You may have taken some extra rooms for your business use. Is that okay?

Section 280A(c) states that you may claim a home office based on the portion of the dwelling that you use exclusively and regularly for business. Thus, the law dictates no specific number of rooms or particulars regarding the size of the office.

The courts make this rule clear, as you can see in the Mills (less than one room) and Hefti (lots of rooms) cases described below.

The Mills Case

Albert Victor Mills maintained an office in his apartment from which he conducted his rental property management business. The apartment was small, totaling only 422 square feet. In the office area of the apartment where Mr. Mills had his desk, he also kept tools, equipment, paint supplies, and a filing cabinet.

The court agreed with Mr. Mills’s allocations and awarded the home-office deduction based on his claimed 23 percent business use of the 422-square-foot apartment.

Planning note. Mr. Mills did not have a single room dedicated to a home office. He had only an area of the apartment where he grouped his office furnishings, equipment, and supplies. If you have a similar situation, make sure your business assets are located in a group.

The Hefti Case

Charles R. Hefti lived in a big house, totaling 9,142 square feet. He claimed that more than 90 percent of his home was used regularly and exclusively for business.

Based on its review of the rooms, the court concluded that 13 rooms, totaling 19 percent of the home, were used exclusively and regularly for business.

Insights

The deductible portion of your home for an office includes the area used exclusively and regularly for business.

Let’s say you have an office in one room and your files in a second room, and you never use these rooms for personal purposes. Further, let’s say you use the office area on a daily basis and the file area in connection with that daily work.

Both rooms would meet the exclusive and regular use requirements, just as Mr. Mills’s and Mr. Hefti’s offices met these rules.

But Not This

“Exclusive use” means that you must use a specific portion of the home only for business purposes. You must make no other use of the space.

Exception. One exception to the exclusive use rule is storage of inventory or product samples if the home is the sole fixed location of a trade or business selling products at retail or wholesale.

Example 1. Your home is the only fixed location of your business, which involves selling mechanics’ tools at retail. You regularly use half of your basement for storage of inventory and product samples. You sometimes use the area for personal purposes. The expenses for the storage space are deductible even though you do not use this part of your basement exclusively for business.

Example 2. In Pearson, Dr. Pearson practiced orthodontics in a downtown medical building but retained the dental records of more than 3,000 patients in 36 file drawers (each measuring 26 inches by 14 inches by 12 inches) and had 1,461 boxes containing orthodontic models (each box measuring 10 inches by 6 inches by 2 1/2 inches).

He stored the records in the attic and basement of his home. The areas used for such storage were not separate rooms, and the remaining portions of the attic and basement were used by Dr. Pearson and his family for personal purposes.

The court ruled that Dr. Pearson may not treat the storage areas as home-office expenses because the records were not inventory or samples and Dr. Pearson did not operate a wholesale or retail trade or business from his home.

To be better understand the home office allocation detailed information. We are here to help you. Don’t hesitate to call our office:415-860-6288 (San Francisco), 917-397-0949 (New York) and 713-396-0107 (Houston), and e-mail us at info@flextcg.com.

The post How Many Whole or Partial Rooms Can You Use for Your Home Office? appeared first on Flex Tax and Consulting Group (FTCG).

If so, is your S corporation salary

• nonexistent?
• too low?
• too high?
• just right?

Getting the S corporation salary right is important. First, if it’s too low and you get caught by the IRS, you will pay not only income taxes and self-employment taxes on the too-low amount, but also both payroll and income tax penalties that can cost plenty.

Second, in most cases, the IRS is going to expand the audit to cover three years and then add the income and penalties for those three years.

Third, after being found out, you likely are now stuck with this higher salary, defeating your original purpose of saving on self-employment taxes.

Getting to the Number

The IRS did you a big favor when it released its “Reasonable Compensation Job Aid for IRS Valuation Professionals.”

The IRS states that the job aid is not an official IRS position and that it does not represent official authority. That said, the document is a huge help because it gives you some clearly defined valuation rules of the road to follow and takes away some of the gray areas.

Market Approach

The market approach to reasonable compensation compares the S corporation’s business with others and then looks at the compensation being paid by those businesses to employees who look like you, the shareholder-employee who is likely the CEO.

The question to be answered is, how much compensation would be paid for this same position, held by a nonowner in an arm’s-length employment relationship, at a similar company?

In its job aid, the IRS states that the courts favor the market approach, but because of challenges in matching employees at comparable companies, the IRS developed other approaches.

Cost Approach

The cost approach breaks your employee activities into their components, such as management, accounting, finance, marketing, advertising, engineering, purchasing, janitorial, bookkeeping, clerking, etc.

Here’s an example of how the cost approach works to support a $71,019 salary as reasonable compensation for this S corporation owner whose corporation had $3.5 million in revenue and 19 employees:

Health Insurance

The S corporation’s payment or reimbursement of health insurance for the shareholder-employee and his or her family goes on the shareholder-employee’s W-2 and counts as compensation, but it’s not subject to payroll taxes, so it fits nicely into the payroll tax savings strategy for the S corporation owner.

Pension

The S corporation’s employer contributions on behalf of the owner-employee to a defined benefit plan, simplified employee pension (SEP) plan, or 401(k) count as compensation but don’t trigger payroll taxes. Such contributions further enable the savings on payroll taxes while adding to the dollar amount that’s considered reasonable compensation.

Planning note. Your S corporation compensation determines the amount that your S corporation can contribute to your SEP or 401(k) retirement plan. The defined benefit plan likely allows the corporation to make a larger contribution on your behalf.

Section 199A Deduction

The S corporation’s net income that is passed through to you, the shareholder, can qualify for the 20 percent Section 199A tax deduction on your Form 1040.

To be better understand the S Corporation Salary’s detailed information. We are here to help you. Don’t hesitate to call our office:415-860-6288 (San Francisco), 917-397-0949 (New York) and 713-396-0107 (Houston), and e-mail us at info@flextcg.com.

