Colorado Springs: What Did I Learn from the 2022 Tax Season?

 

In fact, what did I learn from the 2022 tax season? As well as what do you need to know for 2022? Well, I've been in this business for 20 plus years doing a lot of different tax returns, individual business tax returns, and 2022 certainly hit some firsts, as we were doing tax returns for the 2021 tax year, as well as much slow service from the Internal Revenue Service. All of us know you get on the phone; it takes what takes forever. And sometimes you don't even get through a very, very low percentage of IRS calls are actually even answered. I do know that if I have clients, which I had a few get the little ID verification letters, IRS Call this number or do it online? Well, I'll tell you what calling the number used to work great. But this year, you just cannot get through, it says there's just too many calls going on. I've tried it personally myself a few times, just trying to see how long it's taking to get through for a client. And guess what, it just takes a while.

So then now we're going to try to do the id.me, which I haven't personally done that yet. But I'm gonna try to walk some clients through to try to help them to make sure they get their refunds because they're still waiting for it. And that's just plain crazy. Now, last year, going into the 2021 tax season, the IRS had opened up the system to out for everyone to get what's known as an Identity Protection ID number or an IP pin which was only previously available to those who had had ID theft problems. Now at the beginning of each tax season, right in January, you can go on to irs.gov, verify yourself, get a six-digit number that's assigned to you. And what the purpose of this is to present misuse of your social security number on someone filing a fraudulent tax return. So, keep that in mind. That's something you can definitely do and something I encourage you to do as well. But it's something you got to go in and do each and every year. That way you can prevent yourself from basically having a fraudulent tax return. So now a few of the items that we covered in 2021 tax year are gone.

And that's what I want to kind of touch on now just so you don't want to think about or be thinking about, well, I got all this great tax credits. I got these great refunds when I filed my tax return in 2022. But is it going to happen in 2021? Well, let's see. Well in 2021, keep in mind the Child Tax Credits, this is perhaps the one that most people really observed that is gone, is that you got a $3,000 tax credit for those children that you have from ages six through 17 and $3,600. For those under age six, plus you got half of that up in advance some individuals, some parent to opt out of that advance, others did not. And as a result, what happened in many cases, and I actually had this happen, many actually had reduced refunds at tax time, and I had to sit down and explain to them. This is why your refund is less, now it didn't happen with everybody. But it did happen with some daycare, this was also a huge difference in 2021. With a daycare amount jumping from $3000 per child and $6000 for two or more up to $8000, and $16000, into for 2021. But that was only for the tax year 2021.

That's gone. So then if you're planning and looking ahead to 2022, on your daycare, well be keep in mind that the credits $3000 for one child, and up to $6000 for two children, there's other limits in there. And it's not fully refundable. That was a difference 2021 credit was fully refundable, for the tax year 2022 that we're planning for. Now, you're not dealing with a refundable credit for daycare, if you're having daycare and we do know that someone, having less daycare just simply because of the pandemic and there's your daycare providers. Now, one thing to keep in mind with the daycare credit that you're getting is that it doesn't necessarily have to be a licensed daycare, but you do have to have a tax ID number for the individual to whom you're paying for daycare, because they got to turn around and claim it as income on their tax returns. So, there's a difference there that to keep in mind as well.

Now, Earned Income Credit was very challenging this year. And there's some things that are gone with that. So, I encourage you if you're really depending on the Earned Income Tax Credit, go get a job, go find employment, because a lot of the past things that happened for 2021 are gone. One of the common, one of the other deals was is that if you were 19, and not in school, or part of the foster care system or a homeless youth, if you're 19, you qualify this year for 2021. You were age 24. If you're a student, you've qualified for the Earned Income Tax Credit or 18. If you are in foster care or home with you and you had earned income you qualified for the Earned Income Tax Credit, that is gone for 2022. It reverts back to what existed before, for 2020 and earlier and for 2020. To keep in mind that need to be between the ages of 25 and 65 to qualify for the Earned Income Tax Credit, which that was actually kind of nice for those over 65, because it was over 65 for 2021 also qualified for the Earned Income Tax Credit.

We're previous years they did not but that was once again exclusive to this tax year that we just did 2021. Now another unique feature that was on the 2021 taxes is that if you didn't have that much earned income in 2021, you could have elected to use your 2019 income for calculation purposes of the Earned Income Tax Credit if it gave you a higher credit amount. And I did have several clients that took advantage of this and were able to get them a little bit better refund because of this provision. But that once again, is gone. And so, for 2022 It is vital if you're using this credit that you go find qualifying income, wages to help you to be able to get this credit for 2022. And keep in mind things like retirement income, Social Security, also unemployment, those are not considered Earned Income for the purposes of the Earned Income Tax Credit. So, you need to have self-employment income, Legitimate self-employment income, so keep records, keep good records, especially if you didn't pay in cash, you need to keep records.

Now that cash can be considered but you got to have record keeping receipts, write out receipts, keep records of expenses, all of those can certainly help you to get that credit. If you're self-employed, if you're working at a, at a job, go work, get a job. There's a lot of them out there. So go find work, get have the wages, so you can qualify for the Earned Income Tax Credit. One of the headaches that I had as a tax professional was the Recovery Rebate Credit or what that $1,400 stimulus payment that was sent out in March April May of 2021. If you didn't get it for whatever reason, you were able to claim it on your 21-tax return is recovering rebate credit that is gone as well. So, we're not going to be working to claim that but if you still had not received it, you're gonna have a couple more you years to be able to claim that credit because of just the statute of limitations on tax return filing, so but you don't want to miss out if you didn't qualify for. Also, through 2021, there are a lot of the payroll Protection Program loans or PPP loans that many employers qualified for.

I'm not going to go into too much detail on these, but what I am going to say is that there was first draw, second draw loans, these redirect incentives for businesses to keep their workers some businesses did very well took advantage of these programs, if you're a sole proprietor or a farmer, but you really made out well with these because you took in your tax return. And basically, it was free money, and several clients that were able to take advantage of this through their bank. And their bankers were very good about helping them through these SBA programs, other businesses, if you had employees that you were providing for and getting the loan for on the first draw, or the second draw, or maybe you got just the first draw just depends. But you still needed to use it primarily for wages, but then the rules kind of adjusted as time went on, but you still needed to go in and apply for forgiveness of along, basically certifying that you used it for the appropriate purposes.

And as long as you've gotten that certification done, once again, essentially free money with of course, the provision that was provided through law changes is that even though the it was essentially tax-free income, you're able to deduct the expenses that you paid with the PPP loan. And because many have done this, it's kinds of tax-free income. Now, if you were a partner, in a partnership, an LLC, or a shareholder, in an S corp, this is basically considered tax free income to you or other tax-free income. So, it could actually kind of help with your basis as well. But you'd have to talk to your tax professional or come in and talk to us to be able to help you see exactly what we can do to help you there. If you're still needing to file that, we're definitely available to help you with that. And deducting expenses, as usual through the PPP loans very, very productive for you.

