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Can I Write Off Damages Caused by Hurricane Sandy? And More Tax Q&A – Ask the Tax Pro 12/6/12

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On Thursdays, CPA and Vice President of Corporate Tax Network, Gary Milkwick and his team, answer tax questions for free on the LegalZoom Facebook Page. Did you miss the last Ask the Tax Pro? Don’t worry. We’ve got it all right here.

Ellen: What can you use from the storm sandy as a write off ? My sons home flood and all furniture was lost and not covered by insurance.

Corporate Tax Network: Ellen,

I am sorry to hear that your son’s house was damaged due to the storm. But when this type of disaster happens, a casualty loss may provide tax relief and possible tax refunds to taxpayers. According with the IRS, a casualty loss results when there is damage or destruction of property from an identifiable event that is sudden, or unusual. If personal property is damaged, the loss is the lesser of the property’s decline in value or its adjusted basis reduced by insurance or other reimbursements. However, your son’s loss will be reduced by $100 per casualty and subject to the 10% limitation.

Harold: HI
I would like to know if collection efforts are a business deductible expense mailings, certied, signature confirmation, small claims cost, lawyers costs, stationary and possibly labor for time involved in collection efforts
Thanks for your time

Corporate Tax Network: Hi Harold,
If the collection is related to your business, for example a client did not pay you for services, then the collection expenses would qualify for a business expense deduction. If it is a result of a personal matter, such as trying to recover money when you apartment was damaged by water, then it would not be a business deduction. In this particular example, you could claim it as a casualty loss and may be able to deduct it on your personal return. Labor is deductible if someone has been paid, however if no monetary cost was incurred, labor time by itself, would not qualify for a deduction.

George: Hi, is there any taxation different between one and two members LLC in delaware and wyoming? any taxation advantages by having one or two members LLC?

Corporate Tax Network: Hi George, The biggest differences is in the tax forms you would use. A single Member LLC files Schedule C (sole proprietor) with their 1040, so there is no separate tax return. With a Multi member LLC, you would file form 1065 and each partner would receive a K-1 showing their share of the income. The income from either your Schedule C or your K-1 would be reported on your personal return, so both entities are considered “pass-through” entities since there is no separate tax on them. All taxes (income tax and self-employment tax) is paid on the personal tax return, whether you have a partnership or a sole proprietorship.
Although Wyoming and Delaware are popular choices because of state taxes, keep in mind that if your actual business is operating in another state, you would need to also file as a foreign corporation in that state and pay the fees and taxes associated with that state.

Melany: I live in CA and my hobby is showing dogs. Once or twice a year we have a litter of puppies that we sell. At what point do we need to report that income? My expenses normally far outweigh any profit but I also want/need to know what I should be reporting, if anything. Thanks in advance!

Corporate Tax Network: Hi Melany, With a hobby, as opposed to a for-profit business, you would report the gross income as “other income” on your personal return. You can only deduct expenses, up to the amount of your gross income, but that deduction would be taken as a “Miscellaneous Deduction” on Schedule A which lists itemized deductions such as mortgage interest, real estate taxes and charitable gifts. As a miscellaneous deduction, you can only deduct the amount that is in excess of 2% of your income. So, if your income is $50,000, your hobby expenses would have to exceed $1,000, then the excess could be listed as an itemized deduction. Your expenses however can be claimed to the extent of your business income. You would need to report your income in the year in which you received it, there is no threshold.

Mark: I was married to my wife on june 11 2012. we are currently seperated. how should we file our taxes?

Corporate Tax Network: Hi Mark, If you are “legally” separated on or before December 31, 2012, you will be considered single. If not, you will be considered married, so you could elect to either file 1) jointly or 2) married, filing separately.

Amy: we live in GA and got married Jan this year. my husband works and I havnt workd this yr at all. I have a daughter frm a previous marriage tht I claim and my husband is claiming both of us bc he has taken card of our family this year. he owes back child support so my question is will we get to keep the EIC for my daughter if I file thd injured spouse form or is that only if I worked? we understand any tax refund from his income goes to the child suport. we were just wondering bout the eic?

Corporate Tax Network: To qualify for an Injured Spouse Claim, you must report either 1) your own income or 2) you made some estimated federal tax payments, including the earned income tax credit or additional child credit.
Attach IRS form 8379 when you file and write “injured spouse” in the upper left corner of the first page of the return. If you don’t agree with the amount of the Injured Spouse Claim, you can contact the IRS and request a copy of the Injured Spouse Claim worksheet. However, you would usually not qualify for EIC if you do not have any earned income.

