Entities Subject to Franchise Tax
Each taxable entity formed in Texas or doing business in Texas must file and pay
franchise tax. These entities include:
- Corporations
- limited liability companies (LLCs), including series LLCs
- Banks
- State limited banking associations
- Savings and loan associations
- S corporations
- Professional corporations
- Partnerships (general, limited and limited liability)
- Trusts
- Professional associations
- Business associations
- Joint ventures
- Other legal entities
Entities Not Subject to Franchise Tax
The following entities do not file or pay franchise tax:
- Sole proprietorships (except for single member LLCs)
- General partnerships when direct ownership is composed entirely of natural persons (except for limited liability partnerships)
- Entities exempt under Tax Code Chapter 171, Subchapter B
- Certain unincorporated passive entities
- Certain grantor trusts, estates of natural persons and escrows
- Real estate mortgage investment conduits and certain qualified real estate investment trusts
- A nonprofit self-insurance trust created under Insurance Code Chapter 2212
- A trust qualified under Internal Revenue Code Section 401(a)
- A trust exempt under Internal Revenue Code Section 501(c)(9); or
- Unincorporated political committees
Who is a Minister for IRS purposes?
According to the IRS,
- Ministers are individuals who are duly ordained, commissioned, or licensed by a religious body constituting a church or church denomination.
- They are given the authority to conduct religious worship, perform sacerdotal functions, and administer ordinances or sacraments according to the tenets and practices of that church or denomination.
- Ministers perform services in the “control, conduct, or maintenance of a religious organization”, They have also been given authority to lead committees and church boards.
- Ministers are individuals who are considered a spiritual leader of their church or organization, and are considered to be a spiritual leader by the related religious body
Most services you perform as a minister, priest, rabbi, etc., are ministerial services. These services include:
- Performing sacerdotal functions,
- Conducting religious worship, and
- Controlling, conducting, and maintaining religious organizations (including the religious boards, societies, and other integral agencies of such organizations) that are under the authority of a religious body that is a church or denomination.
You are considered to control, conduct, and maintain a religious organization if you direct, manage, or promote the organization’s activities. A religious organization is under the authority of a religious body that is a church or denomination if it’s organized for and dedicated to carrying out the principles of a faith according to the requirements governing the creation of institutions of the faith.
Tax Treatment for Ministers
Ministers are not exempt from paying federal income taxes. Generally, ministers are required to file a federal income tax return if they have earnings of $400 or more to report their self-employment tax. Different rules apply to ministers who are exempt from self-employment taxes.
Ministers according to the tax code, are treated as self-employed for Social Security purposes but as employees for income tax purposes
Ministers should keep all receipts, canceled checks, and other evidence to prove amounts they claim as deductions, exclusions or credits. Documentation should be maintained for six years from the time they file their tax return. Deadline for filing the federal income tax return is usually April 15 of every year.
Three federal taxes are paid on wages and self-employment income—income tax, social security tax, and Medicare tax. Social security and Medicare taxes are collected under one of two systems. Under the Self-Employment Contributions Act (SECA), the self-employed person pays all the taxes. Under the Federal Insurance Contributions Act (FICA), the employee and the employer each pay half of the social security and Medicare taxes. No earnings are subject to both systems.
SECA = Self Employment Contributions Act – This is a tax assessed to self-employed people who don’t have an employer to pay part of that tax liability
FICA = Federal Insurance Contributions Act (Social Security and Medicare) – This is a tax imposed on employers (6.2% Social Security and 1.45% Medicare) and employees (6.2% Social Security and 1.45% Medicare) so the combined tax contribution is (15.30%)
Ministers are unique in the sense that they carry a dual tax treatment. They are considered employees for income tax purposes, and they are considered self-employed for social security.
Therefore, ministers must pay the full amount of social security tax (without the benefit of the amount being matched by the employing church) on all forms of compensation up to the annual social security wage base—unless the minister has met the strict qualifications and has formally opted out of social security)
If you are a minister and need help in preparing your taxes, please fill out the contact information below
How to withhold taxes from the minister
Must withhold Federal Income Tax since minister is an employee
Must not withhold Social Security Taxes since the minister is self-employed
Ministers should prepay their SS self-employment taxes using the estimated tax vouchers (Form 1040ES) unless they enter a voluntary withholding with the church with respect to federal income tax.