Now also in 2021, and 2022, this is a unique deduction. In all prior years, in the longest time, I've been doing tax returns, meals have always been 50% deduction. But if you're eating in a restaurant, this is the interesting part of that restaurant meals are 100% deductible for 2021 and 2022. So, if you're on the road, a lot and having meals as a result of business travel, and you're eating in restaurants, hey, keep those good receipts, keep good records, you can get 100% of those meals. Now, of course truck drivers, they got the special provision to get 80% on their meals because of the Department of Transportation regulations, which is a very nice provision. I work for several truck drivers on that the over the road truck drivers, there's even a provision for local truck drivers when it comes to meals and per diem, which we really do take good advantage of. So, keep these few points in mind of what is not around for 2021, for I mean for 2022 tax returns. So, you need to make sure you're using a good tax professional to help you walk through all of these particular items. Now some important points that I always this talk about here is good books and records.

I constantly, constantly mentioned to you and mentioned to the clients to whom I personally work with about a mileage log if you're going to claim mileage use a vehicle. You need to keep a mileage log in order to be able to take mileage and automotive expenses because that is what is going to help you in the event of an audit. And once again, another tax court case came through. In this case it was a taxpayer who was a heavy equipment operator. This is for tax year 2014 that this case referred back to this operator work in several locations. He claimed 32,640 miles on his tax return. He just claimed the miles. He did not have a log. He did not keep a calendar. He did not keep a record of work location, even couldn't even provide testimony in the Tax Court regarding the work locations. What does this happen to him? Well, the court Tax Court said Nope. You cannot take this deduction for mileage because you do not have the verification, you do not have the log, you do not have what is needed to be able to properly claim the deduction, which is why I stress so hard, you need to make sure you keep a mileage log when you're having vehicle expenses or wanting to claim vehicle expenses.

And that's even if you're taking actual expenses and depreciation on your business vehicle, it is a absolute must to do that. And some way Well, I'm not gonna keep a record, I'm not good at writing it down. You know, you just got to figure out how to do it. There's apps out there and one app that I tend to mention to individuals to use to help them Track business mileage is called Mile IQ is free, you can use it to track business miles, personal miles, easily an easy app to use from what I understand. So, I would suggest doing that or keep a paper now, what also can help you in doing so is that you take your vehicle for new tires, you take your vehicle for various service work, you get annual maintenance work, you get quarterly oil changes, or maybe oil changes more often. You need to have those records, because what happens is that when you take it into the repair shop, they will record the mileage. And that's actual further verification of your mileage for the year when you claim it.

So yes, keep those excellent records. So that you can have that should once again, just you get that unexpected letter from the IRS because they're, they're trending toward enforcement through Congress right now, or at least that's what they're trying to push. So, we want to make sure you as a taxpayer, are ready for that. So, keep your mileage log and keep it going strong. Now, we want to think about another area, which is your electric vehicles, I'm bringing this up because many are concerned about the cost of a fuel, gasoline and diesel and so on. So maybe some of you are looking at alternatives, such as the electric vehicles, there is a Federal Electric Vehicle Credit that is still available. Yes, some models like Tesla, and GM, if you go and buy a new one of those models, you cannot get the Federal Electric Vehicle Credit and you can't even get the state credit. You might or you might be able to get the credit in some states, it just has to be a new vehicle. But you cannot get the federal credit because the Federal Credit for Electric Vehicles phases out when a manufacturer sells at least 200,000 qualifying vehicles, and GM and Tesla have already sold more than 200,000 of the qualifying vehicles. Now, once again, this vehicle has to have a gross vehicle weight under 14,000 pounds. And the credit is really nice because it's raised anywhere from $2500 to $7500 credit that you get for purchasing of a vehicle. Now there is a very long list.

It's amazing you only hear about a few electric vehicles. But there is an essentially very comprehensive list that you can get from the IRS and talks about all the makes and models of electric cars that you can buy that you can get a new Electric Federal Vehicle Credit on. And certainly, if that's what you're thinking about doing, you need to take a little bit closer look at that. Maybe look at one of these vehicles, I mean, there are, there are models and makes vehicles on there that I had never even heard of before. And then, of course some of the more common names like there's like some you see advertised, like the Nissan, a Nissan still qualifies for there's some BMW and some other makes that are out there that you that you can get a vehicle credit on. Now, of course, as we always talked about the cost can be the issue for many people on these new vehicles. So, but you got to examine and see what's worked. But I just wanted to go ahead and mention that to you. That way, you know that that credit is out there, and is available if you're considering purchasing an electric vehicle.

And another area I'm going to touch on is in the planning session as we look at where we're heading, going into 2022. That's exactly it is, where are we heading? What am I what are we doing? What am I doing? Many people are still getting used to the new W-4s that have been out the last couple years. And they're like, oh my goodness, I mark this and my withholding just isn't right. While there is a calculator you can use on the IRS website, wage withholding calculator estimator that can help you to do that. If you have more than one place where you're working. You may want to use this but I always recommend and I always think it's best not just to use what the IRS provides, but use a tax professional. That's why I keep myself available year-around because I know your situation better than the IRS estimator does to help you perhaps to realize, you fill out that W-4 form.

And what happens when you fill it out is that it just goes off of a base calculation. And it may not necessarily be right for you, it's in essence, it's just kind of guessing. So, if you haven't thought about it, you need to have an, I call it a mid-year meeting with your tax professional, get your pay stubs that show your year to date on withholding federal and state and sit down, have a meeting, whether in person or video conference, have that conversation so that you're not there. In January, in this case of 2023 going, what's up with my withholding have that conversation, let's look at it ahead of time. Now, if you're a self-employed person, or you're operating some type of entity business, like an S corp, or C Corp, you better get your books on par, you better not just be relying upon a type of online software to make sure your books are right. Don't go cheap assets when I say don't go cheap, go with someone who can really help you, look at your books and don't just depend upon individuals who you think are getting the job done. Now I know I say this, because I've encountered over the years, I've encountered people who have come to me right near the end of tax season in some cases, and say, can you help me? And I'm like, well, what kind of help do you need? Well, again, I dig a little deeper and find out that perhaps they have not had some tax returns filed or maybe their W-2s for the for the year that we're processing haven't been filed yet.

And so, we work through those little problems to help them at least get a few tax compliance issues addressed. But then, which is where I've really working into now is trying to help people to solve tax issues. Because the IRS, they'll send out a notice to you, for example. And the notice doesn't always get to you sometimes, or it gets to you years later, or as we see here, they put off notices going to you, as a taxpayer for maybe a path new tax, some all the way back, say to 2015 that they're collecting tax on right now are trying to collect tax on and their whole paperwork and have a whole miscalculation. Well, then how do we come to know that? Well, what I go in and do with individuals, as they come see me is I say, first of all, sign this as a 21-form, or 2448, 2848, whichever I need according to this person's circumstance, so that I can go in and I can take a look and say, here's what's going on on your tax account. Here's the wages that have been reported. Here's the income that's been reported. Here's what the IRS says you owe. Not we agree with this.

