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Should I File My LLC Taxes as an S-Corp? Ask the Tax Pro 1/24/13

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

Mark: I have just formed my first LLC(thanks LZ!), and can you briefly tell me what the benefit of filing as an S-Corp is? Thanks!

Corporate Tax Network: Hi Mark, an S corporation is a pass through entity and an election must be filed with the Internal Revenue Service to be considered an S corporation. An S corporation provides asset protection to the shareholder’s personal assets, it cannot be seized to satisfy business liabilities. However, like a sole proprietorship or a partnership, an S corporation passes through most of its income and losses to the shareholder. Unlike a regular corporation, there is no double taxation, once at the corporate level and again on the individual shareholder level. Each shareholder is subject to his own individual tax rate on the income or loss passed through to him. S corporation shareholders are considered employees of the business and can draw salaries as employee. They can also receive distributions from the corporation that are tax free to the extent of their investment in the corporation. However, a reasonable salary is required to be paid to the shareholder employee and the rest of the net profit is not subject to self-employment taxes but income taxes. Another advantage of the S corporation is that interest in an S corporation can be freely transferred without triggering adverse tax consequences. I hope this list help you decide whether to change the taxation of your LLC.

Cindy: My husband and I own a small business. We want to file a 1040EZ on our selves and file separetly on the business. Is this possible?

Corporate Tax Network: Hi Cindy,

If you and your husband own a small business, most likely you would have to file a Partnership Tax return (unless you are in a community property state, then you can file 2 schedule C’s). Either way, you would not be able to file your individual income taxes on the Form 1040EZ. The only way you can do this, is if your business is taxed as a C-corp, since it will have no effect on your personal taxes.

Sam: My ex has been on disability for the last 6 months, does she have to pay taxes on the money she recieves from the State of California or from her previous employer?

Corporate Tax Network: Sam, if the money received from the state is paid through Workers Compensation then the proceeds are generally not subject to tax. In regards to what she receives from her employer, if the money was paid by the employer then those funds are usually reported on W-2 form and are taxed as wages. What matters here is who paid for the policy, if the employer paid for it, it’s generally taxable.

Harry: If you have rental income from investment property, of course expenses for the property are deductable. If the property is vacant, are upkeep and maintenance expenses as well as other costs associated with the property still deductible?

Corporate Tax Network: Hi Harry, You can deduct those expenses if the property is “in service”, meaning the property is being marketed for either rent or is being rented. Otherwise you would have to capitalize the expenses, and depreciate them once you place the property in service.

Chelsea: Hi I want to start a company that can stand on its on credit and not my personal credit..but the c , s , llc, stuff is confusing

Corporate Tax Network: Chelsea, your company would have to have it’s own credit history to be able to secure credit. Until then you might have no choice but to personally guarantee any loans taken out by the company. I would recommend speaking with an attorney to find out about legal ramifications of co-signing on business loan. C Corp vs S Corp has to deal with how your company will be taxed. As an LLC you would have the most flexibility in selecting how your company is to be taxed. Because everyone’s situation is so unique you should discuss your own situation with a tax advisor to make sure you select the best possible tax treatment for your situation.

Michael: How would you recommend freelancers go about making sure they have enough money at tax time?

Corporate Tax Network: Hi Michael, Your taxes will be made up of income taxes (federal and state), as well as self-employment taxes, which is now 15.3%. Since a portion of the employment tax is a deduction, the effective tax rate is about 13%.
To get a handle on you tax obligations, you would need to make an estimate of your income tax bracket. Take a look at last year’s personal tax return and pick out these two numbers from your 1040. 1) line 44 “Tax” and 2) line 37, “Adjusted Gross income” .
With those two numbers, make a fraction and convert it to a percent. That will be your average income tax rate.
To get you overall taxes, add the 13% to your income rate and that will give you an estimate of how much you should pay in your net income for a quarter.
For example, if your net profit (not gross earnings) is $10,000 and you combined self employment tax and income tax is 30%, then you would make a $3,000 payment with form 1040ES. A similar process would apply if you are paying state taxes, but you would not add in the self-employment tax, since that is just for federal taxes.