So instead of sending estimated taxes, the minister can request to have more Federal Income Tax withheld using the W-4 Form.
Example: a minister earns $1,500 bi-weekly. His Federal Tax Withholding should be around 10% of his gross salary. He then can add voluntary withholding of $15% for his self-employment tax, so his net paycheck is $1,125.00
The excess in federal income tax withheld is a credit that is applied against the minister’s self-employment tax liability.
At the end of the year, the minister should receive a W-2 from the church and not a 1099-NE.
If you are a minister and need help in preparing your taxes, please fill out the contact information below:
We will come to your location!
If you need help to properly organize your church, let us know! We will be happy to help.
Fill out eh form below to E-mail us.
Housing Allowance Tax Benefit
The minister’s housing exclusion provides one of the most significant tax benefits for those who qualify as “ministers of the gospel” under the tax law. This exclusion from income tax is available to ministers who own their own homes and to those who live in church-provided housing. These concepts apply to all “church” organizations that employ ministers, including ministries that may not be a traditional “steeple” church but meet the tax law qualifications to be recognized by the IRS as a church (examples include integral agencies of a church, conventions, or associations of churches). References to “church” or “churches” throughout this resource are intended to include all of these organizations employing ministers who may qualify for the minister’s housing exclusion
Housing Allowance was challenged in federal court as unconstitutional preference for religion. In 2019, a federal appeals court rejected the challenged and affirmed the constitutionality of the housing allowance.
The most important tax benefit available to ministers who own or rent their homes is the housing allowance exclusion. It is non-reportable income for federal tax purposes.
The minister’s housing exclusion is an exemption from federal income tax only—not social security tax. Under the U.S. social security tax framework, all ministers are considered self-employed (even though they are considered employees for income tax purposes). Therefore, ministers must pay the full amount of social security tax (without the benefit of the amount being matched by the employing church) on all forms of compensation up to the annual social security wage base—unless the minister has met the strict qualifications and has formally opted out of social security).
The IRS does not place a percentage limitation on how much of a minister’s compensation may be designated as a housing allowance by the employer. In a few instances, such as with bi-vocational ministers, 100% of cash compensation may be justified as a housing designation and exclusion. It is often best for the church to over-designate a minister’s housing allowance by a reasonable amount (e.g. 10% of anticipated costs), subject to the fair rental value limitation, to allow for unexpected housing expenses and increases in utility costs. However, the minister may only exclude the amounts actually paid within the year for housing-related expenses. In addition to these limits, the housing exclusion may only apply to one residence at a time.
Construction costs qualify as housing expenses. However, since the housing exclusion only applies to one home at a time, excluding construction costs expended while living in another home is problematic. It is inappropriate for a church to directly reimburse expenses related to minister-owned housing because the expenses are not the responsibility of the church. Instead, these expenses are eligible for inclusion under a cash housing allowance paid by the church
Housing Allowance if you Own or Pay Rent
Ministers who own or rent their home do not pay federal income taxes on the amount of their compensation that their employing church designates in advance as housing allowance to the extent that
- the allowance represents compensation for ministerial services,
- is used to pay housing expenses, and
- does not exceed the fair rental value of the home (furnished plus utilities)
The housing allowance amount designation must be part of the minister’s salary and be used exclusively for providing a home. It can cover the following costs:
- Rent
- Mortgage payments
- Real estate taxes
- Home Insurance
- Utilities such as electricity, water, pest control, security system
- Furniture
- Repairs and Maintenance
- Landscaping expenses
This allowance can be excluded on a minister’s tax return, but it should not exceed the fair rental value of the home, including furniture and utilities. If the amount does exceed the fair value, the extra portion is taxable.
Housing Allowance if the Church Provides a Parsonage
Ministers can exclude from their income a rental allowance or the fair rental value of a parsonage that is provided to them as pay for their services. This exemption applies only for income tax purposes. The exclusion does not apply to self-employment taxes.
For a payment to qualify for the income tax exclusion, the church must officially designate it as a housing or rental allowance before it is actually paid. A definite amount must be designated. The amount of the allowance cannot be determined at a later date.
