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2012 Year End Tax Planning

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OK folks,  it’s time to think about what  to do before December 31,  so that you can reduce your tax burden.  If you retain an accountant or a business and tax attorney,  make an appointment to discuss year-end tax planning.  You will have a few of the following issues in mind:

Full deduction vs. Depreciation

Depending on how much money you’re on track to make this year and your ability to reasonably project earnings for next year,  you will either make purchases before December 31,  or wait until after January 1.   Further,  you will either take the full up-front deduction on business equipment,  or depreciate business-related purchases and spread the deductions out over several years,  to soften the tax bite on future earnings.

If you did well financially this year,  you’ll probably take the full deduction on business equipment such as your new computer,  printer,  scanner and/or smart phone this year,  to add more expenses to charge off against gross earnings.   But if subsequent years appear more financially rosy,  then use the depreciation method and spread those deductions forward.

Remember all selling expenses

With the passage of time,  it is easy to allow a few expenses associated with generating revenue to get lost in the shuffle.  Did you attend a professional development conference this year,  or take a course?  Did you buy business books?  Pay to attend networking meetings?  Pay dues to join the chamber of commerce or Rotary club? 

You may deduct these expenses.  Proper labeling and immediate filing of receipts and posting of expenses into QuickBooks,  Excel or even an old-school ledger ensures that you will take all legal deductions in the quarter where they should be documented.  Make it easy for yourself to take advantage of every allowable deduction.  If you have not been on top of this stuff,  start looking for receipts now,  before you get tied up with Chanukkah and Christmas,  and record the transactions,  so you’ll be all set for the January 15 quarterly tax filing.

Retirement plan contribution

Especially if you had a good year,  make the maximum retirement fund contribution.  If you are 50+ years old,  or will celebrate your fiftieth birthday on or before December 31,   you are eligible to make the catch-up contribution of $5, 500.00 maximum.  If revenues generated were not stellar,  try to make the largest retirement fund contribution you can manage  (if you can manage). 

It’s not always possible to set money aside for retirement,  unfortunately.  Making money is often difficult,  slow paying clients ruin cash flow and living  expenses are rising.  It’s been reported that 40%  of the self-employed have no retirement funds available.   Many drew down to stay afloat while re-engineering  professionally,  following a lay-off.  Others used retirement money to launch their business enterprise.   As a result,  the retirement fund deduction is much underutilized,  according to the IRS.

Home office expenses

If your fancy smart phone or land line with bells and whistles are dedicated to business,  then you may fully deduct their purchase and monthly billing charges.  Ditto for your office supplies,  internet connection and other office expenses.  You may also deduct a portion of your heating and electricity expenses  (based on the square footage of your office space as a percentage of your living space).

Create boundaries

The fail-safe way to keep track of business expenses is to open up a separate business checking account and maintain a business-only credit card and thus separate your business and personal spending.  Automatically,  there will be a record of all business expenses.  Most business credit cards will provide a year-end summary of charges,  to help you along  (AmEx does this regardless).

Before the year ends,  get your arms around your business expenses,   allowable deductions and the impact on your tax burden.  As millionaires know,  it’s not just what you make,  but also what you keep.

Thanks for reading,

Kim

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Corporation Subchapter S–Should Your Business Be an S Corp?

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You may operate your business as a Sole Proprietor,  like 70%  of US businesses do,  or maybe as an LLC.  However,  if business should become fabulous and you begin to rake in some serious cash,  then it could make sense to incorporate,  as a method to lower your taxes and protect profits.

You may be implementing a growth strategy that requires you to take on additional investors,  or maybe implementing your exit strategy,  with a plan to sell your business,  perhaps to employees through an Employee Stock Option Plan  (ESOP).  Either scenario may prompt your accountant or business attorney to recommend that you establish a separate legal entity for your venture and the preferred strategy could be to incorporate.

What does that mean in practical terms?  For a Freelance consultant or small business owner,  incorporating usually means setting up an S Corporation.  Last week’s post discussed Limited Liability Companies  (LLCs)  and there are similarities between the S Corporation and LLC.