Anita: I recently filed for a DBA (with you) as part of my existing corp. I have done corp taxes but am getting notices to file for the new entity (?)…won’t it just be filed under the parent entity?

Corporate Tax Network: Hi Anita, If it is only a DBA, your business income taxes would be filed combined with the parent company, so the tax filing requirements would be the same. I don’t have access to the notices you have received, but if these are from the IRS or the state, please discuss them with your tax advisor, to make sure you are in compliance.

Will: I have rental houses, where is a web site I can go to, to see what I can write off?

Corporate Tax Network: HI Will, Here is the link to the IRS form Schedule E, where rental activity is reported. Most of the common deductions are listed on that form. http://www.irs.gov/pub/irs-pdf/f1040se.pdf

Anita: Do I have to file for a ‘pending’ entity? One with no corp ID yet?

Corporate Tax Network: Anita, If the company is not registered with the state, then you do not officially have a legal entity. Once you recieve the articles of incorporation/organization from the state, then you officially have a state registered business, and would have to file a tax return. Your official business registration date would be stamped on the document you get back from the state.

MaryLynn: If I work as a W-2 consultant paid by one company for another company in NJ, can I claim the mileage from my home to my work site — if my employer does not reimburse me? In 2012, I commuted 120 miles each day for six months.

Corporate Tax Network: MaryLynn, if you commute between your primary job location and your secondary job location then the mileage is deductible on the days when you have to go to your primary job location. If you have a temporary job assignment outside of your area then the expenses are deductible as well as long as that job is reasonably expected to last less than a year. For more information you might want to reference IRS Publication 463 which can be downloaded from http://www.irs.gov/pub/irs-pdf/p463.pdf. It lists a lot of scenarios and explains what works in certain cases and what doesn’t.

Chastity: If divorce papers do not state who files a child as a dependent on a tax return, who gets to claim the child(ren); the custodial or non custodial parent?

Corporate Tax Network: Hi,
It can dependent on a number of factors, but when claiming any child as a dependent make sure he/she fulfills the basic requirements of relationship and age test imposed by the Internal Revenue Service. Normally, you can claim a child as a dependent as long as she/he resided with you for more than half of the year, thus the residency requirement means that the parent with primary custody of the child will be able to claim the him/her as a dependent. However, a non- custodial parent can claim a child as a dependent if extra factors are met:
1. Child must have received more than half of his support
2. Child must have been in custody of one or both of the parents for more than half of the year.
3. The custodial parent who would otherwise claim the child must sign a form declaring he will not claim the child as a dependent for that year. The non-custodial parent must then attach this declaration to her tax return.

According to the IRS, the custodial parent is the parent with whom the child lived for the greater number of nights after the separation. In the unlikely event that the child stayed an equal number of nights with both parents, then the custodial parent is the one with the greater adjusted gross income.

Will: I have rental houses, should I start an LLC?

Corporate Tax Network: Will, I would suggest to set up an LLC, ideally for each property, for asset protection purposes. I just want you to keep in mind that this will not give you any tax advantages, the rental activity would still be reported on a Schedule E of your personal tax return.

Mark: Is there any recourse for me to have alimony payments to my spouse to be reduced since my income is lower now than what it was when the alimony amount was awarded?

Corporate Tax Network:Mark, Please come back for free Joe either this friday or next tuesday. This question can be better answered by an attorney at that time.

LegalZoom: Here are the Free Joe details, Mark: http://zoo.mn/bFreeJoe

Brian: My 4 year old daughter is enrolled in all day VPK here in Florida. The first 3 or 4 hours per day is free, but I have to pay for the remaining hours. I am currently paying $300 a month for her tuition. Is there any deductions or write that would apply in this scenario?