The post Avoid Trouble: Don’t Let the IRS Set Your S Corporation Salary appeared first on Flex Tax and Consulting Group (FTCG).

Ah, new tax deductions!

Yep. Say you don’t claim a home-office deduction but now you are working at home and sitting in the fancy chair you inherited from your grandmother.

Let’s say you use the fancy chair 85 percent for business purposes. Can you depreciate 85 percent of that chair?

Yes.

Let’s say that grandma’s estate was appraised and this chair had a value of $10,000 when you inherited it about a year ago. It’s an antique, so it’s not gone down in value since you inherited it.

Depreciating a Formerly Personal Asset

When you convert the fancy chair to 85 percent business use, the law sees you as placing the item in service in your business at that time. That means you can begin depreciating the asset and claiming your tax deductions.

To determine the basis to use for depreciation, use the lesser of

• fair market value on the date of conversion from personal to business use, or
• adjusted basis of the property (generally the amount you paid for the asset plus the cost of any improvements).

With the fancy chair, your adjusted basis is the inherited value.

But say you bought the chair for $8,000. Suppose it was worth $10,000 when you converted it to personal use. You would use the $8,000 figure to determine your depreciation deductions.

Bonus Depreciation and Section 179 Expensing

Unfortunately, unlike assets directly purchased for your business, you may not use Section 179 to immediately expense assets that you convert from personal to business use.

Bonus Depreciation Is a Different Story

If you acquire bonus depreciation qualified property for personal use after September 27, 2017, and convert it to business use this year (or anytime before 2027), you must use 100 percent bonus depreciation if you don’t elect out of it.

Example. You purchased an antique clock for $9,300 in January 2018. Yesterday, you placed the clock in business service by moving the clock from your entryway to your home office. If you don’t make a formal election in your tax return to elect out of bonus depreciation, you must claim a $9,300 depreciation deduction on the antique clock this year.

Basis When You Sell

There’s a trick to basis when you sell converted property—you use a different rule for calculating losses than you do for calculating gains:

• Losses. To calculate losses, use your adjusted basis (conversion basis as discussed above minus depreciation).
• Gains. To calculate gains, use original cost basis minus post-conversion depreciation. In most cases, original cost gives you a higher basis and thus less tax. So don’t accidentally use adjusted basis.

Note. For inherited assets, your cost basis is the estate value (generally, the date of death value).

Clarifying Examples

Let’s say you bought a personal use desk/credenza/bookcase set for $8,000 and then converted it to business use when its fair market value had fallen to $6,000. Here are the tax consequences for three different sales scenarios (to make the examples clear, we ignored depreciation):

• Loss. If you sell the desk/credenza/bookcase set for $4,000, you have a $2,000 deductible loss ($6,000 – $4,000). Note. This is much better than if you sold the desk/credenza/bookcase set as a personal asset, which would create a zero deductible loss.
• Gain. If you sell the desk/credenza/bookcase set for $10,000, you have a $2,000 gain ($10,000 – $8,000).
• Gray area. If you sell the set for $7,000, you have neither gain nor loss on the sale. That’s a decent result—it means no taxes for you (but no deductible losses either).

To be better understand the home office deduction. We are here to help you. Don’t hesitate to call our office:415-860-6288 (San Francisco), 917-397-0949 (New York) and 713-396-0107 (Houston), and e-mail us at info@flextcg.com.

The post Working at Home? Don’t Overlook These Deductions appeared first on Flex Tax and Consulting Group (FTCG).

A lot, a whole lot.

And how much is making things easier worth? Of course, it’s a lot, a whole lot, too.

We now have both the new (a) clarity and (b) easy road to Paycheck Protection Program (PPP) loan forgiveness for the self-employed with no employees. Get ready to smile.

New Easy Road to 100 Percent Forgiveness

Say thanks to the Paycheck Protection Program Flexibility Act of 2020. This new law creates a 24-week period for you to spend your PPP loan proceeds.

If you obtained your loan proceeds before June 5, you can elect to use the eight-week period to spend your PPP loan proceeds.

Here’s the big difference:

• If the 24-week covered period applies, your loan forgiveness for your deemed payroll is capped at 2.5 months of your 2019 Schedule C net profit, not to exceed $20,833.

• If you elect the eight-week covered period, your loan forgiveness for your deemed payroll is capped at eight weeks, not to exceed $15,385.

Why Is This Important?

When you file as a Schedule C taxpayer and have no employees, your PPP loan is based on 2.5 times your 2019 Schedule C, line 31, net profit, limited to $20,833.

Here’s how the loan amount works:

Okay, you have your loan proceeds either in hand or in play at this point.

Let’s keep our eyes on the “easy road” to forgiveness. Under the new 24-week rule, you achieve 100 percent forgiveness when you pay yourself the total loan amount within 10.8 weeks of the date you received your loan proceeds. Let’s round the 10.8 to 11 weeks.

Yes, you are reading this correctly. By simply using the loan proceeds on yourself during the first 11 weeks, you achieve total forgiveness.

Note this. By using the 11 weeks, you achieve total PPP loan forgiveness without having to spend any money on rent, utilities, or interest.

When Can I Apply for Forgiveness?

According to SBA guidance issued on June 22, 2020, you may submit your loan forgiveness application anytime on or before the maturity date of the loan—including before the end of the covered period—if you used all the loan proceeds for which you requested forgiveness.

Example. Ron receives his $20,833 PPP loan on May 15, 2020. He puts the money in his business checking account. During the 11 weeks beginning with May 15, 2020, Ron writes checks to himself that total $20,833. Ron can apply for $20,833 of loan forgiveness anytime after the 11th week.

Is It Really This Easy?

Yes.

What About Interest, Rent, and Utilities?

With the 11-week program described above, you don’t have to consider interest, rent, or utilities to achieve 100 percent forgiveness.

In fact, why bother? By simply using the 11 weeks, you have less paperwork and worry.

Of course, you might want to consider interest, rent, and utilities if this takes you to earlier forgiveness. To obtain full forgiveness, you could spend as little as 60 percent on payroll and the balance on interest, rent, and utilities.

