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Is a Single-Member LLC Taxed as a Corporation? And More Free Tax Advice – Ask the Tax Pro 9/27/12

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On Thursdays, CPA and Vice President of Corporate Tax Network, Gary Milkwick, answers 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.

Carol: If a sole proprietor operates as a LLC are you required to file taxes as a corporation?

Corporate Tax Network: Carol, when you first set up an LLC, it defaults to being taxed as either a sole proprietorship if there is only one owner or as a partnership if is more than one owner. A sole proprietorship is simply reported on Schedule C of your personal tax return, while a partnership must file a separate tax return. An LLC can elect to be taxed as a corporation; if this form has been filed, a separate corporate tax return must be filed. So if you have not elected to be taxed as a corporation and are the only owner, you will simply report your business on your personal tax return; if there is more than one owner, you’ll need to file a partnership return.

Willy: I owe a bunch of money…penalties and interest as infinitum from the late 90′s. I turn 65 in three months. I do not have any child support issues or alimony. Will I need to take steps to protect my Social Security from being garnered?

Corporate Tax Network: Willy, it depends on to which entity or agency you owe this money. Most government agencies are limited in the amount of your Social Security benefits they can attempt to take. In general, they can’t take the first $750 of income and are limited to 15% of your monthly payment that exceeds $750. However, the IRS can take up to 15% of your monthly Social Security benefits even if you receive less than $750 per month. You may be able to work out a payment plan with the IRS if you can show that your level of income and existing assets is unable to satisfy the debt.

Annette: What are your thoughts on doing a home equity loan to pay off $10. k in credit cards, build a garage, and hardwood floors? Loan would need to be for about $25k. I’m not sure if this would be the right move or not or to just keep paying the credit card bills as they are (I pay a bit more than the minimum and have never been late).

Corporate Tax Network: Assuming the interest rate on the home equity loans is lower than the interest rate of the credit cards, it conceptually makes sense. However, credit card debt is unsecured, meaning the credit card companies don’t show up to your home to recover assets purchased if you’re behind on your payments. On the other hand, a home equity loan is secured by the home. It is definitely more difficult for a second mortgage holder to initiate foreclosure proceedings, but it is possible. Therefore, you have to determine whether decreasing the amount of total interest payments is worth having your home serve as collateral for the new loan. One other consideration is that the interest from a home equity loan may be tax deductible as an itemized expense on your personal tax return, which could generate additional savings from a tax perspective.

Penny: Is there a standard $ amount to designate something a Fixed Asset (to depreciate) vs expensing the item? Have the rules to depreciate changed for 2012?

Corporate Tax Network: In general, a fixed asset is defined as having a useful life of more than one year. There is no defined dollar value threshold under which fixed assets can be expensed, but as a practical matter, many companies do set thresholds internally. Also, certain fixed assets can be expensed immediately under Internal Revenue Code Section 179. There have been no material changes to the depreciation rules from 2011 to 2012.

Beverly: I have a 501c3 that consists of youth sports teams, including travel ball. Have always worked out of my home for the past 10 years. Now considering expanding travel ball to a facility with batting ages for development and training. Should/Could this be included under 501c3 or should I do an LLC for this endeavor?

Corporate Tax Network: Beverly, as long as this activity fits in with the overall goals of your nonprofit organization that were approved by the IRS and is not operated with an intent to generate profit, you could include it as part of your 501(c)(3) organization. If you wanted to personally profit from this new activity, you could set up a new LLC or report it separately as a “for profit” activity under the 501(c)(3) and pay taxes on the profits generated.

Alon: I have been unemployed for over 2 years ($0 income) , this year I received about $400 in UI… Do I even NEED to file?

Corporate Tax Network: Alon, you don’t have to file a tax return. Your income of $400 is below the filing threshold, which includes a standard deduction of $5,950 for single filers (or $11,900 for married taxpayers) and a personal exemption of $3,800 for each family member. So your income of $400, after these deductions, will result in zero taxable income and will not be subject to tax, or even required to be reported.

Mzgotmy: If u owe $5100 in child support will ur refund be garnished n who gets it. Is it true u receive money for 3 kids on ur refund.

Corporate Tax Network: Yes, the IRS and the state departments of revenue can both garnish refunds for unpaid child support. For the unearned income credit, you can claim up to three children. The overall exemption for dependent children is not limited to a specific number of children.

Melissa: Hi, I was wondering, is it possible to not receive a tax refund and also not owe taxes, like breaking even so to speak?

Corporate Tax Network: Melissa, yes it is possible, although not likely. In general, you may come fairly close to “breaking even,” but it’s usually fairly rare for someone with a full-time W-2 job or small business to pay exactly the amount of tax due for the year; you usually just don’t have enough information to pay that amount until after the fact.

Gary: Are LOTTO tickets like Powerball tax deductable?

Corporate Tax Network: Gary, lotto tickets are deductible as an itemized deduction on your personal tax return and are only deductible only to the extent of your winnings. For example, if you won $500 you could only claim up to $500 worth of expenses for lottery tickets and other wagers. If you do not have any gambling winnings the gambling losses are not deductible.

