Simple Subjects - Tax

Forming an LLC in the Middle of the Year

Thu, 21 May 2009 22:03:50 -0700

A reader asks: In the middle of this year I reorganized my sole proprietorship into an LLC. My question: Is there some formality I must show the IRS? Also, should I use the LLC name or the original business name for most purposes?

My answer: Given that an LLC is a disregarded entity for Federal tax purposes, there isn't much of a change really. If you formed it in the middle of 2009, the only difference is that you'll have 2 Schedule C's for the year--one for the period during which the business was operated under your name (and SSN), and one for the period during which the business was operated as an LLC (with a new Federal Employer Identification Number).

As to what business name to use in general: I'm not a lawyer, so it would be a good idea to get this verified, but I believe there could be potentially be unlimited liability issues if you don't operate under the LLC's name. That is, if you continue doing business as yourself (or under the name of a "doing business as"), the LLC might not protect you from any lawsuits.

Want to learn more about the entity-selection decision? Take a look at my related book: Surprisingly Simple: LLC vs. S-Corp vs. C-Corp Explained in 100 Pages or Less.

How do I deduct a theft/embezzlement loss?

Fri, 15 May 2009 02:02:51 -0700

A reader asks: This year my business lost money to an employee embezzling funds. How do I deduct that? Can I add it to a 1099 for them?

My answer: Where you deduct the loss varies depending upon whether your business is a sole proprietorship, corporation, etc. But the embezzlement will be deducted as a Theft loss (and generally listed in the "Other Expenses" category on the tax return). IRS Publication 547 has more information.

Want to learn more about the entity-selection decision? Take a look at my related book: Surprisingly Simple: LLC vs. S-Corp vs. C-Corp Explained in 100 Pages or Less.

Should I pay FUTA on my spouse?

Thu, 07 May 2009 20:13:03 -0700

A reader asks: I have a sole proprietorship and employ my spouse and pay futa tax on him. However I was recently told that I must exempt him from futa- I thought I as the owner was exempt but it was optional for the spouse- thus him being able to benefit from unemployment should the business fail. I additionally was told that if I were a corporation he would not be exempt. Do you know if I can still pay futa on him and have him be eligible for unemployment?

My answer: The following quote is from IRS Publication 15:

"The wages for the services of an individual who works for his or her spouse in a trade or business are subject to income tax withholding and social security and Medicare taxes, but not to FUTA tax."

My understanding is that, if the business were a corporation (or an LLC electing to be taxed as a corporation), each spouse would be an employee of the corporation rather than of the other spouse. As such, I believe that both spouses would be subject to FUTA.

Want to learn more about the entity-selection decision? Take a look at my related book: Surprisingly Simple: LLC vs. S-Corp vs. C-Corp Explained in 100 Pages or Less.

Withholding Tax on Payments to Foreign Individuals

Mon, 04 May 2009 20:26:13 -0700

A reader asks: If I contract someone in Uruguay, who does not have a SSN, to do some freelance work, do I need to deduct any taxes from their paycheck? It might mean paying them more money on an hourly basis so they clear what I contracted them for. Thanks!

My answer: I have to admit that I have very little experience dealing with international taxation, so I poked around a little bit on the IRS's site to see what I could find.

IRS Publication 515 (entitled "Withholding of Tax on Nonresident Aliens and Foreign Entities") states the following:

"Generally, a foreign person is subject to U.S. tax on its U.S. source income. Most types of U.S. source income received by a foreign person are subject to U.S. tax of 30%. A reduced rate, including exemption, may apply if there is a tax treaty between the foreign person's country of residence and the United States. The tax is generally withheld from the payment made to the foreign person."

As to the point about tax treaties between countries, you can find information about tax treaties here.

Want to learn more about small business taxes? Take a look at my related book, Surprisingly Simple: Independent Contractor, Sole Proprietor, and LLC Taxes Explained in 100 Pages or Less.

Foreign Earned Income and Tax Brackets

Thu, 23 Apr 2009 21:22:10 -0700

A reader asks: For all of 2009, I will be living and working abroad, and I will earn roughly $150k. I understand that about $88k will be tax exempt. My question is regarding the rest of that money. How will it be taxed?

I have been told that i will pay taxes on the remaining $62k at $150k tax bracket. But I'm not sure how exactly I'd go about calculating that. Any information you can give me will be appreciated.

My answer: Take a look at the worksheet on page 37 of the instructions to Form 1040. Essentially, you calculate your tax on the entire amount (150k), then you subtract what the tax would have been on the excluded amount.

In your case, I believe it should work out that the amount above the exclusion will simply end up taxed at 28%.

Want to learn more about taxes? Take a look at my recent book, Taxes Made Simple: Income Taxes Explained in 100 Pages or Less.