Example. Jane files a Schedule C and has no employees, and on June 1, 2020, she obtains a PPP loan of $20,000. During the first eight weeks, Jane spends $12,000 on herself and $8,000 on qualified Schedule C deductible business interest, rent, and utilities. Jane can elect the eight-week period and qualify for 100 percent forgiveness.

Here are the basic PPP forgiveness requirements that apply to your 2020 Schedule C business deduction payments for interest, rent, and utilities:

• Interest payments on any business mortgage obligation on real or personal property where such obligation was in place before February 15, 2020 (but not any prepayment or payment of principal).

• Payments on business rent obligations on real or personal property under lease agreements in force before February 15, 2020.

• Business utility payments for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.

Meet the Paid Rule

On page 2 of the 3508EZ instructions, you find this:

Enter any amounts paid to a self-employed individual. For a 24-week Covered Period, this amount is capped at $20,833 (the 2.5-month equivalent of $100,000 per year) for each individual or the 2.5-month equivalent of their applicable compensation in 2019, whichever is lower.

We may suffer from unfounded paranoia because we find the word “paid” a word to be reckoned with. But in our opinion, you should have your Schedule C business write you checks from its business account. If there’s no separate business account, make sure the business writes checks that pay your personal expenses in the amount of the deemed compensation.

Special allocations are tricky business. We are here to help you. Don’t hesitate to call our office:415-860-6288 (San Francisco), 917-397-0949 (New York) and 713-396-0107 (Houston) and e-mail us at info@flextcg.com.

The post Government Clarifies PPP Loan Forgiveness for the Self-Employed appeared first on Flex Tax and Consulting Group (FTCG).

The rules that apply to you do not apply to the rank-and-file employee group. The government puts you, the owner-worker, in a separate “owner-employee” category to limit your business’s PPP benefits.

There are four types of owner-employees:

1. General partners in partnerships
2. S corporation shareholder-employees
3. C corporation shareholder-employees
4. Form 1040, Schedule C filers (e.g., the self-employed, sole proprietors, 1099 recipients, single-member LLCs, and husband and wife LLCs treated as single-member LLCs)

If you own all or part of your business and work in the business, you fall into one of the four categories.

The maximum loan attributable to and forgiveness available for the “compensation paid” to any SBA-defined owner-employee across all businesses is

• $15,385 for borrowers who received a PPP loan before June 5, 2020, and elected to use an eight-week covered period.
• $20,833 for borrowers under the 24-week covered period.

Owners of Multiple Businesses Beware

If you have ownership interests in more than one business, you need to consider that the owner-employee loan maximums apply to all your businesses.

The new interim final rule puts the $15,385 or $20,833 deemed compensation cap on the loan forgiveness for the defined owner-employee, but contains no guidance on how to allocate or otherwise deal with the caps when you have ownership interests in multiple businesses.

Example. Jim operates an S corporation and a proprietorship. He receives his PPP loan on June 17. The cap on Jim’s combined S corporation and proprietorship loan forgiveness attributable to (a) Jim’s employment in the S corporation and (b) his profits from the proprietorship is $20,833.

We know Jim can obtain loan forgiveness for up to $20,833, but we have no guidance on how Jim would allocate the forgiveness between the S corporation and proprietorship. Perhaps by the time Jim applies for PPP loan forgiveness, we will have some directions.

Partnerships

The PPP loan forgiveness begins for general partners at the amount of their 2019 net earnings from self-employment (reduced by claimed Section 179 expense deductions, unreimbursed partnership expenses, and depletion from oil and gas properties) multiplied by 0.9235.

You then take the lesser of the amount determined above or $100,000, divide by 12, and multiply by 2.5 to find the loan amount. With this calculation, the maximum loan is $20,833.

The maximum forgiveness attributable due to the partner’s self-employment income is

• $15,385 if the partnership obtained its loan before June 5, 2020, and elected the eight-week regime, or
• $20,833 if the partnership is under the 24-week program.

Planning note. Under the 24-week program, the partnership with no employees does not need to spend any amounts on interest, rent, or utilities to obtain full forgiveness. It can obtain full forgiveness in 11 weeks using the calculated self-employment income of up to $20,833 for each partner.

S Corporations

As with all owner-employees, the PPP loan and its forgiveness for “compensation” are capped at $15,835 under the eight-week covered period and $20,833 under the 24-week covered period.

Reminder. The $20,833 cap is based on the maximum defined compensation of $100,000 divided by 12 and then multiplied by 2.5.

Under the 24-week program, the S corporation whose only employee is an owner-employee obtains full loan forgiveness after 11 weeks when using the 24-week covered period without spending anything for interest, rent, or utilities.

If the S corporation with no employees other than the owner-employee elects the eight-week covered period, the corporation has to spend money on interest, rent, and utilities to rise above the $15,385.

The Paycheck Protection Program Flexibility Act of 2020 created a new statutory 60 percent payroll rule. Using the 60 percent enables the S corporation with no employees other than the sole owner-employee that elects the eight-week covered period to achieve full forgiveness with payments for interest, rent, and utilities.

S corporation owner-employees are capped by the amount of their 2019 employee cash compensation and employer retirement contributions made on their behalf, but employer health insurance contributions made on their behalf cannot be separately added because those payments are already included in their employee cash compensation.

Example. Liz operates her solo busines as an S corporation. Her 2019 W-2 compensation of $68,000 included $18,000 for medical insurance. Her payroll cost for the PPP loan and its forgiveness includes the full $68,000 plus what the S corporation paid into her retirement plan and to the state for unemployment insurance. The total of these amounts is capped at $100,000, which creates the $20,833 maximum loan amount as explained above.

C Corporations

C corporation owner-employees are capped by the amount of their 2019 employee cash compensation and employer retirement and health insurance contributions made on their behalf.

Example. Don operates his business as a C corporation where he is the only employee. In 2019, the corporation paid Don a salary of $60,000, contributed $12,000 to his retirement plan, paid $20,000 for his family’s medical insurance, and paid $350 to the state for unemployment insurance.

