washington small business fair tax workshop september …...(cabs, limo etc.) baggage & shipping...

425-778-2665 www.nwaccountants.com

Washington Small Business Fair

Tax Workshop

September 21st, 2019Your presenter:

Rizwan Chaudhry

Accounting & Tax Practitioner

SBA Volunteer

CCD Volunteer

Past President WAATP NW Chapter

WAATP State Board

ECC Accounting Dept. Board of Advisors

This material and other presentation content is designed to provide accurate and authoritative information in regard to

the subject matter covered. It is provided with the understanding that the provider/presenter is not engaged in

rendering legal, accounting or other professional service by virtue of providing printed or electronic media, use of

examples or cases or any other form of communication. The information provided in all instances is general in nature

and therefore inherently limited. If legal advice or other expert assistance is required, the services of a competent

professional person familiar with the specifics of your particular situation in ALL respects should be sought.

At the end of this workshop, you will

know...

▪ Where to go on-line for Federal tax help.

▪ What are relative tax pros and cons of the basic business structures (sole proprietor; partnership; LLC; Corporation).

▪ What is the difference between an employee and an independent contractor.

▪ Why you need to maintain good records

▪ What income is taxable and what expenses are deductible as business expenses

▪ When you have to pay Self Employment Tax

▪ How to make estimated tax payments

▪ What are the different types of information tax returns.

▪ What are the tax filing red flags and penalties.

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Where can you go for help?

425-778-2665 nwaccountants.com

✓ Washington Secretary of State web site

✓ Washington Department of Labor web site

✓ Washington Business Licensing Service web site

✓ IRS web site

✓ Your Trusted Advisors-

❑ Tax advisor/CPA/Accountant

❑ Insurance provider

❑ Attorney

❑ Banker/Broker/Investors

❑ Family and friends (subject to expertise)

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Washington Secretary of State Web Site for

Corporation Registration Search

www.sos.wa.

gov/corps/

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Bonus


▪ Forms &

publications

▪ Online

classroom

▪ Lots of

information

for new

businesses

▪ Industry

specific

information

▪ Employment

taxes

What’s on

IRS.gov?

www.irs.gov

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• You must register with the WA Department of Revenue if you meet any of the following conditions:

• Your business is required to collect sales tax

• Your gross income is $12,000 per year or more

• Your business is required to pay taxes or fees to the Department of Revenue

• You are a buyer or processor of specialty wood products

http://dor.wa.gov/content/doingbusiness/registermybusiness/

WA State Registration requirements

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Sole Proprietorship-

1. Most Common form of Entity Type

2. 26 million filed as Schedule C’s in 2016(70% of all business filings)

3. Is simplest and cheapest form

4. Is formed with one owner

5. File a Master License Application –Dept of Revenue (DOR)

6. May be right for many

7. Unlimited liability

8. Should avoid for high risk business

9. Income flows to individual via Schedule C

10. Drawback – owner cannot be on payroll

11. Need to be disciplined in budgeting

12. Makes estimated tax payments

13. A Schedule C can also qualify for the new (2018) 20% business income deduction.

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Types of Entities-


Partnership A relationship between two or more

persons who join together to carry on a trade or

business.

▪ At least 2 people

▪ Husband and wife owning a joint business are generally a partnership - Can elect out

▪ Each person contributes money, property or skill & expect share in Profit & Loss

▪ Draw back is that you must share power and have unlimited liability

▪ Files Form 1065, US Partnership Return of Income - information only

▪ Each partner receives a Schedule K-1 (Form 1065): Partner’s Share of Income Credit, Deductions (see pages 1-13 of Pub. 1066)

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Partnership-con’t A relationship between two or more

persons who join together to carry on a trade or

business.

▪ MUST have a Partnership agreement

▪ Preferably by an Attorney – Handshake days are gone

▪ Accountants CANNOT give legal advice!