Well, that's what we got to go back and see or if we go in and take a look at that transcript and see that maybe you haven't filed. That's what can happen particularly with some business owners who put their trust in, in some type of individual who they send off information to that individual each month thinking everything is getting done, but they don't really get the information back or they really don't get the reports back. But they just think everything is getting done. Well. I'm here to caution you particularly, when it comes to your payroll taxes with a C corporation, S-corporation, partnership, or LLC, any of those entity tax that you're talking about. It's vitally important that whoever you're working with, and these are the services that I provide, that they have to you copies of what has been done, what is being accomplished. That's what I do for all of my clients, all of them. We all have the web portal set up, where all of them have access 24 hours a day, seven days a week to their records, all they got to do is log in with their email, and they have their payroll records all sitting right there.

 They have their payroll, compliance tax forms all sitting right there. Everything shown that they have been paid and they're caught up so nobody is behind. So how do you get caught up? If you're a business? And maybe you discover or I go in and I discover Well, you know, your federal income taxes for your business haven't been filed in a few years. It's just kind of good in the sense that the IRS hasn't caught up with you yet because of the pandemic and other issues going on. So, then what do we go in and do? Well, first we pulled transcripts, which is what I go in and do. And then I take a look and see, okay, this is what has not been filed. But if we discover some years have not been filed, what do we got to go and do? Well, first, we got to go in and look at your books, what have you been doing? How have you been keeping it? Well, sometimes I'm coming to learn sometimes individuals and businesses are doing an okay job on their books, they're getting expenses put in through whatever type of accounting software that they're using. But I come to find out, well, maybe their bank statements aren't being reconciled, maybe their other information isn't being done. So how do we know what to do? Well, we don't, sometimes we're starting from just a whole new set of books.

And but we do have to get documentation of course, which what does that entail, that entails getting bank, bank statements. And sometimes it means if they don't have them, sometimes they got to go to their bank, and get those records for two or three years back. And some banks do have those available without much research, and sometimes they do sometimes they don't just depend on the individual banks. So that's what we need to go in and take a look and do. So that's what I'm saying is that if you're working with an individual, you need to make sure whoever that individual is, which is why I take a lot of pride in making sure that all my clients know that their stuff, their financial information, their financial statements, profit and loss balance sheets, those are there, we get them done. Now, we're not perfect, of course, but we get them done in the sense that there's a good record there. And if we make a mistake, we go back and we fix it. Because taking care of the client is number one, for this business. and for me, as a tax professional, that's the difference between a tax professional and one who's just a tax preparer, or one who's just kind of around a little bit, or seasonal. Those are the really individuals that I'm just not personally too big on because they're they come in for the first three and a half, four months, jump in, have an office open, then they close in or maybe open only one day a week or who knows when they're open actually, then they're gone.

But the How's that, how does that help you if you're an individual looking to get something accomplished, because one of the issues I always talk about people is the fact that you need to talk to your tax professional on so many occasions, if you're considering taking money out of your retirement plan, you should talk to your tax professional. If you're considering starting any type of business. If your banker suggests something or an attorney, suggest something before you do anything, I'm serious before you do anything, go find a tax person and talk to them. Find out what kind of tax situation are you going to be in? Because from a tax standpoint, other professionals don't always understand it. They know their area, which is great, they're fantastic at it, they do a good job. But sometimes recommendations are made of a certain type of entity or how you should conduct business. And it's not necessarily good for you tax wise. So yes, make sure that you talk to your tax person before you go in, just go to the state and because it's easy, anybody can go to their state and register as an LLC or register as a corporation or do all these registrations, like Colorado I mean, go and do it for like 50 bucks.

But yet, is that the right action for you to take from a tax standpoint? I don't know. Till I sit down and talk to you and see what your goals are. I see what you're wanting to accomplish. Maybe from a legal standpoint, a certain type of entity is good. But yet, is that still good for you tax wise or what are the tax ramifications of doing that? What's going to happen? So, you got to be willing to really study, really get that information, talk to a tax professional, talk to your tax professional, or talk to us, or talk to me, give me a call here 844-394-4287 to help you to figure that out. So that your tax situation is not so taxing, come the end of the year, because the last information or the last person to know you've done a business should not be your tax person. Because they can help you make good moves, a tax professional can help you make good moves, so that in that first year of your business, you're making good tax moves, and not only help you in the first year of your business, but can help you going forward in your business, make certain types of elections for your business.

And if your bank or your lawyer, whoever you're talking to, doesn't say talk to a tax person. I mean, because I always tell people, you should go talk to a bank about this, or you should go talk to an attorney, it's I'm not licensed to practice law. So, you need to go talk to them about this particular setup, this particular situation, and then work together with the bank or work together with the lead tax person, tax professional, and work together with the attorney so that you are having the best turnout for your business. Now also, I like to remind business people, are you signing any forms on a regular basis, there should be some signatures required. I know when I come in, and I talk to somebody or have a client come in, especially on taxes, there are certain forms, that they only sign that you only sign once in regards to payroll, and then we take care of it. But we always provide the documentation, which is something you should always have from a professional that's working with you, you should have the documentation showing that your sales tax is getting paid documentation showing that your unemployment tax is getting paid and file, I have all those reports available to clients showing that those items are pain.

When it comes to the income tax, yes, we file the entity, the corporation, the partnership, the LLC, all those income taxes are filed electronically. Yet, what I do personally, in my area is that whether it's if they're close by, of course, somebody that can come in and actually sign the authorization to transmit the tax return, I have them come in and do it. Now I have a few clients. And I have more clients developing in a virtual sense, we'll sit down, we'll discuss and have a video conference meeting with them, or at least a phone conversation. And then what I do is I send it to them to sign that form electronically, because we can accept the 8879 with an electronic signature now and still submit the tax return, you should always be signing something whether in person, or electronically. And if you're not always signing something of some sort, then you really need to find out if you don't have physical copies, which to me some, it really depends on the tax professional, myself, I'm one that I still like to provide physical copies to individuals. So, I actually mail out some to my clients that are not in Colorado or in other parts of the country.

I'll still mail out copies of a physical tax return to them. But I also provide electronic copies through a web portal. Do they have those available? I don't know. I do. And that's why I'm so up on this and so much and wanting to be forceful and just reminding you as the listener to think about these things. Are you getting these as a business person? Do you know what's going on with your information? Does your tax professional visit with you about these items? visit with you so that you know what is going on with your business? And so, you're not you may not fully understand it. That's why you have the tax professional. I mean, I don't know how to go and repair a diesel vehicle or do a lot of different other actions but I am here to help my clients to succeed on their tax and to make their tax time have a whole lot less taxing. So, make sure that you are signing forms on a regular basis. Now, many times during tax season, whether it's individual or business, I'll get one, I'll get someone calling in saying, he's, how much you charge to do a tax return.

Well anymore, it's going to happen, it's going to tell people with depends. And because when you call, make a phone call like that to a tax professional, you're just shopping around, as a tax professional I'm not really looking for people who are, who are looking for a low-cost tax preparation option. But I look for is individuals who want it done, right? Who want to do the tax return accurately, and who want a good long-term relationship with a tax professional, to help them to succeed in their taxes, and even help them to save up a little bit of money and understand their overall financial situation? And to have that you are going to pay a little bit more to have that available. Yes, I have some clients that I only do tax returns for. And that's, that's fine. And some of these I've had for many years, they're great people, I'll continue to help them out, continue to serve them. But yet I go beyond just doing those tax returns. If we need additional help, we offer that additional assistance to them.

