Readers who have been reading my blog posts for a while know I’ve addressed LLCs and taxes before. Questions about how to file taxes for an LLC still come up all the time. Consequently, I’ve pulled up a blog from last summer and updated it to share again.
New business clients often tell me that they have an LLC. But that isn’t enough information for me to know how to file their business taxes. An LLC is a legal definition for a limited liability business structure.
An LLC can file income taxes in one of three ways:
- Sole Proprietorship
Individual business owners that have not incorporated will report income and expenses on IRS Schedule C, “Profit or Loss from Business,” filed with the owner’s individual income tax return. A separate Schedule C must be filed for each business. Net business profits are also subject to the employer and employee portions of Medicare and Social Security taxes (i.e., 15.3% in 2017).
Two or more individuals in business together without incorporating must operate as a partnership. Partnerships file a separate income tax return, IRS Form 1065. Partners receive an IRS Form K-1 for their pro rata share of non-wage income and expenses. Partners are responsible for tracking the basis of their shares, which impacts how distributions are taxed.
- Subchapter S Corporation
Qualifying businesses can take the Subchapter -S election and avoid the double taxation of a C Corp. Additional legal documents are required. No outside capital funding is allowed. Sub-S Corporations file a separate income tax return, IRS Form 1120S. Shareholders receive an IRS Form K-1 for their share of non-wage income and expenses. Owner/employees earn wages and get a W-2. Owner’s basis must be tracked.
Taxes can be complicated. Knowing how to file your business taxes might not be as simple as you think. Consult a qualified tax professional to keep it all straight, minimize errors, and leave more time for managing your business.
With tax filing season starting next week, most people are focused on their 2016 income taxes. Others are focused on tax planning for 2017 and beyond. They are laser-focused on upcoming tax changes based on proposals laid out by President-elect Donald Trump during his campaign. His proposed tax law changes include reducing some tax rates and increasing some deductions.
Making plans when the rules are changing is a real challenge. Tax professionals make educated guesses based on their experience and by tracking the proposed policy changes to see which ones are actually implemented. So what can tax professionals and their clients expect in the coming months?
Six tax change proposals we could see in 2017:
- The Middle Class Tax Relief and Simplification Act would provide middle class families with two children a 35% tax cut.
- Affordable Childcare and Eldercare Act would allow individuals to deduct childcare and elder care expenses.
- Reduce the Current Seven Tax Brackets to Three individual tax rates. The current 10% and 15% brackets would be changed to 12%; the 25% and 28% tax brackets would be at 25%; and the highest tax bracket would be 33%.
- Changes to Business Taxes, such as a flat 15% corporate income tax rate and elimination of the corporate alternative minimum tax (AMT).
- Repeal and Replace the Affordable Care Act and replace with a Republican proposed plan with some modifications.
- American Energy and Infrastructure Act which is described as a proposal to spur $1 trillion of infrastructure investment over the next 10 years.
Which proposals will be approved by Congress and signed off by the President? You can be sure we’ll pass on those changes in our weekly blog posts and monthly newsletter. Stay tuned…
Organizations usually budget for the entire year. But an annual budget gives the false impression that cash flows along at a steady rate, like a Stream. In reality, cash flows more like an Ocean. The tide comes in and goes out. The water’s edge along the beach is uneven.
Mother Nature is in charge of managing water flow. Managing cash flow, not so much. Financial professionals help organizations project revenue and expenses by month, week, or pay period. Those financial folks need the right inputs from you to produce clear and reliable cash flow projections to manage the organization’s finances and future.
Three tips to get the right inputs for your cash flow projections:
- Start with your Documents
Revenue and expenses connected to a contract, lease, or other document are a good place to start because payment amounts and frequency are defined. One example is compensation — wages, benefits, and employment taxes. Other examples are retainers, rent, and recurring service agreements. Be sure to put payments to the correct payment period (e.g., some months have an extra payroll period).
- Look to the Past
Last year’s financial transaction details are a gold mine for projecting cash flow where revenue and expenses vary from month to month. Look at what amounts were actually received or paid in each month, and estimate the expected amounts by category for each future month. Make adjustments based on any changes in circumstances.
- Invest for the Future
After plugging in all the known revenue and expenses and estimating the variable amounts, sit back and examine the results. Are there new revenue or expense categories to include? Need funds for technology or expertise? Cash flow projections should include investments in your organization’s future.
Annual budgets assume that your cash flows like a continuous Stream. Reality is more like the ebb and flow of the Ocean’s tide. Cash flow projections that recognize revenue and expense “tides” are a powerful tool for managing an organization’s finances.
Do you ever use your vehicle for business, medical, moving, or charity? If you answer “yes” for one or more categories, you could be eligible to deduct an amount per mile expense on your income tax return. The IRS establishes an optional annual rate per mile to calculate deductible vehicle costs.
Another option is to calculate the actual costs of using your vehicle and allocate the cost based on the mileage for that particular use. Using the IRS’ annual rate is much simpler!
So what are those standard rates?
For 2017, the IRS announced that optional standard mileage rates for the use of a car, van, pickup or panel truck will be:
- For business miles driven – 53.5 cents per mile, based on an annual study of the fixed and variable costs of operating a vehicle.
- For medical or moving purposes – 17 cents per mile driven, based on variable vehicle costs.
- In service of charitable organizations – 14 cents per mile driven, set by statute.
Changes in the business, medical, or moving mileage rates are mainly driven by volatility in fuel costs. The business mileage rate decreased half a cent per mile and the medical and moving expense rates each dropped 2 cents per mile from 2016 to 2017. The statutory charitable rate remains unchanged.
Some limits apply – Taxpayers may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate option cannot be taken for more than four vehicles used simultaneously.
Have more questions? It’s all described on the IRS website, at http://bit.ly/2iinkHX.