Taxation of Owner's Salary for Sole Proprietorship

Thu, 16 Apr 2009 20:52:25 -0700

A reader asks: My business is a sole proprietorship. When I pay myself an income from the business, how is it taxed and how do I report it? Does it count as salary? Is it a loan? Any help you can offer would be greatly appreciated!

My answer: If we're talking about Federal income taxes, it's neither salary nor a loan. In fact, it isn't anything.

As far as the IRS is concerned, for a sole proprietor, there is no distinction between the business and the person running it. As such, moving money from the business' checking account to your own checking account will have no tax effect whatsoever. It would be analogous to you moving money from one personal checking account to another personal checking account.

Quick note: They are going to tax you on the money that goes into the business (ie, the profits). As a sole proprietor, the business' net profit will show up on your own personal Form 1040 (on Line 12). This will be included in your taxable income, and you'll therefore be paying taxes on it.

But again, for sole proprietors, Federal tax law doesn't distinguish between your personal checking accounts and those of the business. As a result, moving money from one to the other will have no tax effect.

About the Author: Mike Piper is the author of Surprisingly Simple: Independent Contractor, Sole Proprietor, and LLC Taxes Explained in 100 Pages or Less.

What are refundable tax credits?

Thu, 09 Apr 2009 20:05:38 -0700

A reader asks: I am self employed, and last year my income was a lot smaller than past years. I paid estimated taxes during the year, however, TurboTax is telling me that I'm getting a refund greater than what I paid in taxes. Could that be right?

My answer: Yes, if you claimed any refundable credits, it is possible to have a tax refund that's greater than the amount of taxes you paid.

Most credits credits are known as non-refundable credits, and they cannot reduce your tax liability below zero. Refundable credits on the other hand can reduce your tax liability below zero.

Some of the more common refundable credits include:

However, given that most credits are non-refundable, having a refund greater than your tax payments is certainly a good reason to want to check everything over just to be sure.

Want to learn more about taxes? Take a look at my recent book, Taxes Made Simple: Income Taxes Explained in 100 Pages or Less.

How do I file a tax return for a prior year?

Wed, 01 Apr 2009 20:10:20 -0700

A reader asks: How do I know if I filed my tax return for 1999? And, if I haven't filed, how do I go about doing that now?

My answer: Easy: contact the IRS and ask them. This page has information on how to request records of previous filings.

As to how to file late, it's much the same process as filing on time. (This page has copies of tax forms from prior years.) I'd suggest getting it done sooner rather than later, by the way. If you owe money for tax year 1999, interest and penalties are still accumulating. The longer you wait, the harder it's going to be.

Want to learn more about taxes? Take a look at my recent book, Taxes Made Simple: Income Taxes Explained in 100 Pages or Less.

Finding an Old IRA

Thu, 26 Mar 2009 20:22:39 -0700

A reader asks: My Father is in his 70s and suffers from Alzheimer's. He's been living with me for the last couple years. I know that he put money into an IRA for much of his life. However, we can't seem to find any records of this account. Can you suggest how I can locate it to see if he still has funds available?

My answer: That's a tough situation. My first suggestion would be to check the Missing Money database. It's essentially a database run by a group of state and local governments that has record as to unclaimed property. I don't know if they'd have information about unclaimed IRAs, but it's worth a shot.

If that doesn't work, it looks like you're going to be stuck trying to hunt it down manually.

Does he have any other statements from other financial institutions? If so, I'd try contacting them to see if they have any information as to him ever having an IRA with them.

Alternatively, do you have any of his old tax returns? If you do, are there any 1099-DIV or 1099-INT forms included? If there are, I would contact the financial institutions listed there as well.

The last thing I can think of: To the best of your knowledge, was he ever audited by the IRS or a state tax agency? If he was, they might have copies of the proof he submitted of having made contributions to a retirement plan.

I wish you the best of luck with your search.

Want to learn more about taxes? Take a look at my recent book, Taxes Made Simple: Income Taxes Explained in 100 Pages or Less.

Where do I deduct my 401k contribution?

Thu, 19 Mar 2009 20:18:52 -0700

A reader asks: I contributed roughly $6,000 to my 401k this year. What I can't figure out is where I'm supposed to deduct that on my tax return. Any help would be appreciated.

Answer: In short, you don't. It doesn't show up anywhere on your 1040, because the amount you contributed has already been subtracted from the amount of wages reported on the W-2 that you received from your employer.

Depending upon your income, however, you may be eligible for an additional tax benefit relating to your 401k contribution. It's called the Retirement Savings Contribution Credit. Form 8880 will give you all the information you need to determine whether or not you're eligible.

Want to learn more about taxes? Take a look at my most recent book, Taxes Made Simple: Income Taxes Explained in 100 Pages or Less.