Small Business Tax

What Is an S Corporation, C Corp, and LLC: What they are and why they matter in 2024?

There’s a lot of buzz around the S Corporation Election and its implications for businesses. Let’s clear the air and help you make informed decisions. This guide aims to demystify these questions and help business owners determine their business tax status and whether to choose the S Corp Election

❓ What Is an S Corporation?

An S Corporation isn’t a business entity; it’s a tax election at the federal level. To become an S Corp for tax purposes, business owners must first register their company as either an LLC or Inc. Then, if they meet eligibility requirements, they may elect to become an S Corporation for federal tax purposes.

IRS S Corp Eligibility Requirements 📑

The IRS has specific eligibility requirements for S Corporations. Here’s a summary; you can find more detailed tax information on the IRS website.

To qualify, the company must:

👉 Be a domestic (USA) corporation
👉 Have shareholders that are individuals, certain trusts, and estates
👉 Not have corporations or non-resident alien shareholders
👉 Have no more than 100 shareholders
👉 Have only one class of stock
👉 Not be an ineligible corporation (e.g., certain financial institutions, insurance companies, and domestic international sales corporations)

❓ What is a C Corporation?

Disorganized books can lead to a lot of problems, such as fraud, deceitful tactics, and internal control nightmares. Keeping your records straight is crucial.

Double-Taxation for C Corporations ➕➕

Double taxation may occur when a corporation pays dividends to its shareholders. These dividends aren’t tax deductible, so the C Corp pays income tax on these profits, then the shareholders also pay tax on the same income via their personal tax returns. Avoiding this double taxation is one of the primary reasons for a business to consider the S Corp election.

💡 S Corp Election for C Corporations

A business can avoid double taxation if it uses an S Corp status for federal taxes. There are pros and cons to this election.

C Corp shareholders may benefit from an S Corp if they want to retain personal liability protection but avoid possible double taxation.

Because each business is unique, owners should consult an expert for professional guidance when making this decision.

❓ Limited Liability Company (LLC) Taxation

A Limited Liability Company or LLC is a separate legal entity from its owners and provides personal liability protection. However, the IRS does not recognize an LLC as its own entity for tax purposes. An LLC starts out as either a single-member disregarded entity, or with two or more partners as a partnership.

All business profits and losses flow through the LLC to its members’ personal tax returns. The company’s taxable income is subject to self-employment taxes (FICA, aka Social Security and Medicare taxes) and income tax.

💡 S Corp Election for LLCs

If an eligible LLC elects S Corporation taxation status, the income paid to LLC members via payroll is subject to Social Security and Medicare taxes, but profits paid as distributions are not.

This often helps LLC members lower their personal tax burden. However, the company must pay its owners reasonable compensation for their work or risk raising a red flag with the IRS.

S Corp Election Tax Help

There’s a lot to consider in 2024 regarding S Corporations, C Corporations, LLCs, and business taxes. We urge business owners to contact a professional for assistance before making any decisions regarding business entities, federal tax elections, and filing tax return forms.

Ready to take the next step? Reach out to us today for personalized advice tailored to your business needs. Let’s find the best tax strategy for your unique situation together.

Home Office Tax Deduction : Work from home FAQs, Rules, and more!

The home office tax deduction allows qualified taxpayers to deduct certain home expenses when they file taxes. To claim the home office deduction, you generally must exclusively and regularly use part of your home or a separate structure on your property as your primary place of business.

How to Calculate the Home Office Deduction ➖

Simplified Method

The simplified option involves multiplying an IRS-determined rate (currently $5) by the square footage of your home office. Your home office cannot be larger than 300 square feet, and you won’t be able to deduct depreciation or home-related itemized deductions with this method.

Standard Method

Calculating the home office deduction using the standard method involves completing IRS Form 8829. First, determine the square footage of your workspace and divide that by the total square footage of your home.

Example

👉 Calculate the square footage of your home office. If your home office is a 15-foot by 15-foot room, its total square footage is 225 square feet (15 feet × 15 feet = 225 square feet).
👉 Find out the total square footage of your home. Let’s say your home has a total area of 1,600 square feet.
👉 Divide the area of your office by the area of your house. For our example, 225 ÷ 1,600 = 0.14 (or 14%). This percentage represents the portion of your total home expenses that can be allocated toward the home office deduction.
After determining the percentage of your household expenses that can be written off, list all of the expenses that pertain to your entire home, such as mortgage interest, real estate taxes, insurance, utilities, and depreciation for the year under the section titled “Indirect expenses” of Form 8829.
Expenses incurred solely for the benefit of the office space are then listed under the “Direct expenses” section. The indirect expenses are totaled and multiplied by the percentage derived earlier (14% from the example). Then the indirect expenses total is added to the total of the direct expenses.

❓ Frequently Asked Questions about The Home Office Tax Deduction

❓ Can I deduct my internet if I work from home?

Since an Internet connection is essential for working from home, you can deduct some or even all of the expenses when filing taxes. Enter the deductible expense as part of your home office expenses. Your Internet expenses are only deductible if you use them specifically for work purposes.

