Simmons Tax and Accounting Services Arizona

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Tax Tips

What type of Entity Should You Be?

^{That is a question that shouldn't have a
"blanket" answer. Many business owners may automatically go to an S
Corporation without realizing the additional maintenance that goes along
with it. The primary reason an S Corporation is set up is to save on
payroll taxes but tax law specifically states that if you are an S
Corporation you must pay a reasonable salary to all working shareholders.
If your business is showing taxable income equal to what a reasonable salary
in your industry is then you may be better off to stay as a sole proprietor
with protection through an LLC (Limited Liability Company). With
payroll comes a reporting obligation that can be very time consuming or
additional costs if you hire a payroll service. On top of that you now
will owe unemployment taxes for both Federal and State which you would not
owe if you were a sole proprietor LLC.}

What is this LLC I Keep Hearing About?

^{An LLC is a Limited Liability Company
which is set up through a states Corporation Commission or Secretary of
State depending on the state. In Arizona, all corporations and LLC's
are set up through the Arizona Corporation Commission.}

^{I hear many times from business owners that
they think that an LLC has it's own tax rates and forms but an LLC is a
legal shell with the flexibility to be taxed as a sole proprietor,
partnership, S Corporation, or C Corporation. When the LLC is
set up and a tax identification is acquired, that is when the tax status is
set up. If no election is made then an LLC defaults to a partnership.
The biggest mistake I see from the "do-it-yourselfer's" is they don't
specifically identify the LLC as a single member which then defaults the LLC
to be taxed like a partnership. If there is only one owner, by definition
the LLC can not be a partnership. It is easy to correct with a letter
to the IRS explaining the error but it costs less to do it correctly the
first time.}

Selling Your Home?

^{If you are selling your primary residence you have up to $250,000
of an exclusion on the net gain and a $500,000 exclusion if you are married. To qualify for
the full exclusion amount you must have lived in your house 2 out of the
previous 5 years from the date of sale. What if you had to move prior to two years? You may still
be eligible for a portion of the exclusion. Call our office to see if you may still be eligible.}

^{Business Deductions}

^{Are you eligible for a home office deduction? It should be your
primary place of doing business and there must be an exclusive location in
your home where you conduct this business. Expenses that may be
deducted are utilities, HOA fees, mortgage interest, real estate taxes,
insurance, and depreciation. Give us a call if you are
uncertain if you qualify.}

^Business^{Owners, this is for you}

It is a filing requirement of all business owners (sole proprietors included) to provide their vendors with a Form 1099-MISC with total annual payments of $600 and greater. Vendors who are C Corporations, S Corporations, government entities, non-profits, and state schools do NOT receive Form 1099-MISC but you may not know what type of entity your vendors are. This is where it is important to have your vendors complete Form W-9 (link to form below) to protect you in case of an audit. This form asks for the vendor’s legal name, tax identification number, and their legal entity status. Don’t forget about your landlord. Most rental real estate is not owned by C and S Corporations and don’t think that just because an entity is an LLC it is exempt from receiving a Form 1099-MISC. In many cases an LLC is treated like a sole proprietor or a partnership which do receive Form 1099-MISC.

http://www.irs.gov/pub/irs-pdf/fw9.pdf

What if you don’t file your 1099-MISC’s? There is a $50 penalty for each missing or incorrect Form 1099-MISC. You may think that’s not so bad but you could also be liable for backup withholding of 28%. If your vendor refuses to provide you with the correct information to complete Form 1099-MISC it is your responsibility to withhold 28% of each payment and submit it to the IRS. One suggestion is to hold on to their first payment until you receive a completed Form W-9. Vendors will cooperate if they know their income depends on it.

For our bookkeeping clients, we are happy to prepare your 1099’s again this year. We ask that if you haven’t already given us verbal authorization to prepare your 1099’s to please respond to this newsletter stating you would like for us to prepare them again. If you have any new vendors, you will need to obtain their information for us.

Business owners don’t forget to update your company minutes. This could actually serve as substantiation for deductions if an auditor suspects that a transaction was done with the intention to avoid tax or a shareholder loan was just to take money from the company. You must still make decisions for the good of the company and not just for saving taxes.

Keep good books and don’t co-mingle your funds! This allows you to take advantage of all of your business deductions and have better substantiation that they are truly for business. Two court cases have emphasized the long standing rule that the burden of proof when challenged by the IRS is the taxpayer's. The IRS agent is entitled not to take the taxpayer's word for deductions. Supporting documents are required.

Keep your personal transactions away from business accounts as this could give an auditor a reason to disregard any expenses that he/she thinks is questionable in nature. Reconcile your bank accounts and credit card accounts. When you miss deductions it affects your bottom line. Understate income and you’re in trouble with the IRS. I don’t recommend either one.

^{Gayle Simmons, CPA, Partner

Simmons Tax and Accounting Services LLP

Phone: (602) 795-0404
Fax: (602) 795-0416

EMAIL: gayle@simmonstax.com

We Make Good "Cents" for Your Business!!}