IRS Small Business Tax Workshop Bob Fay, CPA November 14, 2009

Agenda Start 9:30am – IRS Workshop IRS Code Section bob1 - $100 fine for ringing phone. Please put on silent ring. Break 11:45am for Lunch Questions and answers 12noon Break 12:45pm lunch cleanup State of Ohio intro – 12:55pm State of Ohio taxes – 1pm End 3pm

Agenda Federal Taxes and your new business Forms of business organizations Business Tax Requirements Business Terms Financial Statements Federal Income taxes and SE taxes Payroll taxes and issues Retirement Plans Business out of your home

Good General Advise for your new business Open up a separate bank account Use a separate credit card for business Get an appointment book or calendar –PDA if you can save file Quicken or QuickBooks

Business Tax Requirements Forms of business organization –Sole Proprietorship Sole owner, simple to organize, easy to stop, no legal set up, owner receives all profits Pros and cons

Business Tax Requirements Forms of business organization Partnership two or more people, greater financial strength, definite legal status and structure Pros and cons – run from these!!!!

Business Tax Requirements Forms of business organization Limited Liability Company (LLC) Very popular now, sole owner, disregarded entity by IRS, profit flows thru to owner, limited liability, easy to set up with Secretary of State of Ohio. Great for owning real estate Pros and cons

Business Tax Requirements Forms of business organization S Corporation Shareholders, flow thru profit to shareholders, single taxation, Form 2553 needed to be filed in first year or 75 days into year. Pros and cons – compensation issues

Business Tax Requirements Forms of business organization Regular C Corporation Shareholders, possible double taxation, separate entity, limited liability, sell shares to others, life goes on forever, raise capital, small and large businesses Pros and cons

Business Tax Requirements Bookkeeping and Accounting Single entry or double entry systems Accounting methods – cash or accrual

Business Tax Requirements Bookkeeping and Accounting Single entry or double entry systems Checkbook to spreadsheet to tax return (Quicken) Keeping debit and credit sides of transactions (QuickBooks)

Business Tax Requirements Bookkeeping and Accounting Accounting Methods – Cash or Accrual Cash – report income in year received Cash – deduct expense in year paid Accrual – report income in year earned Accrual – deduct expense in year incurred

Business Tax Requirements Bookkeeping and Accounting –Records needed for deductions –Time and place, business purpose –Claimed amount, business relationship –Travel and entertainment expenses

Business Tax requirements Recordkeeping Keep receipts, invoices, paperwork, bank statements, cancelled checks and etc. Keep some records forever Keep most records 6 to 7 years Quicken or QuickBooks

Business Tax Requirements EIN – Employer ID Number SS-4 Form (IRS.GOV) –Needed if paying wages –Needed if not wanting to use social security number –Needed if business starts a pension plan –Needed if Corporation or Partnership

Business Terms Financial Statements Profit or Loss – Income Statement –Reports income and expenses over a period of time Balance Sheet –Assets and Liabilities as of a certain date

Financial Statements Income Statement – Profit or Loss Reports income less expenses Income – sales, receipts, for products and services sold to customers. Expenses – bills paid out to suppliers, overhead expenses, utilities, rent, maintenance, payroll, etc.

Financial Statements Income Statement – Profit or Loss Entertainment expenses – meals, shows, tickets – 50% deductible Travel expenses – 100% deductible Auto expenses – Actual expenses vs. mileage allowance

Financial Statements Income Statement – Profit or Loss Auto Expenses – Actual expenses – gas, oil, ins, maint, repairs, depreciation, etc Commuting miles – not deductible Standard mileage rate – 55 cents 2009 Standard mileage rate – 95% of the time

Financial Statements Income Statement – Profit or Loss Home in the office expenses Regular use, exclusive use, Form 8829 Mortgage interest, real estate taxes, insurance, utilities, repairs to office room Percentage of house being used as office – applied to expenses for entire house

Financial Statements Income Statement – Profit or Loss Health Insurance – 100% deductible on page 1 of Form 1040 for Schedule C businesses. Depreciation – assets over 1 year in life, building, equipment, furniture, not land, various lives and years for depreciation MACRS – Section 179 limit $250,000 for 2009

Financial Statements Balance Sheet Assets – add value to your business. Cash, Inventory, Capital Assets, Investments Liabilities – what you owe to others. Trade payables, bank loans, payroll taxes Equity – Retained earnings, capital, common stock, paid in capital, excess earnings over distributions

Taxes Federal Income taxes –50% of taxpayers filing a tax return in 2006 showed a total income of less than $32,000 –To be in the top 10% - income over $108,000 –To be in the top 5% - income over $154,000 –It is good to make money and pay taxes

Taxes Federal Income taxes –Income taxes on net profit of business Brackets from 10% to 35% Year 2011 – 15% to 39.6% top bracket Self Employment tax – also known as social security tax is 15.3% of net profit. Ohio income tax – up to 6.5% or so

Payroll Taxes Who is an employee? –The “20 questions” test. Control, direction, place of employment, equipment, report to, supervision, do they work for other people? Independent Contractor – outside professional

Payroll Taxes Federal Payroll taxes issues Gross pay - $7.30 minimum wage Overtime pay – 150% of regular pay over 40 hours worked in a work week

Payroll Taxes Federal Payroll taxes issues Deductions from gross pay: –Social Security tax – 6.2% of gross Limit $106,800 for 2009 and 2010 –Medicare tax – 1.45% of gross –Federal tax – based upon exemptions W-4 –Ohio tax – based upon exemptions –City tax – percentage of gross

Payroll Taxes Federal Payroll taxes issues Employer paid taxes –Match of social security and medicare deduction –State Unemployment – first $9,000 of gross wages in a year per employee –Federal Unemployment – first $7,000 of gross wages in a year per employee –Workers Compensation – Tax based upon gross wages and classification of work (manual class)

Payroll Taxes Federal Payroll taxes issues Do it right from the beginning Employer paid taxes –State Unemployment – THEY WILL AUDIT YOU –Workers Compensation – THEY WILL AUDIT YOU

Retirement Plans –Most Common Plans for Small Businesses –IRAs –SIMPLE –SEP –401k

Retirement Plans –IRAs –Individual Retirement Plan –Good for sole owner Schedule C Business with no employees Limit $5,000 under 50 years old $1,000 catch up additional for 50 and older If working for someone else while starting your own business, limited if covered under pension plan at your workplace

Retirement Plans –SIMPLE –Great plan if you have employees. Under 100 employees and spouse and/or children working in the business –No IRS tax return for plan –Can defer (employee contribution) up to $11,500 under 50 and $2,500 catch up additional if 50 and older. –Company match of up to 3% for employee who are participating in the plan. So some employer cost,

Retirement Plans –SEP –Simple Employee Pension Plan –Up to 20% (25% less adjustments) effective rate, of net profit. –Employer does have to contribute at same percentage to eligible employees. –If still working for someone else who is covering you with a penison plan, this is an nice plan to add

Retirement Plans –401k Plans –Not used by the small employer anymore. High administrative costs and government reporting rules and requirements. –If high income employer, Safe Harbor Plan is a possible option. Minium employer contribution of 4% of participating employees. –Deferral amounts are $16,500 for under 50 years old and $5,500 catch up additional for 50 and older.

Other Tax Issues –Payroll tax deposits – EFTPS –Office in the home expenses –IRS.GOV – great web site

Good General Advise for your new business Open up a separate bank account Use a separate credit card for business Get an appointment book or calendar –PDA if you can save file Quicken or QuickBooks

Questions and Answers Thank you for being here Good luck with your business You can build a better mouse trap!!!