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Starting new business - requesting advice

Hi there,

I have been borrowing my mom's personal money to purchase items to start a business where I build products and put them up for sale. I have not made any profit yet, but hope to do so in future. But it just occurred to us that I may save on taxes as well if I formalize this as a business and submit all those expenses, losses and profits. I heard the word LLC from someone, but not sure how to go about or if there is something else I need to do. Also, should I have done this before I purchased those items or can I still submit those expenses when I file my tax return next year via TurboTax? I would appreciate any advice as we have no knowledge nor  experience in this matter. Thank you so much. 

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Starting new business - requesting advice

I highly recommend you sit down with a local tax pro to get educated on this situation before you make costly mistakes but running into incorporation or an LLC when it is not needed.  

 

If you are new to being self employed, are not incorporated or in a partnership  and  are acting as your own bookkeeper and tax preparer you need to get educated ....  

If you have net self employment income of $400 or more you have to file a schedule C in your personal 1040 return for self employment business income. You may get a 1099-NEC for some of your income but you need to report all your income.  So you need to keep your own good records. Here is some reading material……

IRS information on Self Employment….
http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Self-Employed-Individuals-Tax-Center 

Publication 334, Tax Guide for Small Business
http://www.irs.gov/pub/irs-pdf/p334.pdf 



Publication 535 Business Expenses
http://www.irs.gov/pub/irs-pdf/p535.pdf 

 

Home Office Expenses … Business Use of the Home

https://www.irs.gov/businesses/small-businesses-self-employed/home-office-deduction

https://www.irs.gov/pub/irs-pdf/p587.pdf

 

Publication 463 Travel, Gift, and Car Expenses

https://www.irs.gov/pub/irs-pdf/p463.pdf 

 

 

Publication 946 … Depreciation

https://www.irs.gov/pub/irs-pdf/p946.pdf

          

There is also QuickBooks Self Employment bundle you can check out which includes one Turbo Tax Self Employed return and will help you keep up in your bookkeeping all year along with calculating the estimated payments needed ....
http://quickbooks.intuit.com/self-employed

          
Self Employment tax (Scheduled SE) is generated if a person has $400 or more of net profit from self-employment on Schedule C.  You pay 15.3% for 2017 SE tax on 92.35% of your Net Profit greater than $400.  The 15.3% self employed SE Tax is to pay both the employer part and employee part of Social Security and Medicare.  So you get social security credit for it when you retire.  You do get to take off the 50% ER portion of the SE tax as an adjustment on line 27 of the 1040.  The SE tax is already included in your tax due or reduced your refund.  It is on the 1040 line 57.  The SE tax is in addition to your regular income tax on the net profit.
 


PAYING ESTIMATES
For SE self employment tax - if you have a net profit (after expenses) of $400 or more you will pay 15.3% for 2017  SE Tax on 92.35% of your net profit in addition to your regular income tax on it. So if you have other income like W2 income your extra business income might put you into a higher tax bracket.

You must make quarterly estimated tax payments for the current tax year (or next year) if both of the following apply:
- 1. You expect to owe at least $1,000 in tax for the current tax year, after subtracting your withholding and credits. 
 
- 2. You expect your withholding and credits to be less than the smaller of: 
    90% of the tax to be shown on your current year’s tax return, or 
  100% of the tax shown on your prior year’s tax return. (Your prior year tax return must cover all 12 months.)

To prepare estimates for next year, You can just type W4 in the search box at the top of your return , click on Find. Then Click on Jump To and it will take you to the estimated tax payments section. Say no to changing your W-4 and the next screen will start the estimated taxes section.

OR Go to….
Federal Taxes or Personal (H&B version)
Other Tax Situations
Other Tax Forms
Form W-4 and Estimated Taxes - Click the Start or Update button

 

 

If you formed an LLC for the primary purpose of protecting personal assets, then you're not protecting your personal assets very well, if at all. An LLC is a disregarded entity as far as the IRS is concerned.

 

Check out the below for the different business types, and pay special attention to the part for rental property owners. While you may not have rental property, it will point out the serious *LACK* of protection that an LLC supposedly provides.