Raniesa: I own multiple small businesses that are not necessarily relevant to each other. Can I start a “parent” company and manage them all as “children?” If so, how do I go about doing that?

Corporate Tax Network: Raniesa, there are some advantages and disadvantages to set up a “parent” company on both, legal and tax side of things. When you have multiple layers, you usually receive a greater liability protection. Taxation would depend on how each entity is structured, as you have some flexibility where all entities can still be taxed differently, i.e. corporation, flow-through, etc. However, on the downside, if something was to happen with your “parent” company all of the children would go down with it since they’re owned by that parent. On the contrary, if you have several unrelated entities and something was to happen to one of them, it would not affect the other one unless they are related. Both options are doable, you just need to figure out which one fits your situation better. I would recommend discussing this with an attorney if you are concerned with liability and asset protection and also discuss with your tax advisor on how to best structure taxation of each entity.

Misty: I have a friend who’s husband who has not file taxes for a couple of years now what happens to the people like this? (She has filled herald tho)

Corporate Tax Network: Misty, if your friend’s husband hasn’t filed taxes, he might or might not have consequences. If he is due a refund and he doesn’t file for 3 years after the return was initially due, then he just forfeits his refund and there is absolutely no way to get that back after the 3 year statute of limitation. If he owes money to the IRS they can do what’s called a “substitute return”, which means they’ll basically prepare his return for him without taking any deductions into account and will assess unpaid taxes (which if they do it will be more than what it’s supposed to be), plus add penalties for not filing on time, add penalties for not paying taxes on time, and interest. IRS will then have 10 years to collect the money, which might involve levying property, bank accounts, wage garnishments, etc. If your friend filed her taxes using Married Filing Separate status then she personally should be okay though, but IRS might still go after any property they own jointly if they issue a levy.

Isaac: If I claim zero dependents at work. Do I get more back at the end of the year? Or should I just be claiming all of my dependents?

Corporate Tax Network: Isaac,

You may claim as many exemptions as you are legally entitled to or as few as you would like. If you are entitled to claim one exemption, you can choose to claim one or zero. Each exemption that you claim lowers the amount of money withheld from your paycheck. Generally, if you would prefer a larger refund when you file your income taxes, you should claim fewer exemptions on your w-4. But if you would rather have your tax withholding more closely match your expected tax liability you should claim the correct number of exemptions that you are legally entitle to.

PJ: I live in Washington state and own a Nevada LLC. For a membership-based website, do I need to pay sales tax to Nevada for membership fees? Thanks!

Corporate Tax Network: P.J., if your business has no physical presense in Nevada you should not be liable for any taxes in that state. If your company is actually physically located in Nevada then you need to be collecting sales tax from the tangible products delivered to your Nevada customers. It doesn’t appear that memberships are included as taxable in NV.

Christopher: currently set up LLC with legal zoom. looking for best pass thru taxation. thinking of converting to s-corp. what would be best.

Corporate Tax Network: Christopher,

Both the LLCs and S Corporations have its own advantages and disadvantages. The LLC is a good choice if you want flexibility but you can choose the S corporation if you want to save on employment tax. The main difference between the LLC and the S corporation is the employment tax. With the LLC, the owner is considered self employed and you will have to pay Medicare and social security tax. Meanwhile, an S Corporation only the salary drawn by the owner is subject to employment tax. With the S corporation, a salary is required once the business is profitable. As you can see, the differences rises when the business is profitable, but if the business is running at a net loss, then the tax benefit is the same for both business entities.

Brandi: With a gross income of about $250k if I let my fiancé claim my 2 minor children what would that mean for him? What if we got married?

Corporate Tax Network: Brandi, In order to claim a child as a dependent you must meet the relationship test, age test, residency test and support test. In other words, a dependent must be taxpayer’s either son, daughter, stepson, stepdaughter or a descendant of such child who lives with the taxpayer and receives more than 50% of the support from the taxpayer. However once you get married and file a joint tax return, you can claim your children as dependents, as long as they are qualified childred of either taxpayer or spouse.

Brandi: Yes I’m sure we meet the relationship test but I’m wondering just how much $$$ he will save instead of me filling with them.

Corporate Tax Network: Brandi, if your fiance is not a biological, foster, or adopted parent of your children then the relationship test is not met. You have to meet all tests, including living in the same household. Since you can claim your children as qualifying children, they’ll have to be listed as dependents on your tax return

Mary Elaine: when your only income is widows benefits social security do you need to file taxes?

