Tax

Be Prepared When Natural Disasters Strike

While September and October are prime time for Atlantic hurricanes, natural disasters of any kind can strike at any time. As such, it’s a good idea for taxpayers to think about – and plan ahead for – what they can do to be prepared.

Here are four tips to help taxpayers be prepared:

1. Update emergency plans. Because a disaster can strike any time, taxpayers should review emergency plans annually. Personal and business situations change over time, as do preparedness needs. When employers hire new employees or when a company or organization changes functions, they should update plans accordingly. They should also tell employees about the changes. Individuals and businesses should make plans ahead of time and be sure to practice them.

2. Create electronic copies of key documents. Taxpayers should keep a duplicate set of key documents in a safe place, such as in a waterproof container and away from the original set. Key documents include bank statements, tax returns, identification documents, and insurance policies.

Doing so is easier now that many financial institutions provide statements and documents electronically, and financial information is available on the Internet. Even if the original documents are provided only on paper, these can be scanned into a computer. This way, the taxpayer can download them to a storage device like an external hard drive or USB flash drive.

3. Document valuables and equipment. It’s a good idea for a taxpayer to photograph or videotape the contents of their home, especially items of higher value. Documenting these items ahead of time will make it easier to claim any available insurance and tax benefits after the disaster strikes.

4. Payroll service providers should check fiduciary bonds.Employers who use payroll service providers should ask the provider if it has a fiduciary bond in place. The bond could protect the employer in the event of default by the payroll service provider. The IRS also encourages employers to create an EFTPS.gov account where they can monitor their payroll tax deposits and sign up for email alerts.

• By Leon Clinton
• October 20, 2019

File 2018 Tax Returns by Oct. 15 Extension Deadline

Time is running short for taxpayers who requested an extra six months to file their 2019 tax return. As a reminder, Tuesday, October 15, 2019, is the extension deadline for most taxpayers. For taxpayers who have not yet filed, here are a few tips to keep in mind about the extension deadline and taxes:

1. Taxpayers can still e-file returns. Filing electronically is the easiest, safest and most accurate way to file taxes.

2. For taxpayers owed a refund, the fastest way to get it is to combine direct deposit and e-file.

3. Taxpayers who owe taxes should consider using IRS Direct Pay, a simple, quick and free way to pay from a checking or savings account using a computer or mobile device. There are also other online payment options. Please call the office if you need details about other payment options.

4. Members of the military and those serving in a combat zone generally get more time to file. Military members typically have until at least 180 days after leaving a combat zone to both file returns and pay any tax due.

5. Taxpayers should always keep a copy of tax returns for their records. Keeping copies of tax returns can help taxpayers prepare future tax returns or assist with amending a prior year’s return.

• By Leon Clinton
• October 17, 2019

Tax Advantages of S-Corporations

As a small business owner, figuring out which form of business structure to use when you started was one of the most important decisions you had to make; however, it’s always a good idea to periodically revisit that decision as your business grows. For example, as a sole proprietor, you must pay a self-employment tax rate of 15.3% in addition to your individual tax rate; however, if you were to revise your business structure to become a corporation and elect S-Corporation status you could take advantage of a lower tax rate.

What is an S-Corporation?

An S-Corporation (or S-Corp) is a regular corporation whose owners elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax (and sometimes state) purposes. That is, an S-corporation is a corporation or a limited liability company that’s made a Subchapter S election (so named after a chapter of the tax code). Rather than a business entity per se, it is a type of tax classification. Shareholders then report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates, which allows S-corporations to avoid double taxation on corporate income. S-corporations are, however, responsible for tax on certain built-in gains and passive income at the entity level.

To qualify for S-corporation status, the corporation must submit a Form 2553, Election by a Small Business Corporation to the IRS, signed by all the shareholders, and meet the following requirements:

• Be a domestic corporation
• Have only allowable shareholders. Shareholders may be individuals, certain trusts, and estates but may not be partnerships, corporations or non-resident alien shareholders.
• Have no more than 100 shareholders
• Have only one class of stock
• Not be an ineligible corporation (i.e. certain financial institutions, insurance companies, and domestic international sales corporations).

What are the Tax Advantages of an S-Corp?

Personal Income and Employment Tax Savings

S-corporation owners can choose to receive both a salary and dividend payments from the corporation (i.e., distributions from earnings and profits that pass through the corporation to you as an owner, not as an employee in compensation for your services). Dividends are taxed at a lower rate than self-employment income, which lowers taxable income. S-corp owners also save on Social Security and Medicare taxes because their salary is less than it would be if they were operating a sole proprietorship, for instance.

The split between salary and dividends must be “reasonable” in the eyes of the IRS, however, e.g., paying self-employment tax on 50% or less of profits or a salary that is in line with similar businesses. Furthermore, some S-corp owners may be able to take advantage of the 20% deductions for pass-through entities as well, thanks to tax reform.

Losses are Deductible

As a corporation, profits and losses are allocated between the owners based on the percentage of ownership or number of shares held. If the S-corporation loses money, these losses are deductible on the shareholder’s individual tax return. For example, if you and another person are the owners and the corporation’s losses amount to $20,000, each shareholder can take $10,000 as a deduction on their tax return.

No Corporate Income Tax

Although S-corps are corporations, there is no corporate income tax because business income is passed through to the owners instead of being taxed at the corporate rate, thereby avoiding the double taxation issue, which occurs when dividend income is taxed at both the corporate level and at the shareholder level.

Less Risk of Audit

In 2017, S-corps faced an audit risk of just 0.2% compared to Schedule C filers with gross receipts of $100,000 who faced an audit rate of 0.9% (2018 IRS Data Book). While still low, individuals filing Schedule C (Profit or Loss from Business) are at higher risk of being audited due to IRS concerns about small business owners underreporting income or taking deductions they shouldn’t be.

Help is just a phone call away.

Whether you keep your existing structure or decide to change it to a different one, keep in mind that your decision should always be based on the specific needs and practices of the business. Don’t hesitate to call the office if you have any questions about electing S-Corporation status or are wondering whether it’s time to choose a different business entity altogether.

• By Leon Clinton
• October 14, 2019