First of all the name of the game is to have the corporation pay for as much as it possibly can so you are using pre-tax dollars. That means just what it sounds like, you are using money that you haven’t paid tax on yet. The corporation takes in income then gets to deduct all business related expenses and pays tax only on what’s left over, net taxable income.
C Corporation
If you have a C corporation, then the corporation will pay the tax on the net income. If you can leave some of the money in the corporation (as opposed to taking it out in the form of wages to you) this will save taxes because the corporation pays only 15 % federal tax on the first $ 50,000 of taxable income.
If the corporation makes $ 93,300 and if you can leave $ 50,000 in the corporation you will pay 15 % tax on all of the income, that is, the combined tax between you and the corporation. Here’s how:
Corporation net income $ 93,300
Less: wages to you ( 43,300)
Net taxable income to corporation $ 50,000 taxed at 15 %
Wages to you $ 43,300
Less: standard deduction
& personal exemption ( 9,350)
Taxable income to you $ 33,950 taxed at 15 %
So you’ve paid 15 % tax on $ 93,300 of income!
Remember, if you or you and your spouse are the sole owner/employees of the corporation it doesn’t matter who is paying the taxes you or the corporation. It’s all coming out of your pocket. For example, when you pay yourself wages the corporation will pay the FICA Social Security and Medicare taxes by withholding 50 % from wages and paying 50 % itself. It’s still all coming out of your pocket because you own the corporation.
S Corporation
If you have an S corporation, then the net taxable income and certain other items, like interest income and capital gains, will be passed through to you to be reported on your individual tax returns. If you can leave some of the money in the corporation (as opposed to taking it out in the form of wages to you) this will save taxes because the net income from an S corporation is not subject to self employment tax.
This is the great advantage to using an S corporation instead of a sole proprietorship that reports its income on your 1040 Schedule C. All of the income on the Schedule C is subject to self employment tax. It’s a killer!
Now keep in mind, you are an employee of the corporation and you must pay yourself a “reasonable” wage for the services you perform for the corporation. This means it can’t be too high or too low. If you are the sole owner/employee then no wage is too high because all of the income was generated by your efforts. Under the same theory, if you don’t pay yourself all of the income in the form of wages, the IRS may say you didn’t pay enough.
If you do not take all of the income out in the form of wages you should be careful about taking other distributions. Although you are allowed to take distributions from an S corporation without paying tax on them, the IRS could recharacterize the distributions as wages and charge you payroll taxes on them.
These are just a few areas where you can save money by using a corporation. If you have any questions about your tax strategy call Law Offices of Patricia Rowe at 925-256-1000.
Monday, September 14, 2009
Monday, September 7, 2009
7 Tips To Reduce Corporate Taxes (Way After Year End)
The final extended due date for the 2008 corporate tax returns for calendar year corporations is September 15th. You finally looked at your profit and loss statement and it shows too much net taxable income. Your CPA says you’re going to owe a lot of tax, but you don’t know how you’re going to pay for it because your corporation doesn’t have any cash. You don’t know how the corporation could have ended up with net income because there’s no money in the bank.
What can you do now to reduce your corporation’s taxes now that you’re finally doing the returns?
1. Review Your Cash Expenditures- Go through your receipts (if you don’t have any- here’s the reason why you must save every receipt for anything spent during the year- start now!) pick out the ones for which you paid cash. Add the business-related expenses to the corporate books as “loan from shareholder.” That is debit expense, credit loan from shareholder.
2. Look Through Your Personal Checkbook- Look through your personal checkbook for any business-related expenses. Even if you don't have a receipt- you have a cancelled check or entry on your bank statement. (If you don't receive bank statements in the mail make sure you print out statements from online banking and keep them in your file for each month.) Add the business expenses you paid for the corporation to the corporate books as "loan from shareholder." That is, debit expense, credit loan from shareholder.
