Tax Tips for Businesses—What You Need to Know
As a business owner, your tax obligations may differ depending on your entity—whether you are a sole proprietor, S or C Corp or Limited Liability Partnership (LLP). That’s why it’s always a good idea to hire a tax expert like Mark S. Freedman, CPA, Inc. to help you determine what your specific situation warrants. Here are some guidelines that may help make that determination. Please contact us for more information.
Is it a Business or Hobby?
It always nice when you can make a living at something you love. For some people, it’s hard to define if their passion is a business or a hobby. The IRS defines it this way. A hobby is an activity you do without the expectation of making a profit. If you do not carry on your business or investment activity to make a profit, there is a limit on the deductions you can take. Whether or not it is a profit maker, your tax return must reflect any money made from these activities. In addition, you cannot use a loss from your hobby to offset other income.
The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corporations. For additional information on these entities, visit the IRS’s Business Structures page. In determining whether you are carrying on an activity for profit, all the facts are taken into account. Among the factors to consider are whether:
If you’re not sure whether your passion is a business or a hobby, contact the business tax experts at Mark S. Freedman, CPA, Inc. today.
Organizational and Startup Costs
Have you just started a new business? Did you know expenses incurred before a business begins operations are not allowed as current deductions?
These startup costs are usually amortized over a period of 180 months beginning in the month the business was established. However, current tax provisions allow you to deduct up to $5,000 of business startup and $5,000 of organizational costs paid or incurred. The $5,000 deduction can be reduced by start-up or organizational costs that exceed $50,000. If you want to deduct a larger portion of your startup cost in the first year of business, you might consider holding off on some of these costs until the business is up and running. For additional information on what costs constitute start-up or organizational expenses, refer to IRS Publication 535, Business Expenses.
Contact Mark S. Freedman, CPA, Inc. to learn how to maximize your deduction for start-up or organizational expenses.
Deductible Home Offices
If you use a portion of your home exclusively and regularly for business purposes, whether or not you are self-employed, you may be eligible to take a home office deduction.
If your home office is the primary place in which you conduct your business or trade or where you meet with clients or patients, then you may be able to deduct certain expenses from your taxes. If you use a separate structure not attached to your home for an exclusive and regular part of your business, you can deduct expenses related to it.
Your home office qualifies as your principal place of business if it is exclusively and regularly used for the administration and management of your business. You are allowed one principal place of business. If you conduct business from more than one location, you’ll have to determine which location you use the most and how much time you spend at each site.
As an employee, you have additional requirements that must be meet. You can only take the home office deduction if the use of your home for business is for the convenience of your employer. You cannot take deductions for space you may be renting to your employer.
Your deduction depends on the percentage of your home used for business. If you gross income from your business is less than your total business expenses, you will be limited on how much you can deduct on your taxes.
To find out about your home office situation, contact the tax experts at Mark S. Freedman, CPA, Inc.
Business Eligibility for Schedule C-EZ
Is your business eligible to use the IRS abbreviated Schedule C-EZ instead of the longer Schedule C when reporting business profit and loss on your federal income tax return?
The deductible business expense threshold for filing Schedule C-EZ of the Form 1040 is now $5,000. This change has made more than 500,000 small businesses eligible to use the shorter Schedule C-EZ form. Schedule C-EZ, Net Profit from Business (Sole Proprietorship), is the simplified version of Schedule C, Profit or Loss from Business (Sole Proprietorship).
Schedule C-EZ consists of an instruction page and a one-page form with three short parts—General Information, Figure Your Net Profit, and Information on Your Vehicle. There is a worksheet for determining the amount of your deductible expenses.
To learn more about IRS Schedule C-EZ, and if you can use it for your business, contact us at Mark S. Freedman, CPA, Inc.
Businesses often neglect to include contributions they have made to charitable organizations when preparing their federal tax returns. You can claim up to 10% of taxable income, which can add up to a sizeable tax deduction.
Here are a few tips to help your contributions pay off on your tax return:
Contributions made to individuals, political organizations and candidates, the value of your time or services and the cost of raffles, bingo, or other games of chance cannot be deducted. To count as an eligible donation, contributions must be made to qualified organizations. If you give your contribution in cash, please substantiate it with a bank record or a receipt, letter or other written communication from the donee organization. The name of the organization, the date of the contribution and the amount of the contribution should all be noted.
If the amount is $250 or more the IRS requires a written acknowledgment showing the amount of cash or property contributed, and a description and a good faith estimate of the value of any goods or services given in return for the contribution or a statement that no goods or services were provided in return for the contribution, is required.
Non-cash contributions over $500 require an attachment to the return that lists the type of property contributed, along with the method used to establish its fair market value. For non-cash donations that exceed $5,000, the IRS requires Form 8283, Non-cash Charitable Contributions. Contributions that exceed the 10% of income limitation can be carried over for five years.
Charitable organizations can tell you if they are qualified and if donations to them are deductible. You can also check them out on IRS.gov’s Exempt Organizations Select Check online tool. Also, taxpayers can call IRS Tax Exempt/Government Entities Customer Service at 1-877-829-5500. Have the organization's correct name and its headquarters location, on hand when you call. Churches, synagogues, temples, mosques and governments are not required to apply for this exemption to be qualified.
