2008 Small Business Tax Workshop Material
Table of Contents / Page No.
ECONOMIC STIMULUS PAYMENTS 1 – 16
Rebates 1 – 2
Eligibility 2 – 3
Qualifying Child 3
Phase-Out 3 – 4
Schedule for Tax Returns Processed by April 15 4
IRS Will Not Challenge Accuracy of Certain Returns 5
Answers to Frequently Asked Questions 5-12
Relief for Payments Withdrawn from Tax-Favored Accounts 12
Instructions for completing Form 1040X to get a Stimulus Payment 13 – 16
OTHER BUSINESS TOPICS 17 – 24
Election for Husband and Wife Unincorporated Businesses 17 – 19
Retired insurance agents owe payroll taxes on renewal commissions 19 – 20
Bonus Depreciation Under The Economic Stimulus Act of 2008 20-22
LLC Granted Extension to Make 754 Election 22
Leased Employees' Meal and Incidental Expenses 23 – 24
Estimated Tax Payment Vouchers 24
Limitations Period for Trust Fund Penalty Appeal 24
COURT CASES 25 – 30
Unsubstantiated Business Expense Deductions Denied 25
Losing gambler won important tax breaks 25 – 27
Business deductions vs. commuting expenses – substantiation 27
Wesley Snipes sentenced to three years in Prison and fined $5 million 28
Home Office - Business deductions – proof 28
100% penalty for failure to pay over trust fund taxes 29
Capital gains vs. ordinary income – insurance agents 29
Business bad debt deductions - loans vs. capital contributions 29
Startup expenses - timely election 30
Depreciation - actual ownership vs. bare legal title 30
IRS ENFORCEMENT PROGRAMS 31 – 40
Enforcement Strategy - Criminal Investigation (CI) 31
Definition of Terms 32 – 33
Fiscal Year 2007 Enforcement and Services Results 34 – 35
Examples of reconstructed income 35
Examples of Money Laundering Investigations FY2008 36 – 40
Criminal Investigation: Electronic Crimes Program 40
OFFICE-IN-THE-HOME 41 – 56
Principal place of business 41 - 42
Form 8829 43
In-home Daycare Facilities 44 - 47
Income Limitation 44
Deductions by the entity 48
Worksheet To Figure the Deduction for Business Use of Your Home 49
Depreciation for a Home Office 50
Effect of Rental or Business Use on Exclusion of Gain 50 - 55
Property Used in part as Principal Residence 56
BUSINESS TRAVEL 57 – 61
Determination of “Tax Home" 57
Taxpayers with Home Offices 59
Deducting Local Transportation Costs 60
Temporary Work Locations 61
Deducting a Saturday Night Stay 61
MEALS AND ENTERTAINMENT 62 – 70
Business Requirement for Meals and Entertainment Expenses 62
50% Limitation for meal and entertainment 62
Exceptions to the 50% limitation 62 - 63
Substantiation of Travel and Entertainment Expenses 63
Adequate Records 65
Documentary Evidence 64
Per Diem Method of Substantiating the Amount of Travel Costs 64 - 69
Proration of federal per diem rate for partial travel days 65
Transportation Industry Workers 66
Optional high-low substantiation method for per diem travel expense 67
Domestic Per Diem Rates – Wisconsin – FY 08 68
Domestic Per Diem Rates – Arizona – FY 08 69
Summary 70
START UP EXPENSES 71 – 76
Effective for amounts paid or incurred after October 22, 2004 71
Start-up expenditures incurred on or before October 22, 2004 71
Distinguish Deductible and Amortizable Costs from Capitalized Costs 72
Investigation expenses 72
Pre-opening costs 72 - 74
Table of Contents (continued)
Election to Deduct Start-up Costs 74
Business Expansion Costs 75
Treatment of Costs after Disposition or Abandonment of Business 76
ENTITY SELECTION 77 - 184
Introduction 77
How is income taxed 78
Liability Issues 78
Types of Entities 79-184
Sole Proprietorship 79 - 90
1) Sole Proprietorship – Non-Tax Considerations 79
Sole Proprietorship – Tax Considerations 79
Income Splitting Among Family Members 81
Hiring the Children 81 - 82
Hiring the Spouse 82
Self Charged Rent 83
Advantages / Disadvantages of Sole Proprietor Operations 84
FORM 1040, SCHEDULE C, PROFIT OR LOSS FROM BUSINESS 85-90