If you receive a rental allowance, you can exclude it from your gross income if the amount is used to provide or rent a home, and it does not constitute excessive pay for your services or exceed the fair rental value of the home, including furnishings, plus the cost of utilities.
If the church provides a residence, you can exclude from gross income the fair rental value of the house, including utilities, furnished to you as part of your earnings. But just like a rental allowance, the exclusion cannot be more than the reasonable pay for your services. If you pay for the utilities, you can exclude any allowance designated for utility costs, up to your actual cost.
Example: Rev. Joan Carlton is a full-time minister. The church allows her to use a parsonage that has an annual fair rental value of $24,000. The church pays her an annual salary of $60,000, of which $7,500 is designated for utility costs. Her actual utility costs during the year were $7,000. For income tax purposes, Rev. Carlton excludes $31,000 from gross income ($24,000 fair rental value of the house plus $7,000 from the allowance for utility costs).
She will report on her 1040 as income $53,000 ($52,500 net salary plus the $500 of unused utility allowance). However, her income for self-employment tax purposes is $84,000 ($60,000 gross salary plus the $24,000 fair rental value of the home).
How to designate the Housing Allowance
Housing allowances require action by the church. A cash housing allowance is only excludable under the following rules:
- The allowance must be officially designated by the church. The designation should be stated in writing, preferably by resolution of the board (or a committee of the board) in an employment contract. If the only reference to the housing allowance is in the church budget, the budget should be formally approved by the board.
- Tax law does not specifically say that an oral designation of the housing allowance is unacceptable. Still, the use of a written designation is highly recommended. The lack of a written designation significantly weakens the defense for the housing exclusion upon audit.
- The housing allowance must be designated prospectively (in advance) by the church. Cash housing allowance payments made prior to a designation of the housing allowance are fully taxable for income tax purposes. Carefully word the resolution so that it will remain in effect until a subsequent resolution is adopted.
- Only actual expenses can be excluded from income. The source of funds used to pay for a minister’s housing expenses must be compensation earned by the minister in the exercise of ministry in the current year.
- Only an annual (not month-by-month or paycheck-by-paycheck) comparison by a minister of housing expenses to the housing allowance is required. Example: A church designates a housing allowance in December, effective for the following year, of $30,000 for a minister. The comparison of the $30,000 allowance with actual housing expenses is only required at the end of the year by the minister
If you need help in preparing the housing exclusion document that must be prepared by the minister or the Housing Allowance Declaration Applicable to Minister-Provided Housing prepared by the Church, please send us a message with your contact information below and we will be happy to assist you and your church.
We will come to your location!
If you need help to properly organize your church, let us know! We will be happy to help.
Fill out eh form below to E-mail us.
Adopt and follow an accountable expense reimbursement plan
Many ministers personally spend hundreds or thousands of dollars each year on churchrelated business expenses. For example, a minister might pay for gas while traveling on church business, registration fees for a ministry-related conference, or pick up supplies on the way to a church dinner.
An accountable expense reimbursement plan, in which expenses with appropriate substantiation are fully reimbursed to the minister by the church, is the best form of stewardship.
To qualify for reimbursement, an expense must be both ordinary and necessary. An “ordinary” expense is one that is common and accepted in someone’s profession, while a “necessary” expense is one that is helpful and appropriate in the context of a person’s work. So, while a minister could certainly be reimbursed for the cost of ordering books on theology to research a sermon, he or she would not, for instance, be entitled to reimbursement for buying a detective novel to read on a plane.
Because reimbursements are essentially the church paying money owed to the minister, they should not be considered part of a minister’s taxable salary. Rather, reimbursements are part of a church’s operating expenses, which in this case were initially paid by the minister. When a church lists reimbursements as part of a minister’s compensation package, it gives a distorted picture of what the minister is actually receiving in return for his or her work.
By the same token, it is important that a congregation NOT treat expenses that are really part of a minister’s compensation as church-related expenses. For instance, while a church could reimburse a minister’s restaurant bill from leading a breakfast Bible study group, meal expense would not be reimbursable if the minister were simply getting something to eat on a lunch break or having a purely social meal with members of the congregation.
