Small Business Taxes For Dummies

Eric Tyson, MBA, is an internationally acclaimed personal finance expert. He has worked with and instructed people from all types of financial situations and is a master at keeping complex topics simple. An award-winning financial columnist, he has written numerous bestselling guides on personal finance, investing, mutual funds, home buying, real estate investing, and related topics.

Introduction 1

About This Book 1

Foolish Assumptions 2

Icons Used in This Book 3

Where to Go from Here 4

Part 1: Understanding Small Business Taxes 5

Chapter 1: Small Business Taxes 101 7

Valuing Year-Round Tax Planning 8

Factoring taxes into small business decisions 8

Checking out common tax mistakes 9

Noting How Corporate and Individual Tax Reform

Impacts Small Business 12

Checking out corporate income tax rate reduction and simplification 12

Reducing individual income tax rates 12

Noting 20 percent deduction for pass-through entities 13

Enjoying better equipment expensing rules 14

Increasing maximum depreciation deduction for automobiles 14

Limiting interest deductions 14

Reducing meal and entertainment deductions 15

Eliminating the health insurance mandate 15

Revising rules for using net operating losses 15

Understanding the Different Types of Taxes You Pay and Your Tax Rates 16

Defining total taxes and taxable income 16

Your marginal income tax rate for federal income taxes 17

State income taxes 18

Corporate income tax rates 20

Employment (payroll) taxes 21

Sales taxes 22

Chapter 2: Making Important Business Decisions 23

Choosing Your Business Entity 24

Sole proprietorships 25

The incorporation decision 26

One step further: S corporations 32

Partnerships 34

Limited liability companies (LLCs) 35

Valuing Employee Benefits 37

Retirement plans 38

Health insurance plans 38

Other benefits 42

Benefits that are deductible for corporation owners 44

Chapter 3: Retirement Accounts and Investments for Small Businesses 45

Beginning with Retirement Account Basics: Tax Breaks,

Penalties, and Saving Guidelines 46

Instant rewards: Upfront tax breaks 46

Ongoing tax breaks on your investment earnings 47

Additional tax credits for lower-income earners 47

Retirement account penalties for early withdrawals 48

Guidelines for saving (but not excessively) 49

Surveying Your Retirement Account Options 50

Maximizing your retirement plan’s value 51

Checking out your choices 52

Selecting Top-Notch Investments for Your Retirement Account 54

Considering fund advantages 54

Maximizing your chances for fund investing success 57

Understanding and using index funds 59

Considering exchange-traded funds 59

Using asset allocation in your retirement fund portfolio 61

Selecting the best stock funds 62

Investing in the best exchange-traded funds 65

Balancing your act: Funds that combine stocks and bonds 66

Finding the best bond funds 67

Developing Realistic Investment Return Expectations 70

Estimating your investments’ likely future returns 71

Compounding your returns 73

Chapter 4: Real Estate and Your Small Business 75

Deciding Whether to Work out of Your Home 76

Researching local ordinances and issues 76

Controlling costs 77

Separating your work life from your personal life 78

Doing a cost comparison 79

Leasing Space for Your Business 79

Leaning toward leasing 79

Leasing burdens of retail businesses 80

Negotiating a lease 80

Buying Business Property 82

Taking stock of your financial situation 82

Doing a rent-versus-buy analysis 83

Evaluating leases as a real estate investor 83

Chapter 5: Estate Planning 87

Determining Your Estate’s Tax Concerns 88

Understanding the federal estate tax exemption 88

Figuring out your taxable estate 89

Examining estate tax rates 89

Surveying special estate tax treatment afforded small businesses 89

Reducing Expected Estate Taxes with a Few Strategies 91

Giving away your assets 91

Leaving all your assets to your spouse 94

Buying cash-value life insurance 95

Setting up trusts 97

Getting advice and help 99

Part 2: Ongoing Tax Jobs 101

Chapter 6: Keeping Track of Your Small Business Revenues and Costs 103

Establishing an Accounting System for Your Business 104

Separating business from personal finances 104

Documenting expenses and income in the event of an audit 105

Keeping current on income, employment/payroll and sales taxes 106

Reducing your taxes by legally shifting income and expenses 107

Keeping Good Tax Records for Your Small Business 108

Ensuring a complete and accurate tax return 108

Setting up a record-keeping system 109

Deciding when to stash and when to trash 110

Watching out for state differences 111

Replacing lost business records 111

Chapter 7: Form 1040 Filing Options 113

The New and Improved Form 1040 113

Tackling the Income Lines 115

Line 1: Wages, salaries, tips, etc. 116

Line 2a: Tax-exempt interest 117

Line 2b: Taxable interest 117

Lines 3a and 3b: Ordinary dividends and qualified dividends 118

Lines 4a and 4b: Total pensions and annuities 118

Lines 5a and 5b: Social Security benefits 119

Line 7: Adjusted gross income 120

Line 8: Standard deduction or itemized deductions (from Schedule A) 120

Schedule 1: Additional Income and Adjustments to Income 121

Line 12: Business income (or loss) 121

Line 13: Capital gain (or loss) 122

Line 14: Other gains (or losses) 123

Line 17: Rental real estate, royalties, partnerships, S corporations, trusts, etc. 123

Line 18: Farm income (or loss) 123

Line 19: Unemployment compensation 124

Line 21: Other income 124

Adjustments to Income 125

Line 23: Educator expenses 126

Line 24: Certain business expenses of reservists, performing artists, and fee-basis government officials 126

