2006 Archive

Welcome to SBA's Small Business VOICE - an online discussion forum with the entrepreneaur in mind.

Host: Thomas P. Ochsenschlager, vice president of Taxation for the American Institute of Certified Public Accountants

Time: Thursday, December 14, 2006 at 1:00 p.m. ET (10:00 a.m. PT)

Topic: "Year-End Tax Planning for Small Business Owners"

From : alicia
Location : albany , ny

Question :
some sellers on Ebay charge sales tax for certain states, presumably their state of business or residence - I do not, however, I may sell for large amounts, although I do not sell frequently. Should I be charging sales tax for New York residents (my state of residence) or not, because I don't sell enough? What is the limit of income profit before you have to charge tax?

Reply :
you should collect sales tax for sales within your state of residence. You mgiht wnat to check with NY rules if these are "casual" sales. You may not have to charge sales tax in that case.

From : Theresa
Location : , WV

Question :
I own rental property. I am a sole proprietor. Is it best to incorporate in some way to protect me from liability or is it better to get umbrella insurance? If some type of incorporation is best, should I incorporate each rental home or put all of them under one? I'm feeling, if they are all under one, then one tenant could wipe me out on all the others, but if I incorporate each one, it will be costly. I have 6, but could only claim on one. And then again, is it possibly, that even if you incorporate, that there is a way to get you personally?

Reply :
More of a legal question than tax but holding the property in an entity such as an S corp or an LLC is a good idea to protect you from personal liability. Both of them are "flow thru" entities so the tax benefits of ownership pass thru to you agains subject to the sneaky Passive Loss rules that often apply to rental properties to defer the recognition of the losses.

From : Barbara
Location : Chico , CA

Question :
I purchased a scrapbook business in Nov (except for the name) and will not be able to open until Jan, can I claim the taxes I paid on the business (I will be a sole proprietor for a while)?

Reply :
Yes you can take a deduction for taxes - they are not considered a start up cost but I'm confused as to what taxes you would have paid

From : U.S. Small Business Administration
Location : Washington , D.C.

Question :

Reply :
We're out of time. Thanks on behalf of the SBA and the American Institute of CPAs for joining us today. We've enjoyed chatting with you.

From : Kathy
Location : Pensacola , Florida

Question :
As a sole proprietor of a web-based only service (no products involved) business that just went live, will I be able to take a loss on my taxes for 2006 if my earnings do not surpass my start-uo costs (i.e. computer, office supplies, web host, software, business license, etc.)? Thank you

Reply :
Kathy, generally yes you can take losses if you are a sol proprietor. In effect you take your losses incurred (after the start up period) add up to $5000 of strat up costs you get in the first year and that is your loss for the year.

From : Lee
Location : , AL

Question :
I am a sole propritor, Do I need to pay state income tax? if yes, How to pay it? thank you.

Reply :
Each state has their own rules on income tax and some states do not have an income tax. You need to check with your state and can probably find the answer on their website.

From : John V. Zimmer
Location : Oakton , Virginia

Question :
I have started up an "S" Corporation. Can I make charitable contributions from the corporation? If so, where on IRS Schedule C (Profit or Loss from a Business) do I declare charitable contributions?

Reply :
Yes, you make contributions from the corporation and then the amoutn of the ocrporation is passed through to the s corp sharheodlers in propeortion to their shareholdings. Special rules apply if the contribution is made in the form of property that was appreciated while held by the S corp. If that's you, you should consult a tax professional.

From : Rose Schoy
Location : Pittsburgh , PA

Question :
Dear Sir: We are in the process of finalizing a new business venture that was set-up as an S-Corporation. We would like to reduce the risk that creditors or litigants could pierce the corporate veil and expose the shareholders to personal liability. Although we intend to follow some standards such as not commingling personal & corporate funds and will hold board meetings, etc., we are uncertain what orginial price we should pay for the shares. As a professional service corporation, little capital contribution is required to begin operations. Can you provide any guidance as to what is considered an adequate investment to limit risks referred to above.