3. Review Your Credit Card Charges- Go through your credit card bills for your personal credit cards. (You should have a corporate credit card, but those expenses should already be recorded on the books.) Pick out any business-related expenditures and record them on the corporate books. Again, record as “loan from shareholder.” That is debit expense, credit loan from shareholder.
4. Think of Furniture or Equipment You Use in Your Business- Depreciation! Depreciation! Depreciation! Think of furniture or equipment you use for your business that is not recorded on the corporate books. If you have an office at home you have a desk, chair, computer, printer and maybe other equipment there that has never been recorded on the books. You have cell phones, iphones, cameras, camcorders, bookcases, shelving, storage boxes, file cabinets, etc. If anything can be remotely related to your business put it on the corporate books and depreciate it. It must be recorded at lower of cost or fair market value at the date you placed it in service, which is probably January 1.
5. Pay Yourself Rent for Storage or Office Space- You may be using parts of your house or garage for office or storage space for your business. You can have the corporation pay you the fair rental value of that space per month. Think what you would charge an unrelated party to rent such space. Even though you are way past the end of the corporate year, look to see if you have any outstanding loans you owe the corporation. An amount for rent can be transferred on the books from loan receivable shareholder to rent expense. Remember- you should have a written lease agreement between you and the corporation. In the current year start paying yourself monthly by writing checks from the corporation to you.
6. Pay Yourself A Year End Bonus- Again, you are way past the corporation's year end. But if you are desperate you can do this, although it's risky. If you have an outstanding loan receivable from shareholder you can pay yourself a year end bonus by recording an adjustment from loan receivable shareholder to officer salaries. The problem is you'll have to file amended payroll tax returns and this could cause you to be audited by federal or state taxing authorities. It's best if you have amounts that were paid to you by the corporation at the end of the year. You will still have to pay interest and penalties on the payroll taxes, but this may be worth it if you owe alot of corporate tax.
7. Pay Your Spouse for Outside Services- If you can say your spouse or children performed any kind of services for the corporation, such as, bookkeeping, telephone calls, sales meetings, interior decorating service, filing, modeling for advertisements or brochures, etc. pay him or her as an independent contractor. Again you'll have to have an outstanding loan receivable from shareholder balance. But this will avoid having to amend payroll tax returns. Again make the adjustment from the loan receivable shareholder account to the expense account.
If you are not sure how to do any of these adjustments yourself you can just list the items and give them to your CPA to make the adjustments. If your CPA doesn't know how or doesn't want to do these adjustments, or if you don't have a CPA- call Law Offices of Patricia Rowe at 925-256-1000. We can help! See our website at PatriciaRowe.com.
The final extended due date for the 2008 corporate tax returns for calendar year corporations is September 15th. You finally looked at your profit and loss statement and it shows too much net taxable income. Your CPA says you’re going to owe a lot of tax, but you don’t know how you’re going to pay for it because your corporation doesn’t have any cash. You don’t know how the corporation could have ended up with net income because there’s no money in the bank.
What can you do now to reduce your corporation’s taxes now that you’re finally doing the returns?
1. Review Your Cash Expenditures- Go through your receipts (if you don’t have any- here’s the reason why you must save every receipt for anything spent during the year- start now!) pick out the ones for which you paid cash. Add the business-related expenses to the corporate books as “loan from shareholder.” That is debit expense, credit loan from shareholder.
2. Look Through Your Personal Checkbook- Look through your personal checkbook for any business-related expenses. Even if you don't have a receipt- you have a cancelled check or entry on your bank statement. (If you don't receive bank statements in the mail make sure you print out statements from online banking and keep them in your file for each month.) Add the business expenses you paid for the corporation to the corporate books as "loan from shareholder." That is, debit expense, credit loan from shareholder.
3. Review Your Credit Card Charges- Go through your credit card bills for your personal credit cards. (You should have a corporate credit card, but those expenses should already be recorded on the books.) Pick out any business-related expenditures and record them on the corporate books. Again, record as “loan from shareholder.” That is debit expense, credit loan from shareholder.
