Hi, my name is Bruce Roth, and my guest today is Dave Horwedel. Dave is the founder of Torchlight Tax and Financial Services. He is also an enrolled agent and tax expert in Las Vegas, NV. What is the best business structure for taxes? What type of corporations and corporate entities there are? And why one might choose one over the over?
I want to mention that I’m talking about the tax implications of this, and I’m not practicing law. But, there are two actual types of corporations.
The Best Business Structure for Taxes
There is a C-Corporation which is the major corporation. The C-Corporation has stockholders and they make a lot of money. They usually have corporate meetings and boards of directors meetings. And it’s a big deal. They actually have to pay corporate income tax on the profits on the profits that the corporation makes.
And then as they pay their shareholders in dividends, the shareholders have to pay individual taxes on the dividends they receive. That’s the big corporations, called a C-Corporation.
The other type of corporation is called an S-Corporation. An S-Corporation is a small business corporation, it has limits on how much money it can make. It can’t have more than 100 shareholders. But the main thing about an S-Corporation is that the income it makes automatically flows through to its shareholders, so it never makes an income as a corporate entity. It all gets credited to the individuals who own it, so there’s no double taxation.
And this is a very, very common thing that a small businessman. A self-employed person, they can become an S-Corporation, and they can have tax benefits for them. And it also shields them legally.
Now, there is one other entity that’s not actually a corporation, but everybody thinks it is. It’s called a limited liability company, or LLC. Now, the funny thing about an LLC is that it can apply to internal revenue service to be treated tax wise as an S-Corporation, and in my cases this will give them a significant break as far as the self-employment tax, social security, Medicare. So, there’s actually only two types of corporation really, there’s the C, then I have the S. But there’s also the LLC, that kind of half rates as one, and it’s something that people should be aware of. And it can have definite tax implications for how you do it, and you could also do it to shield yourself from lawsuits and things like that.
Hi. I’m Bruce Roth and my guest today is Dave Horwedel. Dave is an Enrolled Agent and the founder of Torchlight Tax. Dave, what is IRS representation?
What Is IRS Representation?
It means that because you have this Enrolled Agent status you can have your client sign a Power of Attorney naming you as their agent, and they can state exactly what they want you to handle, but basically it goes to the point where you fully represent the person before the IRS and the IRS doesn’t even talk to the person because you’re their agent, you’re authorized to represent them because they signed the Power of Attorney.
Okay. When might a person need someone to represent them before the IRS?
Well, let’s say you get a letter back from the IRS, you did your tax return and then they say, “You owe us $50,000”, you might want to have somebody represent you before the IRS in that circumstance, or if they’re going to do an audit on you it would not be a bad idea to have an Enrolled Agent there because, see, the Enrolled Agent knows the tax law, he knows what the IRS is supposed to do, he knows it and the IRS guy who’s there knows it, so they’re not going to try to push you around. They’re not going to try to cut any corners because they’re going to have to be totally … they’ll have someone there who knows what’s going on, and usually at an audit you can definitely help your client.
Tax Audit Representation Cost
You also could use an Enrolled Agent to do offers and compromise where you settle with the IRS for less than the full payment, when you negotiate installment agreements There’s also a thing called uncollectable status which basically means you have a large debt with the Internal Revenue Service, or you have a debt but it can’t be large. But at the present time you’re not making enough money to pay off that debt and you don’t have any assets that they can seize. You don’t own property that they can just take and is worth a lot of money. So, the IRS rules that you’re uncollectable and they leave you alone. They stop trying to bother you about that unless your income goes up or something changes they’re not going to collect that money.
I have heard many taxpayers or potential taxpayers say something like “I don’t want to raise any red flags by filing my late taxes” or “I want to stay under the radar”. With a healthy fear of the IRS and the inability to pay their tax debt, this seems to many to be the only solution. A variant of this is “Why file my taxes if I can’t pay them?”
This is an understandable concern. Who wants to receive letters and notices from the IRS! You certainly don’t want to give them access to all of your bank accounts and financial data and send them a notice “I have not filed taxes for ten years.”
