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Henderson CPA shares Why Small Businesses May Want to Consider Electing S Corp Status

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Posted by Henderson CPA Tips Posted on Oct 16 2019
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With all the decisions your clients are expected to make when starting a business, which legal structure to choose might not get as much consideration as it should. Most business owners choose to form a sole proprietorship in the beginning, since it’s less paperwork and less costly; many switch entities as their business grows to benefit from the protections provided by a Limited Liability Company (LLC) or C Corporation. But an LLC or C Corp can also choose to elect S Corp status. If your clients come to you with questions about this option, here’s what to know:
 
The C Corp
The biggest reason your clients will choose to form a C Corp. is that corporations provide the strongest protection from business liability for the business owners and/or shareholders. The C Corp is legally a completely separate entity from the owners and shareholders, so it lives and dies on its own and has no bearing on their personal assets.
 
A C corporation can also sell stock or shares, offer employees a stock option plan, and have an unlimited number of shareholders. In fact, if your clients plan to go public, their company must be structured as a C Corp.
 
In a true C Corp, the profits and losses are “owned” by the corporation only, and taxes are based on the corporation’s activity. Business expenses, retirement plan costs and employee benefits are tax deductible to the corporation. Only dividends to the shareholders are taxable as the shareholder’s income. This is referred to as “double taxation,” as owners of the corporation pay taxes both on the corporation’s profits and on their dividends.
 
C corporations are also a pricier choice for legal structure as they pay several state and federal filing fees in addition to the various city licenses and industry certifications a business may need. The steps to form a C Corp can also be cumbersome, as the law requires a corporation to:
 
Select a Board of Directors, meet with the board regularly and keep detailed meeting minutes.
Formally register the business by filing Articles of Incorporation with the state.
Obtain a Tax ID Number or Employee Identification Number (EIN) from the IRS.
Draft corporate bylaws. Corporate bylaws are the official rules for operating and managing the company, proposed and voted on by the Board.
Limited Liability Company (LLC)
As an alternative to the C Corp, your clients may choose to form a Limited Liability Company (LLC), which is a less stringent business structure than the C Corp, but still provides the owners a layer of protection from liability. The LLC is considered a separate legal entity from its members and is responsible for its own finances and legalities in the case of a lawsuit.
 
Unlike the C Corp, LLCs require less paperwork to set up. There’s no board of directors, which gives the company more flexibility when making business decisions. Instead, the LLC’s owners (called members) create and file the Articles of Organization with the state and make the decisions. LLCs still need to acquire an EIN number and maintain the necessary licenses and permits.
 
The biggest difference between the C Corp and the LLC is that the LLC has a choice on how it wants to be taxed. Although the LLC protects its members from legal and financial liabilities, the LLC is not a separate entity in the eyes of the IRS. Instead, it is considered a “pass-through entity,” similar to a partnership or sole proprietorship. Profits and losses of the LLC are passed through to the members and must be claimed on their personal tax returns—unless members decide to have the company taxed as a C Corp. In that case, profits are taxed at the corporate rate (which is a flat 21% due to the Tax Cuts and Jobs Act).
 
The S Corp Election
There is another taxation option for C Corps and LLCs: Electing S Corp status. The S Corp isn’t a legal business entity, but instead a special election made by your clients for tax purposes. The business still retains the liability protection of the C Corp or LLC, but by electing S Corp status, they now have pass-through taxation and are no longer taxed at the corporate level.
 
Why would a C Corp or LLC choose to elect S Corp status? The positives of the S Corp election come down to its income-splitting potential for owners of the LLC or C Corp. Members or owners can decide to take a reduced salary; pay income taxes, Social Security and Medicare taxes on the smaller salary; and take the remainder of their compensation in the form of dividends. Dividends are not subject to self-employment tax, so this dividend distribution is subject to income tax only.
 
Because the profits are passed through to the individuals, the S Corp is not necessarily beneficial to companies with high earnings. There are also limits on the number of shareholders an S Corp can have, so this election might not work for clients who plan to solicit investors.
 
