Disclaimer

Thank you for visiting my Blog. It’s a place where I can talk Small Business, Personal Finance, Accounting, Tax, Business Systems, and other items of interest. The information on this website is meant for educational discussion of tax and accounting matters. It contains only general information and is not tax or legal advice and shouldn’t be treated as such. The information on this website is provided “as-is” without any representations or warranties, express or implied. If you have any specific questions about these matters you should consult your tax preparer, attorney, or professional service provider.

Part VI: How to Choose a Business Structure for a Start-Up?

Professional Corporation (PC), Personal Service Corporation (PSC)

A Professional Corporation is a legal structure used by many professional service providers in the United States. This usually includes fields such as accounting, architecture, attorneys, chiropractors, dentists, landscape architects, naturopaths, nurse practitioners, psychologists, physicians, actuaries, consultants, engineers, and possibly real estate service providers such as appraisers. The services must be substantially performed by employee owners. There may be different laws state by state. For Oregon it may be called an “Oregon Professional Corporation.” Generally, if a new business elects to setup a corporation and provides standard professional services then it would be categorized under these laws. Work with an attorney to get more information about the legal implications of this business structure.

From a tax perspective a business would file as a C Corp and check the box for a “Personal Service Corp.” on IRS form 1120. These types of entities use standard tax years and pay a flat tax rate which vary depending on current tax laws. Similar to a regular C Corp, Personal Service Corporations do not pass-through financial activity to your personal return. Instead, they are taxed at the corporate level and pay W-2 wages to shareholders.

An alternative to a Professional Corporation/Personal Service Corporation is to consider forming an LLC.

Part V: How to Choose a Business Structure for a Start-Up?

C Corporation (C Corp)

A C Corp is a legal entity separate from its owners. Corporations can make a profit, be taxed, and be held legally liable. Unlike other business entities the income, losses, deductions, and credits are not passed-through to its shareholders. C Corp profits can be taxed twice – one time at the corporate level and then a second time when dividends are paid to shareholders. Wages are also paid to shareholders which get taxed as W-2 wages on the shareholders’ personal return. Many times, the main driver to become a C Corp is to scale the business more easily. The corporation has the advantage in the areas of raising capital, going public, or being sold. 

Part IV: How to Choose a Business Structure for a Start-Up?

S Corporation (S Corp)

An S Corp is many times used in Multi-owner businesses that have elected to setup a corporation. It’s designed to avoid the double taxation that can occur with C Corps. There are certain criteria that must be met by the business to file as an S Corp. Taxes are filed on a separate return on form 1120-S. Corporate income, Losses, deductions, and credits are pass through to Shareholders to be taxed on their personal returns.

It’s worth noting that shareholders can receive both a salary (W-2 income) and distributions. In this way the business can retain earnings year over year, and the shareholder pays tax on the salary and potentially the distributions taken in that year. The shareholder will receive a K-1 at the end of the year. A S Corp differs from a Sole Proprietor, LLC, and Partnership which get taxed on the profits of that year even if money wasn’t paid out.

S corps do come with more rigid profit and loss allocations as compared to a partnership, as well as corporate formalities.

Part III: How to Choose a Business Structure for a Start-Up?

Partnerships

Partnerships are a common choice for businesses with two or more people, and for professional service groups. You might see a business with an LP for Limited Partnership or LLP for Limited Liability Partnership. A partnership will file a separate tax return on form 1065. The Partners will receive a K-1 with their pass-through portion. The profits and losses will be shown on the Partners individual tax return. Partners can be paid a salary known as guaranteed payments.

One item to know is that partners are taxed on their portion of the profits (distributive share) whether the money was actually paid out to the Partner or not. This is one item of consideration when deciding between a partnership or corporation. There are also partnership dissolution implications based on State and Federal rules. As outlined in the previous post, LLC’s can file as Partnerships for tax purposes.

Part II: How to Choose a Business Structure for a Start-Up?

Limited Liability Company (LLC)

An LLC offers additional flexibility from a tax perspective. Additionally, it is worth checking into some of the legal protections it can provide. An LLC is a business structure available in the United States and the State of Oregon. From a tax perspective the owner(s), known as Members, can select how to file. If you are the only owner of a business it’s worth considering setting up a Single Member LLC as it files on your personal tax return similar to a Sole Proprietor.

Multi-owner LLC’s many times elect to file as a Partnership. The form 1065 will be used with some modifications for filing as an LLC.

LLC’s can also be taxed as an S-Corp or C-Corp. Additional IRS filings would need to be made to elect these statuses. There are also LLC dissolution implications based on State and Federal rules.

How to Choose a Business Structure for a Start-Up?

When starting a business one of the first questions you might ask after putting together your business plan is “what type of business structure should I go with?” I will be having a series of posts that will go over some of the most common tax statuses for business entities that I see small business owners choose.

I’ll cover a few basic tax implications to provide some perspective. I’d recommend researching the legal ramifications of each form of business or reach out to an attorney for at least some basic information on personal liability risks. It’s good to think long term when selecting a business entity structure as it can be difficult to change. The first post will cover a Sole Proprietorship.

Sole Proprietor

This option is easy to form when there is one owner and gives the owner complete control over the business. A business is automatically considered a sole proprietorship if its conducting business activities and hasn’t registered as any other kind of business. You may still need to license your business locally.