 

Sole Proprietorship – This is a business with one owner, and only own owner. There are no other investors or share holders. This type of business is considered a “disregarded entity” by the IRS. All income and expenses for the business are reported on SCH C as a physical part of the owner’s personal tax return. Again, a sole proprietorship has only own owner. Depending on what state the business is in, registration is not required at the state level. But it may be required at the county, town, or other level of government below the state. For example, your county may require you to register and obtain a county issued Occupational License, which authorizes you to conduct business only within the jurisdiction of the authority that issued the Occupational License. This is most often required when the county, city or other authority below the state taxes personal income or imposes a tangible property tax on business assets utilized to produce business income.

 

Single Member LLC - This is a business with one owner, and only own owner. There are no other investors or share holders. This type of business is considered a “disregarded entity” by the IRS. All income and expenses for the business are reported  on SCH C as a physical part of the owner’s personal tax return. Again, a single member LLC has only own owner. This type of business is required to be registered at the state level, weather that state taxes personal income or not.  Additionally, this type of business may also be required to obtain an Occupational License for the county(s), city(s) or other more localized jurisdictions within that state, in which the business will be operating in.

 

Multi-Member LLC – This is a business with more than one owner.  It’s also the exact same as a Partnership (for tax purposes) This type of business also has to register at the state level, and may also be required to obtain an Occupational License from more localized jurisdictions within the state, in which that business will operate.  This type of business will file its own physically separate tax return with the IRS (and state if applicable) referred to as a Partnership Return, on IRS Form 1065. When completing the 1065 (using TurboTax Business) the business will issue each individual owner a K-1 reporting the income (or loss) of each owner. Each owner will use this K-1 to complete their personal return. So an owner can’t even start their personal return, until after the 1065 Partnership Return has been complete, filed, and all K-1’s issued to all owners.

 

In the community property states of Louisiana, Arizona, California, Texas, Washington, Idaho, Nevada, New Mexico, and Wisconsin if you have a multi-member LLC where there are only two owners, those two owners are legally married to each other, and those two owners will be filing a joint 1040 tax return, they have the option of splitting all business income and expenses down the middle and each partner reporting their share of the business income/expenses on a separate SCH C for each tax filer on the joint return. That means your joint 1040 return will have two SCH C’s included with it – one for each owner. But this can present its own problems in the event of divorce, separation. The issues can become even more compounded upon the death of one of the owners. If that deceased owner’s will does not pass all assets to the surviving partner, then that surviving partner can find themselves in a tax hell, not to mention the problems that can arise with the “new” owner or owners.

 

LLC “Like an S-Corp” – For tax purposes only (and I reiterate: FOR TAX PURPOSES ONLY!!!!!) one can elect to have the IRS treat their single member LLC or multi-member LLC “like an S-Corp” ****FOR TAX PURPOSES ONLY!!!!!****  This means your business is treated like and considered to be a physically separate taxable entity. This is accomplished by filing IRS Form 2553 – Election by Small Business Corporation. This allows you to act as if your single member LLC or multi-member LLC is an S-Corp. But understand that if you want the IRS to treat your LLC like an S-Corp, then the business “must” act like an S-Corp, and follow all the laws, rules and regulations required of an S-Corp by whichever state your LLC is registered in. All business income and expenses is reported on IRS Form 1120-S – Income Tax Return For An S-Corporation. The S-Corp will then issue each owner, investor and/or shareholder a K-1 which they will need before they can even start their personal tax return.  Unlike a single member LLC which is considered a disregarded entity for tax purposes, an LLC that has filed form 2553  “is” considered and treated like a separately taxable entity.

 

LLC “Like a C-Corp” – For tax purposes only (and I reintereate: FOR TAX PURPOSES ONLY!!!!!) one can elect to the the IRS treat their single member LLC or multi-member LLC “like a C-Corp” ****FOR TAX PURPOSES ONLY!!!!!**** This means your business is treated like and considered to be a physically separate taxable entity. This is accomplished by filing IRS Form 8832 – Entity Classification Election. This allows you to act as if your single member LLC or multi-member LLC is a Corp. But understand that if you want the IRS to treat your LLC like a C-Corp, then the business “must” act like a C-Corp and follow all the laws, reules and reguations required of a C-Corp by whichever state your LLC is registered in. All business income and expenses is reported on IRS Form 1120 – IU.S. Corporation Income Tax Return.

 

S-Corp – This type of business is registered at the state level and must conform to the laws, rules, regulations and ordinances of that state which apply to an S-Corp. All business income and expenses is reported on IRS Form 1120-S – Income Tax Return For An S-Corp.  The S-Corp will then issue each owner, investor and/or shareholder a K-1 which they will need before they can even start their personal tax return.  Unlike an LLC which is considered a disregarded entity for tax purposes, an S-Corp  “is” a separately taxable entity, and therefore files its own physically separate tax return and issues K-1’s to all owners, officers, investors and shareholders.

