Business BasicsPresented by:

Maya K. L. Sims, CPA, MAF Office @: Ahmed H. Zaki, CPA, PC678-957-1913 (office)Maya@ZakiCPA.com

Topics

Entity Types Payroll – Employees vs. Contractors Autonomy & Record Keeping Other Watch Items Resources Thank you

Entity Types

Sole Proprietorship Partnership C-Corporation S-Corporation Limited Liability Company (LLC)

Two separate issues when making entity type decision: Legal & Tax. They are related, but can be totally separate issues.

Sole Proprietorship Basic Info:

There can only be 1 owner. Usually require business license (Not applicable for single source subcontractors). May require registration with State Superior Court (around $25 in many counties)

Tax Effect - All taxes are paid by the owner. EIN usually only required if you will have W-2 employees or subcontractors requiring

1099s. Tax reporting is simple as income and expenses are reported on Schedule C and

attached to the individual tax return Form 1040. Losses may offset other active income - of a sole proprietorship that is actively &

materially participated in are also deductible against other active income on the return, which is often very beneficial for new start up small businesses.

All net income is subject to self-employment tax (Social Security + Medicare14.13% effectively 2013) and income taxes. Half of the self-employment taxes are deductible in the calculation of AGI.

Advantages: Simple Losses may qualify to offset other active income.

Disadvantages: Usually the worst tax vantage for profitable companies/contractors. Disregarded entity: Owner is liable for all legal and tax obligations of the company

Partnership Basic Info:

There must be 2 or more owners. Usually require business license (Not applicable for single source subcontractors). Partnership Agreements are generally not legally required, but may be essential to ensure

that Partners fully understand how the work, operations, income, losses and equity are to be handled especially in the case of incapacitation or death.

May require registration with State Superior Court (around $25 in many counties) Tax Effect - All taxes are paid by the owner.

EIN is required as partnerships have to file their own separate tax return Form 1065. All partners are to be issued a Form K-1 from the partnership and the taxes are paid by the

individual partners on their personal tax returns. Losses may offset other active income - of a sole proprietorship that is actively &

materially participated in are also deductible against other active income on the return, which is often very beneficial for new start up small businesses.

All net income is subject to self-employment tax (Social Security + Medicare14.13% effectively 2013) and income taxes. Half of the self-employment taxes are deductible in the calculation of AGI.

Advantages: Simple - simplest multi-member entity form Losses may qualify to offset other active income.

Disadvantages: Usually the worst tax vantage for profitable multi-member companies. Disregarded entity: Owners are liable both jointly and separately for all legal and tax

obligations of the company.

C-Corporation Basic Info:

Are formed by filing Articles of Incorporation with the Secretary of State and are given legal rights as a separate autonomous entity from the shareholders that own them.

Requires a business license Operating Agreements are essential and corporations must hold at minimum an annual

shareholders meetings that is documented with annual minutes. Legally require segregation of books, legal documents and taxes as an autonomous entity.

Tax Effect - Taxes on company income are paid by the corporation. EIN is required and must file Form 1120 annually. Losses and income are fully recognized at the corporate level. All distributions to owners/shareholders must be issued by way of compensation (subject to Medicare

& Social Security) or as dividends (subject to double taxation). Excessive accumulated earnings are subject to accumulated earnings tax. This tax was devised to

prevent corporations from holding to much of the earnings and not giving the shareholders their share of the profits.

Advantages: Corporations receive an exemptions for dividends received from a company that they own (from 70%

- 80%) Officers are also allowed to participate in corporate benefits plans such as Health Savings Accounts,

Dependent Care Accounts, etc. Corporate tax rates are often less than individual tax rates

Disadvantages: All distributions to owners/shareholders must be issued by way of compensation (W-2 or as 1099-Misc

Contractors) subject to Medicare & Social Security and income tax or as dividends subject to double taxation.

S-Corporation Basic Info:

Are formed by filing Articles of Incorporation with the Secretary of State and are given legal rights as a separate autonomous entity from the shareholders that own them. Additionally S-Corporations must file a special election request with the IRS to be considered a Small Corporation (pass through entity) for tax purposes (form 2553).

Requires a business license Operating Agreements are essential and corporations must hold at minimum an annual shareholders

meetings that is documented with annual minutes. Legally require segregation of books, legal documents and taxes as an autonomous entity.

Tax Effect - All taxes are paid by the owner. EIN is required and must file Form 1120S annually. All shareholders are to be issued a Form K-1 from the S-corporation and the taxes are paid by the

individual shareholders on their personal tax returns. All money given to owners/shareholders must be issued by way of compensation (subject to Medicare &

Social Security) or can be given by way of a non-taxable distribution (similar to partnerships). All shareholders who actively participate and provide any service to the company or on the company or on the

company’s behalf must be compensated as W-2 employees with compensation commensurate with their industry. Excessive accumulated earnings are subject to accumulated earnings tax. This tax was devised to prevent

corporations from holding to much of the earnings and not giving the shareholders their share of the profits. Advantages:

Avoids double taxation of C-Corporations Allows the ability to control the amount of officer compensation subjected to Social Security and

Medicare Disadvantages:

Officers are not allowed to participate in corporate benefit programs such as Health Savings Accounts, Dependent Care Accounts, etc.