Line 25: Health savings account deduction 127

Line 27: Deductible part of self-employment tax 128

Line 28: Self-employed SEP, SIMPLE, and qualified plans 128

Line 29: Self-employed health insurance deduction 129

Line 32: IRA deduction 129

Line 33: Student loan interest deduction 130

Line 34: Tuition and fees 131

Nonrefundable Credits: Lines 48 to 55 132

Line 48: Foreign tax credit 132

Line 49: Credit for child and dependent care expenses 133

Line 50: Education credits 133

Line 51: Retirement savings contributions credit 134

Chapter 8: Schedules C and C-EZ 135

Schedule C-EZ 135

Schedule C 136

Basic information 136

Part I: Income 141

Part II: Expenses 143

Chapter 9: The Business Use of Your Home 157

The New, Simplified Home Office Deduction 157

Filling Out Form 8829, “Expenses for Business

Use of Your Home” 160

Recognizing who can use Form 8829 161

Measuring the part of your home used for business 162

Figuring your allowable home office deduction 162

Determining your home office’s depreciation allowance 163

Carrying over what’s left 165

Understanding the Downsides to Home Office Deductions 166

Audit risk and rejection of repeated business losses 166

Depreciation recapture when selling a home with previous home office deductions 168

Chapter 10: Estimated Taxes, Self-Employment Taxes, and Other Common Forms 169

Form 1040-ES: Estimated Tax for Individuals 170

Comparing the safe harbor method to the 90 percent rule 170

Completing and filing your Form 1040-ES 171

Keeping Current on Your Employees’ (and Your Own) Tax Withholding 173

Form W-4 for employee withholding 174

Tax withholding and filings for employees 174

Schedule SE: Self-Employment Tax 176

Choosing a version of Schedule SE: Short or long? 177

Completing the Short Schedule SE 180

Form 8889: Health Savings Accounts (HSAs) 181

Understanding how HSAs work and who can use them 181

Completing Form 8889 183

Part 3: Getting Help 185

Chapter 11: Dealing with Notices and Audits 187

Understanding the Basics You’ll Find on an IRS Notice 188

Assessing Assessment Notices 189

Income verification and proposed changes to your tax return: Forms CP2501 and CP2000 190

Request for your tax return: Forms CP515 and CP518 190

Backup withholding notice 192

Federal tax lien notice: Form 668(F) 192

Handling Non-Assessment Notices 193

Paying interest on additional tax 194

Receiving a delinquent tax return notice 194

What You Should Know about Audits 197

Surviving the four types of audits 198

Prepping for an audit 201

Winning your audit 202

Understanding the statute of limitations on audits 203

Correcting IRS Errors 203

Keeping your correspondence short and sweet 205

Sending a simple response to a balance due notice 206

Getting attention when the IRS ignores you with the help of a taxpayer advocate 207

Amending a Return 209

More expenses than income (net operating losses) 209

The tax benefit rule 210

Taking Action Even When You Can’t Pay Your Taxes 210

Reducing Your Chances of Being Audited 212

Declare all your income 212

Don’t itemize 213

Earn less money 213

Don’t cheat 213

Don’t cut corners if you’re self-employed 214

Double-check your return for accuracy 215

Stay away from back-street refund mills 215

Chapter 12: Keeping Up with and Researching Tax Strategies and Rules 217

The Benefits of Preparing Your Own Return 218

Using IRS Publications 219

Buying Software 220

Accessing Internet Tax Resources 221

The Internal Revenue Service 221

Tax preparation sites 222

TaxTopics.net 222

Research sites 223

Hiring Help 223

Chapter 13: Paying for Tax Help 225

Deciding to Hire Tax Help 225

Unenrolled preparers 226

Enrolled agents 227

Certified public accountants 227

Tax attorneys 228

Who’s best qualified? 229

Finding Tax Advisors 229

Interviewing Prospective Tax Advisors 230

What tax services do you offer? 230

What are your particular areas of expertise? 231

What other services do you offer? 231

Who will prepare my return? 232

How aggressive or conservative are you regarding interpreting tax laws? 232

What’s your experience with audits? 233

How does your fee structure work? 233

What qualifies you to be a tax advisor? 234

Do you carry liability insurance? 234

Can you provide references of clients similar to me? 235

Part 4: The Part of Tens 237

Chapter 14: Ten (Almost) Useful Apps and Software Packages for Small Business Tax Issues 239

Tracking Expenses with Expensify 239

Processing Sales with Square 240

Managing Transactions with EMS+ 240

Marking Miles with MileIQ 240

Managing Your Accounting with QuickBooks 241

Handling Accounting and Invoicing with FreshBooks 241

Preparing Taxes with TurboTax Self-Employed 242

Completing Taxes with H&R Block Tax Preparation and Filing Software 242

Chapter 15: (Almost) Ten Often Overlooked Tax Reduction Opportunities 243

Invest in Wealth-Building Assets 243

Fund Some Retirement Accounts 244

Contribute to a Health Savings Account 244

Work Overseas 245

Calculate Whether a Deduction Is Worth Itemizing 245

Trade Consumer Debt for Mortgage Debt 247

Consider Charitable Contributions and Expenses 247

Scour for Self-Employment Expenses 248

Married Couples Should Crunch the Numbers on Filing Separately 248

Chapter 16: Ten Resources to Turn to After Reading This Book 251

To Develop a Good Business Plan and Improve Your Small Business 251

To Whip Your Finances into Shape 252

To Select the Best Business Entity 252

To Set Up an Accounting and Financial Management System 252

To Hone Your Investment Savvy for Your (and Your Employees’) Retirement Funds 253

For Help with Payroll Regulations and Employee Tax Withholdings 253

To Dig Deeper into IRS Rules and Regulations 254

To Deal with IRS Collection Efforts 254

For More Detailed Advice about All Aspects of Your Income Tax Return 254

For Assistance in Preparing Your Income Tax Return 255

Index 257