The first similarity is that both LLC and S Corporation provide owners with a degree of protection from lawsuits and creditors.  However if negligence is involved,  the  “corporate veil”  will be pierced and the owner(s) will be liable for any damages.

Second,  there are certain similarities in how taxes are handled.  As with the LLC,  S Corporations  (unlike the more common C Corps)  allow a  “pass through”  of business profits or losses to the owner’s  (i.e., S Corp shareholders)  personal tax form 1040 in accordance with the share of business ownership.  There is no separate  (double)  taxation,  as occurs with C  Corporationss.  Both S Corp and LLC owners can deduct pre-tax business expenses such as advertising,  professional services,  travel, etc.  S Corporation owners will file form 1040 schedule E and form 1120S in addition to your usual tax forms.

Yet,  there are a couple of differences that impact the treatment of taxes.  Unlike the LLC and like the C Corporation,  S Corporation owners pay themselves a salary  (that must be deemed reasonable based on industry standards and business revenue)  and they receive dividends  (distributions)  from any additional profits earned.  Dividends are taxed at a lower rate than the salary pay-out and that is one reason that S Corporation tax rates may be lower.

Another difference involves self-employment taxes.  Says Diane Kennedy,  Phoenix, AZ based CPA and author of  “Loopholes of the Rich: How the Rich Legally Make More Money and Pay Less Tax”  (2001),  “If you have a Subchapter S Corporation and you put yourself on the payroll as a W-2 employee,  withholding taxes from each paycheck as you take money out of the corporation,  you can often save a significant amount of money in self-employment taxes”.  Sole proprietors and LLC owners must pay self-employment taxes.

Owners may sell,  transfer,  or gift their shares,  something that cannot be done by LLC owners.  There cannot be more than 100 S Corp shareholder/owners,  but family members who own shares are treated as one shareholder when counting.  Corporations,  regardless of the form,  continue on in perpetuity unless formally dissolved.  Death does not automatically dissolve a corporation,  while LLCs terminate if one owner retires,  resigns,  dies or goes bankrupt, but can be reformed if desired.

On the downside,  S Corporations have more stringent guidelines than do LLCs.  Owners must be US citizens or reside in the US.  There can be only one class of stock and depending on the state in which you’ve incorporated,  there may be additional state taxes.  Businesses that receive 25%  or more gross income from passive income  (think rental income)  and those that receive 95%  or more gross income from exports are prevented from forming an S Corporation.

S Corporation owners must also hold annual board of directors and shareholder meetings and take minutes.  Further,  the owners must strictly separate their personal and corporate bank accounts.  Failure to adhere to all requirements may result in forfeiture of S Corp status and the IRS is looking.

So which business organization strategy is best for your business?  Like I said in the beginning,  it depends on the circumstances.  Throughout the life of you and your consultancy,  it is wise to assess where you are presently and your plans for the future in terms of income,  growth,  exit strategy and taxes and institute the legal structure that will enhance your position.

Thanks for reading,

Kim

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Limited Liability Company — Should Your Business Be an LLC?

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Going into business invariably entails lots of decision-making,  one of which will be to choose the legal structure of the business entity.  As you know there are three choices: Sole Proprietorship,  Limited Liability Company and Corporation,  typically S Corporation for Freelance consultants and small business owners.  Most Freelancers begin as Sole Proprietors and many remain there.  If business-related liability is not an issue,  then that is a perfectly acceptable choice.  About 70% of  US businesses are Sole Proprietorships.  However at some point in the life of your business,  perhaps as revenue and reputation grow,  it may be preferable to move beyond Sole Proprietor status.

At any time,  you may decide to operate your Freelance consultancy through an entity that limits your personal liability as the owner  (alone or in partnership),  decide that it’s worth the  $500.00 or so filing fee  (payable each year on renewal),  plus maybe three hours of attorney or accountant fees to make sure everything is done the right way.  Or maybe it’s not liability you’re worried about.  Maybe you feel that you’ll appear to clients and prospects more  “real”  and the legal structure is more marketing tool than liability protection.  Whatever your motive,  the matter of selecting your consultancy’s legal entity will present itself.  Should you structure your business as a corporation, or as an LLC? The answer to the question is— it depends.