Reply :
This is a legal, not a tax question, but I'll try to answer it while encouraging you to consult with an attorney. The amount required depends on the facts and circumstances, but if your corporation operates in an area which exposes the public to risk, and you don't carry insurance and are thinly capitalized so that there's no recourse for an injured plaintiff except the few assets of the corporation, a court could pierce the corporate veil and require the owners to pay. This is an unusual remedy and normally corporate shareholders are not liable for the company's faults, but the court will look at all the facts and circumstances. If you are concerned, talk with an attorney so that you can sleep at night and not have your personal assets at risk.

From : Jim
Location : Warwick , NY

Question :
I am in the final stages of discussions to merge my small c-corp with the other owner's s-corp. would it be better for him to just buy my assets or the c-corp's stock? thanks tom o.

Reply :
Buyers normally want a step-up in basis of the assets they purchase and so if the assets are appreciated, the buyer would likely prefer to purchase your assets and you should build that tax savings into the puchase price. You'd both have to agree to make the 338(h)(10) election if you want to treat the transaction as a sale of assets for tax purposes even though you can actually sell the stock. This may be something you want to look at.

From : Clayton
Location : Pratt , Kansas

Question :
As a sole proprietor, I usually buy 2 or 3 houses, fix them up and sell them during the course of a couple years, holding the homes for at least 12 months. Am I eligible for capital gains tax rates, or would be considered a dealer selling inventory?

Reply :
Because this is your trade or business, the houses you buy, rennovate and sell are considered inventory and not eligible fro capital gain tax treatment regardless of the holding period.

From : Kathy
Location : Minneapolis , MN

Question :
Is there a limit to the dollars a company can spend for marketing using gift cards?

Reply :
A business may deduct any "ordinary and necessary business expenses." There is no particular dollar limit on advertising expenses, but the IRS may question any item that it deems "unreasonable."

From : Glenn
Location : Londonderry , NH

Question :
I sell a divot repair tool to Golf courses all over the US do i have to charge them sales tax and if so which states.

Reply :
Generally you only have to charge sales taxes for products sold in states in which you have a "nexis" Nexis roughly means any direct conection with the state such as a sales outlet in that state, an employee located in that state, etc. That fact that you may make sales calls in a state in which you don't actually reside does not count as nexis. If you sell only through mail order you should be ok to not collect sales tax. And, of course, NH does not have a sales tax.

From : wayne abbott
Location : lagrange , ga

Question :
I have been interested in the concept of structured sales after I read an article by the AICPA. Where Can I get more information on weather this is a viable alternative when looking at installment sales. In the case of a stuctured sale you exchange the note from the buyer for an insurance contract. Do you think this will be challenged by the IRS?

Reply :
Do not know about this.

From : Lee
Location : , AL

Question :
I am a sole proprietor, I live in AL, Do I need to pay state income tax? if yes, How to pay? thank you

Reply :
As a sole proprietor you are taxed as an individual on the net proceeds [revenues less expenses] of your business. Alabama has an income tax. for more information, see http://www.ador.state.al.us/incometax/ITindex2.html

From : Debbie
Location : Seattle , WA

Question :
For a like kind exchnge transaction do you have to pay for the new property with proceeds from the former property or can you finance the new property if you choose?

Reply :
It sounds like you are referring to a multi-party nontaxable exchange. If a taxpayer wants to, or will only, exchange property for like-kind property, but the party who wants the property doesn't own the like-kind property, the taxpayer can still set up a nontaxable exchange if the other party acquires the like-kind property and then sets up the exchange. Time limits apply. The use of a "qualified intermediary" would be necessary. "Reverse exchanges" are also possible.

From : Lilian
Location : Homestead , FL

Question :
Is there a checklist for record retention?

