Looking ahead to the future while taking care of the past and present are a constant everchanging challenge for the business owner. Although there is no magic bullet, obtain the services of a quailifed professional CPA is your best option to ensure that you satisfy the myriad of steps, actions, forms, and procedures required of a business owner to stay compliant with all federal, state, and local laws.

How S Corporations are Taxed

There is no income tax paid by as S Corporation when the annual tax return is filed to the IRS. However, as a part of the corporate return which is prepared, a Form 1120S, there is an attached schedule which shows each owners respective ownership percentage and via a Form K-1 for which each shareholder should reflect on their personal return. K-1 profits, losses, and shareholder distributions are all required by tax law to be issued based upon the each shareholders ownership percentage. In order for losses to be deductible a shareholder has to have a positive tax basis which is a component of past profits, losses, and loans to and from the business. If a shareholder has no basis to cover losses reported on a K-1, they are by tax law considered to be “suspended losses” and can be rolled forward to future years when the shareholder has positive basis, which can be created by future years profits or the shareholder loaning money to the business.

An owner should report the K-1 profits which is based upon their share of the business and not the amount of their shareholder distributions. This is a common misnomer about S Corporations and often leads to confusion for the new business owner. To that end it is best to remember that you pay taxes on the profits when you make them and not when you take them. For example generally speaking if your business nets $100,000 and you are the sole owner, you will pay taxes on $100,0000 whether you take zero dollar of shareholder distributions, a $100,000 or any number in between. Thus if you were to have a $100,000 profit in any given year and take no distributions then you would be able, absent any other issues, to take shareholder distributions in subsequent years with no additional tax responsibility as these monies would have already been taxed.

Although most states recognize and reflect the same tax treatment for S Corporations as the IRS and charge a relatively insignificant net worth tax such as Georgia, there are many states which charge a franchise tax as well.

Penalty Abatement

There are a myriad of penalties which the IRS can use to encourage compliance ranging from information return penalties, non-filing, non-payment, estimated payment, and failure to deposit penalties. If you are assessed penalties for any reason you still have options. Both the IRS and states will work with you to address your outstanding taxes, interest, and penalties. One of the first defenses to explore is whether you have reasonable cause for your original failure to address you past returns and outstanding monies. If you are to be granted relief under these provisions you will need to be able to show that you have exercised ordinary business due diligence and care in calculating your tax obligations. You will need to be able to illustrate that obligations were generated when circumstances existed which were beyond your control contributed to the monies being owned and assessed.

Not being aware of a law is not a valid defense which can be successfully used when attempting to request penalty abatement as you are required to be prudent in addressing your obligations and responsibilities. Our tax system is one of voluntary compliance and tax penalties are the vehicle by which the IRS uses to ensure that you are financially motivated to file and pay your taxes as they become due. The IR S’s goal is to provide a consistent and fair methodology to assessing penalties to provide civil tax penalties to ensure ones tax obligations are satisfactorily addressed.

When evaluating penalty abatement issues the IRS will consider whether or not a penalty will cause a significant hardship such as a levy might impair a taxpayer’s ability to acquire needed medical care. As well a death, serious illness, or unavoidable absence may establish reasonable cause for considering penalty abatement. However items such as forgetfulness, ignorance of the law, and making a mistake are not generally allowed as reasonable cause in evaluating penalty abatement issues.

Please be reminded that the IRS will work with you to set up an installment agreement to pay outstanding monies as well as perhaps an Offer in Compromise if you qualify.

Please be sure to hurry and file your personal returns by October 15, 2007. Beyond that date you are unduly exposing yourself to unnecessary penalties due to not filing a return. Thus to avoid this additional expenditure I suggest you file your personal return as soon as possible. Though the IRS will  often work with those who are filing and paying their taxes even though they might need a payment/installment plan, the IRS takes a dim view for those who do not file; thus the additional penalty.

Please be reminded that a validly filed extension is not an extension to pay but solely an extension to file. Thus it is critical to also begin preparing for what your 2007 tax liability will be today so that you might avoid late penalties and accrued interest on these monies as well. Staying in touch and well connected with your CPA is the best path to ensuring that all of your tax filings and payments are timely. Staying the course and being consistent are often two of your best friends in keeping your tax obliations and liablilities current. By proper planning you can learn how to avoid unnecessary surprises at years end.

Georgia Withholding: To report your Georgia withholdings, Georgia will assign you to a reporting cycle; be sure to carefully review the reports they send as the due dates will be detailed on the forms.

Georgia Department of Labor: This is a DOL/quarterly report which is due thirty days after the close of the quarter where employers are required to pay for the SUTA/state unemployment taxes. Please note that initially when you business starts this rate is statutory and then it will adjust over time based upon your claims experience. Please be sure to look for this notice of your annual rate which Georgia sends at the first of each year.