For startups or other businesses with losses, however, S Corp losses can be written off on the client’s personal tax returns, which may be beneficial.
 
To qualify for S-Corp status:
 
The business must be a U.S. corporation or LLC
It can maintain only one class of stock
It’s limited to 100 shareholders or less
Shareholders must be individuals, estates or certain qualified trusts
Each shareholder must consent in writing to the S Corporation election
Each shareholder must be a U.S. Citizen or permanent resident alien with a valid United States Social Security number
The business must have a tax year ending on December 31
 
Generally, I recommend that businesses start as LLCs since the structure is simple and flexible. Later, as the business grows and becomes more complex, S corporation status may make more sense. Rather than converting to a corporation and then electing S status, it is simpler to just “check the box” and elect to file your LLC as an S corporation. And you can convert back to an LLC at a later date if you so choose. In California, with LLCs your California Secretary of State registration is still every other year (LLC) instead of every year for (corporations).
 
With the 199A deduction, S status may be of real benefit since shareholder wages are considered in the calculation of the benefit, but guaranteed payments are not. 
 
I still believe that a corporation with an S election provides better legal protection than an LLC.
 
Your clients have until March 15 to elect S Corp status by filing Form 2553 with the IRS. If your client happens to miss the deadline, the business will continue to be taxed as a C Corp or LLC for the current tax year, and the S Corp will kick in the following year. Your client can receive an automatic six-month extension to file for S Corp status by filing IRS Form 7004.
 
Make sure to inform your clients that if the S Corp status is not as advantageous as they thought it would be, the company can revoke the status at any time—all it takes is a majority shareholder vote. The company can determine its own revocation date and if that date happens sometime during the tax year (as opposed to the end of the tax year), the client will need to file two separate tax returns, one as an S Corp and the other as the LLC or C Corp.

Henderson CPA shares Business owners can claim a qualified business income deduction

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Posted by Henderson CPA Tips Posted on Oct 29 2018
Business owners can claim a qualified business income deduction
Eligible taxpayers may now deduct up to 20 percent of certain business income from domestic businesses operated as sole proprietorships or through partnerships, S corporations, trusts, and estates.  The deduction may also be claimed on certain dividends.  Eligible taxpayers can claim the deduction for the first time on the 2018 federal income tax return they file in 2019. This provision is the result of tax reform legislation passed in December 2017.
Here are some things business owners should know about this deduction:
• The deduction applies to qualified:
– Business income 
– Real estate investment trust dividends
– Publicly traded partnership income
• Qualified business income is the net amount of qualified items of income, gain, deduction and loss connected to a qualified U.S. trade or business. Only items included in taxable income are counted.
• The deduction is available to eligible taxpayers, whether they itemize their deductions on Schedule A or take the standard deduction.
• The deduction is generally equal to the lesser of these two amounts: 
– Twenty percent of qualified business income plus 20 percent of qualified real estate investment trust dividends and qualified publicly traded partnership income.
– Twenty percent of taxable income computed before the qualified business income deduction minus net capital gains.
• For taxpayers with taxable income computed before the qualified business income deduction that exceeds $315,000 for a married couple filing a joint return, or $157,500 for all other taxpayers, the deduction may be subject to additional limitations or exceptions. These are based on the type of trade or business, the taxpayer’s taxable income, the amount of W-2 wages paid by the qualified trade or business, and the unadjusted basis immediately after acquisition of qualified property held by the trade or business.
• Income earned through a C corporation or by providing services as an employee is not eligible for the deduction.
• Taxpayers may rely on the rules in the proposed regulations until final regulations appear in the Federal Register. 
More Information
REG-107892-18, Qualified Business Income Deduction 
Notice 2018-64, Methods for Calculating W-2 Wages for Purposes of Section 199A

Henderson CPA shares IRS Notice: Taxpayers should know the telltale signs of a scam