This is all fine. But what is the BIGGEST red flag to the IRS? NOT FILING YOUR TAXES. The IRS knows you exist. You have a Social Security Number. They have access to it. They know you did not file a tax return. If you earned wages your employer sent a W-2 to the IRS. If you were an independent contractor, your customers reported paying you to the IRS. If you earned interest, your bank reported this to the IRS. If you earned dividends or profited on stock sales, your brokerage house reported this to the IRS. If you sold a house, this was reported to the IRS. Even if you made no reported income, they may still catch you out. You own a car or a house or are making payments on one. They can find this out and ask where did this money come from. They may even estimate your income based on your mortgage payment!
Yes, it is true that you might seem to get away for it for a while. But you gain nothing. All the time you are “getting away with it”, the IRS is waiting and the bill is growing. The IRS never goes away. They may be slow. They may be stupid. But they are always there. If you can go an entire lifetime without paying, great. You did it! Of course, if you have an estate, they may still get their fingers in. But if you do not make it through your entire lifetime, being under the radar for some years gains you nothing.
When you finally have to file, you will have to pay the penalties and interest for not filing and paying. And the kicker is the original penalties for not filing are 10X those for not paying!
Plus, on late filings, the rules favor the IRS. If you owe IRS money on un-filed taxes, there is no statute of limitations. If you owe them $10,000 on a return you have not filed from say 2010, you will pay that with penalties and interest if they catch up with you and you file in 2015. And suppose they owe you $15,000 refund in 2011, and you also file it in 2015. Sorry, too late. No refund for you. But the 2010 debt, penalty and interest is on your 2015 tax bill.
To file or not to file?
The answer is to file. There really is no benefit in not filing. But how to best do it?
It is important that it is done right. You are doing a late return and any penalty and interest are based on what is owed. So your best bet is to hire an Enrolled Agent and back him up with any data he asks for. If he asks you for your business mileage for 2010, get it for him. 10,000 business miles might give you a tax deduction of $5.000!
If you paid tuition in a past year, that may be a $2500 credit. Enrolled Agents, such as those att Tax Solutions, are the only federally licensed tax experts. We know the law and will look out for your best interests. So when we ask you a question, listen closely and do not automatically say “Who knows? It was too long ago.” Cooperate with us in finding every tax break.
It takes expert knowledge, hard work, and data to get you every legal tax break. We have the expert knowledge and do the hard work. You will have to help us get the data we need.
If you do decide to go it alone, OK. That is your right. You are still welcome to contact us for a free consultation. We will do it by email, phone, or in-person. We will be glad to help, but we won’t do your whole return for free. If you try it alone and wind up with a large tax bill, you may wish to re-consider. Usually the cost of EA tax preparation is a small percentage of the total tax bill. Also, consider why the return was not filed on time in the first place? Was it because you were confused or did not know what to do? If so, this would be another reason to use an EA.
Now for returns six months past the due date, there is no electronic filing. So you will need file your return by sending a paper copy to the same location you would file your regular return. This data is on the tax form itself. If you have received a notice from the IRS, make sure you send your return to the location directed in the IRS notice.
Using an EA
Another advantage of using an Enrolled Agent is he may be able to assist you in getting an abatement in penalties. This is likely to be approved for one year, not for more than one. This can be a big savings if the year has accrued substantial penalties and interest. The rules about abatement are somewhat complex. Very often you will see an IRS representative who will ask you a bunch of questions, type the answers into his computer and get a computer-generated answer back that you are not eligible for an abatement of penalty and why, but the computer also says you can appeal it. Usually the appeal is approved. Sounds crazy. Well, I never said tax rules were sane. The well-trained EA sits through the expected question and answer period, is told the abatement is disapproved which he expected, files his appeal and gets the abatement.