Most Freelancers and small business owners are directed by their accountants and attorneys to the LLC.  It’s flexible and easy to set up and file.  Your state’s Secretary of State’s office will have a form online for you to inspect.  There may be one or several owners of the LLC,  but there must be a registered agent  (to receive mailings associated with the LLC entity)  who resides within the state.

A big advantage of organizing your business as an LLC is that you will receive protection from creditors of the business.  If the business owes money,  those to whom it owes money will not be able to come after personal property and other assets.   Moreover,  limited liability means that business owner(s) may not be held liable for debts that exceed their investment in the business.  For example,  if your investment in your Freelance operation is $5000.00 and you manage to incur business debts of $8000.00,  you are potentially liable for only the $5000.00.

Furthermore,  there is no separate business tax on the LLC.  All business income and expenses  “pass through”  to the owner(s) of the business,  who pay personal taxes only on the net profit,  based on the share of business ownership.  The owner of a single-entity LLC does not have to file a separate tax return for the business—all financial information is reported on form 1040.  Schedule C Profit and Loss for a Business must also be filed  ( you file schedule C also as a Sole Proprietor),  where one may deduct all of the allowable pre-tax business expenses,  i.e. advertising expenses,  travel and entertainment,  office supplies, etc.  You must also pay self-employment tax,  as do Sole Proprietors.

I was surprised to learn that an LLC can own property.  In fact,  if the property owned increases in value  (and it probably will),  your LLC will avoid the capital gains double taxation that regular corporations  (C Corporations)  would incur should the property be sold or the business entity liquidated.  Like business expenses and profit,  the capital gains would  “pass through”  to the owner(s).

One must be careful when doing business as a separate legal entity,  though.  Your LLC cannot become entwined with personal finances.  Keep your grocery store charges,  shopping sprees and personal vacations out of your business affairs.  Failing to do so will cause LLC status to be forfeited.  Moreover,   an LLC terminates if one of the owners retires,  resigns, dies or goes bankrupt  (remaining owners can form a new LLC).

The LLC works best in relatively straightforward businesses,  single- or multi-owner.  If your goal is to raise money to vastly expand your business,  then the business is advised to incorporate,  so that investors will have the security of holding stock certificates as proof of ownership stake in the business.  Ditto if you plan to take your company public.  I’ll be back next week with a look at incorporating your Freelance consultancy.

Thanks for reading,

Kim

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2011 Year-End Tax Planning

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It’s about that time,  folks.  2011 ends in 7 weeks and it’s time to plan how to handle your taxes.  We all have to pay something  (except if you’re a multimillionaire or billionaire, in which case you pay nearly nothing!),  so before December 31 it’s important to enact a strategy that will work well for you.

Tax planning boils down to either accelerating or deferring income or deductions.  In other words,  do you want to report and pay taxes on more money or less in 2011 and do you want more or fewer write-offs?  The road you follow will depend on many factors,  including what you did last year,  how much money you will make this year,  whether you expect to make rather more in 2012 because a big project will start then,  or you expect to make rather less next year because an important project will soon conclude and you have nothing big on the horizon.

Take a look at your 2010 tax forms and 3rd quarter 2011 P & L statement to see what your financials say about your options.  What do fixed and variable expenses look like?  That will impact your decisions about deductions.  What does net profit look like?  That will impact whether you choose to accelerate or defer income.

If you want to accelerate income,  start by collecting outstanding receivables.  Pick up the phone or send an email and ask clients to pay ASAP,  or at least before December 31.  Tell them it’s a tax-planning matter (it sounds so much more dignified than telling clients that you plain old need the money!).  If you’ve got a contract in the works,  ask for a bigger retainer.

If you opt to defer income,  perhaps because 2011 has been a good year and you’re not sure what 2012 will bring,  then wait until January to collect receivables and ask for a smaller retainer fee.  BTW,  it’s possible to defer up to 25% of your income through your Solo 401K and it’s tax-deductible.

