Business Entities Breakdown Part 2

The previous post was a breakdown of different business entities. This post will go into specifics on business loans & financing, recordkeeping requirements, basic tax filing requirements, deductions, and various expenses.

Business Loans & Financing

Most business entities require a written business plan. This is essential in ensuring your loan provider that you have a solid business model. A loan can be obtained from small business investment companies, banks, federal grants, and direct loans from investors.

Recordkeeping Requirements

It sounds simple, but good bookkeeping is key. Consistency and attention to detail is highly important. Incorporation/organization papers should be updated regularly. Newly adopted plans need to be included in order to be valid. Record all corporate minutes and shareholder meetings.

Basic Tax Filing Requirements

Income taxes are required for sole proprietorships (filed on form 1040 - Sch. C), S-Corps & partnerships (file 1120S & 1065, but income report on 1040 through K-1), and C-Corporations (file 1120 and pay own taxes).

Sales taxes need to be filed with the state if taxable goods/services are sold

Payroll taxes need to be filed with the state and IRS if there are ANY employees.

Deductions

It is extremely important that you keep track of ALL expenses that you are incurring. Have a system / process in place. This will make it a lot of easier to ensure that you are constantly keeping an accurate record of your expenses. Make sure you that are consistent and regularly update. Why is this important? YOU CAN'T SAVE ANY MONEY ON TAXES IF YOU HAVE NO DOCUMENTED DEDUCTIONS!

A list of common business deductions:

• Office suppplies
• Telecommunication (Internet/Phone/Fax)
• Meals
• Travel (even seminars)
  
• Rent for outside office
• Payroll
• Legal and professional fees

The aforementioned examples are common business deductions, but what about the overlooked deductions? A list of commonly overlooked deductions:

• Costs to form your business
• Initial seminars and training
• Auto expenses
• Home Office
• Bank service charges/Credit card fees

When deducting auto expenses, there are two methods of deducting. The first method refers to "actual expenses". Actual expenses are exactly what it sounds like...expenses that have a direct monetary value. This is calculated by expenses x % Business use. Keep track of all auto related expenses, business & total mileage. The value of the car partially determines the total deduction. The vehicle should also be owned by the business entity. The second method refers to "standard mileage rate". This is calculated by Business Miles x IRS Rate. Make sure that you keep track of business & total mileage. The deduction is based on mileage driven only and the vehicle can be owned by anyone.

Retirement Plans

Retirement plans are an effective way of reducing taxable income. Keep in mind that not all plans suite all businesses. Business income, business structure, and desired amount to be contributed all come into play when determining the properly retirement plan. The most common plan types are:

• SEP IRA
• SIMPLE IRA
• 401(k)
• Defined Benefits/Defined Contribution

Documentation

All reimbursement plans should be in your incorporation/formation documents. Also keep logs of vehicle mileage. In regards to bookkeeping, hold on to all receipts, canceled checks, and bank / credit card statements.

Bookkeeping

You'll need to decide whether you want your bookkeeping to be done manually or by a software. Regular reconciliation and efficient organization is critical. It is better to have more documentation, rather than not enough. Regularly review your books to do a "reality check".

Ideas to Take Away

All expenses which are directly related to your business are deductible, but you need to keep track of all your expenses and have adequate documentation in order for the IRS to allow your deduction. Bookkeeping may be tedious, but it is a required part of being a new business owner.

Business Entities Breakdown

Blog post 1 of 2. This post will dive into the differences (from a tax perspective) of five different entity types. The follow up post will go into more detail aboust recordkeeping, expenses, and other finances associated with each entity.

In business, there exists five main types of entities: Sole Proprietorships, Partnerships, C-Corporations, S-Corporations, and the LLC.

Sole Proprietorships:

A sole proprietorship is a business of one without corporation or limited liability status. The pros of a sole proprietorship is that there are no formation costs, no yearly fees, full control to the owner, and minimal recordkeeping requirements.

The cons, however, are the self-employment tax which is 15.3% of income. Additionally there is no liability protection, can only involve one person, there are limited tax benefits, and any losses seem to generate IRS scrutiny.

Partnerships:

A partnership is a type of business entity in which partners (owners) share with each other the profits or losses of the business. The pros of a partnership is that it is very easy to setup, it can involve unlimited partners, it is extremely flexible (in terms of ownership percentage, general vs. limited partners, and asset protection), there is no need for payroll, and there is less record keeping htan corporations.

The cons, however, are the self-employment which, like the sole proprietorship, is 15.3% of income. There are also potential state fees and limited tax benefits.

C-Corporations

A C-Corporation is a legal form of business entity that may have an unlimited number of shareholders. The pros of this includes no self-employment tax and tax deductible benefits (i.e. reimburesement plans and medical). Additionally, this offers the strongest asset protection.

The conts, however, include the setup process that is required (a lot more of a hassle than your partenerships or sole proprietorships) as well as state fees, double taxation, the recordkeeping requirement, and the salary requirement.