They're separate fees. But we also have plans that offer monthly programs to individuals so that you can come in and talk, no additional fees, you're just paying a monthly fee that gets you all taken care of for the year. Now, what many people don't realize when they're trying to find a low-cost way to do a tax return, is security. How secure is their information? This is a huge deal for me. I believe in such stringent security measures. I mean, I got file cabinets locked in here, I have all of my computers are encrypted, the drives are encrypted. There's a password to get into the windows, of course. Plus, there's additional security software on each cuz each computer and of course, I actually help have a third-party service helped me to keep my computers secure. Yes, it is vital that you ask whoever you're going to use to do your tax return. How secure is my data? Do you have a security data plan, which mine is under constant development, but I do have one for software security, for in office procedures to make sure that people's data is safe?

Now, if you're getting a low-cost tax return, this is something to think about, how safe is your data, if you're just doing the lowest cost option, if you're having your neighbor or your individual over, you're saying you know, I can go on to whatever software and I can do your tax return. But when you do a tax return, think about it, are you have your tax return done? How much data do you have to give, you basically give your whole life story over to somebody, all kinds of private information? Now you don't know what that individual is going to do with that information. They could be family. I'm not knocking any family; I'm just saying these are things to consider. You want certain individuals to have access to all of this information. I mean, I mean, they may dispose of it. They may not I don't know. But security, these are things to think about. And so, it all comes down to the old adage, at least the way that I look at all of this, you get what you pay for, if you're going low cost, you're gonna have low cost, security, low cost, protection of your data. So low cost isn't always best for data security. Now, we all as tax professionals in my office, and in many of the well-respected ones that I know, take great precautions to protect computers to protect individual data. I mean, I got a security system in my business as well to help protect the hard drives how protecting computers and the physical, everything on a physical sense. So yes, how secure is the data.

So, keep that in mind too, about security. If you're thinking about your data, and you want to keep it safe. Don't be afraid to pay a little bit extra to a proper tax professional who is available year-round, who has proper securities procedures and who really genuinely cares for you, which is what we do we care for people here, we do what we can to help them to succeed as best as we can. Because as I've really been going through everything and talking about what I learned in this last tax year, I learned that there's a lot of different people Well, there's been a lot of different struggles individuals have had, in the last couple of years because of the pandemic, I've had to also look at helping ones to minimize taxes, try to talk to them a little bit more, try to encourage them, you know, come see me, give me a call. That's why I'm here. We let let's sit down, let's go over this information. If we need to discuss about some sales that you're potentially going to have, let's talk about the potential taxes that can be involved on the sale of some of your assets, like mutual funds, stocks, those kinds of deals, what's potential capital gains, let's discuss those ahead of time. That way to learn, do you want to make those moves are those good moves for you individually, once again, till we sit down and look at it from a tax standpoint, I can't tell you for sure.

But when we sit down and will be able to determine if that is a good move for you. Because sometimes when we make a lot of sales, we have to do certain attachments, things with a tax return, so that the IRS has all the information that they need to be able to get it done. And to do it right. And so that all information is properly done for you. Now, keep in mind that tax time is over, unless you're on an extension in which we're working on several extensions at this time. And as we work on those, we're helping ones or we're reminding was, you know, we don't want to just be thinking about 21, we want to be thinking about 2022 at this time, and thus, minimize tax liability going forward, and then help you to stay organized to get organized and stay organized with your accounting software. As we look to look at your overall profit for the year to be able to make good plans to help you keep moving forward and pay as little tax as possible and make media adjustments. Yes, let's make tax time less taxing, let's review. Let's make a plan. Let's adjust through the year.

And certainly, as your tax professional, I can help you to do that. And I really like helping people to do that. Because making tax time less taxing helping you to pay as little tax as possible, is indeed my goal and what I want to accomplish, we will need to make estimated payments, we may or may not. That's why when we're looking at potential sales of some appreciated assets, we may need to make estimated payments both at the federal and the state level for you. So just keep that in mind, adjust withholding, maybe we'd need to make and I got some clients we're looking at meeting with you're coming up in June and July to just see, okay, they need to make adjustments. So, they need to have a little bit more held out to make sure they're not paying in January at least trying to break even. So that's what I want to do want to help you at least break even that way you're not having a big tax liability, or we're not getting a big refund, let's find let's, let's find the happy medium. Also, I know there are so many people today that are just very concerned about their health.

And that's very understandable. With the virus happening and a lot of people being concerned a lot of different areas. We are total virtual as a business. Yes, you want to meet virtually, we'll do that. I'm happy to do that. I want to discuss that with you make you as comfortable as possible. Whether you live across the street or across town, here I am, or you're across the country doesn't matter. I want to visit with you, I want to help you video interviews always there to help you secure portal, a web portal to be able to help you to upload your documents very easily and securely. So, we can get it, so we can review it electronic signatures as I mentioned, so that you can sign the proper documents sign whatever contracts we need. So, we can move forward and indeed help you with electronic payment. being set up easily set up monthly electronic payments to help you to easily make your payments as well as invoice you so you can pay with your credit card or with a with an automatic check there. So, we certainly encourage you to think about all these items I mentioned today the importance of this, keep in mind the differences from 2021 tax, which we just completed to the 2022 tax year which is actually going back to the rules, essentially, of 2020.

Keep in mind the importance of planning ahead, tax wise and making adjustments, business owners keeping business mileage logs of your vehicle. It's just absolutely vitally important. Then of course keeping good books and records through the year helping to get organized, don't just rely on software, and that's where I see so many people that are using software that's advertised online or advertised whatever way you see it, they talked about all this offer is going to really be great things, but I'll tell you what it is, you can have issues and I've seen those issues. I got issues right now with clients I'm working on and then we're going to have to fix and perhaps even just start all over again, because of the issues within their software, because they're just plopping things in and they think the software is going to fix, put it in the right place, and all the software will not. So don't just rely upon the software, do it yourself software doesn't always make do it yourself easy, doesn't always make it simple, especially when it comes to tax time. And don't rely upon Do-It-Yourself tax software either.

Because that does, what's going to just popped it somewhere. And it's important to know where it goes and how something needs to be properly classified. So, a good tax professional in your corner, can save you 1000s and I mean, 1000s of dollars in taxes. So, keep in mind, about a few are considering an electric vehicle has to be a new vehicle. There's a lot of different makes and models out there that you can take advantage of. But you just got to do some research with the IRS. And you can always call me I'll be happy to share a couple more with you as we go through. And then of course know what your tax professional is doing. Yes, keep in touch with them. Ask them. How are you doing? What is up with this? Do you have this record? Then? Can you have this this completed yet? Can I see a copy of this, can be physical or electronic? Just see, are you signing these forms? What kind of security does your tax professional have? These are all good questions.

