Taxes and Your Business.docx
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Taxes and Your Business.docx
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TaxesandYourBusiness
TaxesandYourBusiness
Ifyouownabusiness,yourbusiness'staxsituationhasatremendouseffectonyourpersonalorfamilytaxsituation.
Atthesimplestlevel,thetaxyoupayonyourbusinessincomeisunavailableforyoutouse,soobviouslyit'sinyourinteresttoreducethistaxburdenasmuchasyoulegallycan.
Asanentrepreneur,you'relikelytofacemanymorevolatileincomefluctuationsthanyouwouldasanemployeeofalargecompany,andyouneedtoretainabsolutelyeverypennyyoucantobuildupacushionincasethingsgetrough.Savingontaxesisoneveryimportantwaytoreduceyourcostsandkeepmoreofwhatyouearn.
Ontheotherhand,owningabusinessalsopresentsnumerousopportunitiesforyoutoreduceyourtaxbillbyhavingthebusinesspayforthings-forexample,familyhealthbenefits,aretirementplan,andperhapsevensomeoftheexpensesofowningahome,acar,andacomputer-thatyouwouldotherwisehavetopurchaseonyourown.Inaddition,ifyourspouseorotherfamilymembersworkinthebusiness,youmaybeabletoreduceyourtotaltaxbillbyspreadingtheincomeandbenefitsamongmorepeople.
Therearelimitstohowfaryoucangowiththesestrategies,andnumerousrulestofollowandrecordstokeeptomakesureyoustaywithintheparameterstheIRSwillpermit.Butifyoubecomeawareoftherulesandthetechniquesthatworkinyourfavor,youcansavealotofmoney.
InthissectionoftheGuide,we'lllayouttheincometaxrulesthatapplytoyourbusinessclearlyandconcisely,tohelpyoufileyourtaxesasquicklyandaccuratelyaspossiblethisyear,andtotellyouaboutplanningstrategiesyoucanusetoreduceyourtaxbillinthefuture.
Asasmallbusinessowner,yourprimaryconcernsareusuallyexpressedintermsofmaximizingyourrevenue,minimizingyourexpenses,andultimately,improvingyourbottomline.Whenitcomestotaxes,however,thegoalisusuallytheopposite:
todeferincomeorreceiveitintax-favoredformssuchascapitalgainsoremployeebenefits,tomaximizeyourexpensesbymakingsureyouclaimeverydeductionyou'reentitledto,andto minimize yourtaxablenetincome.
Becauseoftheseconflictinggoals,whichrequireverydifferentapproaches,businessownerssometimesfallintothetrapofmakingimportantbusinessdecisionsbasedmainlyonthetaxconsequences.
Don'tletthetailwagthedog.Makesurethatyouconsideralltheconsequencesofatransactionorbusinesspractice-fromatax,financial,andstrategicviewpoint-beforefinalizingyourdecision.Whatsoundsgoodfromataxperspectivedoesnotalwaysmakesenseintermsofyouroverallbusinessobjectives.
Ourdiscussionoftheincometaxissuesfacedbyyourbusinessisorganizedaroundsevenkeysubjects:
∙Selectingyourbusinessform providesanoverviewofhowthewayinwhichyourbusinessisorganizedinfluencesyourtaxsituationandthewayinwhichyou'llreportyourincome.Whilethisbookfocusesonthesoleproprietorship,weexplainhowformssuchasthepartnership,limitedliabilitycompany(LLC),Ccorporation,andScorporationoperatefromataxperspective.
∙Definingyourtradeorbusiness discussesthethresholdissuesyouneedtoconsider,includingwhetheryouneedtofileasabusiness,howtoidentifyyourbusiness,howtoselectyouraccountingmethodandyear,andotherpreliminarymatters.
∙Businessincome discussesthetypesofincomethatmustbereportedonyourScheduleC,andforthosewhocarryaninventory,howtocomputeyourcostofgoodssold.
∙Businessdeductions providesdetailedexplanationsofthemostcommonlyusedbusinessdeductions,includingcarandtruckexpenses,travelexpenses,mealsandentertainment,employeecompensation,healthinsurance,andretirementplans.
∙Capitalassetsanddepreciation showshowtohandleyourcostsforrealestate,equipment,andotherlong-termbusinessassets.Italsoexplainswhattodowhenyousell,trade,ordisposeofanassetusedinyourtradeorbusiness.
∙Netprofit,loss,andself-employmenttax wrapsupourexplanationofhowtocomputeyourtaxablenetincome,explainshowtohandleabusinesslossifyouhaveone,andshowshowtocomputeandpayyourself-employment(SECA)tax.
∙Businesstaxcredits explainsthefederaltaxcreditsthatareavailableforhiringdisadvantagedworkers,improvingaccessbythedisabled,operatinginanEmpowermentZone,andtakingcertainotheractionsthegovernmentisseekingtopromote.
WorkSmart
Business-relatedincomeandexpensesareincludedinthe"Employment"sectiontabofCompleteTax.OnthefirstscreenoftheEmploymentsection,you'llseealistofquestions.Whenyouanswer"Yes"tothequestion"Didyouhaveanybusinessincome?
"atopictabfor"Business"willpopup.Clickonthattabtogettothemainscreenforbusiness,whichallowsyoutoinputyoursmallbusinessinformation.