I’d recommend researching the legal ramifications of this form of business or reach out to an attorney for at least some basic information on personal liability risks. From a tax perspective the business is filed on your personal tax return for Federal, State, and Local filings. Usually you will see this business activity filed on a Schedule C – Profit or Loss from Business on your 1040. To pay yourself you can take draws from the business as needed.

The next post will be about partnerships.

KAYAKS. SUMMER SUN. TAX RETURNS

This summer has been much different from summers of the past. I’ve spent most of my time at home and in my office as everything is remote these days. I have found time for day trips out to rivers and lakes as they’re more secluded and great ways to get out of dodge. I did purchase new kayaks for the family so we’re able to strap them to the roof rack and paddle around regional water ways.

This year had a surprise ending as tax season was extended through mid July. I just recently finished filing client returns this year. Along with changes due to COVID-19 we’re seeing many adjustments to tax laws and tax policies, as well as economic support to businesses and taxpayers. If you have specific questions about these tax changes or would like to schedule time for tax planning, please email me your questions.

Here are a select (but not all inclusive) list of tax notes just for you:

• Ever wondered where your tax dollars go? Check out this informative article from the Center on Budget and Policy Priorities

• CARES act (Coronavirus Aid, Relief, and Economic Security) was put into place. This had wide reaching impacts with one well known positive change of making direct impact payments to tax payers. There is a planned tax credit/rebate that should show on your return for 2020 related to this.

• W-4 Employee Withholdings - I’d like to draw attention to this again as changes have been made to both the tax code and to this form in recent years. It’s possible that you can have the highest withholdings set but still owe money at the end of the year. Many employers allow for additional withholdings to be added to paychecks.

• If an employer paycheck just isn’t for you and you run your own business, then consider making quarterly Estimated Tax Payments. This is a method used to pay tax on income that is not subject to withholding. This income includes earnings from self-employment, interest, dividends, rents, and alimony. This can help to protect against penalties and interest owed to the IRS or local agencies.

• The standard deduction for 2020 is $12,400 for single and $24,800 for married filing joint.

• There are 7 tax brackets for 2020 ranging from 10% to 37%.

• PPP (Paycheck Protection Program) - This lending option was part of the coronavirus response. It’s a loan financed through a bank with a shorter payback period. Each bank has a different application process. Note, there are potential risks to taking on additional debt.

• EIDL (Emergency Injury Disaster Relief Loans) - This lending option is through the SBA and is a standard offering. It can provide longer repayment terms at lower interest rates. Be prepared for a more extensive application process. Note, there are potential risks to taking on additional debt.

Wishing you all the best this summer!

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As we get closer to the end of tax season I usually have a getaway planned. The world does not always go as planned especially when it comes to tax filings. This year we’re experiencing something very different with the Coronavirus. Inevitably I will be cancelling my getaway this year scheduled in May, but I’ll always have next year. Plus, think of all the amazing streaming shows and movies I can catch up on, and I can spend some time in my own backyard.

As it relates to the 2019 tax season Diamond Accounting has luckily invested in working together virtually. These technology tools provide client portals to share notes, documents, and other pertinent information; they provide for electronic signatures from a desktop or a cell phone; they provide for simple easy to read tax dashboards, and they provide various paths of communication through email and phone calls. Together we will be relying heavily on these types of technology to successfully finish returns this year.

One final note, the IRS does look at extending filing deadlines in these instances; however, my plan is to continue to complete tax returns by April 15th, 2020 unless a regular extension is needed.

Stay healthy my friends!

Aaron Diamond, CPA

TIPS FOR SEARCHING THE WEB

Here’s an interesting Information Systems/Computer Science tip for searching the web. This can be used for both professional or personal uses in everyday life on the inter-web. When using your favorite web browser (think Google or Bing) try using Boolean searching. To do this, use one of the Boolean operators AND, OR, NOT in the search bar.

If you use AND when searching you will get query results that contains both terms or phrases. This may limit the results you get. Example: Small Businesses AND located in Portland, Oregon.

If you use OR when searching you will get query results that contains one or the other. This may increase search results. Example: Love OR Hate.

If you use NOT when searching you will get query results that contains the first search term but not the second. Example: Show me all movies with Love NOT hate in the title.

Happy searching!

INTRO TO BUSINESS DEDUCTIONS

Clients send me all types of tax related questions. Recently I’ve been receiving questions about what’s deductible through a business.

The IRS says “To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.” This would include basically any expense necessary to operate your business from rent, to magazine subscriptions, to furnishings, even mileage driven for business purposes.

Items that can be deducted through your business but should be categorized differently include capital purchases such as leasehold improvements, equipment, computer hardware, etc. These would be capitalized and then expensed through depreciation. Additionally, if you sold inventory type items these would be categorized as inventory and then expensed when sold through Cost of Goods Sold. 

NEWLY REDESIGNED WEB PAGE

Welcome to the newly redesigned web page for Diamond Accounting LLC. This website is designed to provide basic introductory information about the company, the services provided, and a contact point.

As time allows, I’m planning to add blog posts in the areas of Small Business, Personal Finance, Accounting, Tax, Business Systems, and other items of interest. This blog offers my opinion and should not be considered tax or legal advice. Please seek specific help on tax or legal questions.

I’m looking forward to another successful tax season starting January 1st, 2020.

Happy New Year!

Aaron