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How Should My LLC Pay Taxes? And More Free Tax Advice – Ask the Tax Pro 10/11/12

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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.

Germán: Hi Diana, what’s the best approach to pay taxes when you own an LLC? What are the tax rates? Thanks.

Corporate Tax Network: Germán, LLC is the most flexible entity for tax purposes. This means that with an LLC, you decide how your company is being taxed, since IRS does not have any specific tax rules for LLCs. When you set up an LLC, by default you’re treated as a sole proprietorship for tax purposes if it’s a single member LLC or a partnership if the LLC has more than one owner. However, you are not required to use the default classification and can elect a different tax treatment, such as S Corporation or C Corporation. Which one of these choices to take really depends on multiple factors as they pertain to your own (and your partners’ if you have any) tax situation. If your entity is taxed as either a sole proprietorship, partnership or S Corporation, the net income is reported and taxed on the business owners’ personal tax return where it gets combined with the rest of the income and deductions and personal tax brackets apply. Also, if the LLC is taxed as either a sole proprietorship or a partnership, the income is subject to self-employment tax. C Corporation is a taxable entity and the income derived from the business is taxed at corporate tax rates. In addition, any distributions taken out from a C Corporation are considered dividends and are taxed again on the owner’s personal tax return. I would recommend you to review your individual situation with your tax advisor to determine what tax treatment would be more beneficial for you to elect.

Donna: How can I find out if my son’s estranged wife has been filing joint tax returns for the past several years? My son needs to obtain this information so he can rectify his tax situation with the IRS so he can file his taxes from here out.

Corporate Tax Network: Hi Donna, I don’t have any specific information on the issues your son has with the IRS. With the limited information I have, I would suggest that you contact the IRS and explain the situation. The IRS agent will not be able to help determine whether the son’s estranged wife is filing a joint return with someone else, however, the agent may be able to give you other alternatives. If this information is crucial, you may need to hire an attorney to resolve the matt

Jill: We purchased a retirement home in So. Carolina. I will become a resident of SC but my husband will return to Illinois as he is still employed there but will be retiring in 2013. He will sell that home at this time also. Can my husband become a resident of SC and still live in Illinois for the time he has remaining before his retirement? THANK YOU for yor time~

Corporate Tax Network: Hi Jill, your husband can be treated as a SC resident by taking steps to show that this is where his permanent residence is. That would involve setting up bank accounts in South Carolina, registering to vote, registering an auto. Your husband should also notify his employer that he is now a resident of SC, so they can withhold state taxes on his paycheck. Keep in mind, that he would still need to file a state tax return in IL to report his IL earned income

Jeff: ‎***Virginia- Can I use my IRA to purchase a condo, and if so, what are the taxes/penalties or other consequences or info i need to know ? I am 48 years young. Thank you***

Corporate Tax Network: Hi Jeff,
If you withdraw funds from your IRA for the purchase, the withdrawal will be subject to ordinary income tax. Since you are under age 55, there would also be a 10% penalty on the amount withdrawn. However, if the condo is your first home, up to $10,000 of the withdrawal would not be subject to the 10% penalty.
Here is a link to the IRS site which describes the penalty exclusions for early retirement distributions.
http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics—Tax-on-Early-Distributions

Carol: If you file a 1099 and you pay taxes at the end of the year, how is that tax money distributed?

Corporate Tax Network: Carol, the US income tax is a pay-as-you-go tax, which means that tax must be paid as you earn or receive your income during the year. Generally, the payments should be made in four equal amounts throughout the year. If you only pay your taxes at the end of the year, you might have to pay a penalty for underpayment of estimated tax. You can avoid this penalty if you owe less than $1,000 in tax after deducting your withholdings and tax credits.

Fathima: For single member LLC, in terms of tax benefits, is it better to elect corporate status or S corporation status? We got our EIN today for single member LLC. How soon should we file 8832 or 2553 respectively?

Corporate Tax Network: Fathima, whether you elect for your LLC to be taxed as a sole proprietorship, S Corporation or C Corporation depends on a few factors. Things to consider include the nature of your business, your net annual business income after expenses and your overall personal tax situation, such as how much is your earned income outside of this business. Also depending on what state you are in, you might have additional tax consequences for each entity on the state level. It’s always recommended to review your own individual situation with a tax advisor and discuss pros and cons of each choice as it applies to your own individual situation. If one entity was better than the others, nobody would set up other entity types so the true answer to your question is “it depends”. If you want to elect either an S Corporation or a C Corporation, you have 75 days from the day your LLC was approved by the state.

Gilbert: What’s taxable when you have kids can we add sports and other ativities to list

Corporate Tax Network: Gilbert,
extracurricular activities are generally not tax deductible. However if you incur dependent care expenses for kinds under the age of 13, you can claim them on your tax return. The dependent care expenses are deductible if both parents (married filing jointly) have jobs, and cannot otherwise take care of the children during the day.
You can check publication 503 Child and Dependent Care expenses for more information:
http://www.irs.gov/pub/irs-pdf/p503.pdf

Pepper: If you are nearing retirement age and have used an offer in compromise how will that affect your Medicare coverage..I am 62.

