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Host: Thomas P. Ochsenschlager, Vice President of Taxation at
          the American Institute of Certified Public Accountants (AICPA)

Time: Wednesday, December 16, 2009 at 1:00 p.m. ET
 
Fay Ott
Thomas P. Ochsenschlager, Vice President - Taxation American Institute of Certified Public Accountants




Topic:

"Tax Preparation for Small Business Owners"

 

With tax season around the corner, small business owners can prepare now with useful end of year tax tips from Thomas P. Ochsenschlager, Vice President of Taxation at the American Institute of Certified Public Accountants. Ochsenschlager will answer questions to help business owners with year-end tax planning preparation.


Note to Web Chat Participants: Answers given by the AICPA are being provided in the context of a Web chat without full knowledge of all the details of the taxpayer's circumstances and without an opportunity to conduct in-depth research. The AICPA and its employees cannot assume liability for tax advice being given in this Web chat. Before acting on any advice we provide, you should consult a CPA or other competent professional. Also, we are required by the IRS to provide the following notice: Any tax information in this Web chat is not intended to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.




From :U.S. Small Business Administration
Location : Washington, DC

SBA experienced technical difficulties during the chat that resulted in users not being able to see the answers while the chat was going on. However, all tax-related questions were responded to and the questions and answers are published below.
From :U.S. Small Business Administration
Location : Washington, DC
Question :
Reply :
Our time is up, so I'll have to sign off now. I've had a good time answering your tax questions and hope you've found the information helpful. On behalf of the American Institute of Certified Public Accountants, thanks for participating and for making this another great SBA chat. Tom
From : Cynde Tiesling
Location : Green Bay , Wisconsin
Question :
How does a entrepreneur keep cash on hand to continue to grow a business and new programs without losing most of it to paying taxes and being viewed as profit? We are a very small business and any "profit" is what we use to continue to grow the programs and business. I have to spend down or pay taxes on the money and then have nothing for the first part of the year to reinvest in my business. Why is an S corp not allowed to keep a certain amount of "profit" in the business with taxation for program and job growth? Cynde Tiesling Green Bay, Wisconsin

Reply :
Cynde, I’m not sure I really see a tax question in here, but yes paying taxes are a part of doing business as long as revenue for the taxable year exceeds deductible expenses. I don’t know how you area organized, but if you are an S corporation, a sole proprietor, or an LLC, you can pass any tax losses through to your 1040 to offset other income. So make sure you are keeping good records and deducting all “ordinary and necessary” business expenses. Also make sure you are funding retirement accounts and other tax deductible vehicles to the maximum allowable deductibility to minimize any profit. As far as the Packers, I have good insight from a die hard fan in our office that says Favre is not the key to supporting the team; but she still refuses to accept second best. Go Skins!
From : Bob High
Location : Harrisville , West Virginia
Question :
Inventory Tax - normally classified as personal property tax - why would consigned goods in a retail store be considered "inventory" to the store owner?

Reply :
Consigned goods are inventory items that are typically owned by one company, but are physically held by another company at their own location. Unfortunately, the determination of which taxpayer is deemed to be the owner of the inventory for federal income tax purposes is not necessary of importance for other rules and tax laws. When assessing personal property tax, some localities may assess based on where the goods are physically located at a particular date, without concern as to who has title to the goods, who is required to insure the goods and bear risk of loss, etc. If this is the situation you find yourself in, you may want to consider revisiting your consignment arrangement to make sure it requires the consignor to reimburse the consignee for any such property taxes that are paid by the consignee.
From : louis
Location : chicago , il
Question :
WHAT TAX BREAK DO I GET FROM DOING BUSINESS OVER SEAS AND I LIVE HERE?

Reply :
US taxpayers must pay US tax on their worldwide income. However, there are some ways to reduce the tax burden. In particular, many taxpayers can qualify to claim a foreign tax credit (FTC) on taxes they paid or accrued to a foreign country. The FTC is intended to reduce the double tax burden that would otherwise result, as the foreign sourced income is taxed by both the US and the foreign country. An individual has the choice to take the taxes paid to a foreign country as an itemized deduction or to claim the FTC. The FTC is claimed on Form 1116 for individuals or Form 1118 for corporations.
From : Michael
Location : Sausalito , CA
Question :
If my company does not have a payroll and I'm the only employee of the company do I have to pay my taxes before 2010 for 2009?

Reply :
In regards to income taxes, the answer is “yes” if you owe any estimated income taxes. If you are a sole practitioner or a disregarded limited liability company, the general rule is that your 2009 income taxes must be paid by April 15, 2010. However, you may have to pay estimated income taxes throughout the 2009 tax year if your balance due exceeds $1,000 and you do not have sufficient withholding from other sources. The above rules are different if you have incorporated your business or there are multiple business owners.
From : Donna westphal
Location : Pleasant Hill , CA
Question :
I w/drew money out of my IRA to start a business in 09. How do I avoid paying penalies and taxes on this money? (I am not 59 1/2 yet) Thank you

