Small business owners with net operating losses this year will be able to elect a three, four or five year carryback instead of the usual two year NOL carryback; the carryback offsets income in prior years to generate a tax refund for the owner now. This means potentially recouping taxes paid and receiving an immediate infusion of cash that can be used now to keep the business going.

Who is Eligible
The new rule applies only to “small businesses,” defined as businesses with average annual gross receipts of $15 million or less in the prior three years.

The New Carryback Period
Usually, the NOL carryback is limited to the two prior years. But, the American Recovery and Reinvestment Act of 2009 allows eligible businesses to opt for a three, four, or five year carryback for NOLs arising in 2009.

The Tip
Meet with your tax advisor as soon as possible to assess whether and to what extent you may want to use a longer NOL carryback period. If it makes sense, a refund request can be filed as soon as possible after the close of this year. This is done using a tentative refund application or by filing amended returns for the carryback years. Amending a prior tax return may trigger a tax refund for you and a rapid infusion of cash to start 2010.

When making charitable donations, keep these tips in mind:

• Check that the organization is a qualified charity. Only donations to qualified organizations are deductible.
• For all donations of property, including clothing and household items, obtain a receipt from the charity that includes the name of the organization, the date of the contribution and a reasonably detailed description of the donated property.
• If the amount of your deduction for all non-cash donations is over $500, a completed Form 8283 must be submitted with your 2009 tax return.
• Property valued at more than $5,000 requires a written appraisal confirming its fair market value.
• A new provision in tax laws allows taxpayers over age 70-and-a-half to transfer tax-free up to $100,000 per year to an eligible charity from his or her individual IRA.
• Gifts of Securities: Taxpayers who wish to make gifts to charities may consider selling loser stocks, giving away the resulting cash and then claiming the capital loss and the charitable deduction on their returns. Alternatively, taxpayers may consider giving away appreciated stock, avoiding the tax on capital gains while deducting the fair market value of the stock contributed.

The Tip Time is short, so round up your charitable donations and make them before the ball drops on January 1st.

If you currently pay more than $120 per month in qualified transportation costs, you may now increase your contribution to a pretax transportation account up to $230 per month. If you are not currently taking advantage of this benefit, now is a great time to start.

If you choose to make the election at a later date, the default tax status of an LLC will be that of a partnership. Should you want to change it after formation, you must file an Entity Classification Election (Form 8882) by March 15th for the election to be retroactive to January 1st. If the election is made anytime after March 15th, the new status will be effective as of the filing date of the election form.

Two complications arise if you make the election after March 15th:

1. Reasonable cause explanation. You must explain to the IRS why you did not file the election on time. This is normally not much of a factor, if you can articulate, in writing to the IRS, a “reasonable cause” for not filing on time.
2. Short-year tax return. If the timing of your election is not retroactive to January 1st, you will have to file two tax returns: one for the partnership until the effective date of the filing and one for the new tax entity for the remainder of the year. The necessity of filing “short-year” tax returns raises the complexity of allocating profits and losses throughout the year and will consequently raise the cost of accounting and tax return preparation.

The Tip
Are you considering changing the taxable classification of your LLC? If so, plan on filing the election by March 15th. Even better – file the election now to be effective as of January 1, 2010 and you won’t have to worry about it again.

This tip does not include the reasons you may want to change your taxable classification. We will touch on that in a later tip.

Who pays
Unfortunately, you are one of those poor quarterly taxpayers if you are a sole proprietor, partnership or S corp and any of the following applies to your situation:

• You expect to owe at least $1,000 in tax at the end of the tax year; or
• You expect your withholding to be less than:
  1. 90% of your tax this year, or
  2. 100% of your tax last year

Essentially, if you think you will owe over $1,000 in tax, be prepared to calculate and make estimate tax payments.

If your business is a C corporation, you must make estimated tax payments if you expect to owe more than $500 in tax at the end of the year.

When payments are due
Estimated tax payments are due on April 15, June 15, September 15 and January 15. If you underpay one or more installments, you get charged interest until the day you catch up.