Reply :
Guidelines for retaining tax recrods fro individuals can be found at http://www.irs.gov/individuals/article/0,,id=96820,00.html For small businesses, see http://www.irs.gov/businesses/small/article/0,,id=98575,00.html

From : Thomas Trimble
Location : Glenn Heights , Texas

Question :
Is there a way to offset property taxes on lease properties, that you own, also if you pay these taxes are they deductable on your federal income tax return.

Reply :
Property taxes are generally deductible but as I responded in a previous answer, losses generated by rental properties are generally deferred under the so called "passive loss" rules until there is a final disposition of the property. the bottom line is that if you own the property as an indivdual you report the real estate taxes on Schedule E attached to your return subject to the passive loss limitations referred to above.

From : Laura S.
Location : ,

Question :
I have an S-Corp in its second year. There has been enough cash such that I have taken some shareholder draws to provide income for living expenses. I have not yet put myself on the payroll (I am the only employee) and have not yet paid any SE taxes. Is there a time when I am required to do so?

Reply :
You are required to pay SE tax on self employment income as it is earned. Whether your S Corp income constitutes self employment income depends on many factors as to the character of that income. The underlying concept is whether the income is "earned" vs. income earned from capital. Perhaps more importantly the tax is due throughout the year like the timing of estimated income tax payments. Underpayments can lead to penalties when you file you 1040 for the year. Go to the IRS website and search for their publication on S Corporations and SE Tax. A visit to a tax professional may be helpful as well.

From : Theresa
Location : , WV

Question :
I own rental houses and apartments. I am a sole proprietor. Once I retire and start collecting Social Security, how will this income be considered? Does it affect the amount I am due to collect from SS?

Reply :
If you received income from other sources, your benefits will not be taxed unless your modified adjusted gross income is more than the base amount for your filing status. Your taxable benefits and modified adjusted gross income are figured in a worksheet in the Form 1040A or Form 1040 Instruction Booklet. Before you go to the instruction book, do the following quick computation to determine whether some of your benefits may be taxable: • First, add one–half of the total Social Security you received to all your other income, including any tax exempt interest and other exclusions from income. • Then, compare this total to the base amount for your filing status. The 2005 base amounts are: • $32,000 for married couples filing jointly • $25,000 for single, head of household, qualifying widow/widower with a dependent child or married individuals filing separately who did not live with their spouses at any time during the year • $0 for married persons filing separately who lived together during the year For additional information on the taxability of Social Security benefits see http://www.irs.gov/newsroom/article/0,,id=107537,00.html

From : Lynnette Taylor-Criego
Location : Pittsburgh , PA

Question :
I just started my business in the year 2006. I have not generated an income. How do I incorporate my start up cost on my taxes. I have a home based business and I am the only employee.

Reply :
You must distinguish between start-up costs and "197 intangibles" or organizational costs. Both are reported on Form 4562, Depreciation and Amortization at the time you file your tax return. Start-up costs must be deducted/amortized in the year the business begins.

From : Terri V. Boysaw
Location : Inglewood , California

Question :
I'd like to know if purchasing rental property by year's end would have any tax advantage for me?

Reply :
It could but this close to year end the benefit would be modest and you may not get any benefit at all. Generally, rental properties generate losses after considering all the deductions which include depreciation. The catach is that these deductions are typically limited under the so-call "passive loss" rules which defer the recognition of the losses until you make a final disposition of the property. there are many exceptions to this rule that are applicable under very specific circumstances that are not generally applicable.

From : Charles Leland
Location : Philomath , Oregon

Question :
Discuss the IRS recent position on their free e-filing program using software provided by vendors who sell preferal services and products to users

Reply :
The IRS has prohibited those venders from marketing refund anticipation loans (RALs) through this program. RALs often have extremely high effective interest rates associated with them (because of the combination of iterest charges and fees). Taxpayers often don't understand how much money they are paying for what amounts to be a couple-of-weeks loan. Be very, very careful with RALs.