Don’s corporation has $92,350 in qualifying payroll costs. His loan and forgiveness are capped at $19,240 ($92,350 ÷ 12 x 2.5).

Form 1040 Schedule C Businesses

Your PPP loan and its forgiveness for “compensation” are capped at $15,835 under the eight-week covered period or at $20,833 under the 24-week covered period. The cap amounts are computed using your net profit from line 31 of your 2019 Schedule C.

Your easy-peasy road to 100 percent loan forgiveness is the 11-week program. With 11 weeks of taking the loan amount out of the business, you obtain full forgiveness without paying any rent, utilities, or interest.

When Can the Owner-Employee’s Business Apply for Forgiveness?

According to SBA guidance issued on June 22, 2020, you may submit your loan forgiveness application anytime on or before the maturity date of the loan—including before the end of the covered period—if you used all the loan proceeds for which you requested forgiveness.

Example. Ron receives his $20,833 PPP loan on May 19, 2020. During the 11 weeks beginning with May 19, 2020, Ron’s corporation pays qualified payroll costs that total $20,833. Ron can apply for $20,833 of loan forgiveness anytime after the 11th week.

Special allocations are tricky business. We are here to help you. Don’t hesitate to call our office:415-860-6288 (San Francisco), 917-397-0949 (New York) and 713-396-0107 (Houston) and e-mail us at info@flextcg.com.

The post PPP Loan Forgiveness for Partnerships and S and C Corporations appeared first on Flex Tax and Consulting Group (FTCG).

1. Partner’s Self-Employment Income Creates Cash and Forgiveness

Just as sole proprietors failed originally to ask for their PPP cash assistance, so did many partners.

Three things to note here:

1. The partnership (not the individual partner) applies for the PPP loan.
2. The deemed payroll amount that the partnership uses for the partners is their 2019 self-employment income (both guaranteed payments and ordinary income).
3. If the partnership filed for the PPP loan based on its employees, but failed to include any dollar amount for the partners, the U.S. Small Business Administration (SBA) in an interim final rule authorizes the lender to increase the loan amount for the appropriate partners’ deemed payroll inclusion that was left out of the original application.

2. Paid and Capped

Line 9 of the SBA official forgiveness application reads as below:

Line 9: Enter any amounts paid to owners (owner-employees, a self-employed individual, or general partners). This amount is capped at $15,385 (the eight-week equivalent of $100,000 per year) for each individual or the eight-week equivalent of their applicable compensation in 2019, whichever is lower.

Note the word “paid.”

In general, payments to partners don’t occur in a pattern that would equal the amount needed during the eight-week covered period.

To protect the partnership’s forgiveness amount, make sure that payments to partners during the eight-week covered period equal the 8/52 of the partners’ deemed 2019 payroll. We have not seen a requirement on the “paid” part, but that word is there. So protect yourself.

3. Qualifying Non-Payroll Expenses

When explaining that the partnership had to file for the PPP loan and forgiveness, the SBA stated:

Rent, mortgage interest, utilities, and other debt service are generally incurred at the partnership level, not partner level, so it is most natural to provide the funds for these expenses to the partnership, not individual partners.

4. Apply

If your partnership has not applied for its PPP money, do it now. The SBA has plenty of money available for PPP loans at the moment, but you have to think it won’t last long.

5. Easier Forgiveness on the Way

On Thursday, May 28, the U.S. House of Representatives approved the Paycheck Protection Program Flexibility Act of 2020 by a vote of 417-1. This bill or something similar will be enacted in June to make it easier for all PPP borrowers to qualify for PPP loan forgiveness.

Here are some highlights from this bill:

• Extends the eight weeks to 24 weeks
• Changes the 75 percent rule to 60 percent
• Changes the two years to five years and retains the 1 percent interest rate
• Changes June 30 to December 31
• Adds exemptions that will increase full-time equivalents and that will increase forgiveness amounts

Will make it easier to obtain forgiveness when you have reductions in your employee

If you need our assistance with either the PPP loan or forgiveness, we are here to be of service. Our office e-mail is info@flextcg.com and the office number is 415-860-6288 (San Francisco), 917-397-0949 (New York) and 713-396-0107 (Houston).

The post Six Insights into the PPP for Partnerships appeared first on Flex Tax and Consulting Group (FTCG).

If your small businesses managed to secure a Paycheck Protection Program (PPP) loan before the well ran dry, your next task is figuring out how to use it. Here’s a list of the expenses that qualify for forgiveness (meaning you don’t have to pay the loan back).

Remember, your lender will perform an audit at the end of the 8-week forgiveness period to see how you spent the loan. Keep the relevant paperwork under each section so you can sail through the audit.

Salaries & Wages

A minimum of 75% of your PPP loan must go to compensating your employees, excluding those who earn more than $100,000 per year. We are still waiting for guidance from the Small Business Administration on salaries over $100,000 and business owner/family salaries.

For the audit: Payroll processing reports, tax reports, or other reports such as paid time off (vacation or sick leave).

Healthcare Benefits

This is for paying any company’s group health insurance plan premiums. Company owners and family are included if they’re on the group plan. However, payments to the owner’s policy or Health Savings Account contributions do not qualify for PPP loan forgiveness.

For the audit: Insurance invoice(s) and proof of payment.

Retirement Plan Contributions

If you offer your employees a Defined Benefit Plan, Defined Contribution Plan, or SEP IRA, you can use some of your PPP loans to continue funding that plan. There’s no specific guidance about benefits paid to the owner or owner’s family, but we doubt it would be forgiven.

For the audit: Retirement plan statements, funding schedules, and proof of remittances.

Non-Payroll Expenses

Operating expenses that don’t directly benefit employees — a few of which we’ll list below — can’t total more than 25% of the loan. You’ll have to pay back any excess amounts if you go over that percentage.

Rent

The expense must be incurred and paid during the 8-week loan period to be forgiven. Any rent that was already due before the date of the loan doesn’t qualify. Also, the lease must have been signed before February 15, 2020.