And I recommend you check with because these are questions that I answer even before ones at us because people will say to me, well, you charge whatever I'm like, you know, this is what you are getting, you're getting all this you're getting experiences because it's not just putting numbers on a form, is putting the numbers on the right place on the form. And it's also the data security that you're paying for I pay to keep your data secure. And thus, that's what you're all included in what you're paying for. So, keep these thoughts in mind. And I really appreciate you listening today. Please once again, visit my website which is www.cashtracksfinancial.com or email me its success@cashtracksfinancial.com. I'm also on Facebook, look up the Cash Tracks Financial page. We're on LinkedIn as well and I got a Twitter feed. Also, there where we put periodic posts just to keep you updated on various tax matters.  Sign up for our free a newsletter at cashtracksfinancial.com. 

Cash Tracks Financial Inc.

Marcelino Dodge, EA, CFS

Colorado Springs: (719) 359-8987

Lamar: (719) 336-8739

www.cashtracksfinancial.com

Colorado Springs: Am I Planning for Success or Disaster? Business Start-Up and Taxes

Welcome to The Tax Answers Advisor with Marcelino Dodge, Enrolled Agent, covering what everyone talks about at the dinner table, your Federal Income Tax. On this show today, we will discuss about starting a business. Are you planning for success, or for disaster? Among the questions that we will answered during the show is the type of entity should I be. 

Now if you're considering starting a business and you know in these situation that we're in. It may be questionable to be starting a business, but there are several entrepreneurs out there who have a great idea that even under circumstances that we’re in, you can start a business, and perhaps do very well. Take a look at the markets, see what's happening. You have an idea, a lot of ideas have come out of that successful businesses have come out of situations, bad situations like this and people turn them into a successful business.

 So, you have an idea, you want to start a new business. Well, who do you go to talk to if you want to start a new business? If you want to start a new business, you have an idea. While many people what I have found is they will go and talk to their banker. They’ll possibly go talk to a lawyer. But yet, they often times do not go visit their Accountant or person that does their taxes, which, at least in my opinion, as a professional. If you’re thinking of starting a business. That is the first person you should go speak to, about starting a business.

And there's a number of reasons why that I feel this way, and the biggest reason I feel is because of the potential tax situation or tax areas that you need to be aware of even in creating a business and that's vital to know before you go actually talk to the Attorney or you go talk to a Banker. So, the tax professional like me is a good person to start with, because as a tax professional. One who deals with the numbers and businesses all the time. We can have a discovery session.

To really look at your business idea very closely and see, is a good idea? How we can validate this idea? Is this a program that I want to move forward? Am I making the right choice in looking to start this business? That's some of the areas we can look at with you and helping you to establish goals. Start off with perhaps a model skills. Where do you want to accomplish in the first few months of the business? What do you want to accomplish maybe in six months, in a year and so on?

So to establish those goals helps you to know where your business is going to go or at least give you a direction. And then a success plan would be essential. How am I going to reach this goals now? How to identify the elements of success in the type of business. Now, especially in the type of business whatever type of business you’re looking to start. Hopefully, it’s something that you already know well like, for example, if you been in tree trimming for somebody, and you want to go out and start your own tree trimming business.

Obviously you have the background, you have the training to do that so that's something you can possibly do and do well. And I know some people who go and do this business well because they had the training. Yet even in knowing how to do the actual tree trimming itself with this essential to the business. But then when you go out to start your business and there’s the back and information that is this vital for you be able to do and that's why it's important to talk to myself like a tax professional so that you can have that information ready to go.

Now, once you get your discovery session, get some ideas going, where gonna go? You're going to do and then work on setting up a business plan. Find out these are the steps that I need to take for success. A good question then to consider is what type of entity is my business going to be? Well, we're gonna discuss a little bit each of these a little bit more but one thing I’m going to say here initially is the fact that it's like the beginning suggestion. Everybody says to go and make is go, be an LLC.

That's like what many banks say, many Attorneys say, just go for you in LLC and start your business. Well, from a legal standpoint, I'm not giving any legal advice or anything that, that could be a good idea. But without fully understanding the tax consequences or the tax realities just by going and doing that. We don't know if it's a good idea or not, from a tax standpoint. So from tax standpoint, it's important to know what kind of structure you're going to do because what's going to give me the most protection, to give you the most benefits, and until you have goals established.

We don’t know what entity is going to be the best. So it can range anywhere of what kind of business is going to be best for you or business system is going to be best for you. Is going to be based on your goals, what's going to be better for you to start off with? Is being a sole proprietor perhaps good for you or maybe some type of LLC. If there's more than one person involved, if you have two or more people, should we do it as a Partnership? Some type of Corporation?

That’s when you bring everybody together and really sit down and establish some goals that will help you to be able to start your business and make the correct decisions from the beginning, by having those goals established. Now when it comes to establishing a company, there's entity information which, like if a corporation or an LLC or some type of entity is needed. Like that it's important to get not just rely on me as perhaps the Accountant or Tax Professional but you may need an Attorney.

To help you in setting up those legal situations with your State because a Secretary of State's in each state usually has some type of filing that you need to do and there's articles of incorporation for corporations and there’s other documents required for an LLC. Usually I recommend that you work with an Attorney because they’re though, that is the practice of law. That’s what I recommend. And so that’s why I recommend do that part and so we can now work together with an attorney because in that area.

And as far as there's tax registrations, we can help ones to obtain depending on your state, through your State Department Revenue. Those matters can be handled and of course the IRS numbers, if you’re starting an entity or an LLC usually you need some type of Federal Employer ID number to go with those.

And certainly we work with helping ones attain that. Then of course once you have the federal license number and you have other information required by whatever is required by your particular state.

Because forming an entity is also basically done at the state level. Then you’re going to open up your bank accounts, and then there's so many other areas that we go into help ones to do when you start a business. That is important to cover each of these steps very importantly. Then once you get the business going or once you get through the setup process. Then you also have various accounting.

You have payment system that you need to set up which is what we work to help ones to set up, and these are vital to set up good from the start. Because what happens a lot of times with ones, I’ll go and start a business and I’ll go sign up for some software online, or maybe go to a store and buy it right off the shelf and of course most of its online through subscriptions now. Is that I’ll go and buy the software and we’re in the follow the steps through software to set it up.

But yet getting that set up correctly from the beginning is just absolutely vital. So what we need to keep in mind is that just because software says it's, “Do it yourself and it helps you to run your business”. It's not as easy as it looks because I've seen a lot of reports come in from various software's that, basically, it wasn't set up correctly. And the people, that individuals that set up their business you know they do a great job.

People do a good job with what they do and they make their best effort in fixing up the software, but yet it’s really at least I really recommend having a professional of some sort, like myself, help you to set up that software, and then help the user professional, which what I can do is help you to not only set it up, we can help monitor it, so that your profits are monitored on a daily basis. So we can see okay this is what, this is the money coming in, this is money going out.