If you need write-offs,  scout for year-end deals on office furniture,  computers,  iPads,  office supplies,  software and whatever else you need to do business,  including enrolling in a course or attending a conference.  Office furniture,  computers,  company vehicles and other big-ticket items can be written off in a lump sum,  or depreciated over a period of years  (which is in reality deferring the deduction since it’s being spread out).

If you elect for fewer write-offs,  hold off on shopping until the calendar turns.  Alternatively,  if you are presented with office or business equipment deals that you cannot refuse,  then choose the depreciation method and spread out your deductions.

Speaking of deductions,  remember your retirement plan.  Solo 401K and SEP-IRA are funded with pre-tax dollars and are tax-deductible up to $16, 500.00  If you’re 50+,  the catch-up contribution feature raises the maximum to $22,000.00.  Remember the tax-deductible income deferral feature if you’ve had a very good 2011,  but expect to have a less lucrative 2012.

Further,  you might want to make an appointment with your accountant or business attorney and confirm that you are enrolled in the best legal entity for you.  Your exit strategy can impact  the legal entity you use.   For example,  if you want to take on a partner and eventually sell out,  or pass the business to offspring,   niece or nephew,  a different legal entity may be preferable.

Finally,  the end of the year is the time to assess what’s happened this year for you,  professionally and personally. Review your successes and challenges.  What will you do differently in 2012 and what will you continue to do?  Did you meet your financial goal?  Did you manage to sign a dream client or get a wonderful proposal approved?  What should you reach for in 2012?

Thanks for reading,

Kim

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Year End Tax Reducing Strategies

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President Obama’s tax plan will probably pass before Congress recesses for Christmas. The $250K + crowd can once again relax as they glide by in their Lincoln Navigators,  splashing mud on the hoi polloi.  Nevertheless,  those of us who are somewhat closer to the earth (flat on our backs financially speaking, perhaps?) still have a few defensive measures to take,  regardless of whether Bush’s tax cuts get extended by Obama and Congress.

Get the money now

In addition to giving a nice boost to your cash flow to help with Christmas shopping,  this is also a most clever way to approach clients and entice them to either pay on time,  finally make good on a late payment or even request payment a couple of weeks early.  You are not chasing money,  this is all about tax planning… Your accountant would like you to show X dollars in 2010,  for tax purposes.  The client will benefit by cleaning up accounts payable as the year ends.  That’s how you’ll phrase it when you speak to the finance director and ask that your outstanding invoices,  late or early,  get paid by 31 December.

Or, take the money later

Did you buck the trend and have an extraordinary year in 2010,  but expect less than thrilling billables in 2011?  In that case,  income deferral is your best strategy.  Mail invoices in January and sign contracts that require an up-front payment after the calendar turns.

Pump up the write-offs

If you have a few dollars available,  then stock up on office supplies before 31 December.  If you have more money,  then take advantage of the sales and purchase big-ticket items such as office furniture,  a more powerful computer,  a good camera,  or software that will help you manage business more effectively.  For example,  the right accounting software will make tax planning and business financial analysis easier.  Evaluate whether what you’re using now is sufficient for the needs of your business.

You get to choose how and when the expensive purchases will be written off,  either slowly over a period of years as depreciated assets or immediately,  by using the Section 179 deduction.  You can make that decision at the April 2011 filing.  Conversely,  if you suspect that you will come up short on deductions next year,  shop after the new year.

Review your retirement plan

If you’ve thought about establishing a Solo 401K,  do it by 31 December.  Add extra dollars to your pre-tax funded and tax-deductible SEP IRA or Solo 401K (if you’re age 50 +,  remember the catch-up contribution feature of the latter).  Exercise the profit sharing or salary deferral benefits of your Solo 401K if you’ve had a lucrative year and would like to keep some money away from the tax man for a few years.

Review your choice of business entity

Especially if you operate as a Sole Proprietor,  try to squeeze in an appointment with a business tax attorney or an accountant,  so that your financials can be reviewed and you can talk about where your business is now and what you’d like it to become in the future.  Do you envision selling your business,  or passing it to a family member? Perhaps you would be better served if you changed your business entity to either an LLC or S  Corporation.

