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- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Serie: J.K. Lasser
- Sprache: Englisch
Comprehensive guide to small business tax write-offs and strategies from a leading name in tax Small business owners in the US face enough challenges without overpaying tax. Despite this, millions of small businesses miss out on crucial deductions, tax credits, and tax-saving moves every year, resulting in higher-than-necessary tax bills. In J.K. Lasser's Small Business Taxes 2023: Your Complete Guide to a Better Bottom Line, renowned attorney and small business advocate Barbara Weltman offers a thorough and exhaustively researched roadmap to legally minimizing your tax liability and maximizing your deductions and credits. In the book, you'll find tax facts and planning strategies that help you make business decisions in the most tax-efficient way possible. You'll also discover: * A complete list of the business expense deductions and tax credits available to you and what you need to do to qualify for them * Up-to-date info on current tax law and procedure, including information on the latest relevant legislation * Guidance on avoiding tax penalties and minimizing audit risk * A heads-up on coming changes to help you plan for next year's taxes * Sample forms and checklists to help you get organized and help you stay tax compliant * A free e-supplement that includes the latest developments from the IRS and Congress A concise and plain-English guide for every small business owner in America, Small Business Taxes 2023 is the detailed and accessible tax overview you've been waiting for.
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Table of Contents
Cover
Title Page
Copyright
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
Benefit Corporations
Employees
Factors in Choosing Your Form of Business Organization
Forms of Business Organization Compared
Changing Your Form of Business
CHAPTER 2: Tax Year and Accounting Methods
Accounting Periods
Accounting Methods
Uniform Capitalization Rules
Change in Accounting Method
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
Income from Commercial Fishing
Income from Rentals
Income from Government Programs
Investment‐Type Income
Miscellaneous Business Income
State Income Taxes on Business Income
Noncorporate Excess Business Losses
Net Operating Losses
Other Limitations on Business Losses
Income Earned Abroad
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 for C Corporations
Loss Limitations
Sales of Business Interests
Opportunity Zone Investments
Special Situations
CHAPTER 6: Gains and Losses from Sales of Business Property
Section 1231 Gains and Losses
Sale‐Leasebacks
Installment Sales
Recapture
Involuntary Conversions
Abandonment, Foreclosure, and Repossession of Property
Sale of All the Assets of the Business
Opportunity Zone Business Transactions
PART 3: Business Deductions and Credits
CHAPTER 7: Employee Compensation
Worker Classification
Temporary Workers and Outsourced HR
Deductible Employee Compensation
Compensation to Owners
Stock Options and Restricted Stock
Deferred Compensation
Disallowance Repayment Agreements
Golden Parachute Payments
Fringe Benefits
Cafeteria Plans
Employment Tax Credits
CHAPTER 8: Travel, Meals, and Gift 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
CHAPTER 9: Car and Truck Expenses
Deducting Car and Truck Expenses in General
Actual Expense Method
Standard Mileage Allowance
Leasing a Vehicle for Business
Arranging Vehicle Ownership
Nonpersonal Use Vehicles
Credit for Clean Energy Vehicles
Dispositions of a Vehicle
Reimbursement Arrangements
Recordkeeping for Vehicle Expenses
CHAPTER 10: Repairs, Maintenance, and Energy Improvements
Ordinary Repairs
Rehabilitation Plans
Qualified Improvement Property
Small Business Safe Harbors
Rotable Spare Parts
Change in Accounting Method
Special Rules for Improvements for the Elderly and People with Disabilities
Lists of Deductible Repairs and Capital Improvements
Energy Improvements
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
Collection Strategies
CHAPTER 12: Rents
Deducting Rent Payments in General
Rent for Employee Parking