▪ Spend the money now for a proper set-up to save long and costly battles in the future

▪ No protection from individual liability for General Partners

▪ Partner completes Schedule E of Form 1040

▪ Subject to Self Employment Tax

▪ Partnership income eligible for the new 20% qualified business income tax deduction on partners’ returns

▪ Partners can not be employees of the partnership. (Big drawback!)

▪ Publication 541

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C-Corporations

Regular Corporation (C-Corp) - Files Form 1120 US

Corporation Income Tax Return

Corporations are treated by the law as legal entities, separate from its owners (shareholders).

Individual Liability Protection

Shareholders receive dividends- 1099-DIV (15-35% tax rate)

Employees receive Form W-2

NOT subject to Self Employment (SE) Tax (pay Income Tax)

Publication 542

Possible double taxation (income taxed at corporate level and dividends taxed at individual level)


http://www.irs.gov/pub/irs-pdf/f1120.pdf

http://www.irs.gov/pub/irs-pdf/f1099div.pdf

http://www.irs.gov/pub/irs-pdf/fw2.pdf

http://www.irs.gov/pub/irs-pdf/p542.pdf

S-Corporations

1. S Corporation (S-Corp) - Files Form 1120S

2. Election to be taxed similar to a partnership (Form 2553 to make election by 15th of 3rd month)

3. 100 S/H limit, No Foreign ownership

4. Reasonable compensation (shareholders CAN be employees)

5. An S-Corp does not pay tax on income from daily operations.

6. All income, losses, deductions and credits generated by the S-Corp pass through to it’s S/H

7. Shareholder receives Schedule K-1 (Form 1120S): Shareholder’s Share of Income, Credits, Deductions, etc

8. Shareholder completes Schedule E of Form 1040

9. NOT Subject to SE Tax (Wages subject to FICA)

10. Sub S income eligible for the new 20% qualified business income tax deduction on shareholders’ returns

11. Form 1120S Instructions and Form 2553



Tax Impacts for Various Entities

Income

Tax on

Your 1040

Income Tax

on Entity

Return

SE Tax on

Your 1040FICA and

Med. Tax on

Your W-2

FICA and Med.

Tax Paid by

Entity Total Tax

Sole Proprietor 5,692 11,169 16,861

Partnership 5,692 11,169 16,861

C-Corp 4,991 4,026 3,825 3,825 16,668

S-Corp 7,673 3,825 3,825 15,323

$1,537

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$1,345

Assumes $73,000 in net income (1,2) or $50,000 salary plus $23,000

income (3,4).

1

2

3

4

Bonus

Limited Liability Company (LLC)

▪ Formed by filing Certificate of Formation with SOS

▪ Not a Federal tax entity (Pub 3402)

▪ Multiple Member LLC Generally Considered a Partnership

▪ Single Member LLC Generally Considered a “Disregarded Entity” & Files as Sole Proprietor

▪ Limited Liability Protection

▪ More flexible form of Business Entity

▪ Can elect to be treated as a C-Corporation - Form 8832 or S-Corporation – Form 2553

▪ LLCs are popular because owners have limited personal liability for the debts and actions of the LLC, without many of the formalities of a corporation.

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Independent Contractor or

Employee

Behavioral Control

Right to direct or control how worker does work

i.e. if you receive extensive directions then EE

How, when, where, what tools to use, what assistants to hire, where to purchase supplies etc

Training

If training is provided about procedures and methods then EE

Financial Control

Significant Investment; Share in profit or loss; Not reimbursed expenses; Written Contract

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Record Keeping Requirements

Records must support income and deductions that show amount, time, place, purpose.