2010 Tax Tactics

  • The health insurance deduction for Freelancers,  including Sole Proprietors,  LLC members (single or group),  general partners and S  Corporations (single or group and owning 2% or more of the stock),  will reduce taxes owed on income generated by self-employment and also the amount of self-employment tax owed.  Health insurance premiums are 100%  tax deductible if one is self-employed and does not participate in  a group health insurance plan.  Health plan premiums to insure your spouse and dependent children are also fully deductible.  However,  your business must show a Schedule C profit in order to claim this tax benefit.  Businesses that show a loss will not be eligible for this deduction.
  • Those launching a new business venture in 2010 will have a more generous start-up expense deduction of $10,000.00 ($5,000.00 is the usual limit).  File your registration paperwork toute de suite.
  • The Section 179 deduction has been increased to $500K for 2010 (and 2011).  Maybe you need commercial property for your business,  or a company vehicle or two?
  • If you’ve been thinking about hiring an employee and can find someone good within two weeks,  a one-time hiring credit can be taken in 2011 for an employee hired by 31 December, 2010.  The tax credit will equal 6.2%  of wages paid,  not to exceed $1000.00,  for each employee who is retained for one full year.  Your new employee(s) must have been either unemployed for the 60 days that preceded the hire or underemployed,  having worked a maximum of 40 hours in the 60 days preceding the hire.  Family members hired are ineligible for the new hire tax credit.

Thanks for reading,

Kim

 

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The Roth, The SEP and The Solo 

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As you begin to ponder your inevitable retirement from the Freelance life,  you’ll  need to examine options for saving.  Those who generate an income large enough to make planning and saving for the future an obvious course of action probably have an investment counselor to act as guide through the minefield.  

Yet at some point,  less wealthy Freelancers must also understand how to finance the next phase of their lives.  Choosing the best retirement plan option is confusing and subtle differences can magnify both at tax time and when it’s time to retire.  I hope that you find this post useful as you formulate the plan for your future.

The Simplified Employer Pension Plan

Somewhat similar to Solo 401K,  the SEP IRA retirement plan may be used by Sole Proprietors,  LLCs,   C  Corporations,  S  Corporations and Partnerships.  As an added bonus,  the SEP IRA may be used not only by those who have both W2 and self employment income,  but also by business owners who employ more than just the spouse.

Contributions to the SEP IRA are made pre-tax and contributions are tax deductible.  It is permissible to contribute up to 25 %  of W2 earnings plus up to 20%  of self employment income,  to the maximum annual contribution of $49,000.00 in 2010.  There is no  “catch up contribution”  provision with SEP IRA.

If you have a job,  including one where you are able to participate in a retirement plan,  along with a sideline business,  then SEP IRA is your option of choice.   Up to the maximum,  the amount you choose to contribute,  or even if you choose to contribute,  in a given year is up to you.  Contributions are held tax deferred and withdrawals made after age 59 1/2 are taxed as ordinary income.  Withdrawals made prior to age 59 1/2 are subject to the customary 10 %  premature withdrawal penalty and additionally,  will be taxed as ordinary income.

Small business owners with employees may institute a SEP IRA for themselves and their employees.  Business owners are able to make generous tax deductible contributions to the company SEP IRA on behalf of themselves,  the on-the-payroll-wage-earning spouse and other employees.

The business owner decides at what level to fund the plan,  up to 25%  of annual compensation.  The %  of funding for the business owner must equal what is offered to employees.  Each employee has an individual SEP IRA account and the business owner pays the entire contribution.  The pre-tax money paid into each SEP IRA account is tax deductible for the business and is a tax free benefit for the employee.

If you like,  it is possible to convert a SEP IRA to a Solo 401K,  something you may choose to do when you turn 50 and want to make those catch up contributions.  Other retirement accounts can be consolidated into the SEP IRA,  with the exception of a Roth  401K,  which is an after-tax fund.  It is not possible to borrow against the value of the SEP IRA.  April 15  is the deadline to establish and fund your SEP IRA account in order to receive a tax deduction for the previous year.