Corporate income subject to personal tax rate which may be more than the corporate tax rate.

Limited Liability Company (LLC) Basic Info – Rules may vary, but these are some general standards:

Are formed by filing Articles of Incorporation with the Secretary of State and are given legal rights as a separate autonomous entity from the members and managing members who own them.

Requires a business license Operating Agreements are NOT required, but highly recommended. LLCs are considered to be a less

formal organizational type than Corporations and only require meeting minutes in cases where significant company policies and procedures are being established or changed (not annually

Segregation of books is highly recommended and may be required based on tax elections made. Owners are listed as: Members, Managers or Managing Members All owners have equal voting rights regardless of equity.

Tax Effect – No tax method assigned. LLC’s must elect the tax methodology they wish to be subject to or one will be assigned

Single member, disregarded entity: Default for LLCs with only one member. Same tax effect as a Sole Proprietorship, but with the Legal protection of a corporation.

Partnership – must have 2 or more members: Default for LLCs with two or more members. Same tax effect as a Partnership, but with the Legal protection of a corporation

Corporation – Election must be made using form 8832 S-Corporation – Election must be made for corporate states on form 8832 and an additional election for Small Corporation election

made using form 2553.

Advantages: Flexible taxing method Has same legal protection as a corporation (S or C) Less formal organizational structure than corporations

Disadvantages: All members have equal voting rights If tax elections are not taken timely they may be delayed costing additional taxes in the current year

Payroll If you hire employees or officers are required to be on payroll if company took an S-election Employees vs. Independent Contractors: Not knowing the difference could cost you!!!

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Independent-Contractor-Self-Employed-or-Employee

Who has control? Who sets and how are hours set? Who provides tools? Is this project work?

Company ID Numbers EIN - http

://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Apply-for-an-Employer-Identification-Number-(EIN)-Online

GA Withholding ID - https://gtc.dor.ga.gov/_/#2 GA Unemployment tax ID - http://www.dol.state.ga.us/pdf/forms/dol1a.pdf With regards to the state, do not apply for your ID’s until you are sure you will be running

payroll. Governmental Agencies Involved and the forms they require:

IRS Form SS-4, Form 941, Form 940, Form W-2/W-3, Form W-4, Form

GA Dept. of Revenue Form CRF002, G-7, G-1003/W-2s

GA Dept. of Labor Form DOL-A1, DOL-4N

Employees Fill Out for you to retain on file W-4, I-9, G-4 W-9 (subcontractors ONLY!!!)

Autonomy & Record Keeping

Keeping detailed notes when making major decisions or setting policies and procedures.

DO NOT comingle funds Establish separate Checking and Credit

Card Accounts Automate your accounting records

Bank & Credit Card Accounts

I always recommend that a separate dedicated checking account and credit cards (if you use them) are set up even if it is set up as a DBA. This helps with accounting and tracking and making sure that business transactions are kept separate from personal transactions.

When you automate most banks have online banking and many have integration tools to download transactions directly from your bank reducing data entry time by up to 60%+.

What you may need to set up checking account: Incorporation documents (Corporations) or Organization documents

(LLC) EIN Business License

Advantages of Debit Card over Checks Pitfalls of Co-mingling funds

Automate Your Accounting Records

Work Smarter not Harder! Reduces data entry Makes reviews and projections easier Produces Income Statement and Balance sheet

for year end tax reporting QuickBooks – Basic or Pro

Free courses through public library. Gwinnett County Library: http://education.gale.com/l-lawr54429/SearchResults.aspx?CurrPage=2&CategoryId=3&Sort=RELEVANCE&PrevSort=RELEVANCE&SortAsc=True

QuickBooks Online - (www.quickbooksonline.com) Payroll - http://payroll.intuit.com/

Other Watch Items Automobile Deductions –

You have to track mileage No Matter What Standard mileage deduction Actual expense deduction

Meals & Entertainment 50% deductible

Exception – Meals for employees for continuation of the work-100% deductible Keep your receipts – Date, Costs, Name of client/colleague/business

nature of meeting Depreciation / 179 Deductions

Fixed Assets Business Use of Home

Exclusively and regularly as your principal place of business, as a principal meeting place, as storage, for rental use, or as a daycare facility.

Insurance Health, HSA’s, Group Medical, Disability

Filing Deadlines & Penalties

Auto Deductions Auto Deduction & Mileage

Parking & Tolls Actual parking for business trips is generally 100% deductible

Actual Exp Take annual business miles divided by total annual miles driven to get

percentage of business use. Percentage is applied to expenses to determine deductible portion

Purchase price of auto and date placed in service is used to deprecate the vehicle. Depr. Is also subject to business use percentage.