Reply :
Unless an exception otherwise applies, you will be subject to both income tax and the 10% additional tax on any income generated by the distribution. Unfortunately, there is currently no exception for starting a new business. For traditional IRAs, any income earned is generally subject to taxes upon distribution. There are exceptions, however, on the 10% penalty. In addition to waiting until age 59 ½, you may not have to pay the 10% additional tax if you are in one of the following situations: • You have unreimbursed medical expenses that are more than 7.5% of your adjusted gross income. • The distributions are not more than the cost of your medical insurance. • You are disabled. • You are a beneficiary of a deceased plan participant or IRA owner. • You are receiving distributions in the form of an annuity. • The distributions are not more than your qualified higher education expenses. • You use the distributions to buy, build or rebuild a first home (limited to $10,000). As mentioned above, there is no exception for starting a new business.
From : Judy Person Garcia
Location : Riverdale , Maryland
Question :
What types of paperwork should be maintained throughout the year and what type of accountant works best for startup schools?

Reply :
You would want to keep all of your paperwork dealing with income, expenses, start-up expenses, and capital expenditures (such as the purchase of a building). Purchases, sales, bank accounts, payroll, and other transactions you have in your business generate supporting documents. These documents contain information you need to record in your books. You may choose any recordkeeping system suited to your business that clearly shows your income and expenses. Except in a few cases, the law does not require any special kind of records. If the startup school is a tax exempt entity, you would want to use a CPA that has significant experience with tax exempt entities. If the school is a for-profit entity, you would want to consult with a CPA that prepares business returns.
From : Nick
Location : Saint Paul , MN
Question :
Hi Thomas, 2009 has marked my first tax year where none of my income was taxed, as I've worked the entirety of it as an independent contractor. Being new to the small business game, I was unaware of the estimated quarterly payments I should have been making. Therefore, I have not paid in tax yet this year. I can still make the fourth estimated tax due date on January 15. My question is then: Can I eliminate the penalty for late estimated payments by paying my entire estimated tax in by January 15th and can you point me towards the proper submission process of my estimated taxes? I appreciate any help. Nick Rudie

Reply :
Many people are not aware that they are required to make estimated tax payments. The general rule is that at least 90% of an individual’s income tax must be paid through either withholding or estimated tax payments. If the income was earned throughout the year, the estimated tax payments must also be made throughout the year. Making a fourth quarter estimated tax payment should reduce the amount of your underpayment penalty, but probably will not eliminate it. You will likely be subject to an underpayment penalty through the date of your payment (January 15th). Taxpayers are required to pay estimated tax in four installments: 1st quarter is due April 15th, 2nd quarter is due June 15th, 3rd quarter is due September 15th, and 4th quarter is due January 15th of the following year. These payments are made with a voucher called Form 1040-ES. I would recommend that you check the filing instructions for Form 2210 for further information.
From : Mark Lorenz
Location : Cedar Rapids , IA
Question :
Top Tax rate for C corp is lower than S corp. Accountant appears reluctant to have us change back to C corp for this one owner biz. Why would not moving to C corp be a tax advantage? Additionally accountant indicates IRS frowns on large cash accumulation in C corp. What ore downsides or IRS punitive measures IRS can impose on C corp cash accumulations. As I note many large corps have large cash accumulations w/o penalty?

Reply :
First, I need to correct you. The top tax rates are currently the same for both C corps and for individuals (paid by the shareholders of an S corp). S corps have one level of tax versus two for the C corp. If you are running losses, the S corp is still advantagous since you are able to deduct the S corp losses against other active income on your 1040. You can't do that with a C corp. In section 531 of the Internal Revenue Code there is something called the accumulated earnings tax. This is a 15% tax on accumulated earnings that are deemed to have been unreasonably accumulated "beyond the reasonable needs of the business." As long as your corporate minutes can justify the reason for accumulating the earnings you should be ok upon any inquiry by the IRS.
From : Guy
Location : Denver , CO
Question :
I' m starting a business, I've incorporated it with a LLC and I have an IRS number. The business is not active yet, I only have had expenses this year. Do i have to fill a tax return? Do I have to pay any form of tax?

Reply :
In general, start -up expenditures are amortized and not deductible. There is an exception, however, in which the taxpayer may elect to expense up to $5,000 of the start-up expenditures. With respect to a filing requirement, if the LLC is operating as a partnership, a partnership return should be filed to the extent the entity has deductible expenses.
From : Virgil Dissmeyer
Location : Minneapolis , MN
Question :
LLC's who elect to be taxed as an S Corp, do not normally pay an owner's salary on the LLC books. But S Corp requires a salary. How is this handled on the LLC books?

Reply :
If you are taxed for federal purposes as an S corp, then your LLC members who work in the business are treated as employees and are subject to all the S corp rules related to employee benefits, employment taxes, and the like. The S corp must issue Forms W-2 for these employees and include the benefits as income as appropriate for 2% or greater shareholders. In short, while the business is organized as an LLC under state law, it must begin to think of itself as an S corp for all federal reporting purposes and change the culture accordingly. You should check that the states in which the LLC is organized and doing business also mirror federal treatment and if not you should be aware of the differences.
From : Juan Pelayo
Location : San Francisco , CA
Question :
What start-up expenses are deductible on a taxpayer's Schedule C?