If you cannot pay what you owe, you can request an additional 60-120 days to pay your account in full. You can also request an installment agreement which will likely allow you to pay it off over five years. There is a fee for this and you have to pay interest as well. But if you get this approved and keep your agreement, this protects you from tax levies and garnished wages. You also may be eligible for an Offer In Compromise. Maybe the IRS will accept less than full payment. If you go this route, make sure you check when your debt was assessed. The IRS has a statute of limitations requiring them to collect within ten years of assessment, but this is extended while an Offer in Compromise is under consideration. So if your bill is about to disappear through the statute of limitations, do not enter into an Offer In Compromise. Also, some tax bills are deemed un-collectible if you have no assets the IRS can levy and your income is below a certain level. The level is variable based on the cost of living where you live but you can look it up on the Internet or your Enrolled Agent will find out.
What to do?
If you have any questions or need any tax assistance contact GuardDog Tax for a free consultation. One of our Enrolled Agents (top federally credentialed tax expert) will assist you. Email us or call our Toll Free Number (877) 758 7797.
Many people save thousands of tax dollars by donating to their favorite church or charity, but miss out on thousands more. The charitable deduction is a well-known tax break. A little-known stratagem can dramatically increase its impact. This is completely legal and IRS approved. It worked under Obama, and it still works under Trump. It can save large donors millions, but smaller donors can still benefit.
This huge break applies when a person sells an asset that has gone up in value and makes a charitable donation. The asset can be a house, stock, other property, or even a business. Now, if the person sells the property to make a donation, he makes a taxable profit. This profit is then cancelled out when he makes a donation, subject to certain rules. As an example, suppose he has an asset that he paid $10,000 dollars for and he sells it for $100,000. He now has $90,000 taxable income on the profit of the sale. He donates $100,000. Now has a charitable deduction of $100,000. Assuming he has sufficient income to support that large a donation, he winds up with his taxable income $10,000 less than when he made the sale. Not bad.
But get this. Suppose he donates the asset and the buyer buys it from the charitable organization. He has no income from the sale and a $100,000 donation. If his taxable income is enough to support the donation, HIS TAXABLE INCOME IS $100,000 LESS THAN WHEN HE MADE THE DONATION.
Now, there are a lot of rules and the IRS does not always make things simple. I am not going into all the fine print here. I recommend before you make a large donation counting on a tax savings, check this out with a trusted tax expert. You do not want to discover after-the-fact that it is disqualified by some regulation.
This can apply to many situations. Suppose you started and built a successful business. It started out with zero value and is now worth $2 million. You can sell it, make a $2 million profit and make a $2 million dollar donation. However, part of the donation may be disallowed in the current year if you do not have enough income. You could wind up with a tax bill! And no business!
But if you donated the business, and the buyer bought it from the charitable organization, you have no profit and a $2 million dollar donation to offset your taxable income. If you can’t use it all in current year, you can roll it over to the next.
What if you do not want to give the whole business away? Maybe you want to have some money to live on. OK. Donate 20% and the non-profit sells that. You sell 80% Non-profit gets $400,000. You get $1.6 million dollars. Taking the donation value of $400,000 off, and you get taxed on $1.2 million of the $1.6 million you made off the sale!
If you would rather donate to your church or a charity, rather than pay the US government, applying this stratagem may work well for you. Maybe you feel your church or charity will do more good with the money than the federal government. I feel that way myself. I hope this article helps make it easier for those who wish to donate to do so.
What to do?
If you have any questions or need any tax assistance contact GuardDog Tax for a free consultation. One of our Enrolled Agents (top federally credentialed tax expert) will assist you. Email us or call our Toll Free Number (877) 758 7797.
You may be tempted to forget about your taxes once you’ve filed your tax return, but if you start your tax planning now, you may be able to set yourself up for a big savings next year!
Here are six tips to save you time and money on next year’s taxes:
1. Keep tax records safe
Place your last year’s tax return and supporting records and documents in a safe place. If you ever need your tax return or records, it will be easy for you to get them. If you are familiar with computer systems, you can save or scan your records into the computer and get rid of needless paper. Make sure the records are legible in scanned form and are properly backed up.
2. Take action when life changes occur
Some life events such as a change in marital status or the birth of a child can change the amount of tax you pay. When they happen, you may need to change the amount of tax withheld from your pay. To do that, file a new Form W-4, Employee’s Withholding Allowance Certificate, with your employer.