This is who we owe this week, this is who we need to pay, and so on. On that way you know you have a profit and loss going, and it's accurate. Oftentimes, you also need in the business, not just the profit and loss statement. You need to balance sheet which is needed for your banks. And because oftentimes ones have difficulty setting up their software initially, there’s various numbers in there that are off. And because most people, they do a great job but they don't necessarily understand how an accounting program works.

And that's, this kind of what it is. It's not good or bad, it’s just what I encountered in the business. And so because of that, it's good to have someone help you set up these processes and then help to monitor this processes, this is that way. As I mentioned in the title for the show, “Planning for success or disaster?” You avoid the disaster part of that, by having your accounting system set up very, very correctly, from the beginning of your business.

And so what we're going to do in the next segment here, we're going to go ahead and discuss more individual entity types, and advantages, disadvantages, tax consequences of each. And why again it's so important to decide ahead of time, what kind of entity am I going to be when I start my business. That way, you maximize the potential for your success, maximize potential for your profits in putting together a plan, setting some goals.

Now as a step back now, is from some information you can already considered now that we've established the goals and an action plan. We need to discuss the type of entity for your business to be, perhaps, for your business or starting it may be starting out, it may be best to be a sole proprietorship. Now, also if you’re an individual to all just starting a business. And is you can also be a single person LLC which most people just don't understand or don’t initially know that when you do a single person LLC, by definition, or by default with the IRS that entity is still taxed as a sole proprietorship from the IRS standpoint, which basically means you file an Schedule C. Now, so we're gonna interchange those here a sole proprietorship and single personnel LLC because they are taxed the same which basically from the IRS standpoint that is the individual or that is the person. Now oftentimes when I deal with people who worked and sole proprietorships, or single person LLCs a business.

Usually happens but, usually on a sole proprietorship, and that is the fact that personal funds and business funds are often co-mingled, which means that people sometimes will use their business checking account to pay personal bills with which on a sole proprietorship essentially because it's all the same, it's not really that big of an issue now. But what it does creates though, it creates a little challenge or actually a big challenge in trying to determine how much profit is the business or sole proprietorship making.

Which is why I often tell people, even on a sole proprietorship or single person LLC, it is absolutely essential that, 1. You have a separate bank account for that business. And you treat that account as a business account. Not as your personal savings account, not as personal checking account. Now you can take draws out of that account like an owner’s draw is which is something I do recommend and some, some of my clients do that.

They'll take like $500 or $1,000 a week transfer that from that account over their business account because that’s like a draw of a sole proprietorship, which essentially that's okay and that makes that easy for accounting purposes, for tax purposes and everything. That way, you can easily keep that part separated, and then have everything else that's in that account as a business expense. So that it’s once again easy to track and in a sole proprietorship or single personnel LLC.

The owner or sole proprietor or the member manager of that single personnel LLC. They are not allowed to be an employee. That is one of the biggest mistakes I have seen with these types of businesses, is that somebody set them up and let that owner be a schedule an employee of the business and when you're the owner of that IRS regulations say in a sole proprietorship, no you’re not an employee of the business. You are the business essentially. So you can have employees and sole proprietorships.

I do several of them, I work with them, and it's deducted as wages on the tax return for the sole proprietorship, but the owner is not. Now we keep in mind that once the tax return is started or the schedule C which is what it is on the tax return we go through to complete that. We keep accurate books through the year for the business to help them to know their profit and losses as well as to help the owner to appreciate that they may need to pay quarterly taxes.

And some do need to do that based on what their profit and loss says that each quarter, which is usually April 15th, June 15th, September 15^th and then January 15^th of the following year. So they pay those quarterly taxes because the employers as while the sole proprietor pay self-employment tax, which that is both some of what an employee would normally pay and then an employer would normally match, which is one amount that the owner pays.

Now that actual amount they pay, or the net profit because that's what they pay it on is the net profit of the business after expenses. May or may not close to what they took and draws but the draws don’t necessarily take into account expenses that are often calculated at a later date, such as depreciation for large equipment or other items in the business. Sometimes interest like, they’ve got a business loan isn’t calculated right away it just, it's just very careful. It’s something that a person may need to do.

I’m doing oftentimes that’s where many businesses started as a sole proprietorship or single personnel LLC and that may be what they say and that could end up working good for the person operating the business. I mean I know several people here and I help several people have been sole proprietor for years and it’s worked for them. They’ve get their taxes paid and they operate and they're successful. Could be good for each individual.

We can't say one size fits all, but each individual may be. He’s being a sole proprietorship is the right choice. Now, as we’re going and we talk to individuals wells and establish their goals. Maybe in some cases, a Corporation. That would be either C Corporation or an S Corporation that they may want to estate. Now depending on what they're going to do what their goals are. How many people are coming together to form this business. Maybe they’ll want to form a C Corporation, or an S Corporation.

Many people in small business and in the areas that I worked with, are maybe one or two owners that start up like a CCorporation for example, which is as we look at C Corporation initially. That's an entity of course all to itself. The C corporation pays its own tax. But one of the disadvantages of the C Corporation is that it's also known for double taxation. And see there can be single shareholders or can be multiple shareholders in a C Corporation but nothing flows through to them. It's all paid at the corporate level.

Now, the profits that are made for the year that the C Corp can pay taxes on are can be distributed to the shareholders in the form of dividends. And then see this is where the double taxation comes in is that the C Corp paid which the flat rate for C Corporations is 21% under current law. And that's always basis show on is what current Law, lock is at the time that the show is being done. So they could pay the tax on those profits 21% at the corporate level.

Then they distribute out those to as share as dividends to the shareholders. Then, the shareholders pay tax on those dividends. That's where the double taxation comes in. Oftentimes, we see these are small corporations in their small privately owned corporations which somehow I work with. There's an owner and oftentimes that owner which can be a single shareholder or maybe two or three shareholders of that C Corporation.

They're oftentimes employees of the corporation. Which is allowed because you have a separate entity there, that the employer, which the employee which the owner is an employee of the business. And the nice part about being a C Corp is that there’s many tax benefits that the corporation can pay for the owner. Like, it can buy the owner’s, the Corporate to health insurance for the individual shareholder. Of course there's retirement. You can have retirement plans within the corporation as well.

All of these are subject of other expenses which reduce to Corporation Operation profits. It’s the amount of tax that they pay. And so they’re saying, there's several other areas that are many benefits that a sequel can have. But they just have that one little deal of a double taxation there, but it allows you to people doing. I have some clients, is you can turn around and do very successfully, do very legitimately and very legally, is you can have a building for example that you own as an individual.

And then you can take that building, and at whatever market value is for the area that you're in, you can then turn around and lease that building to your Corporation. But it's vital for that to come across as legitimate as that you have an actual lease agreement that has minutes from a corporate meeting that shows that you’re entering into this agreement between my company ink and me that we're going to deal with this amount per month basis.

And it needs to be at market value of now as a shareholder, that's getting that rent that’s running into your business. It's really nice that you have income coming into you from business that you don't pay Social Security tax on, Medicare tax on. You do pay income tax on it. But yet, you also still get deductions, you get deductions like property tax, you get deduction sections like depreciation on the building, and other items that you perhaps you're paying that the corporations is not paying on the building.