Reply :
Your business start-up costs will depend on the type of business you are starting. They may include costs for advertising, travel, surveys, and training. These costs are generally capital expenses. You can elect to deduct up to $5,000 of business start-up costs and $5,000 of organizational costs paid or incurred. The $5,000 deduction is reduced by the amount your total start-up or organizational costs exceed $50,000. Any remaining cost must be amortized.
From : Alexa Inkeles
Location : Oakland , CA
Question :
I'm a freelancer who will be doing my own book keeping. I'm trying to choose between Quick books and Account Edge as my software platform. Does it matter to a tax accountant which I use? Every time I ask one of them, they offer me a $200 consultation and I don't know if I need it. I'm going to pay to have my taxes done correctly for sure, but I've been compiling my expenses and write offs for 5 years and I feel I understand what they need. I just need to know in what format would they like it. Am I missing something here? Thanks!

Reply :
Asking a CPA if they have a preference for booking software, or if it’s compatible with their own tax software, is a logical question. If it is a question as simple as that, you should be able to find a CPA to respond to you. If the discussion might be more complicated, or lengthy, such as questions about deductible expenses or a home office, most professional will want to be compensated for their time.
From : Gabriella
Location : Plymouth , MN
Question :
Hi there: This is my first year as an independent biz owner (sole proprietor)...I have hours I will bill in December, but client has 30-45 turnaround for pay...do I count this as money earned in 2009 or 2010? Thank you

Reply :
As a sole proprietor, Schedule C is typically used to report the income, as part of your Form 1040. In the first year of the operations, one typically can choose to use either the cash method or the accrual method as the overall accounting method of the operations. Once a choice is made as to the overall method of accounting, which will be applicable to the business operations in all future years. The method of accounting adopted will determine when revenue and expenses are recognized. Generally, under the cash method, revenue and expenses are reported in the year in which received / paid. Under the accrual method, revenue and expenses are generally reported in the year earned / incurred. Thus, if you perform services in 2009, but receive payment in 2010, the cash method would typically recognize the income in 2010, but the accrual method would typically recognize the revenue in 2009.
From : S.L.
Location : ,
Question :
My LLC registration was approved in September 2009. But I have not obtained state tax ID or Federal tax ID yet since I do not foresee any business in 2009. So far I have not got time to do anything with this LLC except for registration. Do I still need to file the 2009 tax for this LLC? Considering the time, even I sent my request for the tax ID’s in today I probably won't get them till 2010. So I wonder whether I can postpone requesting for the tax ID's till 2010 when I am ready to start running the business? How do I set my “tax year”? Does it have to be a calendar year? Can it starts from when I obtain my tax ID’s? Thanks!

Reply :
Your LLC registration is one step in the process of organizing your business. Until you are ready for business, there is no requirement to file a federal return. Your state may have some requirements such as an annual report, LLC fees, etc and so you should check with your state in that regard. If you are the only owner of the LLC, then you have what, for federal tax purposes, is called a Single Member LLC and is treated the same as a Sole Proprietorship, meaning you will report the income and deductions on a Schedule C (Form 1040) once you are ready to begin filing. In that case, the tax year would be the same as your personal tax year, presumably a calendar year. If your spouse or another person is also an owner of the LLC, then you have a partnership and must file a return on Form 1065. Generally partnerships must also choose a calendar year, but there are some exceptions.
From : Aaron
Location : , Colorado
Question :
I started an LLC - what are the ramifications of 'pass through taxation' that apply to me?

Reply :
If you are the only owner of the LLC, then you are a Single-Member LLC and, for federal tax purposes, will be treated as a Sole Proprietor. If that is the case, you simply report your income and deductions on Schedule C (Form 1040) and report the bottom line number on your Form 1040. If there are other owners, then you automatically have a partnership for federal tax purposes and must file a Form 1065. In either case, you have the option to elect to be treated as a corporation by filing Form 8832 (or an S corporation by filing form 2553). Since you mention pass-through taxation, perhaps I should assume you are going the 1065 route in which case the partnership will report your allocated share of the partnerships items to you on a Schedule K-1 which you will then incorporate into your Form 1040. It is difficult to give you exact answers without knowing more about your situation.
From : Victor
Location : Aurora , Colorado
Question :
Should I have a cpa do my taxes or should I just get turbo tax?

Reply :
Computer programs such as TurboTax can work well. However, if you have a more complicated situation, for example, you sold a personal residence, have a business that you report on your Form 1040, Schedule C, have a home office, or, unfortunately suffered some kind of casualty loss, talk to a CPA about his or her services and an estimate of the cost.
From : Iqbal Singh Josan
Location : Murphy , Texas
Question :
Myself and my wife are partners in a home based services business (LLC) and 2009 is our first year of operation. We are going to have a net loss in 2009 and are going to file 1065. We also have full time jobs and will be jointly filing 1040. Is it possible for us to claim deduction in 1040 for our losses in business for 2009?