The Cost of Acquiring, Modifying, or Canceling a Lease
Improvements You Make to Leased Property
Rental of a Portion of Your Home for Business
Leasing a Car
Leveraged Leases
CHAPTER 13: Taxes and Interest
Deductible Taxes
Self‐Employment Tax
Nondeductible Taxes
Deductible Interest
Nondeductible Interest and Other Limitations on Deductibility
CHAPTER 14: First‐Year Expensing, Depreciation, Amortization, and Depletion
Section 179 Expensing
Other Expensing Opportunities
Bonus Depreciation
General Rules for Depreciation
Modified Accelerated Cost Recovery System
Depreciation Methods
Limitations on Listed Property
De Minimis Safe Harbor Rule
Putting Personal Property to Business Use
Amortization
Depletion
CHAPTER 15: Advertising Expenses
Ordinary Advertising Expenses
Promotion of Goodwill
Prizes, Contests, and Other Promotional Activities
Help‐Wanted Ads
Websites and Apps
Social Media
CHAPTER 16: Retirement Plans
Qualified Retirement Plans
Added Costs for Retirement Plans
Credit for Plan Start‐Up Costs
Retirement Plans for Self‐Employed Individuals
Regular 401(k)s and Designated Roth Accounts
Pooled Employer Plans (PEPs)
Individual Retirement Accounts
COVID‐19‐Related Rules
Disaster‐Related Rules
State‐Sponsored Plans for the Private Sector
When to Take Action
Plan Problems and Corrections
Comparison of Qualified Retirement Plans
ESOPs
Retirement Plans Owning Your Business
Terminating Plans
Nonqualified Retirement Plans
Glossary of Terms for Retirement Plans
CHAPTER 17: Casualty and Theft Losses
Casualties and Thefts
Condemnations and Threats of Condemnation
Disaster Losses
Deducting Property Insurance and Other Casualty/Theft‐Related Items
Disaster Assistance
CHAPTER 18: Home Office Deductions
Home Office Deductions in General
Actual Expense or Simplified Method
Actual Expense Method
Simplified Method
Special Business Uses of a Home
Mobile Offices
Ancillary Benefit of Claiming Home Office Deductions
Impact of Home Office Deductions on Home Sales
CHAPTER 19: Medical Coverage
Health Care Mandates
Deducting Medical Insurance for Covering Employees
Deducting Health Coverage for Self‐Employed Persons and More‐Than‐2% S Corporation Shareholders
Using Reimbursement Plans
Tax Credit for Contributions to Employee Health Coverage
Shifting the Cost of Coverage to Employees
Health Savings Accounts (HSAs)
Archer Medical Savings Accounts (MSAs)
COBRA Coverage
Wellness Programs
Reporting Health Coverage on W‐2s
Glossary of Terms for Health Coverage
CHAPTER 20: Deductions and Tax Credits for Farmers
Farm Expenses
Interest on Loans
Qualified Business Income Deduction
Farm Losses
Farm‐Related Tax Credits
Nondeductible Farm‐Related Expenses
CHAPTER 21: Qualified Business Income Deduction
General Rules
Qualified Trade or Business
Qualified Business Income
Basic Limitations
Specified Service Trades or Businesses
Other Limitations
Partnerships and S Corporations
Understatement Penalty
CHAPTER 22: Miscellaneous Business Deductions
Other Business Expenses in General
Moving Expenses
Educational Expenses
Charitable Contributions Made by Your Business
Licenses and Permits
Dues and Subscriptions
Legal and Professional Fees
Bank and Merchant Fees
Supplies, Materials, and Office Expenses
Uniforms and Clothing
Insurance
Commissions
Outsourced Workers
Payments to Directors and Independent Contractors
Penalties, Fines, and Damages
Meal Costs for Day‐Care Providers
Expenses of Persons with Disabilities
Dividends‐Received Deduction
Foreign Housing Deduction
Other Expenses
Checklists of Deductible and Nondeductible Items
CHAPTER 23: Roundup of Tax Credits
Employment‐Related Credits
Work‐Related Personal Credits
Capital Construction—Related Credits
Other Tax Credits
General Business Credit
Credits Offsetting Employment Taxes
PART 4: Tax Planning for Your Small Business
CHAPTER 24: Income and Deduction Strategies
Tax‐Saving Tips
Audit‐Proofing Your Return
Common Errors and How to Avoid Them
Tax Assistance
CHAPTER 25: Distributions from Your Business
Distributions from a Sole Proprietorship
Distributions from a Partnership
Distributions from an S Corporation
Distributions from a C Corporation
CHAPTER 26: Tax Strategies for Opening or Closing a Business
Initial Tax Decisions to Make
Investing Your Own Resources