For the audit: Signed lease contract, proof of rent payment (canceled check, ACH, bank statement, or wire).

Utilities

Service contract agreements must have been in effect before February 15, 2020. This covers electricity, gas, water, phone, internet, etc. It’s not clear what the SBA means by “etc.”

For the audit: Proof of payment for each utility.

Interest in Business Loans

You may use some of your PPP loans to pay the interest on your business mortgage, practice acquisition loan, build-out loan, or any loan secured by business personal property. The mortgage/loan must have been in effect before February 15, 2020.

For the audit: Bank statement or loan invoice showing principal and interest, plus proof of payment. You may wish to pay principal and interest separately during the 8-week PPP loan period, so there’s no question in the auditor’s mind.

The pandemic has inflicted significant damage on many of America’s small businesses. And the financial relief red tape makes the situation even more difficult. Flex Tax can help make sense of it all and take some of the bookkeeping worries off your shoulders, so you can focus on returning to the “new normal.”

The post What Can You Spend Your PPP Forgivable Loan on? appeared first on Flex Tax and Consulting Group (FTCG).

File Away Your Tax Return and All Related Records

Once you’ve filed your return, it’s a good idea to create a single location to keep all the information related to the tax year for which you just submitted. If you keep physical records, this means printing off your return. Including all additional schedules, and sticking everything in a file, along with all the forms you received that reported income, expenses, or other tax-related information. These are forms like the 1099 MISC, 1099 INT, etc.

It’s also a good idea to include receipts for purchased items you’ve claimed as deductions and other records. You’ve used for filing your taxes, such as accounting reports and mileage records. Then if by chance the IRS chooses to audit your tax return, you won’t have to scramble to find all the records you need to prove why you claimed these deductions and credits.

Get Organized for Next Year

There’s no better time for organizing tax records than right now. Since you just filed your taxes, you’re aware of what was hard about the process and what parts of filing you can streamline. This may mean creating a physical file or a file on your computer where you can store receipts as they come in. Since more and more receipts arrive via email, you may want to create a separate receipts folder in your email account so they’re easy to find.

If you think you’ll be able to claim new deductions or credits next year, now is the time to start gathering the information to do so. Or if you expect to lose a credit or deduction you claimed last year, you can start considering other ways you can lower your tax burden to compensate. This may mean contributing more to your retirement plan or donating to charity. Being proactive makes it a lot easier to find everything you need when you’re ready to file your taxes next year.

Keep Receipts

You may be able to itemize your deductions, consider keeping all your receipts. When you itemize deductions, you can deduct the amount of sales tax you paid on goods throughout the year. Although the IRS provides a sales tax calculator that calculates a standard tax deduction. It based on your income and ZIP code. You may have spent more than the standard, especially if you made a large purchase. Likely buying a car or building a house, and paid sales tax on the supplies.

If you create a spreadsheet where you can enter the amount of sales tax on everything you’ve bought, it will ultimately save you a lot of time during tax season. This way, you’ll know whether you spent more than the standard tax deduction you’re eligible for.

Consider Storing Your Records Online

When you prefer to keep the amount of paperwork you acquire to a minimum, you can choose to store all your current and past tax information on your computer. Or — even better — online using a cloud service. You do store it on your computer, and be sure you make regular backups. If you subscribe to a cloud service, the information you store on your computer will automatically backup anytime you’re connect to the Internet, ensuring you never lose those records. If you have paper records, you can scan them and upload them onto your computer so you can store everything in one convenient location.

By getting organized now, you can save yourself a lot of time and more than a few headaches when the next tax season comes around. These tips on organizing tax records after you file will make the process a whole lot easier.

The post Organized Your Tax Paperwork appeared first on Flex Tax and Consulting Group (FTCG).

When it’s time to file a federal income tax return for your small business, there are various ways you can do it, depending on whether you run the business as a sole proprietorship or use a legal entity such as an LLC or corporation.

Each type of entity requires a different tax form on which you report your business income and expenses. Regardless of the form you use, you generally calculate your taxable business income in similar ways.

Step 1—Collect your records

Gather all business records. Before filling out any tax form to report your business income, you should have all records in front of you that report your business earnings and expenses.

If you use a computer program or a spreadsheet to organize and keep track of all transactions during the year, calculating your income and deductions is much easier than trying to remember every sale and expenditure that occurred during the year.

Step 2—Find the right form

Determine the correct IRS tax form. You always need to report your business earnings to the IRS and pay tax on them but choosing the right firm to report earnings on depends on how you operate your business.

Many small business owners use a sole proprietorship which allows them to report all of their business income and expenses on a Schedule C attachment to their income tax return. If you run the business as an LLC and you are the sole owner, the IRS also allows you to use the Schedule C attachment. However, if you use a corporation or elect to treat your LLC as one, then you must always prepare a separate corporate tax return on Form 1120.

Step 3—Fill out your form

Fill out your Schedule C or Form 1120. If you will be reporting your business earnings on Schedule C, you can search the IRS website for a copy to generate the form for you after you input all of your financial information.

Schedule C is a simple way for filing business taxes since it is only two pages long and lists all the expenses you can claim. When complete, you just subtract your expenses from your business earnings to arrive at your net profit or loss. You then transfer this number to your income tax form and include it with all other personal income tax items.

However, if you use Form 1120, you calculate your taxable business income in the same way, but the form requires more details that may not always apply to a small business. The biggest disadvantage of filing Form 1120 is that it is separate from your income tax return.

Step 4—Pay attention to deadlines

Be aware of different filing deadlines. When you use a Schedule C, it becomes part of your Form 1040 and therefore, no separate filing deadlines apply. It is generally subject to the same April 15 deadline.

If you are taxed as a C-Corp, you need to file a Form 1120, you must file it by the 15th day of the fourth month following the close of the tax year, which for most taxpayers is April 15. If you are taxed as an S-Corp, you need to file a Form 1120S, you must file it by the 15th day of the third month following the close of the tax year, which for most taxpayers is March 15. You cannot send this form to the IRS with your income tax return.

