Free Continuing Education for Small Business
Okay, so we can go ahead and get started on the webcast here. So, here's the different things we're going to be going over. The first thing is Entity Selection, choosing the correct entity for your business. The Auto Deduction, Meals and Entertainment Deduction, Home Office, Deferring Payroll Taxes on Owners, Marketing with the Energy Tax Breaks and the Domestic Productions Activity Deduction.
So the first item is Business Entity Selection. When you have your own, when you start a small business, it's very important to make sure you're choosing the best entity for your business. There are several different choices. Sole proprietorship, LLC, partnership, C Corporation and S corporation. So with the sole proprietorship, it's the easiest one to set up. There's no filing necessary with the IRS and no additional tax returns needed, just file it on the schedule C on your personal tax return. The drawback to it is that you do pay self employment tax of 15.3% on any profits.
You can start an LLC. If it's a single member LLC, you're taxed the same way as the sole proprietorship, so it's just recorded on your 1040 on the schedule C. Or you can elect to be taxed as an S corporation and then you would file an additional tax return. If you are a single member LLC that elects to be taxed as an S corporation, you are able to possibly avoid some of that self employment tax, but you do need to take a reasonable salary, so you will have to be on the payroll.
So a multi-member LLC or a partnership is when two or more owners are sharing profits and losses, and then you would need to file the 1065 partnership return. C Corporation, file a separate tax return and you pay tax at the corporate level and on any dividends that you distribute to yourself as an owner. So there is a little bit of double taxation there.
And then the S corporation, that is a flow through entity, so it does have its own tax return but you will get a K1, which then flows through onto your personal tax return. So the S corporation itself doesn't pay tax, you pay tax on your personal tax return and you are able to possibly save on self employment tax by paying yourself a reasonable salary and taking the difference between your reasonable salary and the profits as draws, and those draws are not subject to self employment tax.
So if you want more details on entity selection and which one might be right for your business, you should attend the webcast entitled LLC's and S Corps Explained, using them to reduce taxes that John Huddleston does. And he'll go into much more detail about the different entities and can help you decide which one is best for your business. So remember, you can head on over to smallbusinesswebcast.com and find out when he's doing that.
So next is the Auto Deduction. There are two different methods with which
to deduct your auto expenses on your tax return. First is the standard
mileage deduction. So for 2010, it's 50 cents a mile and you can keep track
of your miles for any business related travel. So business miles includes
trips to see clients, trips to job sites, post offices, banks, supply
stores, etcetera. And especially for construction companies, this is, and
this can be true also for architect and engineering firms also, but there's
a lot of job site visiting, so it's important to keep track of those miles
because it can add up to be quite a large, significant deduction.
It should be noted though, that business miles do not include trips from
your home to your office. These are just considered commuting miles. There
is a way to avoid that though, and that is to make your home office your
principle place of business, then every time you leave your home you're
able to deduct the miles. And we will go over how to get a home office and
qualify for that deduction.
So, the actual expense method is the other method. This is, oftentimes, the
best selection if you have 100% business use vehicle. So if you're a
contractor and you have a truck that's 100% for business use, you're
probably going to get a larger deduction with the actual expense method.
When you use the actual expense method, you get to deduct the business
portion of the actual expenses off of your vehicle. The expenses include
gas, repairs, oil changes, loan interest, tires, license, basically any
upkeep on your car.
You also get to take depreciation, so if you 100% business use truck, it
can be less than 100%, but for this example, you have 100% business use
truck that you pay $20,000 for, you get to depreciate that over 5 years. So
that's a lot of times why the actual expense method ends up exceeding the
standard mileage deduction when you have a vehicle that is high business
You still need to keep track of your business miles to determine business
use. If it's less than 100%, so just keep track. January 1st write down the
mileage on your odometer, keep track of your business miles during the year
and then write down the ending mileage on your odometer at the end of the
year and you'll know your total miles and your business miles so you can
figure out the percentage of business use. You do need to remember, though,
that once you choose the actual expense method, you cannot switch back to
the standard mileage method for that vehicle. You need to make sure that
it's going to be the best choice for you over the life of the vehicle.