❓ Can I write off utilities if I work from home?

You can deduct a portion of other expenses, including utilities, based on the size of your office versus your home. For example, if your home office is 10% of your entire living space, you can deduct that much from the costs of a mortgage, rent, utilities, and some kinds of insurance.

❓ What are the General Rules?

Three general rules for qualifying your home office as a business expense include:

1️⃣ You must be self-employed.
2️⃣ The workspace for a home office must be used exclusively and regularly for business.
3️⃣ Total deductible expenses can’t exceed the income from the business for which the deductions have been taken.

Why can’t I claim the home office deduction?

First, it needs to be the primary space where you work; if you rent office space somewhere else, your home office isn’t tax-deductible. Second, the space needs to be dedicated to working; if you eat at your kitchen table and you also work at it, it doesn’t qualify.

Still have more questions about claiming the Home Office Tax Deduction?

If you have questions about claiming the home office deduction on your taxes, give us a call. We’re here to help you navigate the complexities of home office tax deductions and ensure you maximize your benefits. Call us today and let’s simplify your tax season together!

How to Avoid a Tax Audit for Small Business Owners

A tax audit or a letter from the IRS can be the beginning of a serious headache for many small business owners. You will be asked to check documents and receipts for a period of time in the recent past, and if this happens during a busy time for your business, it might get even more complicated. It’s not a bad idea to learn how you might be able to avoid an audit.

Luckily, only a small number of businesses actually get audited, and in most cases, the audit comes as a letter that requires further documentation.
Small business bookkeeping can be challenging and full of obstacles, but you can increase your chances of avoiding an IRS tax audit by understanding what accounting mistakes generally trigger suspicion and how to avoid them.

Don't Make These Seven Accounting Mistakes that are Likely to Trigger a Tax Audit in 2024

1. Make Sure Your Math Is Consistent and Correct on Your Tax Returns

Ensuring your numbers are accurate and truthful is the first step to avoiding discrepancies. If you’ve been issued a tax form by someone (like a 1099-MISC), the same form will be sent to the IRS, too. The IRS will check that the numbers match.

If there are discrepancies in the math, something so simple can become a trigger for a notice, letter of clarification, or audit. Alongside tax forms, ensure that your tax returns are also truthful and consistent.

Naturally, you might make mistakes, but you should always double-check your math and figures to ensure they match. It’s recommended to hire an accountant to ensure that mistakes on your important documents won’t be made.

2. Ensure Your Bookkeeping and Business Records Are in Order

When organizing your records, it is crucial to understand the importance of keeping business and personal finances separate. You should consider keeping your business income and expenses in a dedicated bank account while keeping your personal finances in another.

These two strategies, when combined, allow you to speed up the process of preparing and filing your tax return and ensure that you’re reporting separate and factual information on your personal and business tax returns. Additionally, you will have evidence to back your claims if you do get audited.

3. Avoid Overpaying Employees Who Own Shares in Your Business

In the case of a C corporation, it might be tempting to pay your executives higher salaries to minimize the corporation’s profits, thus lowering taxes. However, exceedingly high salaries for shareholders might end up triggering an audit. Instead, have a better understanding of the range of salary in your industry and stick to those general guidelines.

4. Don’t Consistently
Report Losses in Your
Business

Be cautious when reporting losses multiple years in a row. If you report a loss twice in a period of five years, the IRS may notice. The IRS might consider your business as a hobby and question your business expense deductions. They may wonder how you’re staying in business if you are not making a profit and assume that you’re taking deductions that could be considered personal in nature.

5. File Estimated Taxes
Every Quarter for Your Business

This is based on your net profits, not your gross revenue. If you believe that you will owe taxes by the end of the year, consider paying estimated taxes every quarter.

If your 1040 generates quarterly tax coupons for the following tax year, and your taxable income will be the same or more than the prior year’s tax return, deciding to pay these quarterly tax coupons can help you potentially avoid IRS penalties and interest.

6. Follow Guidelines Regarding Paying Independent Contractors

Some businesses might decide to hire independent contractors to avoid having to pay payroll taxes. The IRS and your state unemployment agency have defined guidelines for who is an employee and who is a contractor. Misclassifying a person can subject your business to a federal or state employment audit if you’re not following the guidelines regarding employee status.

7. Only Claim Legitimate Tax Deductions for Yourself and Your Business

When claiming business tax deductions, make sure they are legitimate and relevant to your business. Among the many items that might trigger an audit are ‘made-up’ business operating expenses, like using the prior year’s numbers. The IRS can easily compare year-over-year expenses to flag this in their systems.

Expenses that have been misreported or mis-documented for home offices and personal vehicle costs are some of the most flagged deductions.

Are your books IRS Audit-proof?

Ultimately, the best way to avoid a tax audit is to be completely honest and punctual with your taxes. While it’s impossible to promise that an audit won’t happen, double-check your numbers and submit truthful reports.

If you are in doubt, hiring a licensed CPA, like Insogna CPA is a great way to ensure that your taxes are reported accurately. Get your own CPA team to take care of your books and taxes.