The post How to File Federal Income Taxes for Small Businesses appeared first on Flex Tax and Consulting Group (FTCG).

If you are thinking of starting a company, then one of the best steps you can take is to understand the structure options you have before you start your own business. Today we are going to introduce the options you have and how to handle the taxes with those structures.

Small Business Taxes Depend on Business Structure

These are the basics of paying your small business taxes:

What types of taxes do you need to pay?
How much do you have to pay in taxes?
When do you have to pay small business taxes?
And how do you pay small business taxes?

When it comes down to it, these four basics depend on your business’s legal structure. Whatever your business entity is, you’ll first need to know how it affects your tax burden.

Small Business Taxes for Sole Proprietors

A sole proprietorship is a business that’s owned and operated by one individual. Because the owner of a sole proprietorship is flying solo, filing taxes under this business structure is relatively simple.

Instead of filing your small business taxes on behalf of the business, as a sole proprietor, you’ll report business income and losses on your income tax return. Business profits will tax at your income tax rate. Sole proprietors must also pay self-employment taxes, which cover the business owner’s medicare and social security obligations.

If you run a sole proprietorship, you’re generally required to file a Schedule C or a Schedule C-EZ with your Form 1040 and pay quarterly estimated taxes.

Estimated tax is the method that all businesses use to pay social security and medicare taxes along with income tax. If you were an employee, you wouldn’t worry about this—your employer would withhold these taxes for you. But as a sole proprietor, you are responsible for making quarterly payments with the estimated tax method.

To figure out what you’ll need to pay in self-employment taxes—and if you have to pay quarterly—use Form 1040-ES, Estimated Tax for Individuals.

Small Business Taxes for Partnerships

Partnerships are businesses operated by two or more owners. Most partnerships are known as general partnerships, but there can also be limited partnerships or limited liability partnerships. Business owners who are a part of the partnership must pay income taxes, self-employment taxes, and quarterly estimated taxes.

If you operate a partnership, the business has to file Form 1065, which is an annual information return that shows the income, deductions, gains, and losses from the business’s operations—but the business itself doesn’t pay any income tax. Partnerships enjoy what’s called “pass-through taxation,” meaning the income is taxed on the owners of the business instead of being subject to corporate tax rates.

To file taxes, owners who are included in the partnership have to file their respective share of the business’s income and losses on their tax returns. Each partner’s share of the business’s income and losses are shown on Schedule K-1.

Small Business Taxes for C-Corporations

If your small business is structured as a C-corporation, your business is legally separate from you as the owner. C-corporations are subject to what’s called “double taxation.” To start, C-corporations are subject to a flat income tax rate of 21%. Then, shareholders are taxed on their tax returns when profits are distributed as dividends. The primary income tax form for C-corporations is Form 1120.

Shareholders who actively participate in the work of the corporation are considered employees. Only the employee’s salary is subject to self-employment taxes. Dividends are subject to a different dividend tax rate. Many corporations save on self-employment taxes by paying themselves a smaller salary and taking more money out of the company in distributions. There are several other tax advantages to C-corporations as well.

Small Business Taxes for S-Corporations

S-corporations are pass-through entities like sole proprietorships and partnerships. This means that each shareholder reports business income and losses on their tax return and profits are taxed at the personal income tax rate. An S-corporation files an informational tax return, called Form 1120S, but the business itself doesn’t pay a corporate tax. This allows an S-corporation to avoid double taxation.

Similar to C-corps, S-corps can also divide business income between salary and dividends. Salary is subject to self-employment taxes, and dividends are not. You can strategically try to save on self-employment taxes by paying yourself a salary. However, the IRS requires you to pay yourself a reasonable salary given your job title, industry, and qualifications. Both C and S-corporations must pay estimated taxes quarterly.

Small Business Taxes for Limited Liability Companies

A limited liability company (LLC) is a business entity that keeps the owners legally separate from the company’s debts or liabilities. As the owner of an LLC, you’ll have the liability protection of a corporation with the tax benefits of a sole proprietorship or partnership.

If you operate an LLC, you’ll be subject to pass-through taxation, just as you would be as a partnership. In other words, you won’t be taxed twice like corporations are. Instead, as an owner of an LLC, you’ll make quarterly tax payments on your income tax forms. On top of that, you’ll also have to submit Form 1065 each year for informational purposes.

LLCs, offer you additional tax flexibility compared to other business entities. From a legal standpoint, you can exist as an LLC. However, from a tax standpoint, you have the option to be taxed as an S-corporation or C-corporation.

When to Pay Small Business Taxes

No matter what type of small business entity you have, you have to pay quarterly estimated taxes if the business owes income taxes of $1,000 or more. Corporations only have to pay quarterly estimated taxes if they expect to owe $500 or more in tax for the year.

Before you owned a business, filing taxes was a one-time thing. But as a small business owner, you’ll have to pay the IRS four times per year. On one hand, that’s four more tax deadlines you might miss. But on the bright side, by the time your yearly tax deadline comes around, you’ll have already paid three-quarters of your tax return.

To make things even more complicated, businesses must deposit federal income tax withheld from employees, federal unemployment taxes, and both employer and employee social security and Medicare taxes. Depositing can be on a semi-weekly or monthly schedule.

Quarterly Estimated Small Business Taxes

To calculate your quarterly payment, estimate your expected adjusted gross income, taxable income, deductions, and tax credits for the year. The best way to gauge these is by just looking at your taxes from the previous year as a guide.

Once you’ve put a number of these figures, you’ll just have to calculate how much you’ll owe in your estimated quarterly small business taxes. The easiest way to do this is to use the IRS’s Form 1040-ES Estimated Tax Worksheet.

These are the deadlines for quarterly estimated small business taxes:

April 15 (covering the period from Jan. 1 to March 31)
June (covering the period from April 1 to May 31)
September (covering the period from June 1 to Aug. 31)
January (covering the period from Sept. 1 to Dec. 31)

Flex Tax and Consulting Group have served and managed all types of tax and revenue collection for the U.S. for more than eight years. Our value-added services and solutions are based on innovative thinking that fits our valuable clients’ needs. If you have any questions, please don’t hesitate to contact us at 415-860-6288 or info@flextcg.com.