From : GODWILL MOCK
Location : OMAHA , NE

Question :
How do i go about estimating my whole year IRS

Reply :
Start with the information on the IRS Website: http://www.irs.gov/businesses/small/article/0,,id=110413,00.html Going foreward, you can find instructions for estimating your 2007 taxes in the 2006 Form 1040 Instructions.

From : Laurel
Location : Tucson , Arizona

Question :
We need to invest cash to avoid taxes but want to make sure that we have cash on hand in case of business needs. What are the options out there?

Reply :
Invest in something that is more liquid so that you can take money out for business if you need it. Investments can provide income, security, and capital gains, and these are often tradeoffs, so if you want the security of being able to have cash in hand quickly and dependably, you may not get as high a rate of return. You need to see what tradeoffs work best for your situation.

From : Dennis
Location : , Kansas

Question :
Would $25,000 of salary of a wholly owned Sub S with a profit before the salary of $100,00 be reasonable to handle the affairs of the corporation and allow the balance of profits flow through to the stockholder owner?

Reply :
It is impossible to answer this question without more information. What does the S corp sell/make? Are there other fulltime/parttime employees doing some or much of the work of the business? Is the $25,000 representative of what you would be paid by an unrelated employer for handling the same types of responsibilities? Bottom line, your salary can't be arbitrary but must represent a fair market value salary based on the above-mentioned and other factors.

From : Lilian Urbandt FAU-SBDC
Location : Homestead , FL

Question :
When a FL company plans to do business in Texas, does the company need to register in Texas? (situs)

Reply :
Very likely but it really depends on the type of business. Each state has very different rules for registration and/or licensure. We suggest you contact the state and describe your particular situation.

From : Michael
Location : Greensburg , PA

Question :
I work for an SBA women's business center and was wondering if there is any place that I can an overview of "quick tips" of what businesses need to know for end of the year taxes?

Reply :
Type "year end tax tips" into your internet search engine and you will find a wealth of lists for both individuals and small businesses.

From : Alicia Malone
Location : Albany , NY

Question :
I am a freelance writer, considered to be a self contractor. I started working this way in August and ended up quitting the job in October. Then, in November, I started another job with the same status (freelance, self contractor). Because of the interruption in my work, I did not pay quarterly taxes because it was so close to the January date. Will I be penalized for this? I have the money set aside to pay on January 15th, but have not paid anything since August.

Reply :
If by January 15, 2007, you pay 100 percent of your 2005 tax liability, AND you have paid at least 25 percent of this total amount by each of the April 15, 2006, July 15, 2006, AND September 15, 2006, deadlines, you will not be assessed an underpayment penalty. For other exceptions to paying an underpayment penalty, ask your tax advisor. More information is available at http://www.irs.gov/businesses/small/article/0,,id=110413,00.html

From : Russ Koca
Location : Kansas City , Missouri

Question :
Happy Holidays Tom O'. Do you believe the basic planning strategy of tax deferral will be affected by Democratic control of both houses? Do you think that the Bush tax custs will be rolled back if the Dems take the White House? Any thoughts on future capital gains tax rates?

Reply :
Russ good to hear from you. My best guess, with the emphasis on the word "guess" is that the Democrats will not attempt to change rates in the near term. All bets are off after 2010 depending on what the budget deficit looks like. A possible "compormise" that is sometimes talked about is to continue to lower rates for the "middle class" but go back to 39.6% for the top rate on high income earners. Likkewise, depending on the circumstances after 2010 capital gains rates could bump back to 20% but need to consider that there is a whole new election cycle between now and then. Best of the holidays to you and your family!!

From : Kristy
Location : Berkeley , CA

Question :
At what point does it make sense to incorporate? Is there a *magic* number of what one should be netting in CA before it's a good idea? Self-employment taxes along with my husband's salary which kicks us into a higher tax bracket are rough - 52% (15% Self-employment tax, 9%CA state, and 28% Federal) of my net goes to Uncle Sam. Any advice would be much appreciated. Thank you.