Debt versus Equity Financing
Tax Identification Numbers
Choose Your Accounting Solution
Tax Reporting for the First Year
How to Write Off Start‐Up Costs
Setting Up a Business Bank Account and Credit Card
Moving a Business
Aborted Business Ventures
Bankruptcy
Winding Up a Small Business
Tax Reporting in the Final Year
CHAPTER 27: Tax Strategies for a Sideline Business
Reporting Sideline Business Income
Hobby Activities
Business Expenses
CHAPTER 28: 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 29: Alternative Minimum Tax
Alternative Minimum Tax Basics
Deduction Limits for Alternative Minimum Tax
Credit Offsets
Minimum Tax Credit
CHAPTER 30: Other Taxes
State Income Taxes
Employment Taxes
Self‐Employment Tax
Additional Medicare Taxes for Individuals
Sales and Use Taxes
Excise Taxes
CHAPTER 31: Filing Tax Returns, Paying Taxes, and Making Refund Claims
Income Tax Deadlines and Extensions
Online Filing of Business Income Tax Returns
Estimated Taxes
Making Tax Payments
Claiming Refunds
Filing Other Business Returns
CHAPTER 32: Retirement and Succession Planning
Retirement Planning
Social Security Planning
Exit Strategies
Financing Options to Fund Buyouts
Consulting Agreements
Estate Taxes
Estate Planning Concerns
CHAPTER 33: Working with CPAs and Other Tax Professionals
Types of Tax Professionals
Finding a Tax Professional
Tips for Selecting a Tax Professional
CHAPTER 34: Handling Audits with the IRS
Types of Audits
Appeals
Litigation
Mediation
Taxpayer Bill of Rights
Taxpayer Advocate Service
Special Audit Rules for Partnerships
Appendix A: Information Returns
Dividends
Large Cash Transactions
Payments to Independent Contractors
Health Plans
Pension and Retirement Plan Distributions
Retirement and Employee Benefit Plans
Small Cash Transactions
Wages
Merchant Transactions
Foreign Accounts
Appendix B: Tax Penalties
Failure to File a Tax Return or Pay Tax
Failure to File Retirement Plan Returns and Notices
Failure to File Correct Information Returns
Failure to File Correct Payee Statements
Accuracy‐Related Penalties
Preparer Penalties
Penalty Relief
Appendix C: Checklist of Tax‐Related Corporate Resolutions
Appendix D: List of Dollar Limits and Amounts Adjusted for Inflation
Items Adjusted Annually for Inflation
Items Fixed by the Tax Code
Items Set by the IRS
Index
End User License Agreement
List of Tables
Introduction
TABLE I.1 Examples of Tax Definitions of Small Business
Chapter 1
TABLE 1.1 Filing Deadlines, Extensions, and Forms for 2022 Returns
TABLE 1.2 Comparison of Forms of Business Organization
Chapter 5
TABLE 5.1 2022 Taxable Income Breakpoints for Capital Gains Rates
*
Chapter 7
TABLE 7.1 Employee Income from Excess Coverage
TABLE 7.2 Annual Lease Value (ALV) Table for Cars
Chapter 8
TABLE 8.1 North American Area
TABLE 8.2 Sample Expense Diary
Chapter 9
TABLE 9.1 Straight‐Line Half‐Year Convention*
TABLE 9.2 MACRS Half‐Year Convention*
TABLE 9.3 Straight‐Line Mid‐Quarter Convention*
TABLE 9.4 MACRS Mid‐Quarter Convention*
TABLE 9.5 Dollar Limit on Depreciation of Passenger Cars (including Light Tr...
TABLE 9.6 Sample Deductions under the Standard Mileage Allowance for 2022
TABLE 9.7 Dollar Amounts for Passenger Automobiles with a Lease Term Beginni...
TABLE 9.8 Deemed Depreciation
TABLE 9.9 Depreciation in Year of Sale*
TABLE 9.10 Business Mileage Log
TABLE 9.11 Sample Log
Chapter 10
TABLE 10.1 Examples of Repairs versus Capital Items
TABLE 10.2 Guidance on Standards for the Elderly and People with Disabilitie...
Chapter 14
TABLE 14.1 Property Class Life under GDS versus Actual Recovery Period
TABLE 14.2 MACRS Rates—Half‐Year Convention
TABLE 14.3 MACRS Rates—Mid‐Quarter Convention (200% Rate)
TABLE 14.4 When to Change to Straight‐Line Method
TABLE 14.5 Rates for Residential Realty Years (27 Years), Straight‐Line, Mid...
TABLE 14.6 Rates for Nonresidential Realty Years (31.5 Years), Straight‐Line...
TABLE 14.7 Rates for Nonresidential Realty Years (39 Years), Straight‐Line, ...
TABLE 14.8 Recovery Periods under Alternative Depreciation System (ADS)
TABLE 14.9 Percentage for Mineral Properties
TABLE 14.10 Depreciation Worksheet
Chapter 16
TABLE 16.1 Safe Harbor Contributions by Employer (You) for Employees in 401(...