You MUST keep:

receipts, sales slips, invoices, bank deposit slips, canceled checks

Other documents to substantiate income and deductions

Use a separate bank account for business


QuickBooks used by most Small BusinessesSage (Peachtree Pro)Xero FreshBooksMany others available

Record Retention Guide

3 YRS-

Bank Statements and Recons

EE Personnel Records (after termination)

6 YRS-

AR and AP ledgers

Payroll Tax Records

Cancelled Check copies

Travel and Entertainment

Lease (after expiry)

FOREVER-

Corporate Registration

Purchase and Sale

Minute Books, Audit Reports


Principal Business Codes

▪ 6 digit code

▪ Found in Sch C Instructions,

▪ Accounting Method

Principal Business Codes

▪ 6 digit code

▪ Found in Sch C Instructions,



Principal Business Codes on Schedule C

▪ 6 digit code

▪ Found in Schedule C Instructions,


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Business Income

All income your business receives unless excluded by law:

▪ Income from sale of product or for your services

▪ Includes Bartering (1099-B)

▪ Other types of income

▪ Recordkeeping


Business Expense

In order to be deductible, expenses must pass certain

tests:

▪ The expense must be ordinary

▪ It must be necessary to your business

▪ It must be incurred and/or paid by you

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Car & Truck Expenses

▪ If you use no more than four vehicles at the same time for business purposes, you may use the standard mileage rate.

▪ To use the standard mileage rate on a vehicle after the first year of business use, you MUST have used the standard mileage rate the first year.

▪ In later years you can alternate between standard mileage and actual expenses

▪ If you used actual expenses in the first year you can NOT alternate

▪ Standard Mileage Rate Method

▪ Actual Expense Method

▪ Publication 463: Travel, Entertainment, Gift & Car Expenses


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Standard Mileage Rate

▪ 58¢ per business mile for 2019 (2018 54.5¢)

▪ Keep records on business mileage

▪ Can’t take actual expenses if use standard rate

▪ Can’t take depreciation if use standard rate

▪ Consider use of a mileage tracking software like MileIQ


Commuting Expenses When are They

Deductible?

Home Main job/

business

Client/temporary work

Second job

Never deductible

YES

YES

YESNO

Pub 463


Bonus

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Travel Expenses –IRS Pub 463

Transportation (Air Fare)

Local Transportation (cabs, limo etc.)

Baggage & Shipping

Auto

Meals (Limited 50%)

Lodging

Cleaning

Telephone

Tips

Travel expenses are ordinary and necessary expenses of traveling away from your tax home for your business.

Tax home is your regular place of business or post-of-duty, regardless of where you maintain your family home.

Deductible Travel Expenses

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Meals and Entertainment Expenses

Substantially curtailed under 2018 Tax Reform Law-

Meals provided for the convenience of the employer are NO

longer 100% deductible. Now 50%.

Company parties are still deductible.

Business entertainment, amusement and recreation

deductions are GONE as are meals associated with

entertainment. Cannot deduct tickets used for business

entertainment. (ex. Mariners, Seahawks).

Business meals may NOT be deductible, even at 50%- additional

guidance from Congress or the Treasury (IRS) is needed.

❑ Business Gift Deduction Still Limited to $25 per client

Publication 463; Travel, Entertainment, Gift and Car Expenses

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Non-Deductible

Club Dues

Membership Fees

Clothing unless job specific- ex. uniform

Initiation Fees

Entertainment Facilities

Lavish or Extravagant Expenses

Entertainment-ex sporting events

Political contributions - exceptions


Exclusive Use: must use specific area of home ONLY for trade or business

Exception for storage & day care facility

Regular use: area must be used on a regular basis

Trade or Business use: area must be used in connection with a trade or business


Principal Place of business -

Needs to meet the following tests:

1. Used exclusively & regularly for administrative or management activities of the trade or business

2. There is no other fixed location where substantial administrative or management activities of the business are conducted

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Business Use of Home Test..


Home Office Deduction-Actual or Simplified Method

SIMPLIFIED METHOD

▪ $5 square feet up to 300 square feet

▪ Up to a total of $1,500.00 per year deduction

▪ No depreciation allowed

▪ Same requirements as Form 8829

▪ No effect on Schedule A deductions for mortgage interest and property taxes!!