So next is Meals and Entertainment. Meals and entertainment are a 50% deduction on your tax return. There's an exception to the 50% deduction, and that's if meals are provided to an employee for the convenience of an employer at the workplace. So if you're working on a job site, there's no eating establishments near the job site, you want to keep the employees there rather than letting them go and driving a long ways to get to some food and possibly risk them coming back late. So if you do that, if you provide the lunch for them, that is 100% deductible.
When you go out to a meal for business you must be conducting a legitimate business discussion. And you must be able to answer the following questions. Who was entertained? Where did the meal take place? When did the meal take place? Why did the meal take place? And how much did it cost? So good ideas just to keep the receipts from the meal, you can flip it over on the back, write who you were there with and what you discussed and then all the other questions are answered by that receipt. So that's an easy way to keep track of that.
So next is the Home Office Deduction. Like I was saying in the auto deduction, if your home office is your principal place of business, then you're able to deduct all of the business miles every time you leave your home office. So, if it's possible to swing the home office as your principal place of business, then you do get that home office deduction and you possibly get a larger auto deduction.
So, to qualify as a home office, your office meets one of the following requirements. It must be your principal place of business or a place where you meet clients or if the office is a separate structure that's not attached to your house or it needs to be a place where you store inventory. So, if your office qualifies under one of those four, then you would calculate the deduction using the square footage method. So if you have, so an example is if you have a 2500 square foot home and your office, home office, is 500 square feet, then the home office is 20% of your home. This means you're able to deduct 20% of your mortgage interest, property taxes, insurance, utilities, or if you rent, use it to deduct 20% of your rent and utilities, etcetera. You also are able to depreciate a portion of your house. So you would take 20% of the purchase price of your home, less the land, and you would be able to depreciate that.
One note on the storing inventory. If you use your garage to store inventory or a 100% work use vehicle, then you may be able to also deduct a portion of your garage as home office. So if you are a contractor and you have that 100% business use truck, or you have inventory from your jobs and you keep them in your garage, then that's another important deduction.
So Deferring Payroll Taxes on Owners. So corporation owners who are also employees, so this would go for C corporations or S corporations, if you're a sole proprietor, single member LLC or partnership, you wouldn't be paying yourself a wage. So this wouldn't apply to you, necessarily but if you are a single member LLC, remember you can elect to become an S corporation, so this might be something that would work for you in the future.
So, corporation owners who are also employees can defer some payroll tax obligations on their income until the following year. So how you would do that is you would pay a large percentage of the owner's salary at the end of the year and then the payroll taxes wouldn't be due until the beginning of the next year. So if you're a monthly tax depositor and you pay a salary in December, the payroll taxes aren't due on that until January, so if you want to defer that expense into the next year, this is the way you would do it.
So, tax withholding on the salary is treated as if it's paid even evenly throughout the entire year, so it doesn't matter when the corporate owner gets their wage. They could take a small amount each month and then have a large, kind of balloon payment to themselves in December and then they would be deferring those payroll taxes. So when you have withholding on your salary, for federal taxes, like I was saying, it is treated as if it's being paid evenly throughout the year, so you can stop making quarterly tax payments if you have enough tax withheld.
So you don't need to make those quarterly tax payments throughout the year and you can have that large payroll tax taken out at the end of the year. And if you are worried about cash flow during the year, you know, having money to live off of, you can take draws or loans of shareholder during the year. And then convert those to salary at the end of the year. So you don't need to worry about having enough money to meet your personal needs.
So next we have the energy credits. The energy tax credits that are available and how you can market those to your clients. So the American Recovery and Reinvestment Acts was enacted in 2009 and it provides homeowners with the possibility of taking a tax credit for energy saving improvements to their homes in 2009 and 2010. So this is set to expire at the end of this year, but there is a little bit of time left if you want to take advantage of this. So this is a tax credit that's available to individuals on their personal tax returns, this isn't a business credit. So you can market this to your clients as, so basically, there's two different credit.
One credit is up to 30% of the cost or a maximum of $1,500 for high efficiency heating and air conditioning units, water heaters, windows, skylights, doors, etcetera. The other tax credit is for up to 30% of the cost for solar electric systems, solar hot water heaters, geothermal heat pumps and fuel cell property. So there's no $1,500 max on that one. So basically, these tax credits present a marketing opportunity for businesses in construction, architecture and engineering firms. You can let potential clients know about this credit and market to them how you can help them implement these different improvements on their home and point out to them that this tax credit is available to them.