TABLE 16.2 Active Participants' MAGI Phase‐Outs for Deducting IRA Contributi...
TABLE 16.3 MAGI Phase‐Outs for Making Roth IRA Contributions in 2022
TABLE 16.4 Comparison of Retirement Plans in 2022
Chapter 20
TABLE 20.1 Recovery Periods for Farm Property
Chapter 22
TABLE 22.1 Applicable Percentage for Additional Contribution
TABLE 22.2 Standard Meal and Snack Rates for 2022
TABLE 22.3 Checklists of Deductible and Nondeductible Expenses
Chapter 23
TABLE 23.1 Guide to Tax Credits
Chapter 24
TABLE 24.1 Forms for Filing Extensions
TABLE 24.2 IRS Publications of Interest
Chapter 26
TABLE 26.1 States with Intrastate Equity Crowdfunding
TABLE 26.2 Checklist of Actions for Closing a Business
Chapter 28
TABLE 28.1 Locations Where Series LLCs May Be Formed
Chapter 29
TABLE 29.1 2022 Exemption Amounts
Chapter 30
TABLE 30.1 Your Employment Tax Obligation on Common Fringe Benefits for 2022...
TABLE 30.2 Deposit Schedule
TABLE 30.3 Threshold Amounts for Additional Medicare Taxes
Chapter 31
TABLE 31.1 Usual Filing Deadlines
TABLE 31.2 Usual Filing Extensions*
TABLE 31.3 Forms for Amended Income Tax Returns
TABLE 31.4 Filing Deadlines for Employment Tax Returns
Chapter 32
TABLE 32.1 Rollover Options
TABLE 32.2 Full Retirement Age
Appendix B
TABLE B.1 Penalties for Small Businesses for Information Returns
TABLE B.2 Penalties for Small Businesses for Payee Statements
TABLE B.3 Tax Return Preparer Penalties
List of Illustrations
Chapter 1
Figure 1.1 Schedule C, Profit or Loss From Business
Figure 1.2 Schedule K‐1, Partner's Share of Income, Deductions, Credits, etc...
Figure 1.3 Form 8832, Entity Classification Election
Figure 1.4 Part II of Schedule E
Figure 1.5 Form 1120, U.S. Corporation Income Tax Return
Chapter 4
FIGURE 4.1 Computation of Partner's Basis in Partnership Interest
FIGURE 4.2 S Corporation Shareholder Basis in Stock and Debt Basis Limitatio...
Chapter 7
FIGURE 7.1 Sample Form for Section 83(b) Election
Chapter 14
FIGURE 14.1 Form 4562, Depreciation and Amortization
Chapter 16
Figure 16.1 Form 5305‐SEP, Simplified Employee Pension
Figure 16.2 Form 5304‐SIMPLE, Savings Incentive Match Plan for Employees of ...
Figure 16.3 Form 5500‐EZ, Annual Return of One‐Participant Retirement Plan
Chapter 18
FIGURE 18.1 Simplified Method Worksheet for Home Office Deduction
FIGURE 18.2 Form 8829, Expenses for Business Use of Your Home
FIGURE 18.3 Worksheet to Figure the Deduction for Business Use of Your Home...
Chapter 20
FIGURE 20.1 Sample Exemption Certificate
Chapter 21
FIGURE 21.1 Form 8995, Qualified Business Income Deduction—Simplified Comput...
FIGURE 21.2 Form 8995‐A, Qualified Business Income Deduction
FIGURE 21.3 QBI Loss Tracking Worksheet
Chapter 30
Figure 30.1 Schedule SE
Chapter 31
Figure 31.1 Estimated Tax Worksheet
Guide
Cover Page
Title Page
Copyright
Preface
Introduction
Table of Contents
Begin Reading
Appendix A Information Returns
Appendix B Tax Penalties
Appendix C Checklist of Tax‐Related Corporate Resolutions
Appendix D List of Dollar Limits and Amounts Adjusted for Inflation
Index
Wiley End User License Agreement
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J.K. LASSER'S™
SMALL BUSINESS TAXES 2023
Your Complete Guide to a Better Bottom Line
Barbara Weltman
Copyright © 2023 by Barbara Weltman. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
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Preface
Businesses naturally focus on sales to create profits. But the tax results of business activities can't be ignored. Economic conditions, including inflation, supply chain issues, and labor shortages, impact sales and, in turn, affect taxes. And tax rules are continually changing. As a small business owner, you can't rely on the tax rules you've become accustomed to. You need to familiarize yourself with new rules to minimize your 2022 taxes, figure estimated taxes for 2023, and obtain tax refunds from certain prior years. Major recent legislation, including the Consolidated Appropriations Act, 2022; the CHIPS and Science Act of 2022; and the Inflation Reduction Act of 2022, needs to be taken into account.
