The Tax Man Cometh ~ Business Tax Information for Entrepreneurs

The Tax Man ComethThe Tax Man ComethFebruary 5, 2014February 5, 2014

Introduction to Business/TaxationChoosing a CPA

Changes in Tax LawsIncome & Expenses

PayrollEstimated Tax Payments

Tax PlanningState Taxes

Miscellaneous Information

OVERVIEW

Starting a new Business:

•Register with the IRS (SS-4).

•Register with the Department of Revenue (UBI Number).

•Separate Checking Account & Credit Card.

•QuickBooks.

•Comparative Financial Statements / Budgets.

INTRODUCTION INTO TAXATION

Starting a new Business:

•Keep Business & Personal Separate.

•Transfer Amounts from Business Account to Personal Account.

•Find a CPA, Banker & Attorney.

•Being a Business Owner vs. Running a Business.

INTRODUCTION INTO TAXATION

Types of Business:

•Sole Proprietor – Form 1040

•Partnership / LLC – Form 1065

•S – Corporation – Form 1120S

•C – Corporation – Form 1120

INTRODUCTION INTO TAXATION

Things to remember when doing business or taxes:

•Just the facts please.

•What’s your source?

•“Gray Area.”

•Substance over Form.

INTRODUCTION INTO TAXATION

When speaking with a CPA, ask them for background information:•Where did they go to school?•Are they a Certified Public Accountant?•Are they members of a professional and ethical organization?•Are they licensed?•How long have they been in business?•Is their office open all year?•IRS Notices, Audits & Appeals.

ADVICE FOR CHOOSING A TAX RETURN PREPARER

Good rules to remember when communicating with your CPA:•Review your tax return with your CPA.•Always ask questions!•Understand the “Big Picture”.•Manage cashflow with paying taxes.•Don’t fall for the “Hand on the Stomach”.•Avoid the “yes man”.

ADVICE FOR CHOOSING A TAX RETURN PREPARER

Gross Income(Ordinary Income / Short Term Capital Gain /Long Term

Capital Gain)Deductions

Adjusted Gross IncomeTaxable Income

Total TaxCredits

PaymentsTax Liability

INTRODUCTION INTO TAXATION

INTRODUCTION INTO TAXATION

Income (broadly conceived) $ xx,xxxLess: Exclusions (income that is not subject to tax) (x.xx)Gross Income $ xx,xxxLess: Deductions (x.xx)Taxable Income $ xx,xxx

Federal income tax $ xx,xxxLess: Tax credits (x.xx)Federal tax liability $ xx,xxxLess: Withholdings & estimate payments (x.xx)Tax owed or (refund) $ xx,xxx

Basic Formula for Federal Income Tax

INTRODUCTION TO TAXATION

STATUTE OF LIMITATIONS

Period of Limitations..IF THEN the period of limitation is:

1. You owe additional tax and situations (2), (3), and (4), below, do not apply to you

3 years

2. You do not report income that you should report, and it is more than 25% of the gross income shown on the return

6 years

3. You file a fraudulent income tax return No limit

4. You do not file a return No limit

5. You file a claim for credit or refund after you file your return.

Later of 3 years or 2 years after tax was paid

Tax Laws are in the current state of flux and should be constantly monitored for changes. For example there were 55 tax law changes as of January 1, 2014:

•State and Local Sales Taxes.•Deduction for certain expenses for School Teachers.•Premiums for Mortgage Insurance Deduction.•Exclusion of Discharge of Principal Residence Debt.•Research & Development Tax Credit.•Credit for Non-Business Energy Property.•Bonus Depreciation.

TAX LAW CHANGES

Gross Income is everything unless the IRS indicates to the contrary:

•Cash.•Property.•Barter.•Gross income needs to reconcile to your banks statements, Federal Tax Return and State Tax Return.

GROSS INCOME

No expenses are allowed unless the IRS indicates to the contrary:

•Ordinary and Necessary.•Current Expense vs. Capital Expense.•So what if you have receipts……...•Substance over Form or Law vs. Want.• Meals & Entertainment.• Clothes and Dry Cleaning.• Car Expenses.• Personal Expenses.

EXPENSES

You can depreciate property that meets all of the following requirements:

You must own the property.

The property must be used in a business or held for the production of income.

The property must have a determinable useful life which must be longer than one year.

The property must be something that wears out, decays, gets used up, becomes obsolete or loses value from natural causes.

DEPRECIATION EXPENSE

Computer Software – 3 Years.

Auto’s – 5 Years.

Computers – 5 Years.

Computer Equipment – 5 Years.

Furniture & Fixtures – 7 Years.

Rental Building – 27.5 Years.

Commercial Building – 39 Years.

FIXED ASSET LIVES

When you sale your business assets consider the following

•Short Term Capital Gain•Long Term Capital Gain•Ordinary Income Recapture•Section 1231• Section 1245• Section 1250

SALE OF BUSINESS PROPERTY

•IRA•Roth IRA•Simple•401(k)•Roth 401(k)

RETIREMENT PLANS

Most tax agencies require electronic payments & deposits.•EFTPS•Form 941 – Employer’s Quarterly Federal Tax Return.•Form 940 – Employer’s Annual Federal Unemployment Tax Return (FUTA)•Form 1099’s•Forms W-2’s & W-3•Labor & Industries (State)•State Unemployment Tax (State) (SUTA)

PAYROLL TAXES

Individuals can base federal estimated tax payments on:

1. 90% of current tax.2. 100% of prior year’s tax.3. 110% of prior year’s tax if prior year’s AGI is

greater than $150,000 ($75,000 if MFS).4. Annualization exception.5. No penalty if tax is less than $1,000 or no tax

liability in prior year.

ESTIMATED TAXES

Estimate are due on or before the following dates:April 15th

June 15th

September 15th

January 15th (the following year)

If you are required to pay state estimated payments consider making last payment on or

before December 31

ESTIMATED TAXES

What?Accelerate deductions from 2014 into 2013 or defer income until

2014.

Why?The goal of tax planning is to cut the total tax you pay over both

years, not just one.

Project your tax liability. Determine if you owe or get a refund.

Penalty Protection.

TAX PLANNING

When?

Quarterly, but no later than December 31.

Who?

Taxpayers whose income (deduction) fluctuates from year to year.

Own a Business

Taxable Event

Investment Income

K-1’s

TAX PLANNING

Purchasing new business assets.

Section 179Use credit card to make business

purchases. Establish a Health Savings Account.Sell investments that have losses.

Establish a retirement plan.

TAX PLANNING

Log onto Washington Secure Access website:•Labor and Industries•SUTALog onto the Washington Department of Revenue:•Business and Occupational Tax (B&O)•Sales Tax•Use Tax

STATE TAXES

No matter what type of business you are please remember:

•Obtain a line-of-credit.•Establish a Reserve Fund.•Go Paperless.•Use Professionals.•Prior Success Doesn’t Predict Future Success.•Debt is the Jester, Cash is King.

MISCELLANEOUS INFORMATION

Complexity vs. Fairness

Obama Care

Tax Laws Changes are Uncertain, Unpredictable & Unacceptable

IN CLOSING

Mike Patrick

Email: mike@mdpcpa.com

Website: www.mdpcpa.com

Telephone– (509) 315-5760

Cell Phone – (509) 998-4069

** Email Patty at patty@mdpcpa.com to sign up for my Tax / Business Newsletter