That's one of the many advantages of being a C Corp, that can really be very advantageous for you having a C corporation. Now of course we touched a little bit before on the S Corp, which is the other option that you have and it comes to Corporations, is that S Corp which is actually very, very common. Many people I worked with and some entities. You can make an election to be taxed as a Corporation as an S Corp. See it's when you go to form a Corporation at the state level.

Then you go, as at the state level it's corporations, it's all the state is a Corporation. Now when you make these elections to be an S Corp, that's actually with the IRS because you go and you get your EIN number or your employer or your ID number with the IR address. Basically, you tell the IRS, I’m going to have employees, and I'm going to be a Corporation. Well by default, you're going to be classified as a C corporation with the IRS.

Unless you file, it’s a form two, five, five, three, signed by all of the shareholders of the Corporation. Then, you can elect with that. Would you like to be an S Corporation? Now usually I recommend if you're going to be an S Corporation, you do it from like when you initially become a Corporation, from the very beginning. If you have been a C Corporation for several years, and then you want to change to be in taxed as an S Corporation, you can make the election and do it. And that's certainly possible.

I’ve had C Corps go ahead and do that. There could be some tax ramifications down the road if they’re certain profits that you still have and so on. Or perhaps depreciation, that could be depreciation issues or a capital gains issues down the road of certain property is sold. But all that’s just stuff that needs to be disclosed if you decide to make it go from C Corp to an S Corp. That's why it is recommended starting and being a new business, we got to make a good shot from the beginning.

What type of corporation are we going to be? Are we going to be a C Corp, or are we going to be an S Corp?  

A couple of points that I wanted to mention here which is really a wonderful, one of the wonderful basis of the Tax Cuts and Jobs Act passed near the end of 2017, is that you have a Corporate operation or business that is making under $26 million an average sales in a year. You can use the cash method of accounting. That is a true, wonderful revision of that law for a businesses to be able to use the cash method of accounting.

 To do that, that's basically, at least I think it's a much easier method that a curl, so it’s my opinion. I think most businesses take advantage of that. Well you can make an automatic recommendation for. Now, one of the disadvantages of a C Corp that I want to touch on that I had that much experience variance with, is that you have many C Corp especially ones that are smaller ones that may have just a few million dollar sales a year. They may make a lot of contributions and donations to charities, and those are great.

That’s wonderful that they do that to nonprofits and so on, that would be deductible. However, because of limitations within the law, all C Corps can actually deduct about 10% of whatever their profits are. So it's usually pretty limited on what a C Corp can actually take and for most average Americans, people who are running a business. That's one of the advantages that an S Corp has over a C Corp, is that if you make significant donations as a corporation, because the S Corp is a flow entity which means a majority of the time, there's no tax paid at the corporation level.

It's paid at the owner’s level, is that those donations to the nonprofits charitable donations actually go down to the shareholders. And the shareholders can use those and with the higher limits on exempt on. To be able to itemize as a shareholder. Those could possibly put you over, depending on what the S Corp is actually doing. Now back on the S Corp a little bit more, the single shareholder or multiple shareholders on S Corps. As I mentioned it’s the floor through entity.

Now, each shareholder owns a percentage. So if you have two individuals operating as S Corp. It and they would through a 50% of the profits or the losses directly to them. Which is one of the big advantages which can be an advantage or measure disadvantages depends on your situation with an S Corp, but also with the S Corp again just as the C Corp, your shareholders can also be employees of the S Corporation.

Which is a big advantage because unlike the sole proprietor where you're paying self-employment tax, and having to pay a Social Security, Medicare tax benefit that is not deductible in any way. By having an S Corp or a C Corp, you’re getting those deductions fully. You’re paying that Social Security, Medicare tax payers what the Corporation pays to you and that’s withheld. And then submitted and also whatever the matching amount is on the S Corp is also fully deductible to the S Corp.

Now you also with the S Corp, as far as the employers, as far as benefits, you still get some advantages and benefits. It's just some of the differences you got to have some clear outlines on the plan whatever type of benefits you’re going to do. You can still do items like, simple IRAs, you can do those with matching 401 case with matching and so on. Now, the challenge comes in as like with, health insurance, though, is that you can have your entity pay for a health insurance.

But due to the way the rules are written is that whatever the corporation, or the S Corp in this case pays in health insurance has to be added to the income of the shareholder. But within the shareholder, gets to take that off as a self-employed, health insurance deduction. Basically it's a wash, as far as from a standpoint but still it's this kind of interesting how that rule works. Plus, you can have what's called a section 1-0-5 plan.

And also within your S Corp have medical or dental refurbishment in there, that you can for the employees as well as a shareholder. And you can do it in the C Corp as well. It just I once again on the S Corps, those amounts come back as income for the shareholder level. So there's a few differences between S Corp and C Corp that you got to keep in mind and be just aware of. But one could be more advantageous or the other depending on your particular situation and your goals.

Now the other area we want to touch on if you're dealing especially with two or more individuals, because an S Corp can be just an individual and have one individual shareholder in each for both the S Corp and C Corp. Now, if you're talking about multiple person then you got two or more people wanting to go into business together. Well, and maybe if they decide well I don't want to do all the paperwork that a corporation requires which there’s minutes, there's articles of incorporation, and other documents that are required by the state, which is why I recommend if you’re going to do Corporation.

You have some type of Legal Counsel help you do with that. In addition, that we can worked together with as the tax person as the account and helping you to form the business. The same would be true if you’re doing a LLC or a partnership, still needs to be legal agreements in there. Whether you are forming an LLC, multiple personnel LLC and all or a partnership. Now then, what kind of partnership, am I going to form?

Am I going to be general partnership, a limited partnership, which that’s all looking at liabilities, and certainly some people need to look at those things very carefully. And once again to decide what type of partnership if that's just throughout they want to go. We keep in mind that, on a partnership type of business. All the profits and losses once again, it's a flow through entity, it’s not paid at the business level, it's paid on the partners level.

Now, with this though we keep in mind that partners get fairs profit that comes through because of the strict tax structure of a multi person LLC or partnership. The partners will then pay, self-employment tax on whatever those profits are. Also, when it comes to multi member LLC, and the partnership. If you're one of the members of the LLC, or one of the partners, you’re not allowed by current law to be an employee of the business.

You don't get compensated via W-2 form, you can work for the business and it's usually written into the partnership agreement that, that person A is going to get X amount of dollars for their work to the part for their work that they do for the partnership and those are in turn during considered guaranteed payments that you receive. Now depending on also what a person like contributes to the business.

Now you can contribute money, you can contribute may be property, or equipment, whatever those amounts are. That gives you what's known as a basis in your partnership or your LLC, and these basis. You also have basis in your Corporations as well. I neglected to mention those earlier but you do make contributions of cash to a Corporation, and that helps to establish your basis whether you're in C Corp or in S Corp.

Back on the partnerships, and then as you have the basis a person or a general partner may take a distribution of cash that reduces what their basis, or how much they have invested into the business that reduces that for them. So, that's where you got to be very careful with that. And once again, profits that come up of that business as a partnership, or multi-personnel LLC. The partners or the LLC members pay self-employment tax on those profits.