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Posted by Henderson CPA Tips Posted on June 07 2018
Many taxpayers recently filed their taxes and may be waiting for a response from the IRS. Because of this summertime tends to be a period when thieves increase their scam attempts. They try to get people to disclose personal information like Social Security numbers, account information and passwords. 
To avoid becoming a victim, taxpayers should remember these telltale signs of a scam:
The IRS and its authorized private collection agencies will never:
• Call to demand immediate payment using a specific method such as a prepaid debit card, gift card or wire transfer. Generally, the IRS will first mail a bill to any taxpayer who owes taxes. All tax payments should only be made payable to the U.S. Treasury. Taxpayers should never make checks out to third parties.
• Threaten to immediately bring in local police or other law-enforcement groups to have the taxpayer arrested for not paying.
• Demand that taxes be paid without giving the taxpayer the opportunity to question or appeal the amount owed.
• Ask for credit or debit card numbers over the phone.
• Use email, text messages or social media to discuss personal tax issues, such as those involving bills or refunds.
For anyone who doesn’t owe taxes and has no reason to think they do, they should:
• Not give out any information and hang up immediately.
• Contact the Treasury Inspector General for Tax Administration to report a call or email. Recipients should also send emails to phishing@irs.gov.
• Report it to the Federal Trade Commission. They should add "IRS Telephone Scam" in the notes.
For anyone who owes tax or thinks they do, they can:
• View tax account information online at IRS.gov to see the actual amount owed. Taxpayers can then also review their payment options.
• Call the number on the billing notice.
• Call the IRS at 800-829-1040. IRS workers can help.

Henderson CPA shares - IRS reminds retirees of April 1 deadline to take required retirement plan distributions

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Posted by Henderson CPA Tips Posted on Mar 20 2018


Henderson Nevada — The Internal Revenue Service today reminded taxpayers who turned age 70½ during 2017 that, in most cases, they must start receiving required minimum distributions (RMDs) from Individual Retirement Accounts (IRAs) and workplace retirement plans by Sunday, April 1, 2018.
The April 1 deadline applies to all employer-sponsored retirement plans, including profit-sharing plans, 401(k) plans, 403(b) plans and 457(b) plans. The RMD rules also apply to traditional IRAs and IRA-based plans such as SEPs, SARSEPs, and SIMPLE IRAs, however, they do not apply to ROTH IRAs.
The April 1 RMD deadline only applies to the required distribution for the first year. For all subsequent years, including the year in which recipients were paid the first RMD by April 1, the RMD must be made by Dec. 31. A taxpayer who turned 70½ in 2017 and receives the first required distribution (for 2017) on April 1, 2018, for example, must still receive the second RMD by Dec. 31, 2018. 
Affected taxpayers who turned 70½ during 2017 must figure the RMD for the first year using the life expectancy as of their birthday in 2017 and their account balance on Dec. 31, 2016. The trustee reports the year-end account value to the IRA owner on Form 5498 in Box 5. Worksheets and life expectancy tables for making this computation can be found in the appendices to Publication 590-B.
Most taxpayers use Table III (Uniform Lifetime) to figure their RMD. For a taxpayer who reached age 70½ in 2017 and turned 71 before the end of the year, for example, the first required distribution would be based on a distribution period of 26.5 years. A separate table, Table II, applies to a taxpayer married to a spouse who is more than 10 years younger and is the taxpayer’s only beneficiary. Both tables can be found in the appendices to Publication 590-B. 
Though the April 1 deadline is mandatory for all owners of traditional IRAs and most participants in workplace retirement plans, some people with workplace plans can wait longer to receive their RMD. Employees who are still working usually can, if their plan allows, wait until April 1 of the year after they retire to start receiving these distributions. See Tax on Excess Accumulation in Publication 575. Employees of public schools and certain tax-exempt organizations with 403(b) plan accruals before 1987 should check with their employer, plan administrator or provider to see how to treat these accruals.
The IRS encourages taxpayers to begin planning now for any distributions required during 2018. An IRA trustee must either report the amount of the RMD to the IRA owner or offer to calculate it for the owner. Often, the trustee shows the RMD amount in Box 12b on Form 5498. For a 2018 RMD, this amount would be on the 2017 Form 5498 that is normally issued in January 2018. Remember that although an IRS trustee may calculate the RMD, the IRA owner is ultimately responsible for calculating the amount of the RMD.
IRA owners can use a qualified charitable distribution (QCD) paid directly from an IRA to an eligible charity to meet part or all of their RMD obligation. Available only to IRA owners age 70½ or older, the maximum annual exclusion for QCDs is $100,000. For details, see the QCD discussion in Publication 590-B.
A 50 percent tax normally applies to any required amounts not received by the April 1 deadline. Report this tax on Form 5329 Part IX. For details, see the instructions for Part IX of this form.