Corporate Tax Network: Mary, if Social Security is your only source of income then it’s not taxable and no tax return is required. You just need to make sure there are no taxes being withheld from it because if there are, then you would need to file a return in order to receive a refund.

Kim: How does an LLC differ from Inc.? I want to make sure I’m making the right choice.

LegalZoom: Check this out to see what entity type would work best for you:

Corporate Tax Network: Kim,

Both an LLC and an S-corp are flow though entities. Income from an LLC is considered self employment income, and will be subject to self employment taxes, which are paid on the individual income tax return along with income tax.
Flow through income from an S-corporation is not subject to self employment tax. Only income tax will be paid on the net profit from an S-corp, however the shareholder/ owner would need to be reasonably compensated through wages.
Typically LLC is the more flexible option, you can register your business as an LLC, and later change the tax treatment to an S-corporation. S-corporation election can be made within 75 days from the date of incorporation or from the 1st day of the year in which you want the business to be taxed as an S-corp. Generally, you would be able to avoid some self employment taxes if you chose to file as an S-corp, but this would depend on your income and your reasonable compensation.

Jennifer: Can a married couple file seperatly or would it be in our benefit to file joint? We hv 3 kids

Corporate Tax Network: Jennifer, generally it is more beneficial for a married couple to file jointly. In some circumstances, which would depend on income, types and amounts of the deductions you are claiming, it may be better to file separately. It is hard to say without looking at all your tax documents which would be best for you. However, there is a much greater chance that married filing jointly would be most beneficial.

Damon: I want to start a new mfg business (corp), should I register the company, patent and trademarks by EOY or wait until 2013? Are there tax benefits to starting the company in 2012?

Corporate Tax Network: Damon, if you set up a corporation in 2012 you would have to file a corporate tax return for this year, regardless if any activity was conducted by the business or not. This might not be beneficial especially if you are in one of the states that imposes a minimum franchise tax which is usually attached to the tax return. I am not sure if you have to be incorporated before you start applying for patents and trademarks, I suggest to double check with an attorney on this. If the company is setup in 2013 then there’s no tax return to be filed for 2012, assuming that the business has not been conducted.

Damon: If I expense my filing charges against the new corp, am I better in 2012 or 2013?

Corporate Tax Network: Damon, your business expenses are deductible in the year in which your business becomes active. The day it becomes active, is the day that your product/ service becomes available to the consumer and you actively start marketing your product or service. If this does not happen until 2013, then you would not be able to claim your start up expenses until 2013, even if they were incured in 2012. So registering a business in 2012 would benefit you, only if you are able to get everything set up before 12/31/2012 and actually start your business by making your product or service readily available to the consumer. Hope this helps!

Dustin: I have ~$70k in self-employment LLC Business income that I report on my taxes. I generally make a little over $250k per year with my outside job plus my self-employment of the $70k, but I don’t personally take a direct paycheck salary from that $70k. My business is not profitable, so i am able to deduct that $70k fully on employment expenses (employee wages, health care costs, etc). Is it best to keep reporting my income as an LLC or should I upgrade to a corp to report that income? If a corp, S-corp or some other form of incorporation?

Corporate Tax Network: Hi Dustin, If you have a net profit from your LLC of $70,000 and your wages are $180,000, it seems you paid all your social security tax through your current employer. At tax time, you will pay 2.9 % of Medicare tax only. If these figures are similar for future years we would suggest remaining as an LLC. The benefit of converting the current LLC to an S-corporation is minimal. If your personal tax bracket is high and you are not looking to take all the money out of your business, and just pay yourself a small salary, then a C-corp may benefit you more. However there are many variables involved and I would strongly recommend that you speak to a tax advisor in more detail regarding your situation.

Dustin: to clarify, I wrote “employee wages” – I meant “contractor wages” – I do not have employees as a single member LLC.

Corporate Tax Network: Dustin, I would still say that you should not change the tax structure of your business and keep as a single member LLC- reported on a Schedule C.