Corporate Tax Network: Pepper, it should not affect your Medicare. Medicare eligibility is based on reaching age 65 and is not dependent on your income or financial condition.

Boyd: I’m an early-40′s entrepreneur with my own enterprise software development & project management company (S-Corp). I’m happily married with 5 children ages 5 – 13.

What are some strategies by which I can minimize my personal tax burdens so that I actually keep more of my money than the lawless thieves in DC steal from me?

Corporate Tax Network: Hi Boyd,
Here are some tax strategies that can help you minimize your tax exposure:

1. You can hire your kids to do office work full time during the summer and part time during the fall. You can pay them $ 5,800 for the year, thus you can deduct this as business expense. Since your son receives $5800 standard deduction for 2011, his earnings will be completely tax free.
2. You can open a solo 401 k plan and shift your income towards your retirement.
3. Account for your meals and entertainment expenses, this expense is overlooked for most business owners.
4. Keep track of your mileage, thus at the end of year you can take a deduction for the business miles driven.
5. Home office expenses- if your business is profitable you may qualify for the home office expenses if the area being used is exclusively used for business purposes.

Thomas: Hey Diana

If i was to build an social media site that was just as much social networking as it is c-to-c Ecommerce site, should I register the business as an LLC or an S-Corp? Also if I do form an LLC would I need to transition to an S or C-corp later on down the depending on the scussess of the the venture. Thanks

Corporate Tax Network: Thomas, you can register an LLC, since it is the most flexible type of entity and later elect to be taxed as an S corporation by filing IRS form 2553. However, choosing the right entity depends on several factors; income, tax bracket, if you are employed by another employer..etc. The real answer to this question is “it depends”. If you are really interested in this venture, I would strongly suggest to talk to your tax advisor. The advisor will take all your facts and circumstances into consideration to give you the best advice.

Dana: I’ve been doing some consulting on the side as a favor for a friend, and it’s growing into a decent flow of income. Are there tax advantages to incorporating? I don’t have any employees.

Corporate Tax Network: Dana, if your freelance work is showing a decent profit you are subject to self employment tax. You might be able to reduce how much you pay in Social Security and Medicare taxes by setting up an S Corporation while still avoiding double taxation. I would not recommend a C Corporation because that entity is double taxed. Other things to consider include the amount of income being generated, and your own individual tax situation outside of this consulting work. Also, if your work involves any kind of liability issues, then either a corporation or LLC is strongly recommended for legal purposes. I would recommend you review your own individual tax situation with a tax advisor to determine what’s best in your situation

Gloria: We have not received our refund yet. We moved and finally closed the account we had that it was to be deposited in. I sent a form to them with all the new info and three months later still no word or money. It just says we have received it and if correct it will be sent in six weeks after received. We filed through a tax company in Feb. 2012. The checking account was not closed until July 2012. The letter was sent in July. We can not get through to a person the wait is so long Any suggestions?

Corporate Tax Network: Gloria, I am assuming you are referring to your IRS refund, as different states have different procedures. If direct deposit is rejected by your bank, which it should since the account is closed, the IRS gets notified about rejection and they mail you out a check instead. Since you moved you should file IRS Form 8822 – Change of Address, which can be downloaded from http://www.irs.gov/pub/irs-pdf/f8822.pdf This way IRS will have your correct address on file. It’s very unusual that you did not receive your refund yet. IRS has a system for you to check your refund status at https://sa2.www4.irs.gov/irfof/lang/en/irfofgetstatus.jsp You will need to have the amount of your expected refund handy. If all else fails, you should give IRS a call at 1-800-829-1040. If the refund concerns your state, each state has its own procedure for tracking it, and you should contact Department of Revenue of your specific state. Good luck!

Lori: Can you negotiate your back taxes of two years before you file your returm. And if so what is the amount is it 20% or 50% Or 80%????

Corporate Tax Network: Lori, if you are expecting a refund in 2011, the IRS may hold it as a payment towards back taxes. If you would like to make a payment arrangement to pay your back taxes you should contact the IRS 1-800-829-1040
Here is the IRS link where you can find more information about payment plans and installment agreements:
http://www.irs.gov/Individuals/Payment-Plans,-Installment-Agreements
There is no specific %, it will depend on how much you owe, and how much you can afford to pay. Once you give your offer to the IRS, the service can either accept or deny your offer. Because your issue is time sensitive and the deadline for filing your 2011 1040 is only a few days away, it would be best that you contact the IRS as soon as possible.

LegalZoom: The tax pros from Corporate Tax Network will be back next Thursday to answer your tax questions. Join us then! http://zoo.mn/AskTheTaxPro

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October 15th, 2012 at 6:11 am