 

Steve Giorgione warns: Taxpayers Should Be Wary of Unsolicited Calls from the IRS

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Posted by Henderson CPA Tips Posted on Oct 03 2017
Taxpayers who get an unexpected or unsolicited phone call from the IRS should be wary – it’s probably a scam. Phone calls continue to be one of the most common ways that thieves try to get taxpayers to provide personal information. These scammers then use that information to gain access to the victim’s bank or other accounts. 
When a taxpayer answers the phone, it might be a recording or an actual person claiming to be from the IRS. Sometimes the scammer tells the taxpayer they owe money and must pay right away. They might also say the person has a refund waiting, and then they ask for bank account information over the phone.
Taxpayers should not take the bait and fall for this trick. Here are several tips that will help taxpayers avoid becoming a scam victim.
The real IRS will not:
• Call to demand immediate payment
• Call someone if they owe taxes without first sending a bill in the mail
• Demand tax payment and not allow the taxpayer to question or appeal the amount owed
• Require that someone pay their taxes a certain way, such as with a prepaid debit card
• Ask for credit or debit card numbers over the phone
• Threaten to bring in local police or other agencies to arrest a taxpayer who doesn’t pay
• Threaten a lawsuit
Taxpayers who don’t owe taxes or who have no reason to think they do should follow these steps:
• Use the Treasury Inspector General for Tax Administration’s IRS Impersonation Scam Reporting web page to report the incident.
• Report it to the Federal Trade Commission with the FTC Complaint Assistant on FTC.gov. 
• Taxpayers who think they might actually owe taxes should follow these steps:
• Ask for a call back number and an employee badge number.
• Call the IRS at 1-800-829-1040.
Every taxpayer has a set of fundamental rights they should be aware of when dealing with the IRS. These are the Taxpayer Bill of Rights. Taxpayers can visit IRS.gov to explore their rights and the agency’s obligations to protect them.

Henderson CPA shares - Tips to Know for Deducting Losses from a Disaster

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Posted by Henderson CPA Tips Posted on July 03 2017
The IRS wants taxpayers to know it stands ready to help in the event of a disaster. If a taxpayer suffers damage to their home or personal property, they may be able to deduct the loss they incur on their federal income tax return. If their area receives a federal disaster designation, they may be able to claim the loss sooner.
Ordinarily, a deduction is available only if the loss is major and not covered by insurance or other reimbursement.
Here are 10 tips taxpayers should know about deducting casualty losses:
1. Casualty loss.  A taxpayer may be able to deduct a loss based on the damage done to their property during a disaster. A casualty is a sudden, unexpected or unusual event. This may include natural disasters like hurricanes, tornadoes, floods and earthquakes. It can also include losses from fires, accidents, thefts or vandalism.
2. Normal wear and tear.  A casualty loss does not include losses from normal wear and tear. It does not include progressive deterioration from age or termite damage.
3. Covered by insurance.  If a taxpayer insured their property, they must file a timely claim for reimbursement of their loss. If they don’t, they cannot deduct the loss as a casualty or theft. Reduce the loss by the amount of the reimbursement received or expected to receive.
4. When to deduct.  As a general rule, deduct a casualty loss in the year it occurred. However, if a taxpayer has a loss from a federally declared disaster, they may have a choice of when to deduct the loss. They can choose to deduct it on their return for the year the loss occurred or on an original or amended return for the immediately preceding tax year.
This means that if a disaster loss occurs in 2017, the taxpayer doesn’t need to wait until the end of the year to claim the loss. They can instead choose to claim it on their 2016 return. Claiming a disaster loss on the prior year's return may result in a lower tax for that year, often producing a refund.
5. Amount of loss.  Figure the amount of loss using the following steps:
• Determine the adjusted basis in the property before the casualty. For property a taxpayer buys, the basis is usually its cost to them. For property they acquire in some other way, such as inheriting it or getting it as a gift, the basis is determined differently. For more information, see Publication 551, Basis of Assets. 
• Determine the decrease in fair market value, or FMV, of the property as a result of the casualty. FMV is the price for which a person could sell their property to a willing buyer. The decrease in FMV is the difference between the property's FMV immediately before and immediately after the casualty. 
• Subtract any insurance or other reimbursement received or expected to receive from the smaller of those two amounts. 
6. $100 rule.  After figuring the casualty loss on personal-use property, reduce that loss by $100. This reduction applies to each casualty-loss event during the year. It does not matter how many pieces of property are involved in an event.
7. 10 percent rule.  Reduce the total of all casualty or theft losses on personal-use property for the year by 10 percent of the taxpayer’s adjusted gross income.
8. Future income.  Do not consider the loss of future profits or income due to the casualty.                                               
9. Form 4684.  Complete Form 4684, Casualties and Thefts, to report the casualty loss on a federal tax return. Claim the deductible amount on Schedule A, Itemized Deductions.
10. Business or income property.  Some of the casualty loss rules for business or income property are different from the rules for property held for personal use.
Call the IRS disaster hotline at 866-562-5227 for special help with disaster-related tax issues. For more on this topic and the special rules for federally declared disaster-area losses see Publication 547, Casualties, Disasters and Thefts. Get it and other IRS tax forms on IRS.gov/forms at any time.