Corporate Tax Network: Brian, if you’re paying for your daughter to stay in the facility for the purpose of you being able to go to work then you can claim Dependent Care Credit using IRS Form 2441. Generally you will receive a percentage of what you pay back on your taxes. This amount is dependent on how much you actually pay for daycare, your income level, and whether or not your spouse has any earned income. Daycare facility will need to provide you with their EIN, also known as Tax ID Number, so that you could claim this credit on your taxes.

Brian: Thanks. I was still married and my soon to be ex doesn’t work, so I don’t know if I would still be eligible for this credit. Based on what I’ve read, both parents have to be working or attending school. Am I correct on this?

Corporate Tax Network: Brian, you are correct. The amount of daycare expenses to be claimed cannot exceed earned income for each of the parents. If one of the parents did not work during the year, then the IRS’s position is that the non-working parent should have been taking care of the child. The only exception is if that parent was a full time student then the credit would still be allowed.

Jax: How do I file taxes if I worked in two seperate states? I work in CA Jan to July. Nevada July to November.

Corporate Tax Network: When you have wages from two different states, you would file a “resident” state return where you live and a “non-resident” state return in the other state. Any taxes paid in the non resident state, would show up as a credit on your resident state return. Since Nevada does not have state taxes, the credit for CA taxes, unfortunately would not count, since the deduction is not refundable.

JuJu: Hello…just one thing….I don’t have w-2 but I do have a 1099. Now when I file, can I still file for the child earned income? I have 2 dependents…Thank you

Corporate Tax Network: Hi, if you are getting non employee compensation on box 7 of form 1099Misc, that is still considered earned income, and counts towards the calculation of Earned income credit.

Aimee: Do you have to file joint if you are married? If we filed joint last year, do we have to this year or can we file seperate?

Corporate Tax Network: Aimee, each year you have a choice of either filing jointly or separately, you just can’t file single.

Kevin: Can I Claim Medical Bills on my Tax return

Corporate Tax Network: Kevin, Yes you can, these would go on schedule A, itemized deductions. Your medical expenses would have to exceed 7.5% of your AGI, and the portion which exceeds 7.5% would be claimed as a deduction on Schedule A. The other test is whether your itemized deductions are more than your standard deduction, which is either $5950 for a single taxpayer or $11900 for married filing jointly.

Said: How does a sole business owner “pay himself” in lieu of transferring funds directly from a business account to personal?

Corporate Tax Network: Hi Said, As a sole proprietor you must report all business income or losses on your personal income tax return, the business itself is not taxed separately. You’ll be taxed on all profits of the business regardless of how much money you actually withdraw from the business. You can deduct your business expenses just like any other business. You are allowed to deduct much of the money you spend in pursuit of profit, including operating expenses, product and advertising costs, travel expenses, and some of the cost of business-related meals and entertainment. You can also write off certain start-up costs and the cost of business equipment and other assets you purchase for your business. For this reason, a sole proprietor of a business does not pay himself just like any other employee rather he writes himself a check and does not withhold payroll taxes.

Terrence: In order to claim someone
As a dependent. What is the income
Threshold for that individual?

Corporate Tax Network: Terrence, there are a couple of points to be aware of. Is your dependent your qualifying child or a qualifying relative? For example if your dependent is your child under 18 or a full time student under 24 then there is no income limitation as long as you provide more than half of the child’s support. Otherwise the threshold would be the amount of dependecy exemption, which is $3,800 for tax year 2012.

Sandy: If you live in one state but work in another….which one do you file in?

Corporate Tax Network: Sandy, you would need to file in both states. You will claim credit for taxes paid to the non resident state on your resident state return, which will help offset some of your state taxes you owe in your resident state.

Jeri: I was in the process of applying for Medicaid for my mom at the time of her death. Paperwork had been submitted but not approved. Can approval be retroactive? She was in a nursing home for 3 months.