 

C-Corp - This type of business is registered at the state level and must conform to the laws, rules, regulations and ordinances of that state which apply to a C-Corp. All business income and expenses is reported on IRS Form 1120 – Income Tax Return For A C-Corp.   A C-Corp  “is” a separately taxable entity, and therefore files its own physically separate tax return.

View solution in original post

4 Replies

Starting new business - requesting advice

I highly recommend you sit down with a local tax pro to get educated on this situation before you make costly mistakes but running into incorporation or an LLC when it is not needed.  

 

If you are new to being self employed, are not incorporated or in a partnership  and  are acting as your own bookkeeper and tax preparer you need to get educated ....  

If you have net self employment income of $400 or more you have to file a schedule C in your personal 1040 return for self employment business income. You may get a 1099-NEC for some of your income but you need to report all your income.  So you need to keep your own good records. Here is some reading material……

IRS information on Self Employment….
http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Self-Employed-Individuals-Tax-Center 

Publication 334, Tax Guide for Small Business
http://www.irs.gov/pub/irs-pdf/p334.pdf 



Publication 535 Business Expenses
http://www.irs.gov/pub/irs-pdf/p535.pdf 

 

Home Office Expenses … Business Use of the Home

https://www.irs.gov/businesses/small-businesses-self-employed/home-office-deduction

https://www.irs.gov/pub/irs-pdf/p587.pdf

 

Publication 463 Travel, Gift, and Car Expenses

https://www.irs.gov/pub/irs-pdf/p463.pdf 

 

 

Publication 946 … Depreciation

https://www.irs.gov/pub/irs-pdf/p946.pdf

          

There is also QuickBooks Self Employment bundle you can check out which includes one Turbo Tax Self Employed return and will help you keep up in your bookkeeping all year along with calculating the estimated payments needed ....
http://quickbooks.intuit.com/self-employed

          
Self Employment tax (Scheduled SE) is generated if a person has $400 or more of net profit from self-employment on Schedule C.  You pay 15.3% for 2017 SE tax on 92.35% of your Net Profit greater than $400.  The 15.3% self employed SE Tax is to pay both the employer part and employee part of Social Security and Medicare.  So you get social security credit for it when you retire.  You do get to take off the 50% ER portion of the SE tax as an adjustment on line 27 of the 1040.  The SE tax is already included in your tax due or reduced your refund.  It is on the 1040 line 57.  The SE tax is in addition to your regular income tax on the net profit.
 


PAYING ESTIMATES
For SE self employment tax - if you have a net profit (after expenses) of $400 or more you will pay 15.3% for 2017  SE Tax on 92.35% of your net profit in addition to your regular income tax on it. So if you have other income like W2 income your extra business income might put you into a higher tax bracket.

You must make quarterly estimated tax payments for the current tax year (or next year) if both of the following apply:
- 1. You expect to owe at least $1,000 in tax for the current tax year, after subtracting your withholding and credits. 
 
- 2. You expect your withholding and credits to be less than the smaller of: 
    90% of the tax to be shown on your current year’s tax return, or 
  100% of the tax shown on your prior year’s tax return. (Your prior year tax return must cover all 12 months.)

To prepare estimates for next year, You can just type W4 in the search box at the top of your return , click on Find. Then Click on Jump To and it will take you to the estimated tax payments section. Say no to changing your W-4 and the next screen will start the estimated taxes section.

OR Go to….
Federal Taxes or Personal (H&B version)
Other Tax Situations
Other Tax Forms
Form W-4 and Estimated Taxes - Click the Start or Update button

 

 

If you formed an LLC for the primary purpose of protecting personal assets, then you're not protecting your personal assets very well, if at all. An LLC is a disregarded entity as far as the IRS is concerned.

 

Check out the below for the different business types, and pay special attention to the part for rental property owners. While you may not have rental property, it will point out the serious *LACK* of protection that an LLC supposedly provides.