The post Business Structures that Start-Up Companies and Small Business Should Know appeared first on Flex Tax and Consulting Group (FTCG).

Start-up Business Consultants and Software Engineers, particularly those in the early phases of their careers. To face some unique tax complexities and tax planning opportunities due to their career path. Flex Tax and Consulting Group works with many of these consultants and has even given on-site tax seminars at several consulting firms.

This article attempts to summarize some of the major tax areas that consultants should be aware of about their taxes. We aim to help consultants avoid filing mistakes and optimize their finances proactively.

You May Need to File Returns in Multiple States

Start-up Business Consultants and Software Engineers travel frequently. They are often sent to work in different states for weeks or months.

All that travel means the consultant might need to file tax returns in each state they worked. That’s because each state will claim a portion of your income earned in that state.

Your timesheet will help determine the days spent in each state, and your employer will withhold state taxes accordingly. A consultant might see two or more conditions in the state portion of their Form W-2, Wage, and Tax Statement. See box 15 in the bottom left of the example Form W-2.

A common mistake is Consultants and Software Engineers accidentally paying double state tax. This happens because a consultant might not realize they need to take credit in their home state for taxes paid to other states.

You Could Be Taxed on Your MBA Tuition Loan Forgiveness

Sometimes an employer will pay for a consultant’s MBA tuition. The employer often sets this up as a loan that must be repaid if the employee stops working for the firm. However, the loan is forgiven in installments if the consultant continues working for a specific period. For instance, if they covered $120,000 of total tuition payments, then $60,000 might be forgiven after one-year of post-MBA work. And the other $60,000 will be forgiven after your second year of employment.

What is often misunderstood, though, is that loan forgiveness of $60,000 will show up on your Form W-2 each year as a taxable fringe benefit. This likely results in a significant tax bill to you, even though you didn’t receive the $60,000 in cash (it was used to pay your tuition a few years earlier).

What can be done?

They are going forward. The one thing that can do is to claim the MBA tuition expenses as a deduction in the tax year that the costs were paid. This deduction is available for the year 2017. If someone forgot to claim a deduction for their MBA tuition, they could revise their previously filed tax returns as far back as 2014. They are The premise for MBA tuition will be temporarily unavailable from 2018 through 2025.

Let’s illustrate this with an example. Sarah, a graduate of the class of 2017, started her MBA program in 2015. She had $30,000 of tuition expenses in the tax year 2015, $60,000 in 2016, and $30,000 in 2017, for a total of $120,000 of tuition covered by her firm, McKinsey. One year after returning to work, McKinsey will forgive $60,000 of that tuition payment. Sarah will see an extra $60,000 reported on her 2018 Form W-2. The same will happen on her 2019 Form W-2.

Sarah didn’t realize that she would face the tax impact and never claimed the tuition expenses on her tax return. For 2017 taxes, which need to be filed by April 17, 2018, she can deduct the $30,000 paid this year. She can also do the same by amending the tax returns for 2015 and 2016. The tax savings that result from taking the deduction can help her cover the cost of the high tax bill that Sarah will face in 2018 and 2019.

Don’t forget the IRS carefully analyzes this deduction, so we highly advise working with a tax advisor to ensure your return is in good shape. FTCG specializes in handling these cases.

Retirement Saving Optimization

Like many employees, many Consultants and Software Engineers have not given much thought to their retirement savings. Often, they elect to contribute a portion of their wages to a traditional 401(k) on their first day of work and don’t think about it again other than to increase or decrease the contribution amount from time to time.

Many Consultants and Software Engineers are unaware there is a second version of the 401(k), the Roth 401(k). It requires after-tax contributions today to avoid any tax obligation when funds are withdrawn in retirement. The traditional 401(k) works the opposite, shielding income from tax today and deferring tax until retirement.

For Consultants and Software Engineers in the earlier stages of their career. Opting to pay tax now via the Roth 401(k) might be the better choice. If they believe they will be in a higher tax bracket in retirement. Management consultants typically have good career prospects are good. We wouldn’t be surprised if consultants accumulate significant assets over time and work in some part-time or board of director capacity during retirement.

For those clients interested in boosting their savings, we point them to what is known as a backdoor Roth IRA contribution. This allows people to save another $5,500 per year. The backdoor strategy is helpful because it avoids some income limitations. It generally prevents most Consultants and Software Engineers from making a direct contribution. If this might interest you, read more about the backdoor Roth IRA.

Bonus Payments

Another common misconception among Consultants and Software Engineers is the tax treatment of bonus payments.

Bonuses are treated like any other form of wage compensation for tax purposes. That means whether you earned $100,000 in salary and $50,000 in a bonus or $150,000, all in salary will not affect your total tax liability.

However, the bonus payment is subject to unique withholding requirements set by the IRS, often resulting in a significant over- or under-withholding. The implication is that when it is time to file your taxes. You might surprise by a large tax refund or a large balance due. Neither of these outcomes is ideal. One is an interest-free loan to the government, and the other could result in an underpayment penalty.

What can you do about it? There are a few possible solutions, including ingadjusting your withholding selection applied to your regular wages over the remainder of the year.