For those operating in other states you will want to contact the varying local authorities to ensure that you are aware of local tax laws. Please be advised that certain cities also have payroll taxes which should be assessed against wages.

Payroll is perhaps the largest most complex and largest personal administrative exposure for the business owner. Accordingly I recommend all of my clients to utilize the services of a payroll service which will greatly streamline this administrative responsiblility.

Payroll Reporting Guidelines to the IRS

Payroll is the largest and most burdensome administrative responsibility for a business owner.  Whether you have one employee or a thousand, both the IRS and your state has a myriad of payroll reports and deadlines for which you are required to complete. Unfortunately there is not a one stop shop to pay and report all of the varying deadlines and taxes. However, there is a solution which makes the reporting of payroll dramatically more seamless than if you strive to go it on your own.

The easy part of preparing a payroll is the actual paycheck itself, but that is where the simplicity stops and the difficulty begins as there are a dramatic list of reports and varying deadlines to meet. To this end I have recapped below some of the reports and their significance.

Form 941 to the IRS: A quarterly report for payroll to report wages, federal withholding and FICA/Medicaid. These reports are due thirty days after the close of a quarter.

Form 940 to the IRS: A annual report for FUTA/Federal Unemployment. These taxes are paid based upon the first $7000 of an employees salary and is assessed at a rate of .007 up to a maximum of $56 per employee/per year.

Please note you should file all of the reports by their due date ( I suggest filing as soon as you receive especially if you know you will have no payroll ) as both the IRS and your state will assess a penalty for late filing. If you have no payroll you will still need to file these reports marking the reports zero in the amounts being sure to keep a file for your records.

Due to the complexity of payroll reports and payments I suggest that all business owners, regardless of the number of employees, that you retain a payroll service to prepare and maintain your paychecks, payroll reports, and to ensure continued compliance with local state and other ordinances relative to your payroll requirements. In this way you  will aptly delegate one of the more cumbersome aspects of your business to someone who handles payroll each and every day.

Navigating through this administrative nightmare is a critical hurdle that all business owners must overcome. By calling us today we can assist in making you aware of the myriad of the tax laws affecting your payroll responsibilities as well as to refer qualified payroll companies to assist in this important step in your long term success.

Should Your Business Take a Home Office Deduction?

For business owners who might run their business out of their home, tax law allows for you to deduct the prorated business use portion of the home which is being used exclusively for business. Thus, your dining room where you entertain guests will not qualify unless of course you take the dining room table out and put your office in there, using it solely for that purpose.

However, due to tax law allowing only to deduct the building and not the land, the building being depreciated over an extended time period, and that you are only able to deduct the business portion of the home, I find it generally not advantageous to take the deduction. Given the limitation of the deduction that tax law requires, I have generally found that the burden of the record-keeping for both the client and myself to be unduly burdensome for the limited amount of tax savings afforded.

I advise my clients not to take a home office deduction. In evaluating all potential deductions I try to keep my client’s pocketbook in mind as spending roughly the same amount in professional fees as the tax savings allowed seems not be a primary benefit of those I serve, the client.

When you are furnishing your office whether it be in space your business or yourself own (as long as the area is dedicated exclusively to your business) the expenditures are valid payments of the business. If you operate your business out of your home this will hold true as well, however you should be sure to only deduct the prorated business use portion of expenses such as utilities. I recommend that for these expenses the business owners pay the expenses personally and then turn in an expense report to obtain reimbursement for the business use portion.

Being an expert at running your business does not make you one at the responsibility of accounting for your business. By applying our decades of experience we are well suited to guide you to track the financial and operational affairs of your business.

Working with the IRS

IRS rules are set out to assist those who are attempting to comply and to encourage all of us, either willingly or not, to file and pay our just and fair taxes. Tax laws, though complicated to the lay person, are often confusing.  A CPA can help people navigate through the tax maze by making the complicated easier to understand. By seeking and following the advice of a trusted professional we are able to comply with tax law with the least amount of pain and aggravation. By not filing returns, not paying amounts owed when due, and attempting to tackle complex tax issues, we do not have the skill or wisdom to adequately address, many fall prey to our general inability to understand all of the nuances involved. A Good CPA can help address and solve tax issues.