Reply :
Possibly yes. When you prepare the partnership return (Form 1065), that will generate Schedules K-1 for each of the partners. The information from the Schedules K-1 will be included in each partners' individual income tax return (Form 1040). However, there are special rules and limitations that may apply to limit your ability to offset your other income (W-2, interest, dividend, capital gain, etc.)with losses from the Sch. K-1s if the activity is passive.
From : Sarah Vandenberg
Location : ,
Question :
What do Minority Small Businesses need to be aware of when preparing for tax season?

Reply :
Sarah: There are no federal income tax rules that apply exclusively to minority small business. The guidance available for small businesses in general will apply to your business.
From : Nicole Notario-Risk
Location : Grand Rapids , MI
Question :
I have a sole proprietorship as well as a Single Member LLC. Both of those tax filings require a Schedule C on my personal return, correct?

Reply :
The sole proprietorship should be filed as a Schedule C on the Form 1040. The Single Member LLC, you can file using a Schedule C if you "check the box."
From : Jeanne
Location : Denver , CO
Question :
I retired from my job May of this year (2009), to run my small business full-time. How do I optimize my business deductions. Now that I run my e-commerce, Body Cosmetics full time from my home.

Reply :
Thank you for your question; When operating a home based business or any business the most important point is maintaining records of income and expenses on a regular basis that will allow you to demonstrate that you can correctly determine income and expenses . You should also maintain a daily diary and some form of record book that will allow you to record income, names of customers, with the necessary identifying information. In the same way you will also need to record expenses with information that would allow you to identify the name of the company you made a payment to, the amount, purpose, and the category it belongs in. If you maintain an office in your home with a space that is completely dedicated to your business you can allocate the expenses of maintaining the home including utilities, equipment, and other normal expenses. However, the space must be used exclusively for your business it cannot be a space used as a part time office. If you use a vehicle for business purposes you must track mileage for business purposes, if you use a computer or cell phone or blackberry you must also allocate the time these are used for personal purposes versus for business purposes. IN this case as well records that are maintained on a regular basis are best for satisfying IRS requests for information. When you begin to generate income you will also need to be able to estimate any income taxes on a quarterly basis. For more information you can access the Internal Revenue Service website, and it is always advisable to talk to a local CPA to discuss your specific tax situation.
From : Joan
Location : Manchester , NH
Question :
What are your suggestions for organizing tax records?

Reply :
Joan: On an annual basis, if you are going to have your return done by a CPA, it is likely the CPA will provide you with a questionnaire for you to complete; that should provide the basic information needed for the preparation of your return. If not, last year’s tax return is a good starting point for determining what information is needed – and you also should provide the CPA with a copy of that return. For income items, provide the CPA with the current year’s tax reporting information you have received– for example, Form W-2 for wages, Form 1099s for interest, dividends, and miscellaneous income. Compare that information with income items on your prior year return to make sure you have all your income items accounted for. If there are income items on last year’s return for which you did not receive a statement, it might mean that you disposed of an asset at a gain or loss; provide the CPA with information regarding that transaction as well. It also would be good to provide your year-end bank statements, mutual fund statements, etc. Do the same exercise for deductions shown on last year’s return. Provide the CPA with information regarding such expenses for the current year – e.g., cancelled checks, credit card statements, or receipts. Likewise, if you are doing your own return, last year’s return is a good starting point for you in organizing this year’s information In terms of permanent records, it would be a good idea to keep a file of prior year returns and well as files that have items that will be needed for returns in the future – for example, information regarding the basis of property purchased or otherwise acquired (for example by gift or inheritance), loss carryovers, excess charitable contribution carryovers, depreciation expense). I hope this is helpful.
From : bumpbargains, Inc
Location : Golden , CO
Question :
General year end tax questions.

Reply :
There are many tax items that you should consider at year-end. A few various questions include: - Have you satisfied all of your charitable pledges in which you wanted to deduct in the current year? - Are there any opportunities for alternative minimum tax planning (AMT) planning? - Should you prepay your state estimated tax payments? - For the high net worth individuals, have you considered making annual gifts to your family? The best advice that I could offer is that you consult with your local CPA to discuss your personal and/or business situation.
From : Richard Finch
Location : , Colorado
Question :
I am a new startup. I have more expenses than I have revenues. Can I apply losses towards a personal return?

Reply :
Yes. It sounds like you're a sole proprietorship, and you can report the loss on schedule C. If you're a partnership or S corp or an LLC or LLP, you can also deduct your losses. You should organize and operate as a business so that the IRS can't claim that you're deducting the expenses of a hobby. Also, to the extent that your business is not one in which you actively participate, you might be subject to the passive activity loss rules--this would be particularly a problem if your business is in real estate rental activities. Passive losses can only be deducted against passive activity gains, but hopefully you have an operating business and the passive activity loss rules don't apply--if it does, you need to get more in-depth advice than we can provide in this webcast.
From : Ralph Connor
Location : Munster , IN
Question :
Does a small S-Corp have to file a Federal or State Tax return if it has only existed for the last qtr of the year and has not generated any revenue yet? If the same S-corp paid salaries, could it carry the loss forward on next years return as a revenue deduction? For a start up , non operating S-corp with no income from 2009-can the sole two partners claim expenses such as lawyer fees, gas receipts, etc against their income earned from a second job?