How much to pay
Unfortunately, there isn’t an easy answer to this question. The official answer is you must calculate your expected AGI, taxable income, taxes, deductions, and credits for the year, then use Form 1040-ES to figure your estimated tax.

To simplify things, you can withhold 100% of the tax you paid last year and make payments of 1/4 of that amount each quarter, instead of trying to estimate how much your tax burden will be this year.

The Tip
If you haven’t done so already, calculate your estimated tax payment for January. January 15th will sneak up on you faster than you expect, so it’s best to have this task taken care of early.

I’ve tried to be brief, but the rules are complex. So, anyone wanting more information should download IRS Publication 505 or IRS Publication 542 for corporations from the IRS website.

]]> http://www.preceptlaw.com/2009/12/estimated-tax-payments/feed/ 0 http://www.preceptlaw.com/2009/11/qa-llc-taxation/ http://www.preceptlaw.com/2009/11/qa-llc-taxation/#comments Sat, 07 Nov 2009 19:17:52 +0000 Precept http://www.preceptlaw.com/2009/11/qa-llc-taxation/ Question:
I am considering creating an LLC for my business but don’t understand how it and I would be taxed. Will you explain?

Answer:
With a Limited Liability Company (LLC), you have a tremendous amount of flexibility on how the entity is taxed. If the LLC has a single member, the default is for it to be considered a disregarded entity and for the LLC’s income and expenses to become the income and expenses of the LLC member. If the LLC member is an individual, the LLC’s income and expenses would be reported on Schedule C of the member’s Form 1040.

If the LLC has multiple members, the default is for it to be treated as a partnership. As a result, the LLC would have to file a Form 1065 annually and to issue each member a Form K-1 (Form 1065), which would list each member’s share of the LLC’s income and expenses. Each member would then be required to report his or her respective share of the LLC’s income on the member’s tax return.

An LLC can also ELECT to be treated as an S corporation. This requires filing Form 2553 with the IRS by the applicable deadline. If the LLC is treated as an S corporation, the S corporation would file Form 1120-S with the IRS and issue each LLC member a Form K-1 (Form 1120-S). Each member would then be required to report his or her respective share of the LLC’s income on the member’s tax return. The LLC may also issue a Form W-2 to the member of the member is an employee of the LLC.

An LLC can also ELECT to be treated as a C corporation. This requires filing Form 8832 with the IRS by the applicable deadline. In this case, the LLC would file Form 1120 with the IRS and would be taxed on all of its taxable income. The LLC would issue a Form 1099-DIV for dividends paid to LLC members (which would get reported on the members’ tax forms) and a Form W-2 if the member is an LLC employee.

The question of how you want your LLC to be taxed can be a complicated one. If you have any other questions, please let us know.

A Limited Liability Company that has only one owner is taxed as a disregarded entity for Federal Tax purposes.

What does this mean? It means that a tax return is not filed at the federal level for the entity itself. Instead, the income and expense items of the entity are included on the owner’s individual income tax return. These items will typically be reported on Schedule C and/or Schedule E, and depend on the type of activity as to which form is used.

In an S corporation, only the salaries paid to the employee-owners are subject to employment tax. The remaining income, paid as distributions, is not subject to employment tax under IRS rules. Therefore, there is the potential to realize substantial employment tax savings. Case in point:

Mary owns a print shop. In keeping with the industry standard, Mary decides that a reasonable salary for a print shop manager is $35,000 and pays herself accordingly. Mary’s total earnings for the year are $60,000: $35,000 paid in salary and the remaining $25,000 paid as a distribution from the S corp. Mary’s total employment tax is $5,355 (15.3% of $35,000).

If Mary were the owner of an LLC, she would have to pay employment tax on the entire $60,000, equaling $9,180. But as an S corporation, she realizes savings of $3,825 in employment tax.