Line B, principal business or professional activity code 85
Line D, employer ID number 85
Line F, accounting method 85
Line G 86
Line H 86
Part I: Income, Lines 1 to 7 86
Line 1, Gross Receipts or Sales 86
Statutory employees 86
Line 4 87
Line 6 Other income 87
Part II: Expenses, Lines 8 to 27 87 - 90
Car and truck expenses, Line 9 88
Simultaneous use of multiple automobiles 88
Consistency rules 88
Line 11, Contract Labor 88
Employee benefit programs, Line 14 89
Pension and profit-sharing plans, Line 19 89
Rent or lease, Line 20 89
Repairs and maintenance, Line 21 89
Taxes, Line 23 89
Utilities, Line 25 89
Wages, Line 26 89
Other expenses, Line 27 90
Bad debts 90
Tentative profit (loss), Line 29 90
Net profit or loss, Line 31 90
At Risk, Line 32 90
2) Partnership 91-103
Partnership Non-Tax Considerations 91
General Partner vs. Limited Partner 91
Termination of the Partnership 91
Tax Matters Partner (TMP) 92
Partnership – Tax Considerations 92
Pass through items 92
At-Risk Rules 92
Unreimbursed Partnership Expenses 93
How to make a Section 754 election 93
Example of a §754 Election 94 - 96
Employer/Employee Relationship 97
Determining a Partner’s Initial Basis (No Liabilities Involved) 98
Adjusting a Partner’s Initial Outside Basis 98
Partnership Basis Examples 98 - 103
3) S Corporations 104-132
Corporation – Non-Tax Considerations 104
It’s not just liability 104
Consider General Law and Income Tax 104
Corporation – Tax Considerations 105
S Corporation (never been a C Corporation) 105
Late S corporation election “reasonable cause" 106 – 115
Who can be an “S” shareholder 116
Initial Basis in S Corporation Stock 117
Basis Adjustments 117
Shareholder’s Basis Examples 118 - 121
Employer/Employee Relationships 122
Health insurance for a sole S Corporation shareholder 122
Reasonable compensation 122 – 127
Treasury Audit Report for S Corporations 127
S Corporation Distributions with Previous “C” Corporate Earning 129
S Corporation distribution – Example 131
Advantages / Disadvantages of S Corporation Operations 132
4) Limited Liability Company 133-149
Non-Tax Considerations 133
One Member LLC 133 - 134
Confusion Regarding Employment Taxes 134
Recent Changes to Employment Tax Reporting 134 - 135
Tax Considerations 136-137
Husband and Wife (Community Property States) 137
What about “check the box” elections? 138
Self-Employment Tax and the LLC 139 - 140
Rental Income and the LLC 140
Advantages / Disadvantages of LLC Operations 141
Required Records for LLC 41 - 142
LLC vs. LLP 143
Switching from Corporation to LLC 144
Switching from Partnership to LLC 144
Employer Identification Number 145
IRS Ruling 146 – 149
C CORPORATIONS 151 - 184
C Corporation – Non Tax Considerations 151
C Corporation – Tax Effects 152
Employer/Employee Relationship 153
Qualified Personal Service Corporation 153
Double Taxation 154
Payroll vs. Dividend examples 155 - 157
Corporation Tax Rates 158
Distributions to Shareholders & Two Sets of Low Brackets 159
When are Corporate Taxes Due 160
Other Tax Benefits of C Corporation 161
Deductible Fringe Benefits and Other Costs 161
Taxes on Investment Income 162
IRS Standards 162
Accumulated Earnings Tax & Reasonable Needs 163
Accumulated Earnings Tax Worksheet 165
Switch from C to S 166 - 168
Personal Service Corporation 168
Other Tax Determents of a C Corporation 169 - 170
Advantages / Disadvantages of C Corporation Operations 170
Built-In Gains Tax 171
Built-In Gains Tax - Example 172 - 184
CORPORATION LIQUIDATIONS 185 - 231
Reasons for liquidation 185
Drawbacks to liquidating a C Corporation 185-186
Overview of Liquidation Taxation 187
Cost to Liquidate 187
Liquidating a C Corporation (Examples) 189-190
Liquidating an S Corporation 191-192
Observations of Liquidation Examples 193
Comprehensive Liquidation Example 194-201
Form 8594 Instructions 202 – 204
Observations on Example 205