4. Think of Furniture or Equipment You Use in Your Business- Depreciation! Depreciation! Depreciation! Think of furniture or equipment you use for your business that is not recorded on the corporate books. If you have an office at home you have a desk, chair, computer, printer and maybe other equipment there that has never been recorded on the books. You have cell phones, iphones, cameras, camcorders, bookcases, shelving, storage boxes, file cabinets, etc. If anything can be remotely related to your business put it on the corporate books and depreciate it. It must be recorded at lower of cost or fair market value at the date you placed it in service, which is probably January 1.
5. Pay Yourself Rent for Storage or Office Space- You may be using parts of your house or garage for office or storage space for your business. You can have the corporation pay you the fair rental value of that space per month. Think what you would charge an unrelated party to rent such space. Even though you are way past the end of the corporate year, look to see if you have any outstanding loans you owe the corporation. An amount for rent can be transferred on the books from loan receivable shareholder to rent expense. Remember- you should have a written lease agreement between you and the corporation. In the current year start paying yourself monthly by writing checks from the corporation to you.
6. Pay Yourself A Year End Bonus- Again, you are way past the corporation's year end. But if you are desperate you can do this, although it's risky. If you have an outstanding loan receivable from shareholder you can pay yourself a year end bonus by recording an adjustment from loan receivable shareholder to officer salaries. The problem is you'll have to file amended payroll tax returns and this could cause you to be audited by federal or state taxing authorities. It's best if you have amounts that were paid to you by the corporation at the end of the year. You will still have to pay interest and penalties on the payroll taxes, but this may be worth it if you owe alot of corporate tax.
7. Pay Your Spouse for Outside Services- If you can say your spouse or children performed any kind of services for the corporation, such as, bookkeeping, telephone calls, sales meetings, interior decorating service, filing, modeling for advertisements or brochures, etc. pay him or her as an independent contractor. Again you'll have to have an outstanding loan receivable from shareholder balance. But this will avoid having to amend payroll tax returns. Again make the adjustment from the loan receivable shareholder account to the expense account.
If you are not sure how to do any of these adjustments yourself you can just list the items and give them to your CPA to make the adjustments. If your CPA doesn't know how or doesn't want to do these adjustments, or if you don't have a CPA- call Law Offices of Patricia Rowe at 925-256-1000. We can help! See our website at PatriciaRowe.com.
Sunday, September 6, 2009
Estimated Tax Payments
Individuals:
There are two ways to pay your income taxes- through withholding, like on wages, or by making estimated tax payments. Estimated tax payments for individuals are due kind of quarterly on April 15th, June 15th, September 15th and January 15th of the following year.
If Your Income Is Less Than Last Year
The amount of estimated tax you are supposed to pay is 90 % of what you “estimate” you will owe for that year, say 2009. You compute how much you think you will owe, then divide by four and pay that amount. Just use your tax return software for last year and put in your numbers for this year. This is a good method to use if your income in 2009 is a lot less than that of 2008.
If Your Income Is the Same or Higher Than Last Year
But if your income is about the same or higher than last year you should use one of the “exceptions” to penalty for underpayment of estimated tax. That is, pay an amount equal to 100 % of prior year’s tax. (You can pay less but I don’t recommend it- it’s temporary and you never know what they’re going to do with the tax code.) Take the tax on your 2008 1040 line 61, divide by four and pay that each quarter. Then you’re covered- even if you owe $ 1 million on April 15, 2010 you won’t get a penalty. If your prior year’s tax was zero, then that’s all you have to pay for estimated- zero. But be careful, you’ll have to include form 2210 with your return to prove it.
Corporations:
The rules for estimated tax payments for corporations are a little bit different from those for individuals. For a calendar year corporation (one whose tax reporting year ends on December 31) the estimated tax payments are due on April 15th, June 15th, September 15th and December 15th of the current year.
