Tax Education for Massage TherapistsDecember 4, 2013

Presented by Patrick Roberts, CPA

ROCHESTER MASSAGE ALLIANCE

DisclosureIntroduction

The different business entitiesFederal tax tips and planning strategies

Recordkeeping requirementsHelpful tax forms for self-employed individuals

Questions and answersEvaluation of Presenter

Tally your Points

OVERVIEW

Information and advice disclosed in this PowerPoint should not be relied upon until consulting a licensed tax professional or attorney as such information may expire, change or become outdated without prior notice. Patrick Roberts is not liable for damages that result from the misuse, misinterpretation or misunderstanding of such information.

DISCLOSURE

Patrick Roberts’ backgroundPresident of Roberts Accounting & Consulting

Building relationships on a foundation of trust

www.rac-co.com

Contact information:

Barefoot Landing Plaza2139 N. Union Street, Suite 3

Spencerport, NY 14559

Pat@rac-co.com

Cell: (585) 469-0932

INTRODUCTION

DBAs and sole proprietorshipsLLCs (Limited Liability Company)

Partnerships/LLPsS Corporations

THE DIFFERENT BUSINESS ENTITIES

DBAs and Sole Proprietorships

• This entity is the most common form of business and is owned and operated by one individual and has no legal distinction between the business and the owner

• Easiest form of business to create, operate and dissolve

• File your DBA (doing business as) certificate with your county clerk to obtain the rights to your business name

• File all business income and expenses on Schedule C of your personal income tax return (Federal form 1040)

• Net income on Schedule C is subject to federal self-employment taxes (15.3% for 2013)

• Owners need to file quarterly estimated tax payments to avoid underpayment penalties

When was the Internal Revenue Code published (this is when the Revised Statute of the United States became formally organized and codified

into separate tax laws based on subject matter)?

1. 18742. 18783. 19194. 1939

QUESTION 1

LLCs (Limited Liability Companies)

• An unincorporated business organization of one or more persons who have limited liability for the contractual obligations and other liabilities of the business.

• Considered a hybrid business entity because it combines corporation-style limited liability with partnership-style flexibility.

• Creates a separation of liability and risk between the business and member(s)

• Must file NYS IT-204-LL form and must pay the filing fee annually in order to maintain limited liability status

LLCs (Limited Liability Companies)Continued

• LLCs with one member are considered single-member LLCs – Not considered a separate entity for federal tax

purposes– Single member claims all income and expense on

Schedule C of 1040

• LLCs with multiple member can elect to be treated as either a partnership (by default) or a S-corporation (file form 8832)– File income and expenses on Federal form 1065 or form

1120-S– Net income is passed through to each member,

shareholder or partner

• A legal contract entered into by two or more persons in which each partner agrees to furnish either capital or labor (or both) for a business enterprise and those partners then shares a fixed proportion of profits and losses based on their ownership percentage

• By default, partnerships are considered General Partnerships in which case all partners are held personally liable for all partnership debts and guarantees.

• Partners of a partnership are paid “Guaranteed Payments” which are payments to the partner for services rendered– Unlike S Corporations, these payments are considered

self-employment income and therefore subject to SE tax (similar to a sole proprietor)

Partnerships/LLPs

• A partnership can become an LLP (Limited Liability Partnership) by filing formal paperwork with the state (similar to the LLC)

• A LLP is a partnership in which some or all partners can have limited. This entity therefore exhibits elements of both a partnership and a corporation. In an LLP, limited liability partners are not responsible or liable for other partner's misconduct or negligence.

• Both GPs and LLPs file Federal form 1065 with the IRS on an annual basis in order to report income and expenses

• The net income is “passed through” to the individual partners on Schedule K

Partnerships/LLPsContinued

• A federally recognized corporation that makes a valid election to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code. In general, S-corporations do not pay any federal income taxes because the net income/(loss) is passed-through to the individual shareholders and taxed at their individual income tax rate.

• Unlike partnerships, sole proprietorships and LLCs, the net profits that are passed-through to the shareholders are not subject to self-employment tax.

• Shareholders of the S-Corporation can be considered employees

• These entities offer total separation of liability for all shareholders (investors)

S-Corporations

• They are less flexible than an LLC, partnership or sole proprietorship

• To maintain “S” election status, the S-Corporation must hold annual board meetings, file an annual S-Corporation income tax return (Federal form 1120-S) and adhere to all state statutes

• This form of entity, though more difficult to setup, may produce the most favorable tax advantage to the shareholders– No self employment taxation– Net income is taxed at individual tax brackets and is

considered a “dividend” to the shareholders• Net profits increase shareholder tax basis• Net losses decrease shareholder tax basis

S-CorporationsContinued

In 2012, the IRS received over ____________ individual tax returns and collected over

$____________ in taxes.

1. 230 million / $500 billion2. 410 million / $275 billion3. 140 million / $950 billion4. 320 million / $700 billion

QUESTION 2

Claiming the Home Office deduction (Form 8829)Claiming Meals and Entertainment

Capitalizing fixed assets (major purchases)Year-End Tax Planning tips

Miscellaneous Tax Tips

FEDERAL TAX TIPS AND PLANNING STRATEGIES

Claiming the Home Office Deduction

• Must use the home office exclusively for conducting business– Must use your home “substantially and regularly” to

conduct business (i.e. holding in-person meetings with clients in the normal course of your business)

• Deduct 100% of “direct expenses” and apply the “business-use” allocation percentage to calculate the deduction for all “indirect expenses”– Calculated by dividing sq. ft. of office by sq. ft. of entire

home– Rent, mortgage interest, property taxes, insurance,

repairs and maintenance, security, utilities and depreciation

– Home-related itemized deductions apportioned between Schedule A and Schedule C

• Regular method vs. simplified option (new in 2013)

