email), at <www.barbaraweltman.com>. For more information on the tax implications of your small business, visit <www.jklasser.com/>, your 365-day-a-year tax resource. Here you will also find a supplement to this book in February 2009, updating information as it develops.

I would like to thank Sidney Kess, Esq. and CPA, for his valuable suggestions in the preparation of the original tax deduction book; Elliott Eiss, Esq., for his expertise and constant assistance with this and other projects; and David Pugh, my editor, for his understanding and patience.

Barbara Weltman

October 2008

Introduction

Small businesses are big news today. They employ half of the country’s private sector workforce, and now contribute more than half of the nation’s gross national product. Over the past decade, small businesses have created 60 to 80 percent of all new jobs.

Small businesses fall under the purview of the Internal Revenue Service’s (IRS) Small Business and Self-Employed Division (SB/SE). This division services approximately 45 million tax filers, including seven million small businesses (partnerships and corporations with assets of 10 million or less) and more than 33 million of whom are full-time or partially self-employed. The SB/SE division accounts for about 40 percent of the total federal tax revenues collected. Head-quartered in New Carrolton, MD, the SB/SE has service centers in Brookhaven, New York; Cincinnati, Ohio; Memphis, Tennessee; Ogden, Utah; and Philadelphia, Pennsylvania. The goal of this IRS division is customer assistance to help small businesses comply with the tax laws.

Toward this end, the Small Business Administration (SBA) has teamed up with the IRS to provide small business owners with help on tax issues. A special CD-ROM called Small Business Resource Guide 2008: What You Need to Know About Taxes and Other Products, is available free of charge through the IRS web site <www.irs.gov> and IRS tax experts now participate in SBA Business Information Centers where tax forms and publications are also available.

There is also an IRS web site devoted exclusively to small business and self-employed persons <www.irs.gov/businesses/small/index.html>. Here you will find special information for your industry—agriculture, automotive, child care, construction, entertainment, gaming, gas retailers, manufacturing, real estate, restaurants, and even tax professionals are already covered, and additional industries are set to follow. You can see the hot tax issues for your industry, find special audit guides that explain what the IRS looks for in your industry when examining returns, and links to other tax information.

As a small business owner, you work, try to grow your business, and hope to make a profit. What you can keep from that profit depends in part on the income tax you pay. The income tax applies to your net income rather than to your gross income or gross receipts. You are not taxed on all the income you bring in by way of sales, fees, commissions, or other payments. Instead, you are essentially taxed on what you keep after paying off the expenses of providing the services or making the sales that are the crux of your business. Deductions for these expenses operate to fix the amount of income that will be subject to tax. So deductions, in effect, help to determine the tax you pay and the profits you keep. And tax credits, the number of which has been expanded in recent years, can offset your tax to reduce the amount you ultimately pay.

Special Rules for Small Businesses

Sometimes it pays to be small. The tax laws contain a number of special rules exclusively for small businesses. But what is a small business? The Small Business Administration (SBA) usually defines small business by the number of employees—size standards range from 50 employees to 1,500 employees, depending on the industry or the SBA program (these new size standards are currently under review). For tax purposes, however, the answer varies from rule to rule, as explained throughout the book. Sometimes it depends on your revenues and sometimes on the number of employees. In Table I.1 are various definitions from the Internal Revenue Code on what constitutes a small business.

Reporting Income

While taxes are figured on your bottom line—your income less certain expenses—you still must report your income on your tax return. Generally all of the income your business receives is taxable unless there is a specific tax rule that allows you to exclude the income permanently or defer it to a future time.

When you report income depends on your method of accounting. How and where you report income depends on the nature of the income and your type of business organization. Over the next several years, the declining tax rates for owners of pass-through entities—sole proprietorships, partnerships, limited liability companies (LLCs), and S corporations—requires greater sensitivity to the timing of business income as these rates decline.

TABLE I.1Examples of Tax Definitions of Small Business

The IRS reported a “tax gap” (the spread between revenues that should be collected and what actually is collected) of $346 billion and that a substantial portion of this can be traced to entrepreneurs who underreport or don’t report their income, or overstate their deductions. In order to close the tax gap, increased reporting to the IRS and other measures may be adopted.