Covenant Not to Compete Cases 205 – 207
Liquidation with Tax Planning 208 – 215
Thoughts to Consider 216
Articles of Dissolution 217 – 220
Other Considerations 221
Distribution of an Installment Note 221
Family Business Transfers 223
Section 1244 Stock 224-226
Section 338 Election with Example 227-228
Qualified Small Business Stock 229
§1202 - Exclusion of Gain 230
§1045 - Rollover of Gain 230 - 231
FEDERAL DEVELOPMENTS 233 – 247
Form 8919, Uncollected Social Security and Medicare Taxes on Wages 233 – 235
Adjusted Employment Tax Returns (Forms 94X) 236 – 240
Form 941X “Draft Version" 238 - 240
First Filing Date for the e-Postcard Electronic Notice 241 – 243
Form 990-N (e-Postcard) Information (Example) 242
Urban Institute e-Postcard registration 243
REQUIREMENTS FOR AN ACCOUNTABLE PLAN 244 - 247
Accountable Plan Requirements 244 – 245
Business Connection 245 – 246
Adequate Substantiation 246
Substantiation Chart 247
SECTION 179 248 - 255
Election to Expense Certain Depreciable Business Assets 248
Investment Limitation 249
Phaseout 249
Taxable Income Limitation 249 - 250
Qualifying Property 250 - 251
Property Acquired by Purchase 251
Section 179 depreciation expense election and the AMT depreciation adjustment 251
Recapture 251
Sport Utility and Certain Other Vehicles 252
Married Individuals 252
Joint return after filing separate returns 252 - 253
Go Zone Areas 253
Carryover of the Section 179 Deduction 253 - 254
Amending or Revoking the Section 179 Deduction 254 - 255
Section 179 depreciation expense election and the AMT depreciation adjustment 255
EMPLOYER PROVIDED FRINGE BENEFITS 256 – 265
Categories of nontaxable fringe benefits 256 – 257
Cash option for certain qualified transportation fringe benefits 257
Food and Lodging Provided by Employer 258
Employer Provided Vehicle 258 – 261
Qualified nonpersonal-use vehicles 261 - 262
Rules for Withholding, Depositing, and Reporting 262 – 264
Summary of Fringe Benefits 265
EMPLOYEE BUSINESS EXPENSES 266 - 271
Accountable Plans 266
Form 2106 267
Special Rules for Travel and Mileage Reimbursement Plans 268
Failing to Seek Reimbursement 268
Auto Allowances and Employer-provided Vehicles 269
Substantiation of Travel and Entertainment Expenses 270
Adequate Records 271
HEALTH PLAN CONTRIBUTIONS 272 – 276
Self-employed 272
Partnerships 272
S Corporations 272 - 274
Self-insured 274
Highly compensated employees 275
Excludable employees 276
Part-time or seasonal employees 276
MEDICAL SAVINGS ACCOUNTS (MSA) 277 – 284
Important Change 277
High Deductible Health Plan (HDHP) for an MSA 278
MSA Contribution Limitations 278 – 279
Taxes on Distributions 280
MSA Example 281 – 284
HEALTH SAVINGS ACCOUNTS (HSA) 285 – 307
Eligible individuals 285
High Deductible Health Plan (HDHP) for a HSA 286
Establishing an HSA 287
Contribution Limits for 2007 and later years 288
Sum of the monthly contribution limits 289
Full contribution rule 289
Contribution Examples 290 - 294
Additional contribution for age 55 and older 294
Tax treatment for HSA Contributions 295
Taxes on Distributions 295 - 296
Qualified HSA funding distribution only from certain types of IRAs 296
One-time qualified HSA funding distribution 297
Distribution Examples 299 - 302
Tax Consequences after the death of the HSA Account Beneficiary 305
Combination of HSAs with HRAs and Health FSAs 306 – 307
HEALTH REIMBURSEMENT ARRANGEMENT (HRA) 308 – 310
Benefits of the HRA 308
Allowable Reimbursements 308
How the HRA works 309
Nondiscrimination Rules 309
HRAs and Cafeteria Plans 310
SECTION 125 PANS / FLEX SPENDING ACCOUNTS 311 – 317
Use-it-or-lose-it Rule 311
Exception to the Use-it-or-lose-it Rule 312
Medical Expense Flexible Spending Arrangements (Health FSAs) 313
Substantiation 313
Dependent Care Flexible Spending Arrangement (Dependent Care FSA) 315
Withholding and Payroll Reporting 317
|