Henderson CPA - IRS Reminds Seniors to Remain on Alert to Phone Scams during Tax Season

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Posted by Henderson CPA Tips Posted on Mar 24 2017


https://www.stgcpa.com/siteAssets/site9150/images/Hendrson_CPA_Scam_Alert.jpgWASHINGTON – With the 2017 tax season underway, the IRS reminds seniors to remain alert to aggressive and threatening phone calls by criminals impersonating IRS agents. The callers claim to be IRS employees, but are not.
These con artists can sound convincing when they call. They use fake names and bogus IRS identification badge numbers. They may know a lot about their targets, and they usually alter the caller ID to make it look like the IRS is calling.
The victims are told they owe money to the IRS and must pay it promptly through a preloaded debit card or wire transfer. If the victim refuses to cooperate, they are often threatened with arrest. In many cases, the caller becomes hostile and insulting. Alternately, victims may be told they have a refund due to try to trick them into sharing private information. If the phone isn’t answered, the phone scammers often leave an “urgent” callback request.
“The IRS warns seniors about these aggressive phone calls that can be frightening and intimidating. The IRS doesn't do business like that," said IRS Commissioner John Koskinen. “We urge seniors to safeguard their personal information at all times. Don't let the convincing tone of these scam calls lead you to provide personal or credit card information, potentially losing hundreds or thousands of dollars. Just hang up and avoid becoming a victim to these criminals‎."
In recent years, thousands of people have lost millions of dollars and their personal information to tax scams and fake IRS communication.
Later this spring, the only outside agencies authorized to contact taxpayers about their unpaid tax accounts will be one of the four authorized under the new private debt collection program. Even then, any affected taxpayer will be notified first by the IRS, not the private collection agency (PCA).
The private debt collection program, authorized under a federal law enacted by Congress in 2015, enables designated contractors to collect tax payments on the government’s behalf. The program begins later this spring. The IRS will give taxpayers and their representative written notice when their account is being transferred to a private collection agency. The collection agency will then send a second, separate letter to the taxpayer and their representative confirming this transfer. Information contained in these letters will help taxpayers identify the tax amount owed and help ensure that future collection agency calls are legitimate.
The IRS reminds seniors this tax season that they can easily identify when a supposed IRS caller is a fake. Here are four things the scammers often do but the IRS and its authorized PCAs will not do. Any one of these things is a telltale sign of a scam.
The IRS and its authorized private collection agencies will never:
•    Call to demand immediate payment using a specific payment method such as a prepaid debit card, gift card or wire transfer. The IRS does not use these methods for tax payments. Generally, the IRS will first mail a bill to any taxpayer who owes taxes. All tax payments should only be made payable to the U.S. Treasury and checks should never be made payable to third parties.
•    Threaten to immediately bring in local police or other law-enforcement groups to have the taxpayer arrested for not paying.
•    Demand that taxes be paid without giving the taxpayer the opportunity to question or appeal the amount owed.
•    Ask for credit or debit card numbers over the phone.
If you don’t owe taxes, or have no reason to think that you do:
•    Do not give out any information. Hang up immediately.
•    Contact the Treasury Inspector General for Tax Administration to report the call. Use their “IRS Impersonation Scam Reporting” web page. You can also call 800-366-4484.
•    Report it to the Federal Trade Commission. Use the “FTC Complaint Assistant” on FTC.gov. Please add "IRS Telephone Scam" in the notes.
If you know you owe, or think you may owe tax:
•    Call the IRS at 800-829-1040. IRS workers can help you.
Remember, too, the IRS does not use email, text messages or social media to discuss personal tax issues involving bills or refunds. The IRS will continue to keep taxpayers informed about scams and provide tips to protect them. The IRS encourages taxpayers to visit IRS.gov for information including the “Tax Scams and Consumer Alerts” page.
Additional information about tax scams is available on IRS social media sites, including YouTube Tax Scams