Claiming Deductions

You pay tax only on your profits, not on what you take in (gross receipts). In order to arrive at your profits, you are allowed to subtract certain expenses from your income. These expenses are called “deductions.”

The law says what you can and cannot deduct (see below). Within this framework, the nature and amount of the deductions you have often vary with the size of your business, the industry you are in, where you are based in the country, and other factors. The most common deductions for businesses include car and truck expenses, utilities, supplies, legal and professional services, insurance, depreciation, taxes, meals and entertainment, advertising, repairs, travel, rent for business property and equipment, and in some cases, a home office.

Are your deductions typical? The Government Accountability Office (formerly the General Accounting Office) in January 2004 compiled statistics on deductions claimed by sole proprietors for 2001 (no data more current is available). These numbers show the dollars spent on various types of deductions, the percentage of sole proprietors who claimed the deductions, and what percentage of total deductions each expense represented. For example, 25 percent of sole proprietors with business gross receipts under $25,000 claimed a deduction for advertising costs. This percentage rose to 65 percent when gross receipts exceeded $100,000. You can view these statistics at <www.gao.gov/new.items/d04304.pdf>.

What Is the Legal Authority for Claiming Deductions?

Deductions are a legal way to reduce the amount of your business income subject to tax. But there is no constitutional right to tax deductions. Instead, deductions are a matter of legislative grace; if Congress chooses to allow a particular deduction, so be it. Therefore, deductions are carefully spelled out in the Internal Revenue Code (the Code).

The language of the Code in many instances is rather general. It may describe a category of deductions without getting into specifics. For example, the Code contains a general deduction for all ordinary and necessary business expenses, without explaining what constitutes these expenses. Over the years, the IRS and the courts have worked to flesh out what business expenses are ordinary and necessary. “Ordinary” means common or accepted in business and “necessary” means appropriate and helpful in developing and maintaining a business. Often the IRS and the courts reach different conclusions about whether an item meets this definition and is deductible, leaving the taxpayer in a somewhat difficult position. If the taxpayer uses a more favorable court position to claim a deduction, the IRS may very well attack the deduction in the event that the return is examined. This puts the taxpayer in the position of having to incur legal expenses to bring the matter to court. On the other hand, if the taxpayer simply follows the IRS approach, a good opportunity to reduce business income by means of a deduction will have been missed. Throughout this book, whenever unresolved questions remain about a particular deduction, both sides have been explained. The choice is up to you and your tax adviser.

Sometimes the Code is very specific about a deduction, such as an employer’s right to deduct employment taxes. Still, even where the Code is specific and there is less need for clarification, disputes about applicability or terminology may still arise. Again, the IRS and the courts may differ on the proper conclusion. It will remain for you and your tax adviser to review the different authorities for the positions stated and to reach your own conclusions based on the strength of the different positions and the amount of tax savings at stake.

A word about authorities for the deductions discussed in this book: There are a number of sources for these write-offs in addition to the Internal Revenue Code. These sources include court decisions from the U.S. Tax Court, the U.S. district courts and courts of appeal, the U.S. Court of Federal Claims, and the U.S. Supreme Court. There are also regulations issued by the Treasury Department to explain sections of the Internal Revenue Code. The IRS issues a number of pronouncements, including Revenue Rulings, Revenue Procedures, Notices, Announcements, and News Releases. The department also issues private letter rulings, determination letters, field service advice, and technical advice memoranda. While these private types of pronouncements cannot be cited as authority by a taxpayer other than the one for whom the pronouncement was made, they are important nonetheless. They serve as an indication of IRS thinking on a particular topic, and it is often the case that private letter rulings on topics of general interest later get restated in revenue rulings.

What Is a Tax Deduction Worth to You?

The answer depends on your tax bracket. The tax bracket is dependent on the way you organize your business. If you are self-employed and in the top tax bracket of 35 percent in 2008, then each dollar of deduction will save you 35 cents. Had you not claimed this deduction, you would have had to pay 35 cents of tax on that dollar of income that was offset by the deduction. If you have a personal service corporation, a special type of corporation for most professionals, the corporation pays tax at a flat rate of 35 percent. This means that the corporation is in the 35-percent tax bracket. Thus, each deduction claimed saves 35 cents of tax on the corporation’s income. Deductions are even more valuable if your business is in a state that imposes income tax. The impact of state income tax and special rules for state income taxes are not discussed in this book. However, you should explore the tax rules in your state and ascertain their impact on your business income.

