The idea of starting a business is scary enough; then comes the difficult decision of what type of business entity to establish. You’ll need to consider your financial needs, risk and ability to grow. Choosing correctly at the start is critical because it can be difficult to change your legal structure after you have registered your business.
A sole proprietorship is quick and inexpensive to form. You have complete control over your business. You are entitled to all profits from the business. Nonetheless, you are also liable for all business debts and have an unlimited personal liability, which may be undesirable. This type of entity may also make it difficult to raise capital if needed.
A partnership has several options: (1) a general partnership with overall equal division of profits, liability and management or (2) a limited partnership with one partner controlling the operations and other partners with limited roles. Partners must file taxes twice, once for the partnership and once for the individual. Also, if disputes arise between partners, there could be some drama. Similarly, with this type of business, you could be held liable for actions made by your business partner.
A multi-member limited liability company (LLC) is a hybrid between a partnership and a corporation, and it can be taxed as either. This entity provides options for the actual business structure with the limited liability of a corporation and the operational flexibility and tax structure of a partnership.
If liability and outside funding are your main concerns, then a C corporation might be your best fit. A C corporation provides limited liability. Other pros of a C corporation are the ability to generate capital. Plus, the current tax rate is capped at 21%. Conversely, C corporations are subject to double taxation—once when the corporation makes a profit and again when it pays dividends to shareholders. In addition, a C corporation can require a large initial investment of time and money for start-up and administrative costs.
An S corporation is also a good option for limited liability; yet, an S corporation has stricter operational processes including shareholder compensation requirements. Also, foreign ownership of shares is prohibited. On a positive note, this type of corporation eliminates any double taxation since the income is passed through to the shareholders to report on their personal returns.
The best option for you will depend on your personal and business goals and how they align with what each type of entity has to offer.
There is no change in the federal income tax treatment of alimony and separate maintenance payments that are required by divorce agreements executed before 2019. As such, alimony payers take a deduction while alimony recipients include the payment in income post-2018.
However, for any divorce or separation agreements executed in 2019 and later years, alimony will no longer be reported on the tax return. This is also the case for prior agreements later modified to state that the new rules apply.
Even if you already have a divorce attorney, call our office to make sure we work together to get the best tax results for you.
Beginning in 2018, the child tax credit increases to $2,000 per qualifying dependent child age 16 or younger at the end of the calendar year. This is a huge benefit because a credit reduces your tax bill dollar-for-dollar! Also, up to $1,400 of the credit could create a refund if you have at least $2,500 of earned income. Once you earn more than $200,000 ($400,000 if married filing jointly), the credit decreases.
A qualifying child must be a U.S. citizen, U.S. national or resident alien. The child must be your son, daughter, stepson, stepdaughter, brother, sister, stepbrother, stepsister, grandchild, niece, nephew, adopted child or foster child. Also, don’t forget that you must provide at least half of the child’s support during the year and the child generally must have lived with you for at least half of the year. The child cannot file a joint return (or file it only to claim a refund) and you must provide a Social Security number for the child on your tax return.
New this year is a $500 nonrefundable credit, also known as the family credit, for qualifying non-child dependents and qualifying children aged 17, 18, or under 24 if a full-time student. A non-child dependent must be a close relative or live with you. Their taxable income must be less than $4,150 for the year, and you must provide over half of their support. The non-child dependent also must be a U.S. citizen, U.S. national or U.S. resident; however, the Social Security requirement does not apply, though you’ll still need a taxpayer identification number.
Tax laws define reasonable compensation as the amount that would ordinarily be paid for like services by like enterprises under like circumstances. Building a compensation plan into your business right from the start is a good idea. Depending on your business structure, there are many compensation options, including: * Standard salary-simple, easy to manage * Salary and dividends-a mix of both wages and dividends (dividends are usually taxed at a lower rate than wages) * Stock or stock options * Salary with bonus option-gives yourself leeway when the business might not have a good year financially It’s important to have proper documentation and pay yourself an amount that aligns with the size of your business, the market and related profitability. By not doing so, you are asking for trouble from the IRS in terms of additional taxes, penalties and interest. Reasonable compensation is also a hot topic of discussion because it comes into play for determining the new qualified business income (QBI) deduction. In general terms, the QBI deduction is limited to the lesser of 20% of qualified business income or 50% of the total W-2 wages paid by the business once taxable income exceeds threshold amounts. Rules are in place to deter high-income taxpayers from attempting to convert wages or other compensation for personal services into income eligible for the deduction. The complexities surrounding this deduction can be challenging but we can work through the mechanics to make sure you receive maximum results.
