Run Your Own Corporation. Garrett Sutton

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       • Issuing dividends

       • Purchase or sale of equipment

       • Purchase of real property

      We will be dealing with the important topic of documentation throughout the book.

       Choose Your Tax Year

      Another choice you’ll be making during this time is your fiscal year. You can choose to have your company’s fiscal year end at the end of any month, but be aware that federal taxes are due 2.5 months after the end of your fiscal year, not 3.5 months as personal taxes are. So if you elect a calendar year (January through December and ending on December 31st) as your corporate fiscal year, your federal return will need to be filed March 15, not April 15. And as with personal taxes, a six-month extension is available by filing IRS Form 7004, which will probably extend the filing period for your state income tax as well. State income taxes are required for corporate entities in every state with some notable exceptions, including Nevada and Wyoming. Remember that an extension is for filing the tax return, not for paying the estimated taxes due. (You extend, you still pay.)

      However, if you’re making quarterly estimated payments to the IRS, this shouldn’t be such a shock at the end of the year. While federal tax payments for Social Security and Medicare are required to be made quarterly with IRS Form 941 (unless you’re informed by the IRS they find your paperwork too much nuisance for too little income from you, and you file annually with a Form 944), you can also choose to make payments on a monthly, biweekly or weekly basis. Sometimes it’s less painful to pay more often and in smaller increments.

      Be sure to work with your CPA on these matters to get them right. Failure to pay or even falling behind on your payroll tax obligations can lead to personal liability and serious penalties. We will consider such a case further ahead.

       IRS Definitions and Requirements

      The IRS defines a corporation as an entity formed under state law by the filing of articles of incorporation with the state. Articles of incorporation need to be date stamped (or file stamped) by the Secretary of State’s office in order to be official.

      The IRS defines S corporations as corporations that elect to pass corporate income losses, deductions and credits through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on the corporate income. S corporations are responsible for tax on certain built-in gains and passive income.

      The IRS code really doesn’t define LLCs. As such, the IRS allows them the flexibility to be taxed however you, the LLC owner, wants. You can choose C corporation, S corporation, partnership or, if one member, disregarded entity taxation. Your election will be filed on Form 8832.

      The following is a quick comparison of federal tax requirements for traditional C corporations, S corporations and LLC entities.

       C Corporation

       • Files IRS Form 1120.

       • Balance sheet required on tax return.

       • Must use double-entry bookkeeping system.

       • Corporation must file all necessary employment tax returns.

       • Pays tax on all profits. When shareholders take profits as dividends, distributions are taxable on shareholder’s tax returns (double taxation).

       • Some C corporations are defined as personal service corporations (such as professional corporations for physicians) and these are generally taxed at a higher rate.

       • Tax elections are at corporation level.

       • Allocation of income/deductions not permitted.

       • Tax responsibility does not flow through to individual shareholder level.

       • Shareholders who work for the corporation are considered employees (shareholder-employees) and need to draw a reasonable salary which is subject to payroll and withholding taxes. Dividend distributions, however, are not subject to social security tax.

       S Corporation

       • Must make the election (Form 2553) for IRS to consider an S corporation.

       • Files IRS Form 1120S.

       • Must use double-entry bookkeeping.

       • All S corporations are required to file payroll tax and reporting forms for shareholders functioning as employees.

       • Income and expense flow through to shareholders and are not taxed at corporation level.

       • Tax elections are at S corporate level.

       • Shareholders who function as employees must receive reasonable compensation (wages) and payroll taxes must be paid. Dividend distributions are not subject to payroll taxes.

       • Profits flow through to shareholders and are taxed at individual levels (no double taxation).

       LLC

       • IRS form to be used depends on tax classification. If an LLC doesn’t file a Form 8832 and elect the tax classification, default rules apply. Under IRS default rules, a single member LLC is considered \a disregarded entity for tax purposes and taxed as a sole proprietorship, required to file a 1040 Schedule C, and subject to self-employment tax if the business has a net income over $400. A two member LLC defaults to be taxed as a partnership.

       • Can elect to be taxed as a sole proprietorship, partnership, S corporation, C corporation or if one member is a disregarded entity, with tax obligations flowing directly onto the member’s tax return.

       • Bookkeeping is determined by tax classification.

       Startup Expenses and Tax Advantages

      Before you ever quite get the business off the ground – or while you’re still contemplating your options – there are tax advantages available to you. Startup expenses are a good percentage of costs at the beginning of your business and include equipment, supplies and location, and also expenses incurred by investigating a business you want to purchase or create. Startup expenses also include the services performed by your professional team of accountants, attorneys and advisors who assist you in setting up the company, including legal fees for preparing your legal entity, filing fees paid to the state for official records and the like.

      Startup expenses paid before the business is actually up and running can’t be taken as deductions or losses, but during your first tax year you can write off $5,000 and over the next 15 years the rest of the expenses can be deducted, starting with the first month of operation. According to the IRS, the $5,000 deduction is reduced by the amount of total startup costs if those СКАЧАТЬ