S-Corporations

An S Corporation (Small Business Corporation) is a business elected for S Corporation Status through the IRS. This status allows the taxation of the company to be similar to a partnership or sole proprietor as opposed to paying taxes based on a corporate tax structure. The pros of an s-corporation include the associated strong asset protection along with the no self-employment tax and lower payroll taxes. S-Corporations also have some tax deductible benefits.

The cons, however, include the setup process, state feeds, recordkeeping requirements, and the salary requirements.

The LLC (Limited Liability Company)

A limited liability company in the law of the vast majority of United States jurisdictions is a legal form of business company provides limited liability to its owners. This is the most versatile entity and can be taxed as any of the four.

This is essentially "an insurance policy" that is sold by the state. An LLC offers liability protection in registered states. Yearly fees and filing requirements do vary by state.


Entity Setup Steps

Your entity first needs to be formated with the state. Incorporation/organizational papers need to be filed with the Secretary of State. The entity also needs to be registered with the IRS. With the process, a Federal ID Number is obtained. To become an S-Corp, you will need Form 2553 and to establish taxation type for an LLC you need Form 8832. It is also essential to establish a business plan in relation to your entity.


Establishing a Bank Account

Requirements to open an account vary by bank. However, there are a few guidelines that most, if not all banks, utilize for a business to open a bank account. These include having a Federal ID Number, Articles of Incorporation/Organization, and a state business license. All entitles should have their own bank account. This is not required, however, for sole proprietorships.

Business Plans

When creating your business plan, your mindset should be "What is my business going to do and how will it go about it?" This includes creating a msision statement, establishing organization & management, and all financials. Clearly outline your benefits as well. Include your competitive advantage as well as your goals and projections. This will make it easier to obtain a business and will help you track your business progress. Keep in mind that this is not set in stone as it is to be expected that you will change some aspects of your business.


The next blog plost will discuss business loans & financing, recordkeeping requirements, basic tax filing requirements, deductions, and various expenses

Tax Credits for Home Energy Efficieny Improvements Increase

Homeowners can get bigger tax credits for making energy efficiency improvements or installing alternative energy equipment.

The IRS also announced homeowners seeking these tax credits can temporarily rely on existing manufacturer certifications or appropriate Energy Star labels for purchasing qualifying products until updated certification guidelines are announced later this spring.

“These new, expanded credits encourage homeowners to make improvements that will make their homes more energy efficient,” said IRS Commissioner Doug Shulman “People can improve their homes and save money over the long run.”

ARRA provides for a uniform credit of 30 percent of the cost of qualifying improvements up to $1,500, such as adding insulation, energy-efficient exterior windows, and energy-efficient heating and air conditioning systems. The new law replaces the old law combination available in 2007 of a 10-percent credit for certain property and a credit equal to cost up to a specified
amount for other property.

The new law also raised the limit on the amount that can be claimed for improvements placed in service during 2009 and 2010 to $1,500, instead of the $500 lifetime limit under the old law.

In addition, the new law has increased the energy efficiency standards for building insulation, exterior windows, doors, and skylights, certain central air conditioners, and natural gas, propane or oil water heaters placed in service after Feb. 17, 2009.

IRS guidance issued before the enactment of ARRA will be modified in the near future to reflect the new energy efficiency standards. In the meantime, homeowners may continue to rely on manufacturers’ certifications that were provided under the old guidance and on Energy Star labels for exterior windows and skylights in determining whether property purchased before
June 1, 2009, qualifies for the credit. Manufacturers should not continue to provide certifications for property that fails to meet the new standards.

The new law also eliminates the cap on the 30 percent tax credit for alternative energy equipment, such as solar water heaters, geothermal heat pumps and small wind turbines, installed in a home. The cap generally has been eliminated for these improvements beginning in the 2009 tax year.

Funding Options for Renewable Energy Power Plants

Business taxpayers who place in service facilities that produce electricity from wind and some other renewable resources can choose one of three options to fund the project: a tax credit based on the amount invested, a tax credit based on the energy produced or a grant.

The flexibility to choose among these options was enacted as part of ARRA. Taxpayers may opt to claim the energy investment tax credit, which generally provides a 30 percent tax credit for investments in energy projects, instead of the production tax credit, which can provide a credit of up to 2.1 cents per kilowatt-hour for electricity produced from renewable sources.

Taxpayers making qualified investments that are placed in service after 2008 and before 2014 (or 2013 for wind facilities) can make an irrevocable election to claim the energy investment tax credit instead of the renewable electricity production tax credit. IRS will issue guidance explaining how to make the election.

Taxpayers also can claim a grant once the property is placed in service instead of claiming either the energy investment tax credit or the renewable energy production tax credit. For qualified renewable energy facilities, the grant is 30 percent of the investment in the facility as long as construction begins in 2009 or 2010 and the property is placed in service before 2014
(2013 for wind facilities). The Treasury Department will issue guidance explaining how the grant works and how to apply.

Taxpayers electing to receive the grant, created by the ARRA, will not be eligible for either of the tax credits. Proceeds from the grants are not includible in the taxpayer’s gross income, but the grant amount is subject to recapture if the property is disposed of or otherwise ceases to qualify