Even if the church reimburses a minister for a personal expense, that does not suddenly make it a “business expense” in the eyes of the IRS. Business expenses are business expenses whether or not they are reimbursed, while personal expenses are always nondeductible and non-reimbursable. If a personal expense is inadvertently reimbursed by the church, then the minister should immediately refund the money. Otherwise, the church should include the amount of the reimbursement in the minister’s taxable wages on Form W-2.
In the end, there are only two valid ways to deal with ministry-related expenses. The first is for the minister to try to take a federal income tax deduction for unreimbursed expenses 8 Essentials of Compensating Ministers 9 from personal income at tax time. The second is for the minister to provide the church with an accounting of the expenses and for the church to reimburse the minister. Reimbursement is almost always the better option in terms of saving on taxes.
For reimbursements to be excluded from taxes, the minister must provide a detailed accounting. As far as the IRS is concerned, reimbursements paid without proper accounting are simply additional taxable income. To avoid taxes on expense reimbursements, the IRS requires three basic elements:
(1) a business purpose for the expenses,
(2) substantiation of expenses such as a receipt, and
(3) the five W’s noted on the back of the credit card slip or other receipt:
– Why (noting the business purpose),
– What (description, including itemized accounting of cost – which is standard on most receipts),
– When (date),
– Where (location), and
– Who (names of those for whom the expense was incurred).
Failure to keep adequate records of expenses can be problematic should the church or minister ever find themselves audited. Whatever the specifics of the church’s policy, providing ministers with full reimbursement for all reasonable ministry-related expenses should be the goal. Anything less is poor stewardship on the part of the church. Establishing an accountable reimbursement plan is the best option.
We will come to your location!
If you need help to properly organize your church, let us know! We will be happy to help.
Fill out eh form below to E-mail us.
Small Business Tax Return Preparation
The legal structure of a business determines the tax status and the liability of the owners. According to the Internal Revenue Service (IRS) sole proprietorship, partnership, corporation, and S corporation are the most common forms of business ownership
Business structures offer certain benefits and require certain responsibilities, depending on which structure you choose. Accountegrity Tax will be able to guide you in the right direction, as well as create the legal documents required to form whatever structure you choose.
As a business owner, it’s important to understand your federal, state, and local tax requirements. This will help you file your taxes accurately and make payments on time. The business structure you choose when starting a business will determine what taxes you’ll pay and how you pay them.
Employer Identification Number (EIN)
Most businesses need an Employer Identification Number (EIN). Your EIN is your federal tax ID number. You should get one right after you register your new business.
Find out from the IRS if you need an EIN, how to get one, what to do if you’ve lost or misplaced yours, and more.
Income Tax
Most businesses must file and pay federal taxes on any income earned or received during the year. Partnerships, however, file an annual information return but don’t pay income taxes. Instead, each partner reports their share of the partnership’s profits or loss on their individual tax return.
Almost every state imposes a business or corporate income tax. However, each state and locality has its own tax laws. Find out the business income tax requirements in your state or territory.
Self-Employment Tax
If you have your own business, you must pay Social Security and Medicare taxes. Otherwise, you won’t be covered under the Social Security system. Questions? Contact us and we can help learn about who must pay self-employment tax and how to pay it.
Employment Taxes
If you have employees, there are federal tax requirements for what you must pay and the forms you have to file.These employment taxes include:
Social Security and Medicare taxes
Federal income tax withholding
Federal unemployment (FUTA) tax
FUTA ensures that people can receive unemployment benefits after losing a job.
Businesses in all states pay state workers’ compensation insurance and unemployment insurance taxes.
Excise Tax
The federal government taxes businesses that manufacture or sell certain products. If your business uses various types of equipment, facilities, or other products, you may need to pay an excise tax. Learn about federal excise tax requirements and the forms you must file.
Property Tax
Each state has a different definition of what property is taxable. Some states collect property tax from businesses in commercial real estate locations. Others collect property tax for vehicles, computer equipment, and other business assets. The amount of tax you pay is calculated by the total value of the property or on a certain percentage of the value.
Sales and Use Tax
States may tax the sale of goods and services. Check whether your business has to register to pay and/or collect sales tax in your state. Exclusions in sales tax often include food, clothing, medicine, newspapers, and utilities.