Roth 401K

 Unlike SEP and Solo 401K,   Roth 401K contributions are made with after-tax income.  Which option you choose will,  like most of life’s choices,  depend upon how much money you generate.  Depending upon your financial situation,  you may decide to split the difference and have both a  (pre-tax)  Solo 401K and an  (after tax)  Roth 401K. 

It is permissible to use the salary deferred portion of your Solo 401K to make a Roth 401K contribution.   Remember that the maximum annual contribution is $16,500.00  for those younger than 50 years and $22,000.00 for those 50 years and older.  Profit sharing Solo 401K contributions are not eligible to be made as a Roth 401K contribution,  since they are made pre-tax and are tax deductible and you cannot commingle the two.

While Roth 401K income deferred contributions are NOT tax deductible,  withdrawals you make after age 59 1/2 years are tax free IF five years have passed since your first contribution to the Roth (known as the 5 year rule).  Roth distributions must begin at least by age 70 1/2,  unless you roll over to the Roth IRA.

BTW,  if you transition into a job that offers a retirement plan,  you may be tempted to roll your SEP IRA or Solo 401K into the new retirement account.  Be advised that may or may not be a smart move.  Maintenance fees will be much lower for an account attached to a large company vs. that of an individual;  but there is much more investment flexibility available in your Solo 401K vs. what is available to a big corporation. 

Thanks for reading,

Kim

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The Self Employed 401K Plan

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Freelancers are the CEO of our solo business empire and we wear many hats.  In addition to promoting our business services,  networking and prospecting for new clients,  managing our brand,  remaining relevant in a fluctuating marketplace and BTW,  actually working on projects that give us the billable hours that allow us to eat and maintain the roof over our heads,  we must also define,  fund and manage our retirement strategy. 

A March 2010  SBA study found that we Freelancers are much less likely to make adequate financial preparation for retirement.  That’s probably because most of us are either on our spouse’s retirement plan,  or are not generating enough income to incorporate saving into our lives. 

If you’re unmarried and able to spare a few thousand dollars a year,  do set up a retirement account.  It is essential that we have cash available to us as we get older.  Inevitably,  the day comes when one is too old and frail to work.  Plus,  a retirement account  keeps money out of the hands of the tax man,  for a while anyway. 

The Self Employed 401K was created in 2001 and made available on January 1, 2002.  The Self Employed 401K offers benefits that compare well to the traditional 401K plan.  This retirement plan option may be used by Sole Proprietors,  LLCs,  S  Corporations,  C  Corporations and Partnerships.  Solo 401K may also be used by small business owners whose only employee is the spouse.  The spouse must be on the payroll and receive income from the business.

Solo 401K consists of two types of contributions,  salary deferral and profit sharing,   both of which are tax deductible.  Funds deposited into the account are held tax deferred.  As with the typical 401K plan,  you may begin to draw down after age 59 1/2.  Those withdrawals will then be taxed as ordinary income.  Withdrawals made prior to age 59 1/2 will incur the 10%  premature withdrawal penalty and will additionally be taxed as ordinary income.

The Self Employed 401K,  or Solo 401K,  allows Freelancers younger than age 50 to contribute a maximum $16, 500.00 tax deferred annually.  Freelancers aged 50+ are eligible to contribute up to $22,000.00 tax deferred income each year,  known as the  “catch up”  contribution.  Money deposited into a Solo 401K must be generated by self employment only and not salary.

Up to the maximum,  you may decide the amount of your annual contribution.  If you’re unable to make a contribution in a given year,  then don’t make one.  When billable hours are strong,  add extra money to the account whenever possible.  The profit sharing feature allows you to deposit up to 25%  of your annual income,  which is tax deductible and held tax deferred.  That equals maximum $49,000.00 a year for those under age 50 and $54,500.00 yearly for those age 50+.

A solo 401K retirement plan is easy to set up and there are no complicated administrative requirements for us to micromanage.  We are responsible for making the contributions and deciding where to invest.   The deadline for establishing your Solo 401K is December 31 of the year in which you would like to receive the tax deduction (fiscal year end for corporations).  When researching 401K plans,  look for the following:

  • Low expense ratios.  Check out http://morningstar.com for a rate comparison.
  • No or low set-up fees and annual costs
  • Investment flexibility.  You should be able to invest in stocks,  bonds,  index funds and mutual funds.