Reply :
The S Corporation rules require you to determine the income and expenses for whatever portion of the year the business has been in operation so a short year return sould be filed for the S Corp. An S Corp does not allow you to carry forward items as the shareholders are treated as having received the income and expenses for each year whether an actual cash distribution is made or not. With regards to expenses before starting operations, start up costs can be expenses up to $5,000. All other satrt up costs must be amortized over a 180 month period.
From : Geno Moscetti
Location : ,
Question :
Hello Thomas and thank you for your time. We are a bootstrapped startup with two co-founders, that launched our website in November of FY09. We have a LLC in NY State. We are estimating zero revenue for FY09, and our only expenses are for website operations (i.e. no salaried employees). Our books are organized with QuickBooks. Are there members of AICPA who specialize in meeting the tax filing needs of this type of organization? And if so, what is the best way to reach out to them?

Reply :
CPAs can assist small business start-ups with all sorts of accounting, bookkeeping, business advisory and tax services. Try asking friends or relatives for references. A local Chamber of Commerce could be a good resource as well. Finally, you could call the New York State Society of CPAs and ask if they have a referral service. They are in Manhattan.
From : Julie Shoup
Location : Everett , WA
Question :
What are the most common mistakes new small business owners make concerning taxes?

Reply :
Generally failing to keep adequate books and records for both income and expenses. Many new business owners believe they can recall what they did last month and either forget to record income or expenses. They then forget to keep records, bills, receipts, cancelled checks that would allow them to prove to an IRS employee that they have proof of the income and expenses. Also failing to consider that when you begin to make money you need to consider taxes as a cost of business so that you can properly price your product or service.
From : J. Buckiins
Location : St. Pete , FL
Question :
If I use an area of my home as office space, am I able to claim its utilities (elecric, secrity systm, etc.). If so, at what percentage? Can you make the questions asked by other people available? (Includeing the answers)

Reply :
First the space must be used exclusively for business purposes, you can not use a bedroom as an office and meet this test. Then you must determine the total square footage of the house and the space being used for business and come up with a percentage. This is applied against all expenses including utilities, insruance, etc. I am not aware if other questions can be shown.
From : andrea
Location : ,
Question :
Hi, I'm going through a divorce, have been out of work for a few years, and plan to re-establish a consulting business in 2010. The business was a sole-proprietorship in a different state, last active in 2004. Do you have any suggestions for tax strategies considering I am supposed to get support from my husband after the divorce settles?

Reply :
I'm not sure how the tax strategies would interact with your pending divorce--that depends on the terms of the agreement and state law. For tax purposes, you should probably organize to be able to deduct a loss and and to avoid an extra layer of tax on the business. Also, you want to be protected against personal liability. These objectives would be served by a limited liability company, limited liability partnership or a Subchapter S corporation. These would allow any losses to be picked up in your personal return, they would avoid an additional level of tax on the entity (which could be the case if you did a regular corporatoin) and they would limit your liability to your investment in the busienss for any errors or omissions made by your business.
From : Bob
Location : ,
Question :
I haved just started a c-corp in Nov. but am not yet doing any business, and won't until 2010. Do I still need to file taxes for 2009?

Reply :
In general, a corporation is required to file a Form 1120 for the year even if the entity has no gross or taxable income.
From : Beverly Mapes
Location : ,
Question :
What are the biggest tax law changes for small businesses from 2008 to 2009 that we can still do something about this year? (so far I cannot see any questions or answers live, so I hope they show up)

Reply :
You can still purchase equipment like computers or vehicles so long as they are paid for and that you take title to the asset before December 31. ON items like electronics and software using a credit card qualifies as a payment even though you may not pay the credit card bill until next year. Also if you purchase a vehicle before the end of the year you can deduct the sales tax on the vehicle.
From : Bradley Cleveland
Location : Oakland , CA
Question :
I formed an LLC in CA a number of years ago, but I need to shut it down in 2010. What is the process for folding an LLC in CA; is there a tax liability?

Reply :
Please try contacting a CPA in CA that is more familiar with the specific tax rules in that state, and any taxes that may be assessed or additional filing requirements associated with the wrapping up of a business in that state.
From : Stephen Ho
Location : San Francisco , California
Question :
I started a small buisness, while working a regular job. The regular base deduction for my regular job may be higher than the deductible expenses from my buisness. In such a situaton, can I get a tax deduction from both my regular job's basic deduction, and still write off buisness expenses? Or do I have to choose either one, or the other?

Reply :
In general, you may write-off the business deductions to the extent the business is a legitimate business and not considered a hobby. This assumes that you are using a Schedule C on Form 1040.
From : blue energy
Location : , Michigan
Question :
I started a single member LLC later this year. But it had no business activities so far. Do I need to file a tax return? If so, do I file a separate tax return or can I just fill the Schedule C in my 1040?