States may also tax your business on the use of goods and services when sales tax has not been collected. This typically applies to goods and services purchased outside of the state where you conduct business.
Estimated Tax
You must pay federal tax on income that is not subject to withholding. Or, if the amount of your federal income tax being withheld is not enough to cover the taxes you owe, you must pay an estimated tax. We can help you find out if your business has to pay estimated taxes and the steps to follow.
Estimated Taxes
Estimated tax is the method used to pay taxes on income that is not subject to withholding. This includes income from self-employment, interest, and dividends. You may also have to pay estimated tax if the amount of income tax being withheld from your salary, pension, or other income is not enough.
Who Has to Pay Estimated Taxes?
Individuals who run their own business typically have to make estimated tax payments. If you don’t pay enough income tax through withholding or estimated taxes, you may be charged a penalty.
We can help find out if you have to make estimated tax payments and how to pay.
When Are Estimated Taxes Due?
The year is divided into four periods to pay estimated tax. Each period has a specific payment deadline.
These are the Estimated Federal Tax due dates in 2021:
April 15
(Even though the tax filing deadline has been extended to May 17, 2021, estimated taxes are still due on April 15.)
June 15
Sept. 15
Jan. 15 of the next year
Tax Planning for Small Businesses
Planning is the key to successfully and legally reducing your tax liability. We go beyond tax compliance and proactively recommend tax saving strategies to maximize your after-tax income.
We make it a priority to enhance our mastery of the current tax law, complex tax code, and new tax regulations by attending frequent tax seminars.
Businesses and individuals pay the lowest amount of taxes allowable by law because we continually look for ways to minimize your taxes throughout the year, not just at the end of the year.
We recommend Tax Saving Strategies that help you…
grow and preserve assets by keeping Uncle Sam out of your pockets.
defer income so you can keep your money now and pay less taxes later.
reduce taxes on your income so you keep more of what you make.
reduce taxes on your estate so your family keeps more of what you’ve made.
reduce taxes on your gifts so you can give more.
reduce taxes on your investments so you can grow your wealth faster.
reduce taxes on your retirement distributions so you can retire in style.
Tax planning and preparation should never be just a once-a-year activity. Maximize the financial resources available to your business as it grows. Accountegrity Tax can guide you to reduce the tax you pay.
- Sole Proprietorships: The simplest structure, where one person runs their business, which has not been incorporated in any manner under state laws. You can file the business taxes when you do your personal income taxes. However, you are fully liable for the actions of your business – even your personal assets. That is because this structure is not considered to be a separate entity from that of its owner. This does not require a state filing fee to form – so it’s inexpensive.
- General Partnerships: when two or more persons join forces to form a business they have formed a partnership. Generally, there is an agreement called a partnership agreement used to define each partner’s role in the business and their investment. General partnerships are not required to have any formal business filings; these can occur when two people have an agreement to work together. General partners assume liability for the business. These kinds of partnerships are easier to form than limited ones. Partnerships also do not require a state filing fee.
- Limited Partnerships: when there are two business partners (known as “general partners”), they normally seek to get other partners (called “limited partners”) to join them in a business venture. The general partners accept all liability; limited partners have no liability outside of their investments (unless they otherwise agree) and minimal, if any, management rights. Limited partners simply provide much of the cash. These partnerships are more costly to set up and are often used for projects that are considered “one-time” projects.For all kinds of partnerships, there is no tax on its income. Rather, profits or losses are ‘passed through’ to the individual partners.
- Corporations: These structures are separate entities, which makes the formation more complex. When something of value, money or property is exchanged for stock in a company, a corporation exists. This enables corporation to raise its own money, which can be appealing for entrepreneurs. Corporations also must file specific legal documents with state agencies. Many entrepreneurs like corporations due to the liability protection – only the assets of the corporation are at risk, and not personal income or assets. There’s always a price for such benefits: owners of corporations are taxed double on any business earnings: the corporations is subject to state and federal income taxes, and earning distributed to shareholders (via dividends) are also taxed at individual tax rates on their personal returns.