All business owners hope to succeed at scoring good talent. Now, should that accomplishment come from hiring an employee, enlisting the services of an independent contractor, or both? An employee is a smart choice if you want complete control over that person. You decide the hours of work, tools and equipment used, training provided and more. Hiring an employee could be the better choice if the job is essential to your business and not a peripheral job, such as a cleaning crew. On the other hand, employees come with an abundance of legal and regulatory responsibilities on your end. Both the federal and state governments regulate the payment of wages, salaries, overtime and other work-related rules. You also must comply with payroll tax, unemployment insurance and worker’s compensation insurance requirements. You can assign duties to an independent contractor, impose a deadline and work product; nevertheless, you cannot tell that person how to get the job done. Independent contractors can work for others, usually set their own hours and often provide their own tools or equipment. This type of arrangement could be ideal if the work can be done by a professional who doesn’t need much supervision. An independent contractor could also be a good choice when the work is a short-term project that will be completed in a defined period of time. Oftentimes, your only financial responsibility is providing the independent contractor with a Form 1099-Misc each year. The decision to hire an employee or an independent contractor is done on a case-by-case basis; many businesses use a mix of both. Be aware that the IRS considers a worker to be an employee unless you can prove otherwise.
Beginning in 2018, employees are no longer able to deduct out-of-pocket business expenses, including professional dues and licenses, tools and equipment, uniforms, continuing education, and work-related travel, meals and lodging. Instead of footing the bill for these business expenses, ask your employer to consider setting up an accountable reimbursement plan. If your employer sets up an accountable plan, you can submit proper documentation for required expenses and subsequently receive tax-free reimbursement. In addition, the employer gets a tax deduction for the payment. If your employer does not want to set up an accountable plan, you could request an expense allowance to help cover your costs. The employer will need to include this allowance on your W-2; however, it would help reduce your out-of-pocket total.
If you acquire and place into service a new or used passenger vehicle in 2018 and use it over 50% for business, you can depreciate up to $18,000 if you elect to claim first-year bonus depreciation. This is a dramatic increase from last year’s amount of $11,160. Even if you choose not to claim the bonus, the first-year deduction is $10,000 ($3,160 for 2017). The new law also adds the ability to take the bonus depreciation for a used automobile as long as you or your business has never used it previously.
You should also note that the above vehicle depreciation caps do not apply to trucks, vans or SUVs that are rated at 6,000 pounds loaded gross vehicle weight. For example, if you purchase an SUV costing $70,000 and use it 60% for business, you could potentially deduct $42,000 of depreciation for that first year!
All tax rules have their quirks, so make sure to give me a call if this sounds like something you might be considering.
Starting in 2018, deductions for activities that are generally considered to be entertainment, amusement or recreation expenses, or with respect to a facility used in connection with such activities, are disallowed. Forget front row concert tickets or box seats at the MLB game on another company’s dime.
Before the new law, if you took a potential client golfing to discuss a future relationship, this cost was 50% deductible as entertainment associated with the active conduct of a trade or business, but only if adequate records were kept. Now there is no such deduction. The government likes this provision because it eliminates the subjective determination of whether such expenses are sufficiently business-related.
However, if you reward an employee with an expense-paid vacation, you can still deduct this type of entertainment since it is treated as compensation to the employee. If you gave the same type of reward to a contractor, you would have to issue a 1099-Misc in order to gain a deduction.
Celebrations like holiday parties and annual picnics are still fully deductible because they are for the primary benefit of employees. Yet membership dues for any club organized for business, pleasure, recreation or other social purpose are not deductible and never have been allowed.
Give me a call to discuss how these types of expenses might affect your tax liability for the year.
While state and local tax deductions are still available on Schedule A, beginning in 2018 through 2025, the aggregate amount of all state and local sales, income and property taxes on this schedule may not exceed $10,000 ($5,000 for married taxpayers filing separately).
State, local and foreign property taxes and sales taxes that are deducted on Schedule C, Schedule E or Schedule F are not capped.
With the increased standard deduction for these years, this limit will not apply if you are no longer itemizing.
Other deductions remaining on Schedule A for 2018 include the following:
- Personal casualty losses if incurred in a federally declared disaster area.
- Investment interest to the extent of net taxable investment income, with any leftover interest being carried forward to the next year.
- Gambling losses to the extent of gambling winnings.
- Charitable contributions with most gifts deductible up to 50% of AGI (60% for cash contributions) and gifts of stock deductible up to 30% of AGI, with any carryover generally deductible for the next five years.
- Medical expenses, such as prescription drug co-pays, transportation to and from doctors and other medical appointments, cost of dentures, hearing aids and more, to the extent they exceed 7.5% of AGI (10% after 2018).
The U.S. tax system is a pay-as-you-go process. Taxes must be paid as income is earned or received during the year. With the new tax laws, the way tax is calculated for most taxpayers has changed. In addition, any change in your tax situation for the year (e.g., selling stock, changing marital status, working multiple jobs, etc.) can affect how much tax needs to be paid during the year.
If you receive salaries, wages, pensions, unemployment compensation and any taxable Social Security, you can adjust the amount of tax withheld. Some income is not subject to withholding, including income from self-employment or rental activities. Therefore, some of you may need to make estimated tax payments unless you expect to owe less than $1,000 when you file or if you had no tax liability in the prior year (subject to certain conditions).
Making an adjustment to withholding or making an estimated tax payment now may help you avoid an unexpected year-end tax bill and a potential penalty.