Business Tax Tips

Any business with employees must withhold money from its employees’ paychecks for income and employment taxes, including Social Security and Medicare taxes (known as Federal Insurance Contributions Act taxes, or FICA), and forward that money to the government. A business that knowingly or unknowingly fails to remit these withheld taxes in a timely manner will find itself in trouble with the IRS.

The IRS may levy a penalty, known as the trust fund recovery penalty, on individuals classified as “responsible persons.” The penalty is equal to 100% of the unpaid federal income and FICA taxes withheld from employees’ pay.

Who’s a Responsible Person?

Any person who is responsible for collecting, accounting for, and paying over withheld taxes and who willfully fails to remit those taxes to the IRS is a responsible person who can be liable for the trust fund recovery penalty. A company’s officers and employees in charge of accounting functions could fall into this category. However, the IRS will take the facts and circumstances of each individual case into consideration.

The IRS states that a responsible person may be:

• An officer or an employee of a corporation
• A member or employee of a partnership
• A corporate director or shareholder
• Another person with authority and control over funds to direct their disbursement
• Another corporation or third-party payer
• Payroll service providers
• The IRS will target any person who has significant influence over whether certain bills or creditors should be paid or is responsible for day-to-day financial management.

Working With the IRS

If your responsibilities make you a “responsible person,” then you must make certain that all payroll taxes are being correctly withheld and remitted in a timely manner. Talk to a tax advisor if you need to know more about the requirements.

We offer a variety of tax planning services to both businesses and individuals. Conscientious tax planning throughout the year can save you money and make tax time easier. Call us at 817-741-2383 and request a free initial consultation to learn more.

Any employer reimbursing its employees for business-related expenses should consider whether the reimbursement arrangement meets the IRS’s requirements for an accountable plan. Having an accountable plan that meets tax law requirements can provide tax advantages.

Business Connection

Each expense reimbursed under an accountable plan must have a business connection. This means that the expense must be allowable as a deduction and paid or incurred by the employee while performing services as an employee.

Other Requirements

Employees must adequately account for their expenses and return any excess reimbursements or allowances within a reasonable period of time. The meaning of reasonable period of time depends on the facts and circumstances, but the IRS has provided several safe harbors.

Substantiation of an expense within 60 days after it is paid or incurred will be deemed reasonable, as will the return of an advance within 120 days. Alternatively, an employer may provide its employees with periodic statements (at least quarterly) that require them to either account for or return any advances within 120 days of the statement.

Tax Effects

Expense reimbursements made under an accountable plan that meets the requirements are not included in an employee’s wages and are not subject to federal income or employment taxes. This can be a tax saver for both the employer and the employee.

If no accountable plan is in place, amounts paid to the employee count as taxable wages. The employee can potentially deduct the expenses, but only if the employee itemizes deductions rather than claims the standard deduction. The employee’s deduction for employee business expenses and other miscellaneous expenses is limited to the amount that exceeds 2% of adjusted gross income.

We offer a variety of tax planning services to both businesses and individuals. Conscientious tax planning throughout the year can save you money and make tax time easier. Call Manjula P. Modi, CPA PLLC at 817-741-2383 and request a free initial consultation to learn more.

When you start a business, there are endless decisions to make. Among the most important is how to structure your business. Why is it so significant? Because the structure you choose will affect how your business is taxed and the degree to which you (and other owners) can be held personally liable. Here’s an overview of the various structures.

Sole Proprietorship

This is a popular structure for single-owner businesses. No separate business entity is formed, although the business may have a name (often referred to as a DBA, short for “doing business as”). A sole proprietorship does not limit liability, but insurance may be purchased.

You report your business income and expenses on Schedule C, an attachment to your personal income tax return (Form 1040). Net earnings the business generates are subject to both self-employment taxes and income taxes. Sole proprietors may have employees but don’t take paychecks themselves.

Limited Liability Company

If you want protection for your personal assets in the event your business is sued, you might prefer a limited liability company (LLC). An LLC is a separate legal entity that can have one or more owners (called “members”). Usually, income is taxed to the owners individually, and earnings are subject to self-employment taxes.

Note: It’s not unusual for lenders to require a small LLC’s owners to personally guarantee any business loans.

Corporation

A corporation is a separate legal entity that can transact business in its own name and files corporate income tax returns. Like an LLC, a corporation can have one or more owners (shareholders). Shareholders generally are protected from personal liability but can be held responsible for repaying any business debts they’ve personally guaranteed.

If you make a “Subchapter S” election, shareholders will be taxed individually on their share of corporate income. This structure generally avoids federal income taxes at the corporate level.

Partnership

In certain respects, a partnership is similar to an LLC or an S corporation. However, partnerships must have at least one general partner who is personally liable for the partnership’s debts and obligations. Profits and losses are divided among the partners and taxed to them individually.

Are you ready for your dream of running your own small business to become a reality? Call Manjula P. Modi, CPA PLLC at 817-741-2383 now and request a free initial consultation to learn more.

Most ordinary and necessary business expenses are deductible as long as you have the proper documentation. If your return is audited, the IRS may require that you show the type of item purchased and that payment was made. Here are some examples of acceptable documentation.

Checks. A canceled check can be used as proof of payment if it has the name of the payee and shows the cancellation on the back. The IRS also accepts highly legible images of checks if you don’t have your checks returned.

Credit/debit card transactions. You must have an account statement that shows the amount of the charge, the transaction date, and the name of the payee.

Electronic funds transfers. The IRS requires an account statement that shows the amount of the transfer, the date the transfer was posted to the account by the financial institution, and the name of the payee.

Invoices. You must have an invoice or some other form of documentation showing what you purchased. Canceled checks, credit/debit card statements, and records of electronic funds transfers only provide proof of payment.

Cash register receipts. If you receive a receipt with no details of the items purchased, write a description of the items on the slip. As long as the purchase is for a relatively small amount, the IRS should accept it.

If it’s not self-explanatory, make sure you write the business reason for your purchase on the invoice or receipt so you’ll be prepared for any questions from the IRS. And be aware that there are separate substantiation rules for travel, entertainment, and auto expenses.

Whether you need individual or business tax advice, give us a call. We’ve got the answers you’re looking for, so don’t wait. Call our Manjula P. Modi CPA. PLLC today at 817-741-2383 or request a free consultation online to learn more about our tax preparation services.