- S Corporations: These structures are the best of both worlds – a more favorable tax rate and the benefit of liability protection. In S Corporations, all income and losses get ‘passed through’ to shareholders, who then include it on their individual tax returns (only getting taxed once at the federal level). This allows shareholders to report income and losses on personal tax returns and pay tax only at their personal tax rates. However, there is a lot of paperwork with these kinds of businesses, which can mean higher overhead costs.
- Limited Liability Company (LLC): These structures are hybrids, combining some of the best features of a partnership with a corporation. Each state governs LLC’s, meaning each company considering an LLC must verify their state rules on formation. LLC’s enjoy the same kind of liability protection as corporations, and do so without the double taxation. Ownership is not restricted; there may be unlimited number of shareholders including corporations and foreign companies or persons (S corporations are limited to 100 shareholders). These members also get to fully participate in the operations of the business. There are fewer operational rules that LLC’s have to comply with, too – at least as compared with corporations. Most states prohibit insurance companies and banks from forming LLCs.
- Limited Liability Partnerships: General partners have limited liability; therefore, each partner is liable for his or her own malpractice, and not their partners. These kinds of structures are usually found with doctors and lawyers, or other professional practices.
- Non-Profit Corporation: companies formed for the sole purpose of soliciting donations to further charitable, educational, literary, religious, or scientific goals. In most cases, non-profit corporations are exempt from both state and federal taxes and the members of the board govern the entity and determine how to collect and distribute donations based on their charter. Because it benefits the public, it gets special treatment under the law. However, they are also restricted by the IRS in some of their activities (such as not being able to contribute to or intervene in political campaigns).
- Cooperatives, or Co-Ops: These businesses are owned by and operated for the benefit of the people using its services. Profits that are earned are distributed between the members. They do not work very well for many type of business, but often, agricultural businesses, arts and some restaurants use this type of formation. In effect, everyone contributes to the success and everyone shares in the profits (and losses). Some states have stringent guidelines regarding cooperative business structures.
Choosing Your Business Structure
Before determining which business structure works best with you it is important to evaluate your overall goals for your business. Several factors, including income projections, the need to hire employees and the need to protect personal assets should be considered before determining what type of business structure you should use for your business. Additional factors to consider include:
- Long term income goals
- Long term goals for securing financing
- Likelihood of failure (protecting your personal assets)
- Current/Future employee count (tax benefits)
- Business Assets
- Tax filing status
Some other things to think about are the complexity and cost of forming the business structure, or if your business is inherently risk (like construction), you might want a more protective business. It will all depend on the type of business you want to have, as well as the industry you are in.
Legal Structure of a Business
The legal structure of a business determines the tax status and the liability of the owners. According to the Internal Revenue Service (IRS) sole proprietorship, partnership, corporation, and S corporation are the most common forms of business ownership.
Business structures offer certain benefits and require certain responsibilities, depending on which structure you choose. Accountegrity Tax will be able to guide you in the right direction, as well as create the legal documents required to form whatever structure you choose.
Most businesses start as a Sole Proprietor and their main focus is to generate sales and your business is going to get exposed to liability
A Limited Liability Company (LLC) is a legal structure for operations and for asset protection.
An LLC is a business created by a statute and governed by the laws of its operating state. The business structure uses pass-through taxation of a sole proprietorship or a partnership combined with the limited liability of a corporation. This is an ideal situation for most business owners.
Each state has its own rules regarding LLCs, but the legal structure is similar. The owner of an LLC is a member, and LLCs can have one member or multiple members.
Forming an LLC provides the ability to keep your personal and business assets separate, results in a much lower amount of paperwork than a traditional corporation, and has the additional flexibility in tailoring your company to your situation.
Some LLCs are designed for professional services (PLLC), such as doctors or lawyers, while others are used to take advantage of interstate commerce laws. Smart business owners often use LLCs over corporations to benefit from the personal liability protection without dealing with red tape, paperwork, or formalities that can be difficult for a small business, young business, or sole entrepreneur.