Reply :
In general, incorporation (other than S corp) involves a second teir of taxation--one when the corporation earns income, and one when the owner receives a dividend. The corporation can deduct salaries to owners to reduce the corporate level tax, but if they pay all the earnings out then there's no difference between being incorporated and not. Dividends are not deductible by the corporation and would result in double taxation. You could incorporate and not pay salaries or dividends, and this might shelter the income temporarily from high individual income tax rates. The strategy would then be to sell the business later at capital gains rates. The issue may be more on what you need to take out of the corporation and when, more than your rates. If you are thinking of incorporating, talk with a professional--there are a lot of issues to consider.

From : K Wong
Location : ,

Question :
Would you recommend starting a defined benefit plan to reduce taxes?

Reply :
A defined benefit plan may be the most complicated and expensive way to create a retirement savings plan, although much more can be contributed to such a plan than with the more commonly used defined contribution plans like 401(k)s, SEPs and SIMPLES. I highly recommend consulting a retirement planning expert to help you make this decision. Please see the IRS Website for more informaiton on defined benefit plans: http://www.irs.gov/retirement/article/0,,id=108950,00.html

From : Sandra Davidson
Location : Nashville , TN

Question :
I work with an S-corp with two shareholders and a sizable profit. We are planning to issue executive bonuses to the two shareholders that will bring the net income in the neighborhood of $50,000. We are taking advantage of Sect 179 for planned purchases before 12/31/06. What other tips can you point me to check to maximize out deductions and optimize our tax stategy. Many thanks!

Reply :
Minimizing taxes among multiple taxpayers calls for overall tax planning The issuance of bonuses likely decreases S-Corp income, but simultaneously increases the shareholders' income. Consequently, in most situations this does not reduce overall taxes. If issued as wages, there are possible FICA type taxes while S-corp flowthrough income may or may not be subject to equivalent Self Employment tax. This could actually increase overall tax! Section 179 is an excellent way to reduce your taxes, but care must be exercised not to exceed flowthrough income and produce an unusable S Corp loss. Some S Corp losses may only be partially deductible while shareholder wage income is fully taxable. These scenarios should also include an evaluation of state income taxes and corporate level property taxes. In some states section 179 is not fully allowable, so what is advantageous for federal tax may not fully flow through to the state tax. The best way to minimize taxes is to get you tax professional to calculate the tax using the various planned scenarios.

From : anderson
Location : st louis , mo

Question :
what size business is required tp pay taxes

Reply :
Every size business is potentially subject to tax! If by size you mean "amount of income" (vs. assets), depending on the form in which the business is conducted may influence whether and how much tax you end up paying. For example, if operated as a sole proprietor tax would be calculated on your personal return but subject to the various limitations on income required for filing. Some business entities, like S Corporations, flow the business income to the shareholders personal return and thus are not usually subject to tax. The "choice of entity" is one of the most important decisions a business makes and should involve a tax professionals input if you predict the business will produce large amounts of income or loss.

From : Tony Zhou
Location : Union City , CA

Question :
How to reduce tax payment legally for small business owners?

Reply :
There are many ways to reduce taxes legally. The law allows for certain business purchases of assets to be fully deducted in the year of purchase (Code Section 179) for example. Additionally, retirement plans are an excellent way to reduce (defer) taxes until retirement age when your tax rate is likely lower than when the income was earned. Other employee benefits plans allow the business to take a tax deduction without inclusion in the employees income, for example medical plans. Small business owners can also avail themselves of operation as an S Corp if properly elected and appropriate to your circumstances. If your business qualifies to use the cash method of accounting, the business can plan their payments of expenses to defer tax. Their is no easy answer to reduce tax in all business circumstances, but a tax professional can be used to help with this evaluation and proper planning of your specific business affairs to minimize or reduce your taxes.

From : Martin Murphy
Location : lake Forest , ca

Question :
Is there a checklist that I can get to send to my clients for year end tax planning review

Reply :
4974 - Yes ! The AICPA has a member section called the Tax Division. Among other benefits, membership includes an annual package of practice guides and checklists. Included in that package are client organizers, preparation checklists, and just about every other guide and checklist you may need. The website is tax.aicpa.org.