Tax Problems

The best first issue is to review the reasons for the assessment. Many times during this process it is discovered that it is not a payment issue but the original returns filed need to be amended. After the determination of a just and fair tax, one can begin to adequately assess and make arrangements for the monies due. Great care should also be taken during this time to ensure that all payments and credits have been properly applied to the balance owed

Trust Fund Monies

In the event your business has employees or collects sales tax, the monies withheld from payroll and sales taxes collected are technically withheld “in trust.” As such they have legal exposure to both the company for payment, as well as those personally responsible parties who knew about and controlled such payments. A responsible party is generally defined as those who were most/responsible for payments that would well extend to check signers, accounts payable, officers, and financial staff. This assessment is for one personally who collected trust monies which they unduly did not remit to the appropriate taxing/legal authority. As these monies are withheld in trust, they do not belong to the company/business. Both the IRS and individual states take a very dim and stern view of all those who unduly use their money. A 100% penalty may be assessed to the responsible parties making them personally responsible for any collected and unpaid trust fund monies.

If a business is not able to pay its staff payroll taxes/remit collected sales taxes as due, it is a clear warning side that the business model is upside down. Though most times it would indicate that the margins of a business are not adequate to support the business’ present staffing levels and overhead, it could also be an indicator that the business is not properly leveraged/financed.

Installment Agreements

The IRS will work with taxpayers to pay the monies owed over time. This option requires the taxpayer to file a form requesting that a specified amount be paid monthly over time. The IRS then has to accept the plan prior to it becoming effective. Though this is a practical way to address a larger balance over time it does not stop the assessment of penalties and interest which will continue to accrue until all monies are paid in full. Thus, it is most advantageous to consider procuring the funds from other sources as these finance/carrying charges are usually much less than that of the Internal Revenue Service.

Failure to File Penalties

Failure to File Penalties are assessed in addition to normal penalties and interest for those who do not make their payment and filings on a timely basis. Please be reminded that an extension does not allow a taxpayer to pay at a later date, as income taxes are generally due and payable as they are earned. However, a situation is greatly exasperated when a taxpayer does not file their taxes on a timely basis. Thus it is financially most advantageous to file a return even if a taxpayer does not have the monies to pay a return as the monies become due.

Paying Your Taxes

Since World War II, the IRS has been a pay as you go system. Prior to that time, the IRS simply collected their monies at the end of the year when one’s annual tax return was filed. Many entities by virtue of their tax treatment as flow through entities do not pay any income taxes when the returns are filed but rather the income is communicated to the partners via a K-1 which is a part of the return. The entity’s partners are then responsible for reporting their portion of the earnings on their personal/appropriate returns. Thus there are many entities such as Partnerships, LLC’s, LLP’s, ans S Corporations for which no income taxes are due when these returns are filed.

C Corporations are responsible for paying their taxes as they go and they do not have the ability to pay all of their taxes at year end and still avoid assessed penalties and interest. Thus, it is critical to tax plan several times a year to determine the ultimate amount of year end liability due and to take appropriate measures to plan accordingly.

For S Corporations and individuals we suggest that you tax plan at least twice annually. At that time it is also advantageous to review a client’s internal finances and obtain their projections of profits for the rest of the year. By utilizing this information as well as by being aware of their personal return issues, itemizations, exemptions, etc. you are able to get an estimate of what your taxable income and your tax will be.

Both the IRS and states require you to pay as you go thus requiring you to pay enough in estimates for the taxes due on the profits/taxable income generated. However payroll withholding has the added incentive that by tax law is deemed to have been statutorily paid evenly throughout the year, making only the settlement of your year end taxes the IRS and state’s concern rather than every individual quarter.

Extensions

Extensions are a legal way of notifying the IRS that you plan to file your return after the original due date. Both C and S Corporate returns are due March 15th of each year or two and a half months after year end. Personal returns, Partnerships, LLC’s, and LLP’s are generally required to be a calendar year return and are due April 15th of each year or three and a half months after year end.

The IRS allows a six month extension for both Corporate and Personal Returns, however please note that this is solely an extension of time to file and not an extension of time to pay and any late payments will result in assessments from both the IRS and state for penalties and interest. Please be advised that the penalties are even worse if you do not file the extension or the original return by the due date. These incentives are simply in place to give you time to file and pay. The Corporation and Personal extensions are for six months and accordingly expire on September 15th and October 15th respectively. There are no valid extensions available after this date.

One of the most widely debated, contested, and misunderstood issues of tax law is how to handle the deduction of business vehicles for the business owner. Just recently the IRS announced that 2007 purchasers of qualified hybrid vehicles will be able to continue to claim the Alternative Motor Vehicle Credit. The proclamation came after the IRS completed its quarterly review of the number of hybrid vehicles sold. The amount of the credit available is based upon the type and year of the vehicle purchased so be sure to consult tax tables to be sure of a vehicles eligibility and the amount of the credit to be claimed. At purchase you should ensure that you obtain a copy/written acknowledgment of the vehicles certification credit from the dealer as the credit amounts vary based upon the quarter the vehicle was purchased as well as the amount of the vehicles sold.