This book focuses primarily on federal income taxes. 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.
The book takes a holistic approach to taxes, showing you where applicable the ramifications that tax decisions can have on your business activities and your bottom line. Statistics, resources, and other materials are provided to help you better run your business by making good tax decisions and implementing sound business practices.
It is important to stay alert to future tax changes. Be sure to check on any final action before you take any steps that could be affected by these changes.
For a free supplement on tax developments after October 1, 2022, affecting small businesses (available in February 2023), go to www.jklasser.com or www.BigIdeasForSmallBusiness.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 (and Chapter 33tells you how to work with a tax professional). 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 personal liability for an owner as well as reporting of income and claiming tax deductions. Part 1 also explains tax years and accounting methods that businesses can select. And it covers important recordkeeping requirements and suggestions to help you audit‐proof your return to the extent possible and protect your deductions and tax credits.
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 topic in a chapter discusses the types of income or loss to report and special rules that affect them. Then scan the second part of each topic in a 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 provides you with guidance on the various types of deductions you can use to reduce your business income, including the qualified business income (QBI) deduction for owners of pass‐through entities. In the first part of each topic in a chapter, you will learn what the write‐off is all about and any dollar limits or other special requirements that may apply. As with the income chapters, the second part of each topic chapter explains where on the tax return you can claim the write‐off based on your form of business organization. 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 business expenses that are not deductible.
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, owning multiple businesses, taking distributions, and avoiding audits. It also highlights the most common mistakes that business owners make in their returns, so by avoiding them you will not lose out on tax‐saving opportunities. You will also find links to resources 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. Finally, you will see how to work with a tax professional and what to do if you are audited.
In Appendix A, you will find 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. Appendix B covers tax penalties that may apply if you fail to do something you were supposed to do, or if you do it wrong or do it late. Appendix C contains a checklist of tax‐related corporate resolutions to help you keep your corporate minutes book up to date. Appendix D is a list of dollar limits and amounts for certain tax rules that are adjusted annually for inflation to help you plan ahead.
Several forms and schedules as well as excerpts from them 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.) While most returns today are prepared and filed electronically, if you do not use software or a paid preparer to complete your return, you can obtain the forms you need from the IRS's website at https://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 “Idea of the Day®” (via e‐mail) at www.BigIdeasForSmallBusiness.com. Again, the Supplement to this book, which covers developments after October 1, 2022, may be found at www.jklasser.com and my website www.BigIdeasForSmallBusiness.com.
This book has been in print for more than 25 years and has tracked dramatic changes in tax law and business operations. For those who are using it for the first time, the book is a resource guide for handling taxes effectively as well as for making financial decisions and using business practices to increase your bottom line. For those who are perennial readers, you will see that while much in the book is unchanged, it has been updated and expanded to reflect changes from new laws, court decisions, and IRS pronouncements as well as my additional comments on tax strategies and business practices. For tax practitioners, I recognize that there are no citations, and that there are some issues that are unsettled. I invite your comments on any areas in which you disagree with my presentation and for ways to make improvements in future editions (send comments to [email protected]). I also recognize that more small businesses are going global and have to contend with foreign taxes and the implications on their U.S. returns, but the subject of foreign taxes is not fully addressed in this book.
I would like to thank Sidney Kess, Esq. and CPA, for his valuable suggestions in the preparation of the original tax deduction book, and Elliott Eiss, Esq., for his expertise and constant assistance with this and other projects.
Barbara WeltmanOctober 2022
Introduction
Small businesses are vital to the U.S. economy. Small businesses account for 99.9% of all firms, employ 46.8% of the country's private sector workforce, and contribute 43.5% of the nation's gross national product.
It's estimated there were more than 33.2 million small businesses—sole proprietorships, limited liability companies, partnerships, S corporations, and C corporations. While COVID‐19 certainly hit many small businesses hard, the pandemic did not stop interest in entrepreneurship. New businesses are forming at numbers greater than before the pandemic. The gig economy has expanded and small businesses continue to be present on Main Street, farms, homes, and anywhere else that a business can be found.