When Do You Claim Deductions?

Like the timing of income, the timing of deductions—when to claim them—is determined by your tax year and method of accounting. Your form of business organization affects your choice of tax year and your accounting method.

Even when expenses are deductible, there may be limits on the timing of those deductions. Most common expenses are currently deductible in full. However, some expenses must be capitalized or amortized, or you must choose between current deductibility and capitalization. Capitalization generally means that expenses can be written off ratably as amortized expenses or depreciated over a period of time. Amortized expenses include, for example, fees to incorporate a business and expenses to organize a new business. Certain capitalized costs may not be deductible at all, but are treated as an additional cost of an asset (basis).

Credits versus Deductions

Not all write-offs of business expenses are treated as deductions. Some can be claimed as tax credits. A tax credit is worth more than a deduction since it reduces your taxes dollar for dollar. Like deductions, tax credits are available only to the extent that Congress allows. In a couple of instances, you have a choice between treating certain expenses as a deduction or a credit. In most cases, however, tax credits can be claimed for certain expenses for which no tax deduction is provided. Business-related tax credits, as well as personal credits related to working or running a business, are included in this book.

Tax Responsibilities

As a small business owner, your obligations taxwise are broad. Not only do you have to pay income taxes and file income tax returns, but you also must manage payroll taxes if you have any employees. You may also have to collect and report on state and local sales taxes. Finally, you may have to notify the IRS of certain activities on information returns.

It is very helpful to keep an eye on the tax calendar so you will not miss out on any payment or filing deadlines, which can result in interest and penalties. You might want to view and print out or order at no cost from the IRS its Publication 1518, Small Business Tax Calendar (go to <www.irs.gov/pub/irs-pdf/p1518.pdf>).

You can obtain most federal tax forms online at <www.irs.gov>.

PART 1

Organization

CHAPTER 1

Business Organization

If you have a great idea for a product or a business and are eager to get started, do not let your enthusiasm be the reason you get off on the wrong foot. Take a while to consider how you will organize your business. The form of organization your business takes controls how income and deductions are reported to the government on a tax return. Sometimes you have a choice of the type of business organization; other times circumstances limit your choice. If you have not yet set up your business and do have a choice, this discussion will influence your decision on business organization. If you have already set up your business, you may want to consider changing to another form of organization. In this chapter you will learn about:

• Soleproprietorships(includingindependentcontractorsandhusband-wife ventures)

• Partnerships and limited liability companies

• S corporations and their shareholder-employees

• C corporations and their shareholder-employees

• Employees

• Factors in choosing your form of business organization

• Forms of business organization compared

• Changing your form of business

• Tax identification number

For a further discussion on worker classification, see IRS Publication 15-A, Employer’s Supplemental Tax Guide.

Sole Proprietorships

If you go into business for yourself and do not have any partners (with the exception of a spouse, as explained shortly), you are considered a sole proprietor and your business is called a sole proprietorship. You may think that the term proprietor connotes a storekeeper. For purposes of tax treatment, proprietor means any unincorporated business owned entirely by one person. Thus, the category includes individuals in professional practice, such as doctors, lawyers, accountants, and architects. Those who are experts in an area, such as engineering, public relations, or computers, may set up their own consulting businesses and fall under the category of sole proprietor. The designation also applies to independent contractors.

Sole proprietorships are the most common form of business. The IRS reports that one in seven Form 1040s contains a Schedule C or C-EZ (the forms used by sole proprietorships).

There are no formalities required to become a sole proprietor; you simply conduct business. You may have to register your business with your city, town, or county government by filing a simple form stating that you are doing business as the “Quality Dry Cleaners” or some other business name. This is sometimes referred to as a DBA.

From a legal standpoint, as a sole proprietor, you are personally liable for any debts your business incurs. For example, if you borrow money and default on a loan, the lender can look not only to your business equipment and other business property but also to your personal stocks, bonds, and other property. Some states may give your house homestead protection; state or federal law may protect your pensions and even Individual Retirement Accounts (IRAs). Your only protection for your personal assets is adequate insurance against accidents for your business and other liabilities and paying your debts in full.