It is possible to borrow against the plan’s account balance,  maximum $50,000.00 or 50% of the account balance.  If the loan is paid back on time,  there will be no penalty charges or taxes assessed to the transaction.  It is also possible to transfer funds from another retirement account into your Solo 401K and consolidate your holdings.

We’ll delve further into this topic next week.  Thanks for reading.

Kim

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Starting A Business? Consider Your Legal Entity Part I

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SOLE PROPRIETORSHIP

The default legal identity for the vast majority of Freelance business consultants, the Sole Proprietorship is an extension of the owner and is not a separate legal entity.  It is possible to use a separate business name (dba = doing business as) when operating as a sole proprietor—registering with the state and /or city can be a good idea—and it’s also possible to obtain from the IRS a separate business tax ID (Employee Identification Number, or EIN) and open a business bank account, both of which are recommended.  Sole Proprietorship offers no liability protection.

The tax return filed is your own.  Since there will be business expenses,  you will file schedule C along with 1040.  Deduct the portion of your home used for business on form 8829 Use of Home for Business.  See your P & L for the numbers to use for schedule C business deductions.

Quarterly estimated taxes must be paid on the 15th of January,  June and September along with the annual filing on April 15.  Remember to file the self employment tax schedule SE in April.

SMALL BUSINESS CORPORATION

To form an S Corporation is to create a separate legal entity for your business.  You must file articles of incorporation;  write by-laws for the corporation;  and elect a board of directors and officers.  It is furthermore required that annual meetings of corporation shareholders and directors be held and  official minutes for all corporation meetings be written and retained.

To set up an S Corp. choose a name for  your business (check the name availability on your state website),  get an EIN number and call the Secretary of State’s office to receive filing instructions.  The fee is about $275, paid annually.  It is recommended that you trademark your business name.

This is a relatively new form of corporate status.  As in the standard corporation, called the C  Corporation, owners and shareholders in the business are issued stock (of one class only).

To operate as an S Corp., certain conditions must be met:  the business must be a small business, must be based in the US,  may consist of 1 to 100  shareholders only  and no shareholder can be a nonresident alien.  Business owners and the business will have limited protection from liabilities, providing that no owner has been proven to be negligent.  If an owner is proven to be personally negligent, the owner will be held personally liable.

The tax return filed is the owner’s  form 1040, along with schedule E (due April 15) plus form 1120S (due March 15).  As with any business, quarterly estimated taxes must be paid, in this case using form 1120W.  Shareholders file schedule E along with their form 1040. There is no separate corporate tax.

If this is the business entity that you elect, be careful to meet and maintain all of the conditions.  Meaning, even if you are the sole owner, you must still hold annual meetings and write and retain minutes.  Failure to meet these conditions can cause you to lose the tax advantages of  S Corp. status and the business will be re-classified as a C Corporation.

CORPORATION

Known as the C Corporation, this is the granddaddy of separate business entities.  C Corp. status offers more protection against liability than any other business entity.  If you run a large business, if your business has locations in more than one state,  if the business is expected to be very long lived  and/or if the business could be subject to significant liability,  it is worthwhile to operate as a C Corp.

Stock will be issued (of any class) and stock options can be offered.  It is generally easier to raise investment capital, as stock and/or options can be made available.  On the downside, a C Corp. has comparatively larger administrative expenses, is subject to more regulatory scrutiny and is taxed at a higher rate.

To do business in this fashion select a name for the business, obtain an EIN number and file articles of incorporation with the Secretary of State for a fee of  about $275, paid annually.  It is recommended that the business name be trademarked.

Corporation by-laws must be written and a board of directors and officers must be elected.  An annual meeting must be held for directors and officers and meeting minutes must be written and retained.

The corporation  must file the annual tax form 1120 on March 15,  plus estimated taxes on form 1120W on the 15th of  April,  June,  September and December.  Business owners file form 1040 with schedule E on April 15 plus estimated quarterly tax payments on the 15th of January, June and September using form 1040–ES.

Next week, I’ll be back with 3 more options for your business legal entity.

Kim