Tax Move Takeaways

• Multiple State Income Tax Filings: Each state has its rules, and too often, Consultants and Software Engineers will double pay state income taxes without ever knowing. FTCG solves this problem for our management consultant clients as a national firm that does not charge anything extra for each state income tax filing. Be very careful if using a do-it-yourself online solution. If using an accountant, make sure they are familiar with the tax code of the relevant states.
• MBA Employer Sponsorship: Having your MBA paid for by your employer is great, but there is often a sizeable future tax bill associated with it when you return to work. Deducting the tuition expenses in the tax years when you were a student is a great way to offset the costs if eligible. If you did not take advantage of the deduction at the time. FTCG can help determine your eligibility and even go back and amend past year’s tax returns
• Retirement Saving Optimization: In the early stages of your career, consider making contributions to a Roth 401(k) on an after-tax basis rather than a pre-tax Traditional 401(k). And after reaching the $18,500 limit for the 401(k), consult a tax advisor if interested in contributing another $5,500 to an IRA, as the backdoor Roth IRA contribution strategy might benefit you.
• Bonus Payments: Bonuses have special withholding rates but are subject to standard tax rates. If you are not proactive, you might be over withheld. You will not get that money back for months until you file that year’s tax return. You may want to adjust the withholding on your standard paycheck to increase your cash flow. In the meantime, to recapture those funds sooner, a tax advisor can help you with this.

The post What Start-up Business Consultants and Software Engineers Should Know About Their Taxes appeared first on Flex Tax and Consulting Group (FTCG).

Taxpayers can follow these three steps to use new Tax Withholding Estimator

All taxpayers should use the new Tax Withholding Estimator to do a Paycheck Checkup. This tool helps people make sure their employers are taking out the right amount of tax from the employee’s paychecks. The money withheld from an employee’s paychecks throughout the year should cover the amount of tax they owe.

Taxpayers who haven’t yet checked their withholding can follow these simple steps for using the estimator. Results will include a recommendation of whether the taxpayer should consider submitting a new Form W-4, Employee’s Withholding Allowance Certificate, to any of their employers.

Step 1: Gather documents. 
Before beginning, taxpayers should have a copy of their most recent pay stub and tax return. Taxpayers should go to the main Tax Withholding Estimator page on IRS.gov. Once there, they should carefully read all information and click the blue Tax Withholding Estimator button.

Step 2: Answer the questions.
Users will answer a series of questions about their specific tax situation. When they complete each section, they click the blue “Next” button that takes them to the next section.

Step 3: Review the results.
Taxpayers use the estimator’s results to determine if they need to complete a new Form W-4, which they submit to their employer, not to the IRS. The tool helps the user target a tax due amount close to zero or a refund amount.

Flex Tax and Consulting Group can help you all services here, please don’t hesitate to contact with us.

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You have been operating your business as a sole proprietor for several years. Lower Your Employment Taxes by Operating as an S Corporation. Now, as the business is growing, you are thinking about incorporating as an S corporation in order to limit your liability, avoid double taxation of corporate profits, and to make it easier to obtain financing. Your accountant suggests another advantage to consider: reduction of your liability for employment taxes. Intrigued, you ask for more information.

Shareholders can wear two heads—employee and investor

Reducing your overall employment tax liability is possible because you can be both the owner and an employee of your corporation. Shareholders can be employees of the business—this means that they can be paid salaries as employees. Employment taxes must be paid on the amounts received as salary. However, shareholders can also receive dividends from the corporation. No employment taxes need to be paid on a dividend.

Putting these two options together means that a reasonable characterization of money received as salary versus dividends can help you reduce self-employment tax liability, while still generating business expense and wages paid deductions for the corporation.

Comparison of tax liability demonstrates savings

You think that dividing your income from the business into salary and dividends sounds promising, in theory. But, you still want your accountant to show you the dollars.

Your business will have $200,000 of gross income in 2019. Your deductions total $100,000, leaving $100,000 of income that you will receive. How does having a corporation and taking $100,000 partially as salary and partially as dividends save you money?

1. Sole proprietorship. You must report the entire $100,000 as earnings from self-employment as income on your Form 1040. Also, you have to pay self-employment tax on these earnings, which will be $12,283. (You are entitled to deduct one-half of this payment from your gross income.)
2. Corporation. You elect to receive a $20,000 dividend and $80,000 in salary. The total employment tax liability is $10,640. (Although your corporation receives a deduction for the employment taxes it pays.) Using the dividend/salary strategy saves you over $1,600 in employment tax liability in 2019, alone.

Using an S corporation avoids “double taxation”

In order for the salary/dividend strategy to be most effective, your corporation should be an S corporation. Unlike salary payments, dividend payments can not be deducted by a corporation to offset its current income. This means that a regular C corporation will need to pay corporate level tax on amounts it pays out as a dividend. In the example above, the tax on $20,000 would be $3,000—thereby wiping out any overall savings. By electing S corporation status, you can avoid this result. True, you will have to pay taxes on the dividend income, but your corporation will not need to do so.

Allocation of income to dividends must be reasonable

If you can save roughly $1,600 in employment taxes by paying yourself a $20,000 dividend, why not eliminate all employment taxes by dropping the salary portion and just taking a dividend? Remember that old adage: “Pigs get fed, but hogs get slaughtered?” Or, “If it seems too good to be true, it probably is?”

The IRS closely scrutinizes transactions between shareholders and their S corporation—especially if those transactions have tax avoidance potential. The more stock you own and the more control you exert over the corporation, the more likely the transaction is to be scrutinized. If the payments are challenged, the IRS will look to see if you are doing a great deal of work for the corporation. If you are doing substantial work, then the IRS will expect to see a salary that is “reasonable” for the type and quantity of work done. And, it will recharacterize the “dividend” as salary and hit the corporation with a bill for unpaid employment taxes.

Prudent use of dividends can lower employment tax bills

By paying yourself a reasonable salary (even if at the low-end of reasonable) and paying dividends at regular intervals over the year, you can greatly reduce your chances of being questioned. And, you can still lower your overall tax burden by lowering your employment tax liability.

Forming an S corporation

An S corporation is just a regular corporation that has made a special tax election with the IRS. First, you must form a corporation with state authorities. Then you need to file Form 2553 with the IRS stating you are electing S corporation status with its pass-through taxation.

Once you make this election, it can be difficult and expensive to undo. You also are bound by the corporate formalities of every corporation—holding board of directors meetings, recording the minutes, making regular filings, etc. But your reward is a lower tax bill.

The post Lower Your Employment Taxes by Operating as an S Corporation appeared first on Flex Tax and Consulting Group (FTCG).