Keysha: hi Tim, I’m relocating from Florida to North Carolina how will my Taxes differ and is my relocating money refundable ?

Corporate Tax Network: Keysha, your tax situation will most likely be different because Florida does not impose state income tax on individuals, while North Carolina does. Your moving expenses are an adjustment on your personal tax return to reduce your gross income, which in turn reduces your tax liability.

Thanh: If one is married but has moved out in may. What status can the other spouse choose if the have a child together and the staying spouse provides all of thecost of support ?

Corporate Tax Network: Thanh, the filing status for the spouse who maintains his or her home for the children would be Head of Household, as long as this person did not live with his or her spouse for the last 6 months of the year. The other spouse that moved out should file Married Filing Separately as long as the two spouses are legally married as of December 31 of the year in question.

Michael: I run a free penpal inmate website. Do I need to register with the IRS when the income from it for the past 2 years is $12.09?

Corporate Tax Network: Michael, you do not need to “register” with the IRS as long as you don’t mind conducting this activity as a sole proprietorship under your personal name, especially if this activity is a hobby and you don’t rely on income from this activity to support yourself and/or your family. However, the income derived from this hobby activity should still be reported on your tax return as such. In addition, if you have any expenses associated with this income, you can generally claim those as part of your itemized deductions as long as they don’t exceed your hobby income.

Kim: If I plan an event under my business name. 1. Can I write off the expenses associated with the event on my taxes? 2. If there is profit from the event, do I have to include that when I file my taxes?

Corporate Tax Network: Kim, if the event has a business purpose (i.e. is “ordinary and necessary” for the operation of your business), you can use it as a tax deduction for your business. The total revenues and expenses generated from the event should be reported on your tax return for your business, so if the event is profitable, the profit from the event will be included on your tax return.

Amy: My 17 yr old daughter (High School Senior this year) has some money in a UTMA. As a custodian of the money, I will be putting a portion in a 529 so it will not count as asset for the FAFSA. I have 3 questions… 1)How much money can she have in the UTMA account so it will not hurt her chances to get financial aid? 2)The UTMA is a fund and the interest will show up on her income tax return for 2012. Will that hurt her chances for financial aid? 3)If she is going to college beginning in the 2013-14 school year, what is the latest date I can transfer the money to the 529 so it won’t have to be listed as an asset.

Corporate Tax Network: In the determination of eligibility for financial aid, certain percentages are applied to different assets, such as a child’s assets and parents’ assets, to calculate the available income for college. Children’s assets are assessed at 20% of their value, while parents’ assets are assessed at a maximum rate of 5.64%, along with an asset protection allowance depending on the age of the parent. A child’s income would also be assessed at a higher rate than income in the name of the parent.

One strategy would be to invest more of the amounts held in UTMA accounts in a custodial 529 college savings plan, custodial Prepaid Tuition Plan, or custodial Coverdell Education Savings Account. Custodial plans owned by a dependent student are treated as though they are a parent asset on the FAFSA, which will yield a more favorable financial aid treatment.

Another strategy would be to transfer money in the child’s name back to the parents’ name. This can be tricky, since you don’t want to breach the fiduciary duty to the child, so you might want to check with Free Joe or legal counsel on the cleanest way to carry out such a transfer.

This transfer often occurs by spending the child’s money for the benefit of the child on nonparental obligations (e.g., a laptop, summer camp or other existing expenses) while saving a similar amount of money in the parents’ names; otherwise there could be tax implications or the possibility of violating the fiduciary duty to the child.

Generally, the FAFSA evaluates assets held at Dec. 31 of the year prior (i.e. if you’re filling it out in 2013, it evaluates assets held as of 12/31/12), so any changes you make would be evaluated as of that date. Hope that helps!

LegalZoom: The “Free Joe” Gary references is our free legal advice session tomorrow: http://zoo.mn/bFreeJoe

Jarrod: how much equipment can you write off on your taxes

Corporate Tax Network: Jarrod, all of the equipment used in the trade or business can be depreciated on your tax return. Most equipment used in the business is usually depreciated over 5 years. However, if your total equipment purchases are less than $560,000 you can elect to immediately expense up to $139,000 without having to depreciate it over 5 years using Internal Revenue Code Section 179. In addition, if you don’t qualify for section 179, you can expense 50% of the cost of new equipment on your federal tax return using the “bonus” depreciation provision available for 2012.

Diego: I have a music production company that I started with LZ 2 years ago and have been working on producing but not working with anyone or making money. Can I still get tax deductions?

Corporate Tax Network: Diego, you can start deducting your business expenses as long as the business has already begun operations with a profit motive. You can claim your expenses as long as they are ordinary and necessary for the business. Good luck!

Jo Anna: Is it true that property granted in a divource decree is not taxable (in Texas?)?

Corporate Tax Network: Jo Anna, marital property that is received in a divorce decree is not taxable.

LegalZoom: Thanks to Gary of Corporate Tax Network for joining us today to answer tax questions. He’ll be back next Thursday, so join us then for more free tax advice.

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October 1st, 2012 at 6:05 am