Asyoucontinuetoreadthroughthisbook,we'llexplainunfamiliartermsandtellyouhowtohandleyourvariousitemsofbusinessincome,expense,gain,loss,etc.
SelectingYourBusinessForm
Oneofthemostimportantdecisionsthatyouwillhavetomakeinconnectionwithstartingabusinessisthelegalforminwhichtooperateyourbusiness.
Moreover,asyourbusinessgrows,youmayconsiderchangingformstoaccommodatemoreowners,adifferentcapitalstructure,oraneedtoshieldyourgrowingwealthfrombusinessliability.
Thereareseveralchoices:
∙asoleproprietorship
∙apartnership
∙alimitedliabilitycompany
∙acorporation (includingaregular"C"corporationoranScorporation)
Asyoucanimagine,therearesignificantincometaxconsequencesthatflowfromeachofthesechoices.Butdon'tforgettoweighthetaxissuesagainstthenon-taxissues,suchaswhattypeofbusinessformwillbesthelpyoutooperateandgrowthebusiness,andwhatform,atyourdeath,willmakeiteasierforyoutopassalongthebusinesstoyourheirsasagoingconcernifyoudesire.
TaxAspectsofSoleProprietorships
Asoleproprietorshipcanbedefinedasanyunincorporatedbusinesswithasingleowner.It'sthemostcommonlyusedformfornewsmallbusinesses.Ifyourbusinesshasonlyoneowner,theIRSwillpresumethatit'sasoleproprietorshipunlessyouincorporateunderstatelaw.
FromtheIRS'sperspective,thebusinessisnotataxableentity.Instead,allofthebusiness'sassetsandliabilitiesaretreatedasbelongingdirectlytothebusinessowner.Whentaxtimerollsaround,allincomeandexpensesgeneratedbythebusinessarereflectedoneitherScheduleC, ProfitorLossfromBusiness, orScheduleC-EZ, NetProfitfromBusiness. Whicheveroftheseformsyouuse,itmustbeincludedaspartofyourannualindividualtaxreturn(Form1040).
Togiveyouahandleonhowthisformworks,your grossrevenuefromsales and otherbusinessincome itemsarereportedonthetopoftheScheduleCorC-EZ.Expensesofthebusinessaresubtractedfromincometoarriveatthenetprofit(orloss)figureatthebottomoftheform.
ThenetprofitorlossisthencarriedoverfromtheScheduleCorC-EZandreportedonpage1oftheowner's1040.Thismeansthatthereisnoseparatetaxrateschedulethatappliestoasoleproprietorship—thebusinessowner'sindividualtaxratewilldeterminetheamountoftaxpaidontheearningsofthesoleproprietorship.
Themainadvantageofasoleproprietorshipissimplicity.Becausethereisonlyoneowner,theaccountingrulesaremucheasiertounderstandandtouse.Also,abusinessownermaytransfermoneyinoroutofthebusinesswithnotaxeffectstokeeptrackof.
Forexample,whenyoupayyourselfasasoleproprietor,yousimplywithdrawmoneyfromyourbusinesscheckingaccount—youdon'thavetoissueyourselfapaycheckandmakepayrolltaxdeductions.
Similarly,ifyoudecidetocontributesomepersonalmoneytothebusiness,youcansimplyaddittoyourcheckingaccount—youdon'thavetoformallymake(andkeeptrackof)yourcapitalcontributionasyouwouldwithapartnershiporacorporation,atleastasfarastheIRSisconcerned.
Soleproprietorsaregenerallyrequiredtopay self-employmenttaxes onallofthebusiness'snetprofits,ascomputedonScheduleCorC-EZ.YoumustuseScheduleSEoftheannualincometaxreturntocomputeandreportthesetaxes.
Foreachquarter,asoleproprietorgenerallyneedstomakeanestimatedtaxpayment thatincludesincometaxandself-employmenttaxes.
Asoleproprietorwho sellsabusinessasset oreventhebusinessitselfistreatedasifheorshesoldeachindividualitemthatwasincludedinthesale,andgainorlossoneachitemmustbecomputedseparately.Intangibleassetssuchaspatentsandcopyrightsareconsideredassetsofthebusiness,andseparategainorlossiscomputedonthemaswell.
Beyondthesebasicissues,soleproprietorsmayfacesomenotabledistinctionsintheirtaxsituations.
∙Someverysmallbusinesses maynotneedtofileataxformatall.
∙SomebusinessescanfileScheduleC-EZ, NetProfitfromBusiness.
∙Somefamily-ownedbusinesses canusesole-proprietorshipstatus.
∙Statutoryemployees useScheduleCorC-EZtoreportincomeandexpenses.
MustYouFileaScheduleC?
Ifyouarethesoleownerofabusinessoroperateasanindependentcontractor,you'regoingtobecomeverywellacquaintedwiththetaxformusedbyallthesebusinesses:
theScheduleC, ProfitorLossfromBusiness, oritsshortercousin,the ScheduleC-EZ, NetProfitFromBusiness.
Doyouneedtofilethisform?
Whilewesuspectthatmostofyoualreadyknowtheanswertothatquestion,itpaystoreviewthefilingrequirementsjustincaseyourbusinessdoesnotmeetthemforaparticulary
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