Okay, so the last thing is Domestic Productions Activities Deduction. This is a big one for construction, architecture and engineering firms. So this one is also set to expire at the end of 2010, however if you haven't taken it in past years, there's still time to amend the 2007, 2008 and 2009 returns in case you missed it. That's why I definitely want to go over it.
So the domestic production activities deduction started in 2005 and it allows many architects, engineers and contractors a 3%, well it started at 3% in 2005, it increased to 6% in 2009 and 9% in 2010, so it allows a deduction for your participation in domestic production. So basically, domestic production includes any construction, engineering or architectural services performed in the US on construction in the US. So the amount of the deduction allowable is limited to 50% of W2 wages paid by the tax payer, and this does include wages paid to the owner. So if you are the only person working in the company, and you think, well, no, I can't take this deduction because I don't have any employees, you can make yourself an employee and pay yourself a wage.
So once again, if you're a single member LLC, that's why it would be a good idea to go ahead and make that S Corporation election so that you can pay yourself a wage and then you're able to take this domestic production activities deduction. And you do need to remember that it is for domestic production, so it does have to take place in the US. And if you are an S Corporation, the deduction is calculated on your S Corporation return, but then flows through onto your personal return on the K1 and, you know, if you're a sole proprietorship, and do a Schedule C, then that deduction is going to be on your personal return as well.
So that was all of the tax tips that I have. So I want to open it up for
questions. I'll un-mute everyone here. So if you need, if you want any more
clarification on anything I went over, feel free to ask and you can ask in
chat if you don't want to ask out loud. So does anybody have any questions
Carl: This is Carl Colton. The domestic activities design
or whatever it was, did you say that did not apply to LLC's?
Jessica: No, any entity can take that. It just is different on how
it's applied, so if you're a single member LLC, you can definitely take it,
it just is on your personal 1040.
Carl: Okay, and it says "for domestic production includes
construction," as an architect, how does that work?
Jessica: If you do the design on any building that's been
constructed in the US, then that would be domestic production. Does that
answer your question?
Carl: Yeah, thank you.
Male Participant: Hey . . .
Male Participant: Can you hear me?
Male Participant: Can you go to the slide that talks about home office
Jessica: I'm sorry, I can't hear you very well, what was that?
Male Participant: Go back to the slide that talks about home office
Jessica: Yes. Let's see. Okay.
Male Participant: So, you mentioned that that office space should be a
separate structure, so I have a separate office room in my house which I'm
using for a home office. It just has the laptops, desktops and other things
related to my business. This place is not being shared with anything else,
but it's part of the house. Can I still deduct it as a home office?
Jessica: Yes. So this list here of the four different requirements,
it must meet one of the requirements. So, it doesn't need to be a separate
structure. It just needs to be used 100% for business, but it can be,
definitely be just a separate room in your house.
Male Participant: Okay. And I can do this even if I'm LLC and an S
Corp? Am I right?
Male Participant: Okay. Because someone told me if I'm an S Corp, I
cannot do that, so that kind of threw me off and I'm not claiming it for
the last two years.
Jessica: Well, if you're an S Corporation, it's a little different.
You can't deduct it straight off of your S Corporation income. What you can
do is, there's two different ways. You can take it based on the W2 wage
that you pay to yourself and then the deduction would be a miscellaneous
deduction on your schedule A, or you can pay yourself a management fee and
put that management fee on the schedule C and take the home office
deduction against that management fee on the schedule C.
Male Participant: Okay.
Jessica: Does anyone else have any questions?
Carl: This is Carl Colton. That was all the questions I
had. I thought it was a very helpful seminar.
Jessica: Okay. I just want to remind everybody again to, if you
haven't already, to go to smallbusinesswebcast.com and also I'm available
for any consulting, tax preparation, QuickBooks help you might need. So,
feel free to email me or give me a call if you need any help with that. Or
if you think of any other questions after you get off here, feel free to
email me or give me a call. And, we'll be emailing you the PDF of the
slides for this presentation, so you'll have that as a reference.
Carl: Great. Thank you very much.
Jessica: If there's no other questions, then, is that all the
Male Participant: Yes. Thank you.
Jessica: Okay. Well thank you, and have a good rest of the day.