3. Report changes in circumstances to the Health Insurance Marketplace
If you have enrolled for health coverage through the Health Insurance Marketplace and receive advance payments of the premium tax credit in 2016, it is important that you report changes in circumstances, such as changes in your income or family size, to your Marketplace.
Advance payments of the premium tax credit provide financial assistance to help you pay for the insurance you buy through the Marketplace. Having at least some of your credit paid in advance directly to your insurance company will reduce the out-of-pocket cost of the health insurance premiums you’ll pay each month.
However, it is important to notify the Marketplace about changes in circumstances to allow the Marketplace to adjust your advance payment amount. This adjustment will decrease the likelihood of a significant difference between your advance credit payments and your actual premium tax credit.
4. Choose your tax preparer wisely
If you want to hire a tax preparer to help you with tax planning, start your search now. If you already have a tax preparer, give him or her a call and find out which tax planning strategies you can use this year. Also, check to see if your preparer is an enrolled agent, CPA, or lawyer. These professionals have had to pass stiff examinations to get their license, and also are required to do Continuing Professional Education every year so they don’t mis-advise you. If your preparer does not hold one of these licenses, suggest he take the enrolled agent exams. If he knows his business and is a pro, he will pass.
5. Consider itemizing
If you claim a standard deduction on your tax return, you may be able to lower your taxes if you itemize deductions instead. Review what is deductible on Schedule A or get with an Enrolled Agent to sort it out. Also, be aware of the fact that any deductions you create that when totaled fall below the standard deduction give you no tax benefit. Let’s say you plan a $5000 charitable deduction at the the end of every year to your church, and in 2016 this will bring your total itemized deductions close to but slightly below your standard deduction. You get no tax benefit from this donation. Well, that is fine in one sense as you wanted to make the donation to help your church. But why not make the $5000 donation on January 1st of 2017 and make another donation on December 30th 2017. Your church will be just as happy, and in 2017 you will get a tax benefit as the $10,000 donation that year will put your itemized deductions well above the standard deduction.
If you learn to think with deductions, credits, and taxes, you can save your future tax dollars. Now is the time to do so. Tax pros are usually quite happy to assist you on tax planning in the summer. Somehow, it does not seem to work as well on April 14th.
For help with tax planning, or any other help you may need, contact Torchlight Tax and Financial Solutions.
What to do?
If you have any questions or need any tax assistance contact GuardDog Tax for a free consultation. One of our Enrolled Agents (top federally credentialed tax expert) will assist you. Email us or call our Toll Free Number (877) 758 7797.
If you’re self-employed, you pay the self-employment tax on your income. This tax applies to sole proprietors, partners, or LLC members. It does not apply to Corporations.
The self-employment tax is the government’s way of collecting Social Security and Medicare taxes from your self-employment income. Tax owed is in addition to any income tax. In 2016, the Social Security tax is 12.4 percent on the first $118,500 in wages. The Medicare Tax is 2.9 percent on all your income – there is no ceiling. An additional .9 percent is charged on your income over $200,000 ($250.000 if married filing jointly).
If you’re an employee, a portion of your wages is hit with a Social Security tax. In general, half of these federal employment taxes are withheld from your paychecks while the other half gets paid by your employer. However, you pay the extra 0.9 percent Medicare tax if you are a high earner. Your employer doesn’t owe any part of this.
What you pay in self-employment taxes is likely to increase. As the Social Security tax ceiling increases to account for inflation, more and more of your income will be subject to the 12.4 percent Social Security tax.
Thus, we are looking at a 15.3% tax on most people’s income. It is not as obvious for the employee. For the self-employed individual, the 15.3 % tax can be VERY obvious come tax time, especially if he did not plan or set aside for it. Please note there is no “standard deduction” or “exemption” on self-employment income. The tax starts on your first dollar of net self-employment income.
Joining the ranks of the self-employed can be pretty heady stuff. Increased independence. No boss to report to. No fixed ceiling on your income. The opportunity to create a business you are proud of.
What to do?
If you have any questions or need any tax assistance contact GuardDog Tax for a free consultation. One of our Enrolled Agents (top federally credentialed tax expert) will assist you. Email us or call our Toll Free Number (877) 758 7797.