If you are the only person listed in the LLC, you are considered a single-member LLC and will file Schedule C
If there are two people listed as members or managers in the LLC, that is considered a partnership
The LLC is formed with the State of your residency. An LLC can be taxed as a Sole Proprietor, a Partnership or an S-Corporation
Your business cannot be taxed as an LLC, it can only be taxed as a Sole Proprietor, Partnership or S-Corporation by the IRS
Benefits of moving your LLC to an S-Corp: When the profits of your business (income less expenses) reach around $50K in a year, it is advisable to elect to be treated as an S-Corporation because the S-Corporation can save you thousands of dollars in self-employment tax. This means that you business can start processing payroll for 2 or 3 employees, and the owner can also get a W-2 with a reasonable salary and also pay yourself distributions
When not to switch to an S-Corp: a) when you are starting your business, your focus is to produce income and generate sales; b) when you are participating with passive income activities such as rental income, since you do not pay self-employment taxes when you have passive income.
When you form a business, you are making two decisions: a) you are making a legal decision, and b) you are making a tax decision.
Legal Entity Tax type
Sole Proprietor is taxed by default as Schedule C attached to Form 1040
Single Member LLC is taxed by default as Schedule C attached to Form 1040
Multi Member LLC is taxed by default as Schedule K-1 (Form 1065) attached to Form 1040
C-Corporation is taxed by default as C Corporation Form 1120
Single Member LLC, Multi Member LLC and C Corporations can elect tax treatment as an S Corp by filing form 2553 and at the end of the year will file the 1120-S
C Corporations are subject to double taxation: which means that the profits from the corporation are going to pay tax when they file form 1120 and then the shareholders, the owners of a C Corporation, will pay taxes when they receive distributions from the C Corporation or the Professional Association
Many small businesses are organized as limited liability companies. Compared to corporations, LLCs have more management flexibility and fewer legal requirements.
The default LLC tax system is simple, too. LLCs with one owner are taxed like sole proprietorships, and multi-owner LLCs are taxed like partnerships. The LLC’s owners,
known as members, pay self-employment taxes and report business income and expenses on their personal tax returns.
An LLC can also elect to be taxed as an S corporation, even if it only has one owner.
Electing S corp. taxation doesn’t convert your business structure from an LLC to a corporation. It simply changes the way you file and pay taxes and handle owner income.
Switching to an S corp. may make sense if the financial benefits outweigh the administrative hassles.
A major reason for choosing S corp. taxation is to save money on self-employment taxes.
If an LLC is taxed like a sole proprietorship or partnership, owners are self-employed, and they pay Social Security and Medicare taxes on all business profits, up to federal limits.
If an LLC is taxed as an S corp., the owners can be company employees. They must pay themselves a reasonable salary for the kind of work they do. They’ll pay Medicare and Social Security taxes on that salary, but not on any additional company profits.
Owners of an S corp. may be able to put more money in tax-deferred retirement accounts than they could otherwise. But switching to an S corp. can also mean additional paperwork and expense, especially if you don’t already have other employees.
You’ll need to run payroll, you may have to enroll in state workers’compensation and
unemployment programs, and you may have additional tax forms to file.
Can I Change My Business From LLC to S Corp.?
An LLC can’t elect S corp. taxation unless it meets IRS requirements for S corp. ownership and organization. Under IRS regulations, an S corp. must:
Be a U.S. business
Have no more than 100 shareholders (owners). Shareholders can be individuals
and certain trusts and estates. Shareholders can’t be corporations, partnerships, or non-resident aliens
Have only one class of stock
An LLC that doesn’t meet these requirements can’t convert from LLC to S corp.
How to Change from LLC to S Corp.
To make an LLC to S corp. election with the IRS, you need to file form 2553 Election by a Small Business Corporation.
The form must be signed by shareholders and an officer of the company. If you want your election to be effective for the entire tax year, it should be filed:
By March 15 of the year you want the election to take effect.
Any time during the prior tax year.
Newly formed LLCs can file an election for the LLC to be taxed as an S corp. within two months and 15 days of the date the business begins its first tax year.
In some situations, a company can take advantage of S corp. taxation despite filing the form late. A tax professional can advise you on timing, how to convert an LLC to an S corp., and how to prepare and file LLC as S corp. taxes.
Whether you’re setting up a new LLC or you’ve been in business for a while, it’s worth considering whether a multi-member or single-member LLC to S corp. conversion will save you money. It can be a complicated equation, so it’s a good idea to run the numbers and get legal and financial advice before you decide.