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 57 million tax filers, including 41 million individuals filing Schedules C, E, or F, as well as (3.8 million partnerships and 6.8 million corporations with assets of $10 million or less), and about 7 million filers of employment, excise, and certain other returns. The SB/SE division accounts for about 40% of the total federal tax revenues collected. The goal of this IRS division is customer assistance to help small businesses comply with the tax laws.
There is also an IRS Small Business and Self‐Employed Tax Center at https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed where you'll find links to topics of interest, such as stages of a business and free online learning opportunities.
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 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 average size of a small business in the United States is one with fewer than 20 employees with annual revenue under $2 million. Different government departments and agencies, as well as different industries, use their own definitions of “small business.” For federal tax purposes, the answer varies from rule to rule, as explained throughout this book. Sometimes, it depends on your revenue, the number of employees, net worth, or total assets. In Table I.1 are nearly 3 dozen definitions from the Internal Revenue Code on what constitutes a small business in 2022. You may be a small business for some tax rules but not for others.
TABLE I.1 Examples of Tax Definitions of Small Business
Tax Rule
Definition
Accrual method exception for small businesses (
Chapter 2
)
Average annual gross receipts of no more than $27 million in the 3 prior years (or number of years in business, if less)
Archer medical savings accounts (
Chapter 19
)
Fewer than 50 employees
Bad debts deducted on the nonaccrual‐experience method (
Chapter 11
)
Average annual gross receipts for the 3 prior years of no more than $5 million
Building improvements safe harbor (
Chapter 10
)
Average annual gross receipts for the 3 prior years of no more than $10 million
and
building's unadjusted basis no greater than $1 million
Centralized audit regime for partnerships–election out (
Chapter 33
)
100 or fewer partners
Disabled access credit (
Chapter 10
)
Gross receipts of no more than $1 million in the preceding year or no more than 30 full‐time employees
Employer mandate exemption from providing affordable health coverage
Fewer than 50 full‐time/full‐time equivalent employees
Estimated tax for C corporations based on prior year's return (
Chapter 30
)
Taxable income of less than $1 million in any of the 3 preceding years
Employee retention income tax credit (
Chapter 7
)
Fewer than 100 employees
Employer differential wage payments credit (
Chapter 7
)
Fewer than 50 employees
First‐year expensing election (
Chapter 14
)
Qualified property for 2022 of no more than $3.78 million
Golden parachute payments exemption (
Chapter 7
)
100 or fewer shareholders
Independent contractor versus employee determination—shifting burden of proof to IRS (
Chapter 7
)
Net worth of business does not exceed $7 million
Interest deduction limit exemption (
Chapter 13
)
Average annual gross receipts of $27 million or less in the 3 prior years
Late filing penalty for failure to file information return—cap (
Appendix B
)
Average annual gross receipts of no more than $5 million for a 3‐year period
Qualified small employer health reimbursement arrangement (
Chapter 19
)
Fewer than 50 full‐time and full‐time equivalent employees
Reasonable compensation—shifting the burden of proof to the IRS (
Chapter 7
)
Net worth of business not in excess of $7 million
Recovery of legal fees from the government
Net worth less than $5 million and fewer than 500 employees at the time the action is filed
Repair regulations—deduction under safe harbor for items up to $2,500 per item or invoice (
Chapter 10
)
No applicable financial statement (SEC filing; audited financial statement)
Repair regulations—safe harbor not to capitalize improvements to buildings (
Chapter 10
)
Average annual gross receipts under $10 million and building has unadjusted basis under $1 million
Research credit–offset to AMT(
Chapter 23
)
Businesses with average annual gross receipts in the 3 prior years of $50 million or less
Research credit—offset to employer's Social Security taxes (
Chapter 23
)
Corporation or partnership with gross receipts of no more than $5 million for current year and no gross receipts during the 5‐year period ending with the current year (similar for sole proprietors)
Retirement plan start‐up credit (
Chapter 16
)
No more than 100 employees with compensation over $5,000 in the preceding year
Savings Incentive Match Plans for Employees (SIMPLE) plans (
Chapter 16
)
Self‐employed or businesses with 100 or fewer employees who received at least $5,000 in compensation in the preceding year
Section 1244 losses (
Chapter 5
)
Equity of no more than $1 million at the time stock is issued
Simple cafeteria plans (
Chapter 7
)
100 or fewer employees on business days during either of the 2 preceding years
Simplified change in accounting for repair safe harbors (
Chapter 10
)
Total assets less than $10 million or average annual gross receipts in 3 prior years less than $10 million
Small business/self‐employed (SB/SE) division of IRS
Self‐employed individuals, plus corporations and partnerships with assets under $10 million
Small employer automatic enrollment credit (
Chapter 16
)
No more than 100 employees with compensation over $5,000 in the preceding year
Small employer health care credit (
Chapter 19
)
No more than 25 full‐time equivalent employees
Small business stock—exclusion of gain on sale (
Chapter 5
)
Gross assets of no more than $50 million when the stock is issued and immediately after
UNICAP small reseller exception (
Chapter 2
)
Average annual gross receipts of no more than $26 million for a 3‐year period
UNICAP simplified dollar value last‐in, first‐out (LIFO) method (
Chapter 2
)
Average annual gross receipts of no more than $5 million for a 3‐year period
Reporting Income
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. This is so, whether your business is full or part time and how you're paid (in cash, crypto, or otherwise).