One might assume that these savings could be further manipulated by reducing the salary to an extremely low amount and attributing the rest of one’s earnings to distributions—but this would be an incorrect assumption. In practice, the IRS is careful to notice whether a salary is reasonable by industry standards. If it determines a salary to be unreasonable, the IRS will not hesitate to reclassify distributions as salary.

Still, while the potential employment tax savings may make the S corporation an attractive structure for your business, bear in mind that you would then have to deal with the administrative burden associated with payroll tax. The payroll tax is a pay-as-you-go tax that must be paid to the IRS regularly throughout the year, or you will incur interest and penalties. The paperwork alone can be an overwhelming task for someone who is not familiar with it.

Owners of LLCs pay their self-employment tax once a year on April 15 when personal income taxes are normally due. Income tax filings are also relatively easy for the owners of an LLC: A single-member LLC files the same 1040 tax return and Schedule C as a sole proprietor; partners in an LLC file the same 1065 partnership tax return as do owners of traditional partnerships.

Employment taxes are just one aspect to consider when choosing an entity type for your business. There is no one, magical entity that works for everyone. The important thing is to consider the operational, legal and tax aspects of each structure as they apply to your unique situation.

When deciding whether to elect to treat your corporation as an S Corporation, you should know the main difference between S and C is the corporation’s tax structure.

Once you incorporate your business, you will generally have to decide within about two and a half months whether you want to remain a C Corporation or file a form 2553 with the IRS to become an S Corporation.

In an S Corporation, the shareholders are taxed similarly to the stakeholders in a partnership or sole proprietorship. Income from the business flows through to the shareholders, who are taxed on that income.  The S Corporation still must file a federal tax return, but the corporation itself does not pay taxes.  In other words, an S Corporation avoids the “double taxation” of C Corporations in which taxes are paid by shareholders and the corporation itself. In a C Corporation, shareholders report income from the corporation on their 1040 form.

S Corporations have a number of restrictions that C Corporations do not. For example, the company must be incorporated in the United States, it cannot have foreign shareholders, it cannot have more than 100 shareholders, and all shareholders must be individuals.

The S Corporation has some clear tax advantages in addition to avoiding, in most cases, double taxation. One of those advantages is that losses the corporation incurs may be taken against income on personal tax returns by the corporation’s shareholders.

The S Corporation was designed for small businesses that require more structure than afforded by partnerships or even LLCs. To determine whether an S Corporation structure is the best fit for your company, carefully examine the benefits and disadvantages of such a structure before making this important decision.

The end of tax season is finally upon us.  As you rush to prepare and file your individual tax return by midnight on April 15th, keep in mind these five suggestions for streamlining the process and saving money:

1. File electronically.  Consider filing electronically instead of using paper tax forms. If you file electronically and choose direct deposit, you can receive your refund in as few as 10 days.
2. IRA contribution. It isn’t too late to make a contribution to your IRA and take a deduction for 2008.  Make sure your contribution is made by April 15th and you tell the investment company to consider it a 2008 contribution.
3. Refinancing expenses.  With low mortgage interest rates, the past year saw a flurry of refinancing transactions, as homeowners sought to lock in the lower rates.  If you refinanced a mortgage in 2008, you can deduct the points paid, but you must deduct them over the life of the loan.  If your new loan is a 30-year mortgage, that means you can deduct 1/30th of the refinancing points this year.  It may not equate to much, but don’t throw it away.
4. Check your personal information carefully.  This seems simple, but as the old saying goes, the devil is in the details.  The IRS receives untold numbers of tax returns with simple errors or omissions each year.  So, check your return one last time to make sure your names, social security numbers, addresses and bank information are correct.  Also, make sure to sign the return if you file by mail.
5. File an extension.  If it just isn’t humanly possible to finish your return and deliver it by midnight tomorrow, file an extension.  By filing an extension, you will have six more months (until October 15th) to file your return.  The key, though, is that the extension is for filing not paying.  When filing an extension, you must estimate your total tax liability for 2008 and submit payment for that liability along with your extension request by midnight on April 15th.