Bank Reconciliation
Reconciling your business checking account each month allow us to keep your bank account, accounting, and taxes up-
to-date.
Having us reconcile your account each month allows you to…
- Identify lost checks, lost deposits and unauthorized wire transactions.
- Detect and prevent excess/unjustified bank charges and ensures transactions are posted correctly by your bank.
- Detect and prevent embezzlement of funds from within your company.
- Know how your business is doing? You can’t really know unless all accounts are reconciled and properly
accounted for on your financial statement. - Manage your cash more effectively. Proper management of funds not only saves money, it makes money for
you. - Protect yourself. By timely reconciling and promptly objecting to your bank about any unauthorized, fraudulent
or forged checks presented to your bank and paid by that bank, you can relieve your agency of responsibility for the shortfall and transfer the risk to the bank. This reason to reconcile alone should be enough. Crime exists. - Sleep Better. You will sleep more peacefully at night knowing your bank accounts are reconciled, in balance and that all escrow funds, accounts, checks and disbursed funds are properly accounted for.
Income Statement
An income statement, otherwise known as a profit and loss statement, basically adds an itemized list of all your revenues and subtracts an itemized list of all your expenses to come up with a profit or loss for the period.
An income statement allows you to…
- Track revenues and expenses so that you can determine the operating performance of your business.
- Determine what areas of your business are over-budget or under-budget.
- Identify specific items that are causing unexpected expenditures. Like phone, fax, mail, or supply expenses.
- Track dramatic increases in product returns or cost of goods sold as a percentage of sales.
- Determine your income tax liability.
Balance Sheet
A balance sheet gives you a snapshot of your business’ financial condition at a specific moment in time.
A balance sheet helps you…
- Quickly get a handle on the financial strength and capabilities of your business.
- Identify and analyze trends, particularly in the area of receivables and payables. For example, if your receivables
cycle is lengthening, maybe you can collect your receivables more aggressively. - Determine if your business is in a position to expand.
- Determine if your business can easily handle the normal financial ebbs and flows of revenues and expenses?
- Determine if you need to take immediate steps to bolster cash reserves?
- Determine if your business has been slowing down payables to forestall an inevitable cash shortage?
Balance sheets, along with income statements, are the most basic elements in providing financial reporting to potential lenders such as banks, investors, and vendors who are considering how much credit to grant you.
Preparing your own income tax return can be a challenging task that can leave you with more questions than answers.
Unless you are very well versed on IRS tax law, you can prepare your own taxes, but most people are not very familiar with all the current changes in tax law.
Even if you use a tax software, there is no substitute for the assistance of an experienced tax professional.
There is too much at stake when preparing your individual tax return. It could mean several thousands of dollars in savings!
It could mean you having to pay to the IRS a huge tax bill or not being able to maximize your income tax refund for not using all the available credits and deductions.
Another risk is being audited by the IRS for not using the correct form, claiming the wrong credits and deductions, or not providing enough evidence to substantiate income and expenses.
According to a study released by the US Government’s General Accounting Office last year, most taxpayers believe they benefited from using a professional tax preparer.
When we prepare your personal income tax, we make sure that you do not leave credits and deductions unclaimed, that we cover all of your personal situations, such as dependents, investments, retirement, education credits, etcetera, and all your itemized deductions.
When you choose our services:
– You will get an experienced tax preparer that has passed the Annual Season Filing Program with the IRS, which gives our firm the IRS approval to prepare taxes.
– Your tax return will be checked and rechecked by our computer software identifying potential problems the IRS may look at more closely.
– Your tax return will be filed electronically so you will get a refund back quicker.
– We will show you how to adjust your payroll federal tax withholding so you can get a bigger refund.
– Our firm will guide you through potential deductions to limit your tax liability or to maximize your refund.
Our firm can assist you whether you need to file a current year tax return or prior year return.
When it’s tax season, it can be extremely beneficial to have a professional tax preparer on your side.
Accountegrity Tax can help you with deductions and credits to ensure you receive the largest refund. We have vast knowledge of the forms, schedules, and rules to maximize your potential tax savings.