From : Alicia Malone
Location : Albany , New Yyork

Question :
Is income averaging only applicable to personal finances or does it also apply to small businesses? and, If so, where can I get more information about it?

Reply :
Income averaging for individuals has largely been eliminated. However, farmers can avail themselves of farmer income averaging. You can get more information from the IRS website.

From : Judith Olson
Location : Two Harbors , MN

Question :
is the cost of leasing a building for my wholesale business tax-deductible? I am hoping to do retail sales in the same space eventually, and have the same question about that. thanks....

Reply :
Generally the answer is yes if the average annual gross receipts are $10mil or less. But this is a farily complex question if the gross receipts exceed this in which case where inventory is involved a portion of the lease payments are to be "capitlaized" into the cost of the inventory. This becomes even more complex where you have a retail sales faciltiy at the same location as the wholesale business. It would be prudent for you to consult a tax professional on this question.

From : Kimberly Burton
Location : Saginaw , MI

Question :
How should a new business working out of thier home file taxes?

Reply :
Please see the IRS Website for a wide variety of information for small businesses: http://www.irs.gov/businesses/small/index.html And the home office deduction: http://www.irs.gov/newsroom/article/0,,id=108138,00.html

From : Rose
Location : Pittsburgh , PA

Question :
Is there any guidance as to what your minimum investment should be in an S-Corporation to reduce the risk that the corporate veil will be pierced and the shareholders would be personally liable to creditors or litigants?

Reply :
This is a legal issue, not a tax issue, but I'll try to answer it but advise you to talk with your attorney. The amount to avoid exposure for the owners would depend on all the facts and circumstances. If your business is undercapitalized and doesn't have insurance in a way that exposes the public to risks, with no recourse but to the few assets of the corporation, a court might allow a plaintiff to peirce the corporate veil and go after the assets of the owners. In this, a court will consider the nature of the business, the risks involved, the level of capitalization, and other factors--there's no minimum investment that would apply to all companies. Talk with an attorney--if you're concerned, you may have an issue and want to be able to sleep at night!

From : Sylvia Antonino
Location : Hampstead , North Carolina

Question :
Interested in hearing about tax strategies and planning to minimize taxes owed.

Reply :
Hope you find some tips in the responses we're giving other participants. If you have a specific question we'll try to address your issue.

From : Mark
Location : South Bend , IN

Question :
If I work in a home office for my company, can I deduct the office space off my taxes?

Reply :
Note: If you are an employee, you have additional requirements to meet. The regular and exclusive business use must be for the convenience of your employer. See general information below. Expenses that you may be able to deduct for business use of the home may include the business portion of real estate taxes, mortgage interest, rent, utilities, insurance, depreciation, painting and repairs. You can claim this deduction for the business use of a part of your home only if you use that part of your home regularly and exclusively: • As your principal place of business for any trade or business • As a place to meet or deal with your patients, clients or customers in the normal course of your trade or business Generally, the amount you can deduct depends on the percentage of your home that you used for business. Your deduction will be limited if your gross income from your business is less than your total business expenses. For more information see IRS Publication 587, Business Use of Your Home, available at IRS.gov or by calling 1-800-TAX-FORM (1-800-829-3676). For more information on the home office deduction: http://www.irs.gov/newsroom/article/0,,id=108138,00.html

From : Bruce Hallett
Location : St. Augustine , Florida

Question :
My small business has several uncollectable invoices. What is the appropriate accounting method to account for these losses and is there any tax liability for uncollected monies? Thanks in advance.

Reply :
If you are on the cash method of accounting then you don't report the receivables until you collecte them. If you are on the accrual method of accounting then you may be able to use Revenue Procedure 2001-10 if your average annual gross receipts are less than $1mil then you can use the cash method and report inventories as mateirals and supplies. If you think you might qualify for this you should conlsult a tax professional.