 

Sole Proprietorship – This is a business with one owner, and only own owner. There are no other investors or share holders. This type of business is considered a “disregarded entity” by the IRS. All income and expenses for the business are reported on SCH C as a physical part of the owner’s personal tax return. Again, a sole proprietorship has only own owner. Depending on what state the business is in, registration is not required at the state level. But it may be required at the county, town, or other level of government below the state. For example, your county may require you to register and obtain a county issued Occupational License, which authorizes you to conduct business only within the jurisdiction of the authority that issued the Occupational License. This is most often required when the county, city or other authority below the state taxes personal income or imposes a tangible property tax on business assets utilized to produce business income.

 

Single Member LLC - This is a business with one owner, and only own owner. There are no other investors or share holders. This type of business is considered a “disregarded entity” by the IRS. All income and expenses for the business are reported  on SCH C as a physical part of the owner’s personal tax return. Again, a single member LLC has only own owner. This type of business is required to be registered at the state level, weather that state taxes personal income or not.  Additionally, this type of business may also be required to obtain an Occupational License for the county(s), city(s) or other more localized jurisdictions within that state, in which the business will be operating in.

 

Multi-Member LLC – This is a business with more than one owner.  It’s also the exact same as a Partnership (for tax purposes) This type of business also has to register at the state level, and may also be required to obtain an Occupational License from more localized jurisdictions within the state, in which that business will operate.  This type of business will file its own physically separate tax return with the IRS (and state if applicable) referred to as a Partnership Return, on IRS Form 1065. When completing the 1065 (using TurboTax Business) the business will issue each individual owner a K-1 reporting the income (or loss) of each owner. Each owner will use this K-1 to complete their personal return. So an owner can’t even start their personal return, until after the 1065 Partnership Return has been complete, filed, and all K-1’s issued to all owners.

 

In the community property states of Louisiana, Arizona, California, Texas, Washington, Idaho, Nevada, New Mexico, and Wisconsin if you have a multi-member LLC where there are only two owners, those two owners are legally married to each other, and those two owners will be filing a joint 1040 tax return, they have the option of splitting all business income and expenses down the middle and each partner reporting their share of the business income/expenses on a separate SCH C for each tax filer on the joint return. That means your joint 1040 return will have two SCH C’s included with it – one for each owner. But this can present its own problems in the event of divorce, separation. The issues can become even more compounded upon the death of one of the owners. If that deceased owner’s will does not pass all assets to the surviving partner, then that surviving partner can find themselves in a tax hell, not to mention the problems that can arise with the “new” owner or owners.

 

LLC “Like an S-Corp” – For tax purposes only (and I reiterate: FOR TAX PURPOSES ONLY!!!!!) one can elect to have the IRS treat their single member LLC or multi-member LLC “like an S-Corp” ****FOR TAX PURPOSES ONLY!!!!!****  This means your business is treated like and considered to be a physically separate taxable entity. This is accomplished by filing IRS Form 2553 – Election by Small Business Corporation. This allows you to act as if your single member LLC or multi-member LLC is an S-Corp. But understand that if you want the IRS to treat your LLC like an S-Corp, then the business “must” act like an S-Corp, and follow all the laws, rules and regulations required of an S-Corp by whichever state your LLC is registered in. All business income and expenses is reported on IRS Form 1120-S – Income Tax Return For An S-Corporation. The S-Corp will then issue each owner, investor and/or shareholder a K-1 which they will need before they can even start their personal tax return.  Unlike a single member LLC which is considered a disregarded entity for tax purposes, an LLC that has filed form 2553  “is” considered and treated like a separately taxable entity.

 

LLC “Like a C-Corp” – For tax purposes only (and I reintereate: FOR TAX PURPOSES ONLY!!!!!) one can elect to the the IRS treat their single member LLC or multi-member LLC “like a C-Corp” ****FOR TAX PURPOSES ONLY!!!!!**** This means your business is treated like and considered to be a physically separate taxable entity. This is accomplished by filing IRS Form 8832 – Entity Classification Election. This allows you to act as if your single member LLC or multi-member LLC is a Corp. But understand that if you want the IRS to treat your LLC like a C-Corp, then the business “must” act like a C-Corp and follow all the laws, reules and reguations required of a C-Corp by whichever state your LLC is registered in. All business income and expenses is reported on IRS Form 1120 – IU.S. Corporation Income Tax Return.