If you’re not sure what category your business’s charitable contributions fall into, contact Mark S. Freedman, CPA., Inc. today. We can help you figure it out.
Domestic Production Deduction
If you qualify your production activity for your business, you may be eligible for a tax deduction on your U.S.-based business activities.
The IRS limits the deduction to income from qualified production activities in whole or in part based in the United States. The following are considered qualified production activities.
Contact us today if your business fits into this category, especially if you have not claimed this deduction.
Information About IRS Notices
If you receive an envelope from the IRS—and it’s not what you expect—don’t panic. These matters can often be easily resolved.
Each year, the IRS mails millions of letters and notices to taxpayers requesting payment of taxes, notifying them of changes to their account or requesting additional information. The letter will provide instruction on what you should do, along with a phone number (1-800-829-1040) to call if further information is needed.
Before calling make sure to have a copy of the letter or notice so they can expedite your call. Review the correspondence, comparing it with your tax return. If you agree with the IRS correction to your account, then no reply is necessary unless you owe a payment. If you do not agree with the correction, it is imperative that you contact the IRS. Explain why you disagree, and documents and other information you want the IRS to consider. Mail your information along with the bottom tear-off portion of the notice to the address shown in the upper left-hand corner of the IRS correspondence. Allow a minimum of 30 days for a response.
Sometimes, the IRS sends a second letter or notice requesting additional information or providing additional information to you. Keep copies of all correspondence with your tax records.
You’ve received an IRS notice and still aren’t sure what to do? Contact us at Mark S. Freedman, CPA, Inc. It would be our pleasure to assist you.
Where's My Refund?
If you filed your business or corporate taxes, expect to wait six to eight weeks if you sent a paper tax return and three to four weeks if you filed electronically. Setting up direct deposit of the refund will also make the wait time shorter.
When preparing a paper return, complete IRS Form 8050, making sure that the routing and account numbers of your bank account are accurate. Attach it to your business’ or corporation's tax return. Note: Form 8050 can only be filed with the original IRS Form 1120 or 1120S. The business/corporation is not eligible to receive direct deposit if the receiving financial institution is a foreign bank or foreign branch of a U.S. bank.
Your refund can be delayed for a number of reasons. For example, a name or identification number and Social Security number listed on the tax return may not match the IRS records. You may have failed to sign the return or to include a necessary attachment, such as Form W-2, Wage and Tax Statement. Or you may have made math errors that require extra time for the IRS to correct.
For more information on IRS refunds or for any other tax-related questions contact us at firstname.lastname@example.org.
Your Appeal Rights
Did you know you can appeal and IRS decision? If you disagree with the agency either about the amount of tax liability owed or about proposed collection actions, you have the right to ask the IRS Appeals Office to review your case.
Your most important rights are explained in IRS Publication 1, Your Rights as a Taxpayer. During contact with taxpayers, Be aware that IRS employees are required to explain and protect these taxpayer rights, including the right to appeal.
In addition, you can also appeal:
Appeals are informal. Sometimes your local Appeals Office, which is independent of the IRS office that proposed the disputed action can resolve an appeal by telephone or through correspondence.
Another option is Fast Track Mediation. In this case, an appeals or settlement officer acts the intermediary between you and the IRS helping both parties to reach a mutually satisfactory solution. Most cases not docketed in court qualify for Fast Track Mediation. Fast Track Mediation may be requested at the conclusion of an audit or collection determination, but before your request for a normal Appeals hearing. Fast Track Mediation doesn't eliminate or replace existing dispute resolution options, including your opportunity to request a conference with a manager or an Appeals hearing. You may withdraw from the mediation process at any time.
You may represent yourself or seek out representation by an attorney, certified public account or individual enrolled to practice before the IRS. If an agreement cannot be reached, or if you prefer not to appeal within the IRS, in most cases you may take your disagreement to federal court.
Before making a decision, contact Mark S. Freedman, CPA, Inc. and let us advise you on the best course of action to take.
Filling Deadline/Payment Options
If the tax deadline has snuck up on you, there are options for last-minute help. For forms or publications download copies from the IRS Forms page under Tax Tools on our website. If you find you need an extension, you can get a five or six months of additional time to file by using IRS Form 7004, Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns. If it’s paying your tax bill that’s the problem, be aware that the IRS has several payment options available.
The extension gives you extra time to get the paperwork to the IRS. However, it does not extend the time you have to pay your taxes. You’ll have estimate any tax due when you request an extension. You can also send a payment for the expected balance due, but this is not required to receive the extension. You will owe interest on any amounts not paid by the March 15 deadline, plus a late payment penalty if you have paid less than 90 percent of your total tax by that date.
Mark S. Freedman, CPA, Inc. can guide you through the filing and payment options process. Contact us today.
Mark S. Freedman, CPA Inc.
8949 Reseda Blvd., Suite 123
Northridge CA 91324