Janet: my husband is 140,000 thousand dollars in debt to the IRS for a business he owned and my name was not on that business. Then he openend a second business in which he begged me to use my credit for so I let him. I asked him to let me sign the innocent spouse form because for some reason they are trying to get to him for the money through the new business whichmy name is on but he won’ have me sign the form! Why shouldn’t I be claimed innocent?

oh and by the way my husband has a tax attorney for this and he said his attorney has not recommeded that I sign the innocent spouse form either and my name is not on anything from the first business,

Corporate Tax Network: Janet, Is the business reported on your joint individual tax return? If it is then both you and your husband are equally liable for the accuracy of information reported on your joint tax return. You can claim Innocent Spouse Relief only if your husband withheld information from you and when you signed your return the information on it was accurate to the best of your knowledge. If you are aware of the extent of the situation before you sign that tax return then you will not be eligible to claim Innocent Spouse Relief. Your only option at that point would be to file Married Filing Separate to avoid being personal liable.

Ray: Hello, I want to know if I am receiving an annuity from PERS in Calif and move to Arizona, would I be liable for any state tax in Ca. or Arizona? Thank you

Corporate Tax Network: Ray, PERS pension is not considered a California sourced income for income tax purposes as long as you were not a resident of California for the entire year. Public Law 104-95 signed by President Clinton prohibits any state from imposing income taxes on pension income of a non-resident. But since you are a resident of Arizona, you would have to report all of your income in your state and it will be taxed.

Jessica: Can u write off schooling and mileage to school if it is far away?

Corporate Tax Network: Jessica, There are tax credits for College tuition, fees and books, however there is no credit or deduction for travel expenses.

Laura: I am considering converting a small traditional IRA into a Roth IRA. Last year I know there was some special tax advantage – you had 2 years to pay the tax or something like that. Any special rules for 2012?

Corporate Tax Network: Laura, unfortunately, there are no special rules similar to what we had in 2010 where we have the option to spread the income from a conversion 50/50 over 2011 and 2012. Although a conversion before year-end will trigger a bigger federal income tax bill for this year, and maybe a bigger state income tax bill too, there is a benefit to doing the conversion this year. With the Bush tax cuts expiring at the end of the year, today’s federal tax rates will be a lot lower than next year. Converting this year means you will pay less tax on the conversion. Another thing to remember is that if you change your mind, you have until Oct. 15, 2013 to unwind or recharacterize the 2012 conversion. That said, consult a good tax pro who is privy to your tax situation before making this big decision. Good luck!

Dawn: I have had a small business since 1981. How long must I keep tax records, such as deductions for home office, auto, tools and son? I am slowly drowning in paper, since I have kept all my records since 1981.

Corporate Tax Network: Dawn, generally you must keep records for at least 3 years after the tax return was filed. If you have any business assets you have to keep acquisition records for at least 3 years until after you file a return for the year in which the asset was disposed of. It sounds like your records from the early 80s can safely be destroyed now.

Justin: How long does a state have to notify you about back taxes. The state of Georgia let me know about 2006 taxes at the beginning of 2011. I sent them the check, they never received it. I was in Iraq at the time. Can I get them to negotiate on the penalties and interest? What would my legal grounding be?

Justin: Meaning I wrote the check and sent it sometime in 2007, but they never received

Corporate Tax Network: Justin, if the taxes were assessed and not collected the usual federal statute of limitation is 10 years. Was your 2006 return e-filed or mailed in? Was the payment attached to it? Do they have a copy of the return on file? If the payment was not received on time, penalties and interest would accumulate until payment is received. Do you have a proof of mailing in the payment? You can always try to get the penalties abated on the grounds of having a reasonable cause. I would recommend you try to negotiate with GA Dept of Revenue or hire an attorney, CPA, or Enrolled Agent to negotiate with them on your behalf

Kumar: Just wondering: if you do small jobs like landscaping, or montly maintenance services, is it fine to print out a job invoice for the customer, even if you are not a registered business?

Corporate Tax Network: Kumar, you can provide invoices to your customers. If you are not a registered business, then you are assumed to conduct it in your name, and will still have tax reporting requirements to file a Schedule C on your personal tax return.

Darlena: Is there a way to get an early refund based on your income if you have earned over $!0;000 dollars

Corporate Tax Network: Hi Darlena, Generally, you can not get an early refund. However if you were eligible for a child tax credit in 2011, you would have been notified by the IRS and may have received checks in the summer of 2012 for an advance payment of the 2012 credit. If you have a job where you will get a W2, you can reduce any tax withholdings to increase your take-home pay. However, please be careful not to reduce it too much, to avoid a tax liability at the end of the year.

LegalZoom: The Tax Pros from Corporate Tax Network will be back next week to answer more of your questions. If you haven’t posted your question yet, save it til then and join us at 11am PT/2pm ET next Thursday!

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December 10th, 2012 at 1:54 pm