Corporate Tax Network: Hi Jeri, A lot of the Medicaid rules are made by each state. You may need to contact your state Medicaid department to find out more information regarding your question. I apologize I cannot be of more help. We try to answer all the questions that come in, however this question is not income tax related, and you may need to contact your state or perhaps see if there is a phone number you can call on the application you are filling out to get more details.

Amy: My son went to go live with his Father in August 2011. According to our divorce decree and custody I have the right to claim my son on my tax returns in ALL tax years. My ex husband signed a document agreeing to allow me to continue to claim him. How do I handle this on my tax return?

Corporate Tax Network: Amy, if your divorce decree states that you are the one claiming your son as a dependent then this is how you will claim it. Your son does not have to live with you as long as he is still a minor and divorce decree tells you to claim him. You can reference the Exemptions section of Form 1040 to see how this is to be reported

Amy: Someone told me I can claim him as a Dependant but I can’t get the Child Tax Credit since he doesn’t reside with me

Corporate Tax Network: Amy, you should be able to claim the child tax credit. If the other parent is a custodial parent and signed form 8332, it would need to be attached to the return when filing.

LaVerne: I bought a travel trailer on June 12, 2012. Can I claim the interest as I live in this as my primary residence? I live in Az.

Corporate Tax Network: Hi, to deduct the interest payment portion of travel trailer loans a taxpayers must itemize their taxes using schedule A of the IRS form 1040. In addition, the travel trailer must meet the IRS definition of a primary or secondary residence to deduct the interest. Taxpayers can deduct interest payments for their first and second home if they do not use them as rental properties. For second homes, taxpayers do not actually have to reside in their homes to qualify for a deduction but must have the intent to use it as a second home or vacation home. The travel trailer must have a separate cooking, toilet and sleeping facilities; without these facilities it does not qualify as a home for tax purposes. In addition, to deduct the interest on their travel trailers taxpayers must use the travel trailer as security to obtain the travel trailer.

Scott: Are time and mileage deductible for volunteer services provided to a disabled individual? The individual is not connected with a non-profit entity.

Corporate Tax Network: Hi Scott, Unfortunately, time and mileage for volunteer services to a disabled individual is not tax deductible. According with the IRS, charitable contributions are deductible only if you itemized and are made to qualified charitable organizations, payments to individuals are never deductible.

Delaney: Queston!! Its my first time filing taxes and im on my own! What all do i need to go in and get it done quick and without stress. The past year i worked 3 jobs, got my own place and a car.

Corporate Tax Network: Delaney, welcome to the wonderful world of paying taxes! The fact that you got a car would not affect your taxes. If you’re renting your place it will not affect anything. Each of your 3 jobs would have to send you a Form W-2 by the end of this month. That form has all relevant information that should go on your tax returns. You will need to provide those forms along with your personal information to a tax preparer. If your income is under a certain threshold you might qualify for free tax preparation from IRS volunteers. Check out this website: http://irs.treasury.gov/freetaxprep/

Bruce: if worked in Mississippi and they took out taxes for there state and my residential state of md what way can I know if they took to much or not enough for either state.do I file 2 state tax refunds

Corporate Tax Network: Bruce, You would have to file 2 state returns. Taxes paid to the non resident state can be claimed to reduce taxes for your resident state. If you paid too much to the non resident state, you will get a refund. The tax rates would depend on your tax bracket. If you need to find out before filing your taxes, have your accountant prepare an estimate for you.

Kelly: Can you claim a child that was born November 2012 EIC for taxes

Corporate Tax Network: Kelly, congratulations on your new addition, or as we’d like to say in the tax world, your new exemption! As long as the child qualifies as your dependent you can claim him or her as if the child was your dependent for the entire year. This would include a personal exemption and EIC if you qualify for it.

LegalZoom: The experts from Corporate Tax Network will be back next Thursday for more tax Q&A. Join us then! http://zoo.mn/AskTheTaxPro

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January 28th, 2013 at 5:33 am