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.
There's a “tax gap” (the spread between revenues that should be collected and what actually is collected) estimated to be $1 trillion per year and a great portion of this can be traced to entrepreneurs who underreport or don't report their income, overstate their deductions, or fail to pay self‐employment tax where warranted. While audit rates have recently been at historic lows due in part to budgetary issues, the SB/SE division wants to increase the number of its examiners and look carefully at self‐employed individuals in an attempt to detect intentional or unintentional reporting errors. Funding for the IRS has been substantially increased, so watch for more audits to be conducted.
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, salaries and wages, utilities, supplies, legal and professional services, insurance, depreciation, taxes, meals, advertising, repairs, travel, rent for business property and equipment, and in many cases, a home office.
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; it does not mean essential. The IRS and the courts often reach different conclusions about whether an item meets this definition and is deductible, leaving the taxpayer in a somewhat difficult position. If the taxpayer relies on a more favorable prior 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. However, 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 and Revenue Procedures, which are official IRS positions, as well as Notices, Announcements, and News Releases, which carry less weight. The IRS 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. More recently, the IRS simply posts information on its website, in the form of Frequently Asked Questions (FAQs) or other pronouncements, which is helpful in understanding the IRS position on a matter.
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 37% in 2022, then each additional $100 deduction will save you $37. Had you not claimed this deduction, you would have had to pay $37 of tax on that $100 of income that was offset by the deduction. For C corporations, there is a flat rate of 21%. This means that the corporation is in the 21% tax bracket. Thus, each $100 deduction claimed saves $21 of tax on the corporation's income. Deductions are even more valuable if your business is in a state that imposes income tax. The details of 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 costs can be written off ratably as amortized expenses or depreciated over a period of time. (Capitalized costs, such as for the purchase of machinery and equipment, are added to the balance sheet as company assets.) 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).
Some expenses, even though related to business and not incurred but for business, are not deductible. The tax law specifically bars deductions for certain expenses (e.g., entertainment costs, transportation fringe benefits). And no deduction is allowed for personal expenses that are business‐related, such as commuting costs. These nondeductible expenses are pointed out throughout the book.
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. Most business tax credits are offsets for income taxes, but some reduce employment taxes.
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 must also manage payroll taxes if you have any employees. You may also have to collect and report on state and local sales taxes. Some businesses, such as farms, may have excise tax responsibilities. 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 the IRS's Tax Calendar for Businesses and Self‐Employed at https://www.irs.gov/businesses/small-businesses-self-employed/irs-tax-calendar-for-businesses-and-self-employed.
Should you need them, you can obtain most federal tax forms online at https://www.irs.gov. Nonscannable forms, which cannot be downloaded from the IRS, can be ordered by calling toll free at 800‐829‐4933 during normal business hours.
PART 1Organization
CHAPTER 1Business Organization
Sole Proprietorships
Partnerships and Limited Liability Companies
S Corporations and Their Shareholder‐Employees
C Corporations and Their Shareholder‐Employees
Benefit Corporations
Employees
Factors in Choosing Your Form of Business Organization
Forms of Business Organization Compared
Changing Your Form of Business
Alert
At the time this book was published, Congress was considering tax changes that could affect 2022 tax returns and planning for 2023. Check the online Supplement in February 2023 at www.jklasser.com or www.BigIdeasForSmallBusiness.com to see what changes have been enacted and when they become effective.
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 awhile 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.
According to the Tax Foundation, 95% of all businesses in the United States are organized as sole proprietorships, partnerships, limited liability companies (LLCs), or S corporations, all of which are “pass‐through” entities. This means that the owners, rather than the businesses, pay tax on business income. The way in which you set up your business impacts the effective tax rate you pay on your profits. Taxes, however, are only one factor in deciding what type of entity to use for your business.