Reply :
As a single member LLC under the check the box rules, you can elect to use a Schedule C as part of your Form 1040. If there are no business activities for the year, as well as no deductible expenses for the year, you do not need to file a Schedule C.
From : Jackie Strat
Location : Henderson , NV
Question :
This is in anticipation for 2010. We will form a multi-member LLC (say 5 people) for residential real estate investing. We want to minimize taxes. One member will likely have a significant ownership interest and be the managing member. All others will be passive. As I understand it, the four will only pay tax on their distributive shares of the profits. My problem is with the managing member. I believe he has to be compensated for the active work. This is minimal – receiving the monthly rent checks from the property management firm, less their fee. Once in awhile he will conduct local house-hunting trips to find a new property the LLC may buy. I think he needs to be compensated for this, but how much? This would be subject to SE tax, so it should be minimal, in keeping with the small work load. And we want his share of profits to not be subject to SE taxes. I read articles from the 1990’s from the AICPA on this, where they discuss bifurcation for his total “take” and an 80% threshold was mentioned. As I understand it, the IRS has not finalized rulings an definitive guidance on this matter. What advice do you have for me and where can I get further information? Thank you.

Reply :
First, there is no guarantee that your passive members are not subject to SE tax as the statute refers only limited partners, which arguably they are not. If you can justify this position, you are probably alright. With regard to the managing member, yes you need to provide a reasonable compensation based on numerous factors which attempts to achieve a fair market value for the services. This income is subject to SE tax as you know. I believe the bifurcation articles you are referring to are discussing state law limited partners as well and I have my doubts they would apply to LLC members, but I would have to check the sources. It may partly depend on how state law distinguishes managing and nonmanaging members in an LLC.
From : Jackie Strat
Location : Henderson , NV
Question :
When I submitted my question, there were no other questions showing. After I submitted it, I saw questions from Mark and Sarah, and mine. I navigated away from the page, came back, and saw only mine. Now Shirley's pops up, but not the others. IMHO, this chat format is not user-friendly, but I do appreciate the opportunity to "meet" with Mr. Ochsenschlager.

Reply :
The SBA webchat group is having technology issues, and we believe answers should be available shortly.
From : Blue Energy
Location : ,
Question :
I bought a house as my primary residence in 2009. If my single member LLC uses the same address, will this affect my home buyer tax credit for 2009? Thanks

Reply :
As lonog as it is the primary residence of the taxpayer and meets the other requirements of the credit, then you shouldn't have a problem. You can have an office in home or just a mailing address and still have a primary residence--the only issue the business address would raise is whether, in fact, the house is your primary residence, but if you have really live there, it shouldn't be a problem. Also, to the extent that a portion of your dwelling is an office and not a residence, you might have to back out the value of that portion of the house in calculating the homebuyer's credit.
From : Michelle
Location : San Francisco ,
Question :
I plan to use a CPA for the first time this year. What information should I gather to make the process easier?

Reply :
Michelle: The CPA is likely to provide you with a questionnaire for you to complete; that should provide the CPA with the basic information needed for the preparation of your return. If not, last year’s tax return is a good starting point for determining what information to take to the CPA – and you also should provide the CPA with a copy of that return. For income items, provide the CPA with the current year’s tax reporting information you have received– for example, Form W-2 for wages, Form 1099s for interest, dividends, and miscellaneous income. Compare that information with income items on your prior year return to make sure you have all your income items accounted for. If there are income items on last year’s return for which you did not receive a statement, it might mean that you disposed of an asset at a gain or loss; provide the CPA with information regarding that transaction as well. It also would be good to provide your year-end bank statements, mutual fund statements, etc. Do the same exercise for deductions shown on last year’s return. Provide the CPA with information regarding such expenses for the current year – e.g., cancelled checks, credit card statements, or receipts. Also, if you have a child you will claim as a dependent on your return, you should provide their social security numbers. In addition, if there have been any major changes in your life during the year that could impact your return, be sure to discuss them with your CPA. For example, if during the year, you got married or divorced, had a child, received an inheritance, started a business, note those to the CPA. I hope this is helpful.
From : VendsWell
Location : Burlington , NC
Question :
I recently purchased a vending business selling drinks and snacks. Is there a year end tax on inventory in North Carolina?

Reply :
Sorry - we are not familiar with all of the various localities specifically. In general, many localities assess personal property taxes on inventory owned at year end or located in the locality at year end.
From : Brian Garcia
Location : ,
Question :
What should I claim if I run my buisiness from my home.

Reply :
Thank you for your question; When operating a home based business or any business the most important point is maintaining records of income and expenses on a regular basis that will allow you to demonstrate that you can correctly determine income and expenses . You should also maintain a daily diary and some form of record book that will allow you to record income, names of customers, with the necessary identifying information. In the same way you will also need to record expenses with information that would allow you to identify the name of the company you made a payment to, the amount, purpose, and the category it belongs in. If you maintain an office in your home with a space that is completely dedicated to your business you can allocate the expenses of maintaining the home including utilities, equipment, and other normal expenses. However, the space must be used exclusively for your business it cannot be a space used as a part time office. If you use a vehicle for business purposes you must track mileage for business purposes, if you use a computer or cell phone or blackberry you must also allocate the time these are used for personal purposes versus for business purposes. IN this case as well records that are maintained on a regular basis are best for satisfying IRS requests for information. When you begin to generate income you will also need to be able to estimate any income taxes on a quarterly basis. For more information you can access the Internal Revenue Service website, and it is always advisable to talk to a local CPA to discuss your specific tax situation.
From : Kate Morgan
Location : east derry , nh
Question :
I do not have the funds to hire a cpa Would putting this on a crdit card be an reasonable way to fund such advice? What should I expect to pay / hourly rate for cpa?