The Henderson CPA says Identity Theft Affecting Your Financial World…Taxes.

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Posted by Henderson CPA Tips Posted on Aug 21 2016

For 2016, the Internal Revenue Service (IRS), the states and the tax industry joined together to enact new safeguards and take additional actions to combat tax-related identity theft. Many of these safeguards will be invisible to you, but invaluable to our fight against these criminal syndicates. If you prepare your own return with tax software, you will see new log-on standards. Some states also have taken additional steps. We also know identity theft is a frustrating process for victims. If you become a victim, we are committed to resolving your case as quickly as possible. 
The IRS has put in place assistance and prevention strategy in order to stop identity theft in your taxes. Here are nine key points:

•    Taxes. Security. Together. The IRS, the states and the tax industry need your help. We can’t fight identity theft alone. The Taxes. Security. Together. awareness campaign is an effort to better inform you about the need to protect your personal, tax and financial data online and at home. 
•    Protect your Records. Keep your Social Security card at home and not in your wallet or purse. Only provide your Social Security number if it’s absolutely necessary. Protect your personal information at home and protect your computers with anti-spam and anti-virus software. Routinely change passwords for internet accounts. 
•    Don’t Fall for Scams.  Criminals often try to impersonate your bank, your credit card company, even the IRS in order to steal your personal data. Learn to recognize and avoid those fake emails and texts. Also, the IRS will not call you threatening a lawsuit, arrest or to demand an immediate tax payment. Normal correspondence is a letter in the mail. Beware of threatening phone calls from someone claiming to be from the IRS. 
•    Report Tax-Related ID Theft to the IRS. If you cannot e-file your return because a tax return already was filed using your SSN, consider the following steps: • File your taxes by paper and pay any taxes owed. • File an IRS Form 14039 Identity Theft Affidavit. Print the form and mail or fax it according to the instructions. You may include it with your paper return. • File a report with the Federal Trade Commission using the FTC Complaint Assistant; • Contact one of the three credit bureaus so they can place a fraud alert or credit freeze on your account. 
•    IRS Letters. If the IRS identifies a suspicious tax return with your SSN, it may send you a letter asking you to verify your identity by calling a special number or visiting a Tax payer Assistance Center. This is to protect you from tax-related identity theft. 
•    IP PIN. If you are a confirmed ID theft victim, the IRS may issue an IP PIN. The IP PIN is a unique six-digit number that you will use to e-file your tax return. Each year, you will receive an IRS letter with a new IP PIN. 
•    Report Suspicious Activity. If you suspect or know of an individual or business that is committing tax fraud, you can visit IRS.gov and follow the chart on How to Report Suspected Tax Fraud Activity.