From : Les edwards
Location : cincinnati , ohio

Question :
which retirement plan would be best for a small business Roth IRA or 401k ?

Reply :
The answer depends on the form of the business [sole proprietorship, S corporation, LLC, partnership] and whether or not the business has employees. If the business owner has no employees, you should consider a “Solo 401(k)” which allows you to contribute a substantially larger amount to a Solo 401(k) and the contributions are deductible. A traditional IRA can also be deducted pre-tax. Roth IRA contributions [limited to the lesser of $4,000 or earned income -- $5,000 for those over 50], however, are not deductible from taxable income but qualified withdrawals (after 5 years and reaching age 59 1/2) are not subject to income tax. There are many variables and regulations governing each of these retirement savings options. You should contact a competent retirement plan advisor for help in choosing and setting up a retirement savings plan. For more information, check out the IRS Website at: http://www.irs.gov/retirement/article/0,,id=108975,00.html

From : EDWARD KLEIN
Location : HUDSON VALLEY NUSINESS JOURNAL , NEW YORK

Question :
WILL THE RULE GOR SMALL PUBLIC COMAPNIES SUFFERING WITH THE HIGH EXPENSE OF SOX BE MODIFIED THIS YEAR.

Reply :
Not a tax question but SEC Chairman Cox announced yesterday that they were considering a scaled down version of SOX for smaller public companies.

From : Julia Zimmer
Location : Minneapolis ,

Question :
Are you in the chat right now? I don't see the chat going on.

Reply :
We're on now. Sorry for a few minutes delay--technology!

From : Kathryn Lampron
Location : Shoreham , Vermont

Question :
As a Lincoln Logs log home dealer, our home is our model. How do I calculate what percentage of my home is used for business and how can I depreciate my home as a business asset; what are the downsides of taking that depreciation.

Reply :
Expenses that you may be able to deduct for business use of the home may include the business portion of real estate taxes, mortgage interest, rent, utilities, insurance, depreciation, painting and repairs. You can claim this deduction for the business use of a part of your home only if you use that part of your home regularly and exclusively: • As your principal place of business for any trade or business • As a place to meet or deal with your patients, clients or customers in the normal course of your trade or business Generally, the amount you can deduct depends on the percentage of your home that you used for business. Your deduction will be limited if your gross income from your business is less than your total business expenses. For more information on the home office deduction: http://www.irs.gov/newsroom/article/0,,id=108138,00.html The downside of any depreciation deduction you take is that you lower your basis in your home when you sell it, thereby increasing the capital gain on the sale of the house. The amount of depreciation taken on the house will be subject to tax and not be protected by the capital gain exclusion from the sale of your principal residence. For more tax information on small businesses, see http://www.irs.gov/businesses/small/index.html

From : Pretty
Location : ,

Question :
I'm going to operate a small buiness (self employed), I need to pay federal income tax, SE tax. all right? Do i need to pay state income tax-AL ? Thank you.

Reply :
Generally you are correct. If you operate as a corporation the answer might be a bit diffrent. In that case you may only owe SE tax on your salary as an employee but that salary has to be reasonable. If you're providing services then most if not all your income will be suject to SE tax.

From : K Wong
Location : ,

Question :
Should a consultant making $200,000 switch from LLC to an S-corp to reduce self employment taxes?

Reply :
No. $200,000 of wages is $200,000 of wages no matter what form of entity the business is operating as. Assuming the consultant is the owner of the LLC and that $200,000 is a reasonable, market-valued wage, the entire amount would be subject to SE taxes: but only $94,200 (in 2006) would be subject to the social security component of the self-employment tax and the remainder would be subject only to the smaller medicare tax. If you "checked-the-box" on Form 8332 to incorporate the LLC and made an S election for 2007 (it is too late to make the S election for a calendar year 2006 entity) than the S corp would still have to report $200,000 on the consultant's form W-2 as wages, subject to FICA. Technically, switching from an LLC would simply change the SE liability to a FICA liability.