 

S-Corp – This type of business is registered at the state level and must conform to the laws, rules, regulations and ordinances of that state which apply to an S-Corp. All business income and expenses is reported on IRS Form 1120-S – Income Tax Return For An S-Corp.  The S-Corp will then issue each owner, investor and/or shareholder a K-1 which they will need before they can even start their personal tax return.  Unlike an LLC which is considered a disregarded entity for tax purposes, an S-Corp  “is” a separately taxable entity, and therefore files its own physically separate tax return and issues K-1’s to all owners, officers, investors and shareholders.

 

C-Corp - This type of business is registered at the state level and must conform to the laws, rules, regulations and ordinances of that state which apply to a C-Corp. All business income and expenses is reported on IRS Form 1120 – Income Tax Return For A C-Corp.   A C-Corp  “is” a separately taxable entity, and therefore files its own physically separate tax return.

Starting new business - requesting advice

Thank you so much! I am the only person in this business. (So I guess I may have to file Single Member LLC).

 

I have a small follow-up question to clarify my understanding: Do I need to file or Single member LLC or submit any documentation at all if I want to submit losses and expenses to save on taxes if I don't have any profit by end of the year? Or can I claim those without having any LLC or any other documentation to  formally declare my business? Thanks again. 

Starting new business - requesting advice

If you don't set up a Single Member LLC you are just self employed or sole proprietor and file a Schedule C in your personal tax return.   You can show a loss.  If you are a Single Member LLC you still file it on Schedule C unless you set it up as a S Corp.  then you have to file a separate 1120 S corp return.   

Some general info on self employment on Schedule C.......

You will need to keep good records.  You may get a 1099NEC at the end of the year if someone pays you more than $600 but you need to report all your income no matter how small.  You might want to use Quicken or QuickBooks to keep track of your income and expenses.

 

There is also QuickBooks Self Employment bundle you can check out which includes one Turbo Tax Online Self Employed  return....

http://quickbooks.intuit.com/self-employed

 

When you are self employed you are in business for yourself and the person or company that pays you is your customer or client.

 

To report your self employment income you will fill out schedule C in your personal 1040 tax return and pay SE self employment Tax.  You will need to use the Online Self Employed version or any Desktop program but the Desktop Home & Business version will have the most help.

 

Here is some IRS reading material……

 

IRS information on Self Employment

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Self-Employed-Individuals-Tax-Center

 

Pulication 334, Tax Guide for Small Business

http://www.irs.gov/pub/irs-pdf/p334.pdf

 

Publication 535 Business Expenses

http://www.irs.gov/pub/irs-pdf/p535.pdf

 

You pay Self Employment tax on $400 or more of net profit from self-employment in addition to any regular income tax.  You pay 15.3% SE tax on 92.35% of your Net Profit greater than $400.  The 15.3% self employed SE Tax is to pay both the employer part and employee part of Social Security and Medicare.  So you get social security credit for it when you retire.  

 

Starting new business - requesting advice

Thank you so much! I am the only person in this business. (So I guess I may have to file Single Member LLC).

 

I have a small follow-up question to clarify my understanding: Do I need to file or Single member LLC or submit any documentation at all if I want to submit losses and expenses to save on taxes if I don't have any profit by end of the year? Or can I claim those without having any LLC or any other documentation to  formally declare my business? Thanks again. 

 

Whether you form a single-member LLC or not is up to you - this is a legal issue. from a tax standpoint, there is no difference in federal taxation. a single-member LLC  is for federal purposes a disregarded entity so you file Schedule C as you would as a sole proprietor. it's included with your 1040.  LLCs are state law entities so you need to apply for it. there are websites where you can do this or use a lawyer who can discuss the pros and cons. using a lawyer or tax pro is highly advisable because there may be other issues - do you need to charge and collect sales or other taxes. if you do most likely you'll need to register with your state.  sales taxes can be complicated especially if you sell to out-of-state customers. 

expenses incurred before your business began are start-up costs which are not deductible until the year the business actually begins. there is also a tax law that can come into play if you have losses in multiple years. 

 

it's IRC code section 183 that states

 If the gross income derived from an activity for 3 or more of the taxable years in the period of 5 consecutive taxable years which ends with the taxable year exceeds the deductions attributable to such activity (determined without regard to whether or not such activity is engaged in for profit), then, unless the Secretary establishes to the contrary, such activity shall be presumed for purposes of this chapter for such taxable year to be an activity engaged in for profit.

 

put another way losses in 3 out of 5 consecutive years could result in the IRS disallowing the losses and instead treating you activity as a hobby. which means income would be taxable but many expenses would be disallowed 

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