ACTUAL COSTS

▪ Share of utilities

▪ Share of house depreciation

▪ Direct expenses such as

repairs

▪ Cleaning

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Hobbies ▪ If you do not carry on your

“activity” for profit you

cannot take a loss

▪ Expenses generally

deductible up to amount of

gross income and are taken

on Schedule A

▪ Individuals, Partnerships,

S-Corporations and

LLC’s

▪ Pub 535


Bonus

Self-Employment Tax

Self-employed people who are sole proprietors or partners may be subject to self-employment tax.

Self-employment tax is Social Security and Medicare taxes.

Working for someone else they pay half and you pay half.

Working for yourself you pay all of it!

If your net profit from self-employment is $400 or more, you must file Form 1040, Schedule SE, Self-Employment Tax


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Self-Employment Tax con’t

▪ Social Security 12.4%; Medicare 2.9%;

▪ Total =15.3%

▪ Maximum Social Security for 2019 is $132,900

Includes wages (2018 $128,400)

▪ No maximum for Medicare

▪ Pay as you go

▪ Expect to owe taxes - including self employment tax- of $1,000 or more when you file your tax return make 1040ES

▪ Form 1040ES

▪ Pub 505 Tax Withholding and Estimated Tax

29/37

http://www.irs.gov/pub/irs-pdf/f1040es.pdf


Dates adjusted for

weekend/holidays

June 15June 15June 15

April 15

June 15

Sept 15

Jan 15

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EFTPSThe Easiest Way to Pay Federal Taxes

Secure- Fast-Accurate-Convenient-

Easy-Select Payment Method-By telephone-On-line


If Sole Proprietor:

Must have one EFTPS for business if you have EE’s

Must have a separate one for self employed earnings estimated payments

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Information Returns Form 1099 Misc.

Payments of $600 or more for services

Rent of $600 or more

Prizes and awards of $600 or more

Royalties of $10 or more

All payments to crew members of fishing boats.

Form W-2.

Form 1099-K for Credit Card transactions

Form 8300.

Cash of over $10,000

Form 114 if have foreign account balance over $10,000 at any time during the year.


Information Returns

Make sure to get a

completed W-9

BEFORE you pay the

Independent

Contractor!


Some Red Flags1. Making too much money

If you make more than $200K IRS audit rate increases from about .65% to

3.62%

If you make more than 1 Million rate 6.21%

If you make more than $10 Million rate goes to around 16.22%

2. 1099’s and W-2’s not reported properly

3. Large charitable deductions

4. Home office deductionIt is not home office deduction but rather poor records to support the

deduction.

5. Meals and travel expenses (Entertainment, and possibly some meals,

no longer deductible)Again it is not deduction but rather poor record keeping.

6. Claiming 100% vehicle use when records say something else.

7. Consistent large losses, IRS thinks this may be a Hobby.


Avoiding Penalties

File an Accurate/Timely /Correct Return

20% Accuracy Related Penalty if You Understate Tax Liability Due to:

Negligence

Substantial Valuation Misstatements

Substantial Understatement of Tax

75% Civil Fraud Penalty

Felony Criminal Fraud

Combined Penalty is 5%/month

4.5% late filing and 0.5% late payment


CHOOSING A TAX PREPARER

Check Preparer’s Qualifications-

EA, CPA, RTRP or Attorney

Check Preparer History-

Via NAEA, WAATP, AICPA, BAR, NSA

Preparer Fees

Avoid fees based on % of refund


QUESTIONS ???Be sure to visit www.irs.gov/smallbiz

www.nwaccountants.com

Contact us at: 425-778-2665 or

[email protected]

19125 North Creek Pkwy Ste 203

Bothell, WA 98011

Facebook: https://www.facebook.com/NW-Accountants-

Inc-316756725365243/


http://www.irs.gov/smallbiz

http://www.nwaccountants.com/

mailto:[email protected]

washington small business fair tax workshop september …...(cabs, limo etc.) baggage & shipping...

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