• See if you qualify for the “simplified method” (new in 2013)

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Simplified-Option-for-Home-Office-Deduction

• Learn more by referring to IRS Publication 587

http://www.irs.gov/publications/p587/index.html

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Home-Office-Deduction

Claiming the Home Office Deduction Continued

Claiming Meals & Entertainment

• Meals and entertainment are considered 50% deductible– Write the purpose of the meeting as well as who you

met with on the receipt

• You cannot classify a personal meal or activity as a deductible “meals and entertainment expense” when you are the sole beneficiary of such an expense (the expense must be incurred to benefit the business either by developing a client relationship or meeting to conduct business)

A sole proprietor can deduct 50% of the meals and entertainment costs incurred in

order to conduct business. Did this 50% deductibility factor come from the idea

that the other 50% of the expense relates to personal benefit?

1. Yes2. No

QUESTION 3

Capitalizing Fixed Assets (Major Purchases)

• “To capitalize” means to classify an item as an asset on the balance sheet (as opposed to an expense) and depreciate that asset over its relative “useful life”– “To depreciate” means to allocate or stretch the cost of

an asset over an extended period of time (generally 3 or more years) in order to smooth the impact such an expense has on the income statement

• The IRS has many revenue regulations on the concept of expensing vs. capitalizing an expenditure– Generally, you should capitalize a major purchase if that

asset is going to be useful to the business for more than one year (computer, furniture, vehicle, building, software, etc.)

– Generally, you should expense a cost when such an expense will only have benefit in the current year (i.e. the cost to repair the toilet)

Capitalizing Fixed Assets (Major Purchases)Continued

• The IRS offers elections to accelerate the depreciation of a capitalized asset:– Section 179

• Limited to $500,000 of qualified capital expenditures in 2013

• Can only be claimed in the year of purchase• Asset can be considered new or used

– Bonus Depreciation• 50% of the cost of qualified assets• Can only be claimed in the year of purchase• Asset must be new

– MACRS (Modified Accelerated Cost Recovery System)

The Massage Therapy Alliance bought a bunch of used computers for $10,000 on January 1, 2013. The computers are considered qualified assets and they

have a useful life of 5 years. What amount of depreciation expense can the Alliance claim on

these computers for 2013?

1) $7,0002) $5,0003) $2,0004) $10,000

QUESTION 4

Year-End Tax Planning Tips

• Pay as many bills as feasibly possible before 12/31 to decrease your net income subject to self-employment taxes

• Invoice at the beginning of the following tax year to defer income tax – This is only a good idea when you know that your tax

bracket is going to be either:• Higher in the current year (the year you are

deferring the income), or• Lower in the following year

• Pay your 4th quarter estimated tax payment for New York State before 12/31 in order to claim that state income tax payment on your current year’s Schedule A (only beneficial if your itemize your deductions)

Miscellaneous Tips

• If you haven’t already done so, get a business bank account as well as a business credit card– Don’t mingle personal bank accounts and credit cards

with business financial activity

• Get an FEIN! (Federal Employer Identification Number)– http://www.irs.gov/Businesses/Small-Businesses-&-Self-

Employed/Apply-for-an-Employer-Identification-Number-(EIN)-Online

• Standard mileage deduction vs. actual vehicle expenses deduction– St. mileage deduction rate is $0.565/mile in 2013

• Claim the interest on your auto loan as it relates to your business-use vehicle (it doesn’t matter which deduction you take)– Apply the business-use allocation percentage of the

vehicle to determine

• Keep adequate records for all business income and expenses claimed on your tax return (especially your expenses)– If audited and you cannot substantiate the expenses you

used to offset your income, the IRS assumes that those expenses were never incurred

• Statute of limitations– General rule is that the IRS has three years to audit

you:• From due date of tax return (if filed prior to that due

date) or• From the date the tax return was filed if extended or

filed late– Special circumstances may allow the IRS to have six

years to audit you:• If the return includes a “substantial underestimate

of income”• You’ve left off 25% or more of your gross income

(subject to litigation)– The IRS has no time limit if you never file a return or

if it can prove civil or criminal fraud.

RECORDKEEPING REQUIREMENTS

• When claiming mileage for business use, be sure to:– Create a mileage log that lists the vehicle, the odometer

at the beginning and end of the business trip, the purpose of the trip, the date of the trip and the location of the trip

– Have at least two car receipts from your mechanic that substantiate the odometer readings you list on your mileage log (one at the middle of the year and one at the end is preferable)

• Be sure to adequately separate your business expenses into the proper category when reporting those expenses on your tax return (i.e. don’t record a client meal as a “miscellaneous business expense” in order to avoid unfavorable tax treatment)

RECORDKEEPING REQUIREMENTS - CONT’D

What did Patrick go to school for before deciding to become an accounting major?

1. Business2. Math

3. Teaching4. Geology

QUESTION 5

• Schedule C of Federal form 1040 (Reporting Profit and Loss)– http://www.irs.gov/pub/irs-pdf/f1040sc.pdf

• Schedule SE (Calculating self-employment taxes)– http://www.irs.gov/pub/irs-pdf/f1040sse.pdf

• Form 1040-ES (Calculating estimated taxes for individuals)– http://www.irs.gov/pub/irs-pdf/f1040es.pdf

• Form 4562 (Claiming depreciation and amortization)– http://www.irs.gov/pub/irs-pdf/f4562.pdf

• Form 8829 (Claiming the home office deduction)– http://www.irs.gov/pub/irs-pdf/f8829.pdf

HELPFUL TAX FORMS FOR SELF-EMPLOYED INDIVIDUALS

QUESTIONS & ANSWERS

EVALUATION OF PRESENTER

TALLY YOUR POINTS