That's one of the main disadvantages of a partnership as well as various legal ramifications that can come in there but from a tax standpoint, there's a lot of risk. You can end up paying self-employment tax once again that's where if that's a route someone decides to go and that's when could be what we established, once you go through the goals. Put together a plan and we figure entity. We discuss the advantages, disadvantages of this particular entity type. We come to the conclusion, okay well in partnership is the way.

It’s the way we’re gonna go understanding these matters about, okay, you're not gonna be an employee business. Youre gonna be paying self-employment tax on the profits and that. But we’re going to have employees, you’re going to be there, just going through those areas. Trying to figure that out. Now one of the areas that many people just don’t fully understand once again is just the fact because it’s like the in thing to go inform LLC.

Which if person wasn’t going to form a Corporation or didn’t want to go through the headaches of having a corporation because there’s many, there’s a lot of paperwork with the corporation. A multi-personnel LLC is a good option but the drawback to the multiple personnel LLC is based on current IRS rules. The multi person LLC is taxed as a partnership. So which basically leads you back to the partnership rules and regulations for the LLC members of what they need to be doing or how they’re going to be conducting business.

Usually when I come to see what I’m dealing with an LLC and I don’t know why more don’t recommend this, but when I worked with multi-personnel LLCs usually for simplicity purposes and makes it easier on the LLC members which is a beautiful election in the tax code. A multi-personnel can elect, the stay as an LLC at state level but for federal purposes they can make an election to be taxed as an S Corporation and what is the significance of them being taxed as an S Corporation. A tax standpoint that makes it easy for them to really get by with not having to pay a self-employment tax from the profits from the business. It allows them to be employees of the business so that their amounts that they would normally pay in self-employment tax, once again their Social Security Medicare. It allows them to get a W-2 form as an LLC member because they’re being taxed not as a partnership which is what a multi-person LLCs are taxed by default.

You get some license, be taxed as an S Corp so that the LLC members are allowed to be employees of the business which I have found when I have this discussion with my employers. They find it to be a very appealing deal especially if they’ve been in the sole proprietorship and accounting together to form this LLC business or LLC and they come to find we can do that? You know that’s great, we’d rather be like an employee and that’s because we’ve been paying this self-employment tax for all those years, having this big tax bill at the end of the year.

We don’t want that anymore and so this solution I offer to them and with this multi-person LLCs be intact as an S Corporation. It works out great for them  into some of the benefits and talking about having an escort, where they can have like retirement plan and so on. Having things more back and forth that you can get into with big partnership. So whenever I can in setting up their books and they have because they keep their money separate and they’re able to have benefits of being an employee of their business.

Which once again goes into some of the benefits I talked having an S Corp where they can have retirement plan and so on with and without having the things going back and forth that you can run into with being a partnership. So whenever I can, I usually don't recommend partnerships to people we can avoid it. Usually a multi person LLC could be a better option but this depends on circumstances.

But if we’re gonna do multi-personnel LLC, I usually recommend, let’s be taxed as an S Corp so you can take advantage of the benefits under S Corp Law into the having to pay self-employment tax and have all of the other issues that arise with being taxed as partnership. 

In starting a business just to touch real quick here, it's important to speak to your accounting or tax professional. I recommend actually speaking to them first.

Because we can help you to establish goals, help you put together a plan, and the most importantly, help you to understand whether initially, you should be a sole proprietor or single person LLC. And understand the tax ramifications of being this is understanding you may need to pay self-employment tax on your profits. Also, the fact as a sole proprietor, you can co-mingle funds even though we don't recommend it. I don't recommend it. I still recommend you treat your sole proprietorship business as like an entity like a corporation that way you can track your profits and losses much better and have a separate bank account.

We talked about the advantages of a being a corporation, such as an S Corp or C Corporation. Now, with these type of entities, it’s vitally important, absolutely essential that if you go through this route that the checking account with these Corporation, whatever you choose to be is truly a separate account of course and it’s in the tax ID number of the business. And it's treated. Everything is treated as business related money for the business.

That way if you've done all your other legal protections and had all the consultations with the Attorney regarding set up of these that you don't break that Corporate veil, as well as for IRS Audit purposes if for reason that happened. You can show distinctly to me this has not been my personal checking account, look at this, I got all my business expenses right here. This is business income coming in, business income going out. My paychecks, look this, I have a separate account, this is where I’ve been getting my money from my account so it's all here.

So it's all good and nice and clean, which is what we really like to see. And so, with good plan as well as come to see the importance if you decide to be a multi-personnel LLC or a partnership, a little bit of difference is there with one of those being could be because you're one of those how if you’re one of the entities, the multi-personnel LLC or partnership that you do pay self-employment tax on those.

And so it's important to consider very carefully what you're going to do in those matters as well so that you make a good choice and so planning is essential from the very beginning. What I do see happen oftentimes, businesses because they’re often starting out small, is that they often start off because it’s easiest to do it makes sense. They may start off as a sole proprietor, because they don't have big, big plans but maybe not a lot of money but you want to get going.

So we started the sole proprietors, we helped to build the business up. And then at some point down the road they got a good business going, you know maybe we need to turn into, especially if it’s a single owner, maybe be a single or single shareholder in a corporation and then decide, I want to be a C Corp. Or all the taxes are paid at the corporate level or do I want to be an S Corp where some losses flow through to me any individually, and I pay tax on the profits after they flow through to me.

Certainly, those can be very advantageous now of course, going from the Sole Proprietorship, to a Corporation, which is what many people can do. The advantage of course then you can be an employee of the business, which to me that is just absolutely essential, because if you're having good profits in your business, you want to reduce your self-employment tax and start taking advantage of having items such as your salary.

Also, such as your contributions to retirement plans, business matching to retirement plans all of that becomes deductible to the business. And I stress also here the importance. Also if you want to be an LLC, a multi-personnel LLC in particular. I really strongly recommend with your consultations that if it's practical and it’s in with your goals being a multi-personnel LLC that's taxed as an S Corporation can be a big advantage for you and could work very well for us you.

After we established some goals that may be the best way to go. But once again, no matter what entity we talked about here. None of these entities is a one size fits all, each individual's circumstances, each individual goals, each individual's business. We have to consider all those items. We have to consider the plan. What do you want to accomplish with your business? And then and only then can a recommendation be made as to what type of business entity, you are going to be?

Don’t let anyone just tell you, all you need to run out set up an LLC. Talk to your Accountant or Tax Person first. They’re the one’s I can best advice you from a tax standpoint, which entity would be best for you. That is what I certainly suggest for you to be doing. Now, I’m going to mention that if you decide or if you'd like me to cover on The Tax Answers Advisor from a tax standpoint, tax planning stand point, you can email me at success@cashtracksfinancial.com.

I certainly do appreciate all you listening today, next week we're going to consider, “How safe is my tax information?”. A vital topic when you consider how many different tax preparers are out there and if you’re using what's known as a “ghost preparer”.