As you organize your business, consider which type of entity to use after factoring in taxes (federal and state) and other consequences. Also, as business activities and tax laws change, consider whether to change from your current form of business entity to a new one and what it means from a tax perspective, which is discussed later in this chapter. Finally, be sure to obtain your business's federal tax identification number or a new one when making certain entity changes (explained in Chapter 26).
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, however, 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. Other terms used for sole proprietors include freelancers, solopreneurs, and consultants. And it includes “dependent contractors”: self‐employed individuals who provide all (or substantially all) of their services for one company (often someone laid off or retired from a corporate job who is then engaged to provide nonemployee services for the same corporation). Further, it includes those working in the gig economy through such online platforms as Uber, Lyft, HopSkipDrive, TaskRabbit, Takl, and Upwork (although some workers for these companies may be employees under state law or court decisions).
Sole proprietorships are the most common form of business. The IRS reports that more than one in 6 Form 1040 or 1040‐SR contains a Schedule C (the form used by sole proprietorships). Most sideline businesses are run as sole proprietorships, and many start‐ups commence in this business form.
There are no formalities required to become a sole proprietor; you simply conduct business. If the name of your business is something other than your own name, 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 a fictitious business name (FBN). This is sometimes referred to as a DBA, which stands for “doing business as.”
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 other personal assets is adequate insurance against accidents for your business and other liabilities and paying your debts in full.
Simplicity is the advantage to this form of business. This form of business is commonly used for sideline ventures, as evidenced by the fact that half of all sole proprietors earn salaries and wages along with their business income. For 2019 (the most recent year for statistics), more than 27 million taxpayers filed returns as sole proprietors.
Independent Contractors
One type of sole proprietor is the independent contractor. To illustrate, suppose you used to work for Corporation X. You have retired, but X gives you a consulting contract under which you provide occasional services to X. In your retirement, you decide to provide consulting services not only to X, but to other customers as well. You are now a consultant. You are an independent contractor to each of the companies for which you provide services. Similarly, you have a full‐time job but earn extra money by doing graphic design work through Fiverr. Here too you are an independent contractor.
More precisely, an independent contractor or freelancer is an individual who provides services to others outside an employment context. The provision of services becomes a business, an independent calling. In terms of claiming business deductions, classification as an independent contractor is generally more favorable than classification as an employee. (See “Tax Treatment of Income and Deductions in General,” later in this chapter.) Therefore, many individuals whose employment status is not clear may wish to claim independent contractor status. Also, from the employer's perspective, hiring independent contractors is more favorable because the employer is not liable for employment taxes and need not provide employee benefits. (It costs about 30% more for a business to use an employee than an independent contractor after factoring in employment taxes, workers' compensation and other insurance, and benefits.) Federal employment taxes include Social Security and Medicare taxes under the Federal Insurance Contribution Act (FICA) as well as unemployment taxes under the Federal Unemployment Tax Act (FUTA).
You should be aware that the Internal Revenue Service (IRS) aggressively tries to reclassify workers as employees in order to collect employment taxes from employers. And states do so as well to see that workers are covered by unemployment insurance and workers' compensation. A discussion about worker classification may be found in Chapter 7.
There is a distinction that needs to be made between the classification of a worker for income tax purposes and the classification of a worker for employment tax purposes. By statute, certain employees are treated as independent contractors for employment taxes even though they continue to be treated as employees for income taxes. Other employees are treated as employees for employment taxes even though they are independent contractors for income taxes.
There are 2 categories of employees that are, by statute, treated as non‐employees for purposes of federal employment taxes. These 2 categories are real estate salespersons and direct sellers of consumer goods. These employees are considered independent contractors (the ramifications of which are discussed later in this chapter). Such workers are deemed independent contractors if at least 90% of the employees' compensation is determined by their output. In other words, they are independent contractors if they are paid by commission and not a fixed salary. They must also perform their services under a written contract that specifies they will not be treated as employees for federal employment tax purposes.
Statutory Employees
Some individuals who consider themselves to be in business for themselves—reporting their income and expenses as sole proprietors—may still be treated as employees for purposes of employment taxes. As such, Social Security and Medicare taxes are withheld from their compensation. These individuals include:
Corporate officers
Agent‐drivers or commission‐drivers engaged in the distribution of meat products, bakery products, produce, beverages other than milk, laundry, or dry‐cleaning services
Full‐time life insurance salespersons
Homeworkers who personally perform services according to specifications provided by the service recipient