So, use the same rules as above for individuals, i.e., estimate the corporation’s actual tax if income is less than prior year or pay an amount equal to 100 % of prior year’s tax if income is equal to or greater than the prior year.
Unfortunately the “exception” to penalty for underpayment of estimated tax that allows you to pay zero if prior year’s tax was zero is not available to corporations. Attach completed form 2220 to the corporate return to prove your exception.
Individuals:
There are two ways to pay your income taxes- through withholding, like on wages, or by making estimated tax payments. Estimated tax payments for individuals are due kind of quarterly on April 15th, June 15th, September 15th and January 15th of the following year.
If Your Income Is Less Than Last Year
The amount of estimated tax you are supposed to pay is 90 % of what you “estimate” you will owe for that year, say 2009. You compute how much you think you will owe, then divide by four and pay that amount. Just use your tax return software for last year and put in your numbers for this year. This is a good method to use if your income in 2009 is a lot less than that of 2008.
If Your Income Is the Same or Higher Than Last Year
But if your income is about the same or higher than last year you should use one of the “exceptions” to penalty for underpayment of estimated tax. That is, pay an amount equal to 100 % of prior year’s tax. (You can pay less but I don’t recommend it- it’s temporary and you never know what they’re going to do with the tax code.) Take the tax on your 2008 1040 line 61, divide by four and pay that each quarter. Then you’re covered- even if you owe $ 1 million on April 15, 2010 you won’t get a penalty. If your prior year’s tax was zero, then that’s all you have to pay for estimated- zero. But be careful, you’ll have to include form 2210 with your return to prove it.
Corporations:
The rules for estimated tax payments for corporations are a little bit different from those for individuals. For a calendar year corporation (one whose tax reporting year ends on December 31) the estimated tax payments are due on April 15th, June 15th, September 15th and December 15th of the current year.
So, use the same rules as above for individuals, i.e., estimate the corporation’s actual tax if income is less than prior year or pay an amount equal to 100 % of prior year’s tax if income is equal to or greater than the prior year.
Unfortunately the “exception” to penalty for underpayment of estimated tax that allows you to pay zero if prior year’s tax was zero is not available to corporations. Attach completed form 2220 to the corporate return to prove your exception.
Tuesday, September 1, 2009
7 Ways to Avoid Being Audited By the IRS
We’ve all talked to the next door neighbor who has his brother in law preparing his tax returns. He always gets all his withholding back because his brother in law comes up with very creative deductions, like his cat for a dependent, his kid’s private school tuition for child care credit and the cost of his built-in pool for medical expense.
Well, the truth is you can deduct whatever you want on your returns until you’re audited. Then you’re screwed!
Keep in mind, the federal statute of limitations is three years and states are three to four years. That means the IRS has three years to audit your return. They don’t even look at your return until two years after you’ve filed it. So, by the time they audit you, disallow your deductions, recalculate your tax and assess a deficiency it’s three years after you filed and you’ve got to pay interest and penalties in an amount almost as much as the additional tax.
It’s better to keep receipts and records and deduct only what you’ll be able to defend in an audit. Another bit of advice is watch how you report your income and deductions on your tax return:
1. It’s all in the presentation! Schedule C “Profit or Loss from Trade or Business” is the area that usually gets people audited. The IRS is looking at deductions. Give as much detail as possible on the schedule of expenses. Don’t have a lot in “miscellaneous expense” or “office supplies.”
2. Report all of your income. Sounds simple- but many people miss a basic check you should do before you file. If you have 1099 income make sure your income reported on schedule C equals or exceeds the total of your 1099’s. The 1099’s are recorded on the IRS’ computer so it’s an automatic letter to you if your income is less than the total reported to the IRS on 1099’s.
3. If you have received income that really belongs to someone else- usually interest income- report the total amount per the 1099-INT and subtract the “nominee interest” that belongs to the other person. A lot of tax prep software has this feature and will do it for you.
