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

 

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.