Taxes and LLCs

Regular readers of my blog posts know I’ve addressed LLCs and taxes before. Questions about how to file taxes for an LLC still come up all the time, including last week at my Start-Up with Financial Success workshop at BizLaunch/Arlington Economic Development. So I decided to pull up a blog from “the Archives” and update it to share again.

Piece of paper that says "TAX" with hand holding pen

The first question I ask new tax clients who own a business is, “What type of business do you have?” The response I often get is “I have an LLC.” That answer isn’t enough information for me to know how and when to file their business taxes. I need to ask more questions at that point, like “and how do you operate for tax purposes?” Answering that one can be tough. 

An LLC is a state-defined limited liability legal business structure. Business owners often form an LLC to protect their personal assets in case their business is sued. An LLC can file business income taxes in one of three different ways, depending on the circumstances:

  1. Sole Proprietorship

Individual business owners that have not incorporated are, by default, a Sole Proprietor. Sole Proprietors report income and expenses on a separate form filed with the owner’s individual income tax return, IRS Schedule C, “Profit or Loss from Business.” A separate Schedule C must be filed for each business that the owner operates. Net business profits are subject to income tax and the employer and employee portions of Medicare and Social Security taxes (i.e., 15.3% in 2019).

  1. Partnership

Two or more individuals in business together without incorporating are, by default, a Partnership. Partnerships are considered a separate tax entity and are required to file a separate income tax return, IRS Form 1065, “U.S. Return of Partnership Income.” Partners receive an IRS Form K-1 for each one’s pro-rata share of non-wage income and expenses, based on the operating agreement (a MUST). Partners are responsible for tracking the basis of their shares to determine how distributions are taxed.

  1. Subchapter S Corporation

Qualifying businesses can take the Subchapter-S election and avoid the double taxation of a C Corp. A number of rules apply to see if a business owner(s) qualifies. Sub-S Corps are also considered a separate tax entity and are required to file a separate income tax return, IRS Form 1120S, “U.S. Income Tax Return for an S corporation.” Shareholders receive an IRS Form K-1 for their share of non-wage income and expenses, based on the operating agreement (again, a MUST). Owner/employees earn wages and get a W-2.

Determining how your LLC operates for tax purposes is not easy. It depends on the circumstances and many rules apply. Need more information? The IRS has you covered, as usual. Check out their tax information, tools and resources for business and self-employed individuals at https://www.irs.gov/businesses.

The Earned Income Tax Credit Still Exists!

Many of the tax rule changes under the 2017 Tax Cuts and Jobs Act eliminated or reduced tax benefits that we were used to. For example, miscellaneous itemized deductions and personal exemptions are gone and deductible state and local taxes are capped at $10,000. Isn’t there any good news about taxes? Yes! The Earned Income Tax Credit, or EITC, still exists! 

Don’t leave money on the table!

EITC is a valuable tax benefit for working people with low-to-moderate income. Eligibility and the credit amount depend on your earned income and number of eligible children in your household. For example, in 2019, a married couple that earns up to $52,493 with two eligible children could get a $5,828 federal tax credit. For 2018, the average EITC credit was $2,445. 

Five things that you should know about EITC:

  1. A tax credit is even better than a tax deduction because it’s a dollar-for-dollar tax liability reduction, not just a reduction of taxable income.
  2. EITC is a refundable credit and could reduce your tax liability to a “negative” amount. Your refund could be even bigger than the amount of federal taxes that were withheld from your paycheck. 
  3. Taxpayers qualify based on their income, the number of children they have, and the filing status they use on their tax return. For a child to qualify, they must live with the taxpayer for more than six months of the year.
  4. To qualify for EITC, you must have earned income (e.g., wages or self-employment income) that cannot exceed an IRS-specified amount that is adjusted annually. Taxpayers may move in and out of EITC eligibility, especially after major life events.
  5. To get the credit, you must file an income tax return, even if you do not owe any tax or are not otherwise required to file. 

Some people don’t know about EITC or they do not know that they qualify. Each year, 30% of the EITC-eligible population is new to this valuable tax credit, many of whom don’t know about it. Not taking a credit that you qualify is just like giving away money! Who wants to do that? Don’t miss out on your EITC refund. Don’t let your friends and family miss out on their EITC refunds. 

Need help? Get details about income limits, credit amounts and eligibility at https://www.irs.gov/newsroom/the-earned-income-tax-credit-can-put-money-in-taxpayers-pockets.

Is Your Computer Secure?

We use our computers and other devices every day. Cyber thieves know that, so they work every day to break into computer systems to steal valuable financial and personal data. We are all vulnerable and we all need to protect ourselves. Security advice to protect your data is everywhere. But how can you sift through all of it? 

That red screen can’t be good!

Here are five tips compiled from different reliable sources to help you create a secure computer environment and protect your private information:

  • Anti-virus Software

Anti-virus software scans computer files or memory for certain patterns that may indicate the presence of malicious software and looks for patterns based on the signatures or definitions of known malware from cyber criminals. Anti-virus vendors find new issues and update malware daily, so it is important that you have the latest updates installed on your computer. Keep security software set to automatically receive the latest updates so that it is always current.

  • Firewalls

Firewalls provide protection against outside attackers by shielding your computer or network and preventing malicious software from accessing your systems. Firewalls can be configured to block data from certain suspicious locations or applications while allowing relevant and necessary data through. But remember, firewalls do not prevent attacks; they protect against malicious traffic (unless the user accidentally installs malware – see “phishing” below).

  • Two-Factor Authentication

Many email providers now offer two-factor authentication protections to add an extra layer of protection. Often, two-factor authentication means the returning user must enter username and password plus another step, such as entering a security code sent via text to a mobile phone. A thief may be able to steal the username and password but it’s highly unlikely they also would have the mobile phone to receive the code and complete the process.

  • Backup software/services

Critical files on computers should routinely be backed-up to external sources, such as a copy of the file is made and stored either online as part of a cloud storage service or saved to an external hard drive. Periodically verify that the files are backed up and can be retrieved.

  • Phishing emails

Never open an email from a suspicious source, click on a link in a suspicious email or open an attachment without scanning it first. Otherwise, you could be a victim of a phishing attack and your data could be compromised. Never click links within pop-up windows, download “free” software from a pop-up, or follow email links that offer anti-spyware software. The links and pop-ups could be installing the spyware that they claim to be eliminating. 

You may assume that the information you have on your computer is not valuable to a cyber thief. But think about it; access to your personal information, bank accounts and credit cards are all that cyber criminals need to steal your identity and create havoc in your personal life. Following these five cyber security tips will help you create a secure computer environment and protect your financial and other personal information.