Limits on depreciation for luxury vehicles $25,000 in Section 179 deduction available on Autos over 6,000 lbs. loaded

Standard Mileage Deduction Take total annual business miles & multiply by standard rate (57.5 cents per

mile, 2015) Take annual business miles divided by total annual miles driven to get

percentage of business use. Multiply percentage times Auto Loan Interest.

IRS Publication 17 Chapter 26

Business Use of Home Exclusive Use – A room or separate identifiable space. The

space does not need to be marked off by a permanent partition. Regular Use Must be related to trade or business Square footage of space used for business divided by the total

square footage of home is used to determine the percent of business use.

Direct Deductible Expenses: Paint/Repairs just for the business use space

Indirect Deductible Expenses: Utilities Insurance Repairs & Maintenance Rent Security System Depreciation

IRS Publication 587

Depreciation / 179 Deductions Fixed Assets

Items that don’t wear out or get consumed in a year. Computers, Filing Cabinets, Desk, Office Furniture, Leasehold Improvements,

etc. Special Depreciation Allowance – for qualified items

Must be new item Can take up to an additional 50% in depreciation in year of purchase

Section 179 Deduction – for qualified items Can be new or used item Deduction limit $500,000 (last update published 2014) Deduction limit for Leasehold Improvements $500,000 (last update published

2014) Deduction limit for qualified sport utility and certain other vehicles $25,000

4 wheeled passenger vehicle Rated at 6,000 pounds gross vehicle weight or more But rated less than 14,000 pounds.

Purchase limit phase out starts at $2,000,000 (last update published 2014) IRS Publication 946

Insurance Health Insurance on your W-2

If your company has a group policy then the premiums reduce your box 1 wages reported to the IRS as they are tax exempt.

There are special reporting requirements for S-Corp owners. Pre-tax health insurance dollars also reduce wages subject to Social Security and Medicare.

HSAs vs. Traditional Health Insurance HSA

transfers initial outlay costs to policy holder. Makes Insurance company pay more if annual spending increases

Often has lower premiums HSA accounts accumulated tax free and can be used for long term health care and private nursing in

later years Contributions and withdrawals from HSA accounts are tax free If self employed premiums deductible as Self-Employed Health Insurance Require high deductible plans

Deductible Minimums: $1,250 Individual, $2,500 Family (2014) Deductible Maximums: $6,350 Individual, $12,700 Family (2014)

HSA contribution limit - $3,300 (single), $6,550 (family), catch-up provision for ages 55+ $1,000. Traditional Plan (if you are self employed)

Premiums are deductible as self-employed health insurance Co-Pays Can reduce premiums by increasing deductible, using PPO or POS plan

Disability Make your company the beneficiary Hire someone to continue your business when you can’t

Filing Deadlines & PenaltiesPlease note the below are the general deadlines. They may vary if they fall on

weekends or holidays: Jan 31st – Employers distribute W-2s & 1099-Misc to recipients   Feb 28th – Employers file W-2s & 1099-Misc with the Social Security & IRS (paper returns) March 31st – Employers file W-2s & 1099-Misc with the Social Security & IRS (electronic

returns)

Mar 15th – Corporations & S-Corporations Deadline to file!!! Apr 15th – Individual Returns, Partnerships, Sole Proprietors, IRA Contributions

Very important to note that Extensions to file are NOT an Extension to PAY!!! All Tax payments are due on the filing dates above (March 15th or April 15th as applicable)!!!

Penalties Most penalties are calculated on the taxes due. So in most cases if there are no taxes due

there is no penalty. S-Corporation and Partnership Returns are an exception to this rule. Although these two

entity types do not pay Federal Income Tax, they can both be assessed a Civil Penalty for failure to file if timely extensions are not filed or if under an extension the return is not filed by the extension deadline. This penalty can range from $250 to $5,000+. 

Please note the Extension deadlines as well:  Sep 15th – Corporations, S-Corporations & Partnerships Deadline to file!!! Oct 15th – Individual Returns, Sole Proprietors, IRA Contributions

(IRA contributions must be made before filing return)

Resources Georgia Secretary of State

Filing for Georgia Corporations & LLCs online at: https://ecorp.sos.ga.gov/ IRS

www.irs.gov Pub 17, Federal Income Tax for Individuals) Pub 15, Circular E (Employer Tax Guide) Pub 542, Corporations Pub 587, Business Use of Home Pub 946, How to Depreciate Property Pub 969, Health Savings Accounts & Other Tax-Favored Health Plans Pub 1542, Per Diem Rates Instructions for form 2553 (S-election) Instructions for form 8832 (Entity designation)

Small Business Administration (SBA) www.sba.gov

Entrepreneur.com List of Best Banks for Small Business:

http://www.entrepreneur.com/bestbanks

Business Basics

Maya K. L. Sims, CPA, MAF Office @: Ahmed H. Zaki, CPA, PC

678-957-1913 (office)Maya@ZakiCPA.com