4. Again- they’re looking at your deductions- check Schedule A- itemized deductions- review the standard percentages used by the IRS and make sure you don’t exceed them.
5. Office-In-The-Home- yes- the IRS has made a special form to “flag” the fact you are taking this deduction. But don’t let that stop you! If you have an office in the home you are entitled to this deduction. As long as the percentage of business use (computed by taking the square footage of your office divided by the square footage of the whole house or apartment) is a “reasonable” amount you won’t be audited. Make sure it’s a “reasonable” %- I wouldn’t go over 20 %.
6. Vehicle Expense- another flag- but complete the detailed schedule showing how you computed the deduction and make sure it’s attached to your return. If filing electronically find software that includes the detail.
7. Non-cash Charitable Contributions- IRS hot topic right now- gifts of used clothing and stuff to Goodwill- yes another form to flag it- but complete the form 8283 with name and address of charity, date of donation and estimated value. Put descriptions of items given- use the large items like sofa, desk, TV, video recorder, instead of “miscellaneous.” Enter the cost- we usually estimate this a three times the value.
These are just a few areas where you can avoid an audit by being careful with your presentation. If you have any questions about your deductions or presentation call Law Offices of Patricia Rowe at 925-256-1000.
Well, the truth is you can deduct whatever you want on your returns until you’re audited. Then you’re screwed!
Keep in mind, the federal statute of limitations is three years and states are three to four years. That means the IRS has three years to audit your return. They don’t even look at your return until two years after you’ve filed it. So, by the time they audit you, disallow your deductions, recalculate your tax and assess a deficiency it’s three years after you filed and you’ve got to pay interest and penalties in an amount almost as much as the additional tax.
It’s better to keep receipts and records and deduct only what you’ll be able to defend in an audit. Another bit of advice is watch how you report your income and deductions on your tax return:
1. It’s all in the presentation! Schedule C “Profit or Loss from Trade or Business” is the area that usually gets people audited. The IRS is looking at deductions. Give as much detail as possible on the schedule of expenses. Don’t have a lot in “miscellaneous expense” or “office supplies.”
2. Report all of your income. Sounds simple- but many people miss a basic check you should do before you file. If you have 1099 income make sure your income reported on schedule C equals or exceeds the total of your 1099’s. The 1099’s are recorded on the IRS’ computer so it’s an automatic letter to you if your income is less than the total reported to the IRS on 1099’s.
3. If you have received income that really belongs to someone else- usually interest income- report the total amount per the 1099-INT and subtract the “nominee interest” that belongs to the other person. A lot of tax prep software has this feature and will do it for you.
4. Again- they’re looking at your deductions- check Schedule A- itemized deductions- review the standard percentages used by the IRS and make sure you don’t exceed them.
5. Office-In-The-Home- yes- the IRS has made a special form to “flag” the fact you are taking this deduction. But don’t let that stop you! If you have an office in the home you are entitled to this deduction. As long as the percentage of business use (computed by taking the square footage of your office divided by the square footage of the whole house or apartment) is a “reasonable” amount you won’t be audited. Make sure it’s a “reasonable” %- I wouldn’t go over 20 %.
6. Vehicle Expense- another flag- but complete the detailed schedule showing how you computed the deduction and make sure it’s attached to your return. If filing electronically find software that includes the detail.
7. Non-cash Charitable Contributions- IRS hot topic right now- gifts of used clothing and stuff to Goodwill- yes another form to flag it- but complete the form 8283 with name and address of charity, date of donation and estimated value. Put descriptions of items given- use the large items like sofa, desk, TV, video recorder, instead of “miscellaneous.” Enter the cost- we usually estimate this a three times the value.
These are just a few areas where you can avoid an audit by being careful with your presentation. If you have any questions about your deductions or presentation call Law Offices of Patricia Rowe at 925-256-1000.
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