Reply :
Considering a credit card is reasonable but that is a question to ask the CPA right away. Hourly rates vary considerably and CPAs sometimes have other billing arrangement such as a flat amount for the job. The best approach is to meet with the CPA to discuss the nature of the work as well as alternative billing arrangements. Don’t hesitate to ask about the credit card. You should also ask for an estimate of the cost or an estimate range.
From : Kenya Smartt
Location : Cedar Hill , TX
Question :
I have recently started a small photgraphy business. I don't have a studio or anything, I only provide on-location photo sessions and portrait orders. I have no employees, it is only me. I have been told by a tax consultant that I do not have to pay taxes because my business does not make enough money and this does not sound correct to me. Is this true? If not, which taxes am I responsible for paying?

Reply :
If you are a sole-proprietor, you should file Schedule C with your Form 1040. Depending on the amount of your total income and expenses, you may or may not have to pay income and/or self-employment taxes. However, we recommend that you report all of your income and deductions regardless. Unfortunately, you can only deduct your expenses to the extent that you have income. These are referred to as the “hobby loss” rules. However, there are exceptions if you make money in 3 of 5 consecutive years and/or you can prove that you are engaged in the activity for profit. You may also want to check whether there are any state or local sales or excise taxes assessed on the gross proceeds of your business.
From : Spud
Location : Gautier , Ms
Question :
I"am a paint contractor,what can I deduct this yr.

Reply :
Keep good records of all your income (including any payments that were made to you in cash), as well as all expenses you paid associated with your business. If you are operating as a sole proprietorship, you will file Schedule C with your individual income tax return. You may also be required to file Schedule SE to assess and pay social security taxes on your business income. Several other forms may be needed as well (Form 4562, etc.). Many of your expenses that are related to the operations will be deductible, including paint and other supplies used in your operations. If you purchased any equipment, Section 179 might permit you to claim a full deduction for the cost of the equipment this year, rather than depreciating it and spreading the deduction over several years.
From : Nancy Scott-Noennig
Location : Berkeley , CA
Question :
I started a small business, selling my hand-crafted items, this year. I rented a work space in February, but I didn't actually get my seller's permit, business license, etc., until November. Can I deduct my rent expenses back to February?

Reply :
Business start-up costs are the expenses you incur before you actually begin business operations. Your business start-up costs will depend on the type of business you are starting. They may include costs for advertising, travel, surveys, training and even renting a work space. These costs are generally capital expenses. You can elect to deduct up to $5,000 of business start-up costs and $5,000 of organizational costs paid or incurred. The $5,000 deduction is reduced by the amount your total start-up or organizational costs exceed $50,000. Any remaining cost must be amortized. It is possible that you will only be permitted to deduct your expenses to the extent that you have income. These are referred to as the “hobby loss” rules. However, there are exceptions if you make money in 3 of 5 consecutive years and/or you can prove that you are engaged in the activity for profit. Unfortunately, I do not have sufficient information about your business to make this determination.
From : Greg Faulkner
Location : Sugar Hill , Ga.
Question :
I would like to obtain assistance with preparation with some incorrect filed taxes. I can be reached via 678-765-2703 or cell 678-200-7403. My email: gfaulk12003@yahoo.com

Reply :
We suggest that you seek the services of a tax professional in your local community, particularly if you have tax problems with prior returns.
From : Meera
Location : ,
Question :
I started my new business this year. I am in building design field, and things have been extremely slow. I was told that for this fiscal year I will not be able to take any loss unless I actually start earning money. Any suggestions?

Reply :
I don’t necessarily agree with that response. If you have legitimately started your business by advertising, marketing your efforts, your office equipment is in place and you are able to begin a job just as soon as you get a client – also make sure you have your business licenses in place – you should be fine showing the deductions on a tax return without any income. Be sure to land some contracts within the first three years to avoid possible scrutiny from the IRS, but in general, as long as you are putting forth a serious and complete effort to conduct a business, you have a strong argument for business deductions.
From : Randall Bullen Photography
Location : Glen Ellyn , Illinois
Question :
How do I apply for a resale certificate? What IRS forms do I need and where do I get them?

Reply :
If by resale certificate, you mean government permission to sell business inventory to customers and to collect and remit sales tax, this is something you apply for from your state authority, possibly the Secretary of State or some similar local office within the department of revenue. This is not an IRS requirement. If you are referring to something else, such as a certificate to allow you to purchase items for use in your business that are not being offered by you for sale to customers, then that is also something you get from your local department of revenue.
From : rich fallis
Location : marshall , wi
Question :
LLC tax deferrals. How much? How often?

Reply :
This question is so vague it is very difficult to answer. LLCs do not automatically defer tax. Not sure what the question is going to.
From : Wendy
Location : Riverside , CA
Question :
Will I have to pay $800 even if I don't make any money on a corp?