From : Gene Luccarelli
Location : Wyckoff , NJ

Question :
Can you describe the procedure for claiming the energy efficiency credits made to commercial buildings that was the result of the Energy Policy Tax Act of 2005? Thanks.

Reply :
Taxpayers may expense the cost of energy efficient commercial building property (EECBP) placed in service in calendar years 2006 and 2007. The deduction for any building for any tax year can't be more than the excess (if any) of (1) $1.80 X the square footage of the building over (2) the deductions allowed under this provision in an earlier year. EECBP is property that is (1) depreciable or amortizable, (2) installed on or in a building located in the US, and (3) certified as being installed as part of a plan that will meet a 50% energy use reduction test.

From : Robert Lewis
Location : Cathedral City , CA

Question :
I am a Small Business Owner, about to retire. My business is an insurance agency, from which I receive commissions from various insurance companies through which the insurance is placed. When I stop working, I will continue to receive 'renewal' commissions so long as the business stays in force. Is this still considered to be 'earned income' and reported as such ? If so, I will of course no longer have any business operating expenses to offset the apparent earned income - which will presumably lead to a large increase in my taxable income. Furthermore, if I opt for early Social Security, won't this 'earned income' negatively affect the amount I can receive ? Are there any solutions to the above dilemma, which seems to me somewhat unfair ?

Reply :
Your renewal commissions are income and are taxable, but they will not result in a reduction of your social security benefits if they are for work done before you retired. These are "special payments" in social security terms. However, if you continue working for the agency in some capacity, these may be considered current earnings and result in a reduction of social security benefits. Here's a reference that will answer your questions: http://www.socialsecurity.gov/pubs/10063.html .

From : George L. Faust
Location : Brookhaven , MS

Question :
My business is posting a $175,000 profit this year. I don't think that I sent in enough estimated taxes to counter the big tax payment due. What are some things that I can do before years end or tax time?

Reply :
Assuming that your business is a sole proprietorship, the entire profit [revenues less expenses and depreciation, if any] on your business will be subject to tax on your individual Form 1040 return. I am also assuming that you paid taxes on your business for the 2005 tax year. Your last estimated tax payment for 2006 is due January 15, 2007. If by January 15, 2007, you pay 110 percent of your 2005 tax liability, AND you have paid at least 25 percent of this total amount by each of the April 15, 2006, July 15, 2006, AND September 15, 2006 deadlines, you will not be assessed an underpayment penalty. For other exceptions to paying an underpayment penalty, ask your tax advisor. More information is available at http://www.irs.gov/businesses/small/article/0,,id=110413,00.html

From : U.S. Small Business Administration
Location : Washington , D.C.

Question :

Reply :
Welcome! On behalf of the AICPA, thank you for joining us on SBA's 2006 tax chat. Let's get started.

From : R WElsh
Location : madison , wi

Question :
I am a sole propriortor. Can I deduct my personal health insurance premiums. Does my insurance have to be in my companys name?

Reply :
Yes, as a sole proprietor filing Schedule C for your business, GENERALLY you may deduct 100% of your health insurance premiums as an "above-the-line" deduction on Form 1040, page 1. There are, however, two limitations: (1) You can only deduct them to the extent of your earned income and (2) you cannot deduct them if you or your spouse are ELIGIBLE (whether or not participating) in any employer's health plan. If you fall prey to either of the limitations above, you can only deduct the premiums as an itemized deduction on Schedule A subject to the 2 percent of AGI limit. The policy does not need to be in the name of the company if you are a sole proprietor.

From : Chris
Location : Phoenix , AZ

Question :
Any suggestions on reducing short-term capital gains on "quick flip" real estate sales?

Reply :
consider a "like-kind" exchange under code section 1031 rather than a "sale". Another alternative is to "harvest" capital losses you might have in your investment portfolio to offset the gain from the real estate.