Reply :
Not sure what is being referred to here. If the $800 is a franchise tax fee imposed by a state on a corporate business, then the fee is likely imposed regardless of income or loss. If the $800 is an income tax, then it depends if that $800 is the correct amount of TAXABLE INCOME computed having considered all appropriate income and deductions. If so, and the corporation is a C corporation, then a corporate level tax must be paid on that amount. If it is an S corporation, then that amount is passed-through to the shareholder and reported on the owner’s tax return.
From : anthony
Location : danbury , ct
Question :
I formed a sole owner LLC this year, do I file a seperate return for the LLC or do I just file income from LLC on my own personal tax returns since LLC is solely owned by me and money earned from LLC was paid directly to me?

Reply :
As the sole owner of an LLC, Limited Liability Company, for federal income tax purposes you may simply file a Form 1040, Schedule C, along with your personal income tax return. This is the basic business form filed by sole proprietors and most small businesses. Other forms may be necessary if you purchased equipment for your business, or if your earnings are subject to the self-employment tax. You must be able to demonstrate that you are maintaining adequate business records so that your accounting method can be verified. You must keep copies of invoices and independent verification of business expenses. Also if you are running the business form your personal residence the schedule C form easily links to the appropriate tax form for correctly deducting home office expenses. State laws typically follow federal rules but you need to make certain that you are in a state that conforms to the federal rules for LLC’s.
From : Sarah Vandenberg
Location : ,
Question :
Are there any tax benefits for Minority Business Enterprises?

Reply :
There are no tax benefits available solely because a business is a Minority Business Enterprise.
From : Julie Shoup
Location : Everett , WA
Question :
I am a new portrait photography business, just started up in October. I don't have a studio, I work on location. I'd like to know the most common mistakes new business owners tend to make in order to avoid them myself.

Reply :
The basic mistakes new business owners make is failing to set up a basic record and accounting system so that they can demonstrate their correct income and correct expenses. Many also fail to segregate their business income from their other income when depositing funds to their business account. Many also fail to keep copies of invoices that demonstrate that a business expense has been paid off fail to keep adequate records of customer billings that prove income. Many think they must incorporate when starting a business and that usually creates far more paperwork for both federal and state purposes than a new business is prepared to deal with. Most importantly many fail to set aside funds with which to pay their taxes as there is no one else that will withhold federal or state taxes for them Many also think that if they just purchase an accounting software package that it will answer all of their questions. A session with a CPA can be just as important an investment as anything else you will do when starting a business. A qualified CPA can help get you started and help keep you from making these types of mistakes.
From : Bea
Location : Springfield , MA
Question :
What are the tax implications of a LLC declearing bankrupcy?

Reply :
Generally, to the extent of the bankruptcy or insolvency, the taxpayer is often not subject to income recognition from debt forgiveness. However, it does reduce the taxpayer’s basis in the assets. The filing requirements for the taxpayer’s federal income tax return typically do not change with the bankruptcy. Additional forms, such as Form 982, may need to be attached to the return. See IRS Publication 908, Bankruptcy Tax Guide, for additional information. Note that the financial accounting implications often differ from the tax implications. As a result, you also need to be diligent about understanding the results of each, and making sure that those differences continue to be tracked appropriately in the company’s records going forward.
From : david sans
Location : new york , ny
Question :
My company has no revenues yet - should I file for corporate taxes?

Reply :
Yes. Every business incorporated in the U.S. should file an income tax return whether or not it has taxable income for the year.
From : HJ Wang
Location : San Jose , CA
Question :
(1) My company was formed in Feb-2009. It has not generated revenue yet. Should I file tax return? (2) Am I entitled to reduce my personal income tax becasue my company has not paid me for my work?

Reply :
(1) You should discuss your filing responsibilities with a tax professional. For example, if you are operating a corporation, you must generally file a Form 1120 every year even if you have no revenues. On the other hand, if the business is a partnership, the partnership does not generally need to file a return until it receives taxable income or has deductible expenses. (2) if you have not received any income or payments from the business, you are not entitled to take a deduction (for your efforts or time devoted to the business) on your personal income tax return
From : Andrew Smith
Location : New York City , NY
Question :
This is my first year in running a small building company in NYC. We have no employees, and pay people as independent contractors. What is the forms do I need them to fill out, and which forms do I need to file with the IRS? By what dates do they need to be done?

Reply :
Independent contractor status is a complex area of the tax law; and thus, it is best practice to discuss such filing responsibilities with a competent tax professional. In general, if a business utilizes a worker as an independent contractor, the business should have the worker fill out a W-9. Further, it is a best practice for the worker to have a written agreement with the business as to the services provided by the worker. The business is generally required to provide the independent contractor with a Form 1099- MISC by January 31 stating the gross received by the worker.
From :U.S. Small Business Administration
Location : Washington, DC
Question :
Welcome, everyone, to the U.S. Small Business Administration's 2009 year-end tax chat. It is my pleasure to host the chat on behalf of the American Institute of Certified Public Accountants. It looks as though we have some good questions from small business owners across the country, so let's begin. Tom