Monday, August 31, 2009

Tax Deductions Incurred As A Result of Job Loss

As the jobless rate is expected to reach 9.5 for August and 10 percent by 2010 and you unfortunately find yourself among the 6.7 million individuals who have lost their jobs since the recession officially began in 2007, here is some information you should know about the tax effects of your job loss.

Severance pay and unemployment compensation are taxable. Payments for any accumulated vacation or sick time are also taxable. You should ensure that enough taxes are withheld from these payments or make estimated payments. Under the American Recovery and Reinvestment Act (ARRA), the first $2,400 of unemployment benefits an individual receives in 2009 are tax free. This provision applies only to benefits received in 2009: Normally, unemployment benefits are taxable. Also, you may request that taxes be deducted from your unemployment benefits so that you do not wind up with an unexpected tax bill during tax time.

You can deduct certain expenses you have in looking for a new job in your present occupation, even if you do not get a new job. You cannot deduct these expenses if:

  • You are looking for a job in a new occupation,
  • There was a substantial break between the ending of your last job and your looking for a new one, or
  • You are looking for a job for the first time.
Employment and outplacement agency fees. You can deduct employment and outplacement agency fees you pay in looking for a new job in your present occupation.

Employer pays you back. If, in a later year, your employer pays you back for employment agency fees, you must include the amount you receive in your gross income up to the amount of your tax benefit in the earlier year.

Employer pays the employment agency. If your employer pays the fees directly to the employment agency and you are not responsible for them, you do not include them in your gross income. This one you do not have to worry about since fees paid to the employment agency are not disclosed.

Resume. You can deduct amounts you spend for preparing and mailing copies of a resume to prospective employers if you are looking for a new job in your present occupation. This includes the cost of typing, printing and mailing your resume.

Travel and transportation expenses. If you travel to an area and, while there, you look for a new job in your present occupation, you may be able to deduct travel expenses to and from the area. You can deduct the travel expenses if the trip is primarily to look for a new job. The amount of time you spend on personal activity compared to the amount of time you spend in looking for work is important in determining whether the trip is primarily personal or is primarily to look for a new job.
Even if you cannot deduct the travel expenses to and from an area, you can deduct the expenses of looking for a new job in your present occupation while in the area.
You can choose to use the standard mileage rate to figure your car expenses. The 2008 rate for business use of a vehicle is 50½ cents per mile (58 ½ cents per mile after June 30, 2008).

Wednesday, August 12, 2009

How to Start A Limited Liability Corporation

A Limited Liability Company (LLC) is a relatively new business structure allowed by state statute. LLCs are popular because, similar to a corporation, owners have limited personal liability for the debts and actions of the LLC.

A few types of businesses generally cannot be LLCs, such as banks and insurance companies. Check your state’s requirements and the federal tax regulations for further information. There are special rules for foreign LLCs.

Other features of LLCs are more like a partnership, providing management flexibility and the benefit of pass-through taxation. In a pass through entity, the profits or losses of the business pass directly through to the owners' personal income tax returns, on their Form 1040. The LLC files a Form 1065, and then lists each member's taxable profit on Form K-1. In other words, the LLC itself does not file taxes. However, if the LLC has just one owner, it will be taxed as a sole proprietorship.

Owners of an LLC are called members. Since most states do not restrict ownership, members may include individuals, corporations, other LLCs and foreign entities. There is no maximum number of members. Most states also permit “single member” LLCs, those having only one owner.

Additionally, there is a managing member, who also enjoys the rewards of limited liability and is typically the person responsible for managing the business. (However, if the LLC has just one owner, it will be taxed as a sole prprietorship.)

  • Owners have limited personal liability for business debts even if they participate in management.

  • Profit and loss can be allocated differently than ownership interests.

  • IRS rules now allow Limited Liability Corporation (LLC) to choose between being taxed as partnership or corporation.


  • More expensive to create than partnership or sole proprietorship

  • State laws for creating Limited Liability Corporation (LLC) may not reflect latest federal tax changes

For additional information on the kinds of tax returns to file, how to handle employment taxes and possible pitfalls, refer to Publication 3402, Tax Issues for Limited Liability Companies (PDF).

Sunday, August 2, 2009

How To Start A Business as a "S" Corporation

Suppose you can answer every personal tax problem that comes your way. Your friends and family call you to prepare their income tax returns because they are unhappy with their present tax return preparer. Word gets around that you are extremely good at taxes and soon their friends start calling you, and they’re willing to pay for your services. You figure if you do this a few evenings a`week, you could make a nice profit. After, doing some research into the different types of business structures, you decide that an "S" corporation would be the best type of business structure to operate under. The first reason why you chose a corporation is that you want protect your home, bank accounts and other personal assets against lawsuits made against the business. The second reason is that you don't want to be taxed at the corporate level and the shareholder level.

An S corporation is a regular corporation that has elected "S corporation" tax status. Forming an S corporation lets you enjoy the limited liability of a corporate shareholder but pay income taxes as if you were a sole proprietor or a partner.

An S corporation is a pass through entity. In a pass through entity all business profits "pass through" to the owners, who report them on their personal tax returns in the same matter as in sole proprietorships, partnerships, and LLCs. The corporation itself does not pay any income tax, although an S corporation with more than one owner must file an informational tax return, like a partnership or LLC, to report each shareholder's portion of the corporate income.

In order to create an S corporation, you must first create a regular corporation by filing articles of incorporation with your secretary of state's office. All shareholders must sign and file IRS Form 2553 in order to operate as a "S" corporation. The election should be made by

  • No more than two months and 15 days after the beginning of the tax year the election is to take effect, or
  • any time during the tax year preceding the tax year it is to take effect.
To qualify for S corporation status, the corporation must meet the following requirements:
  • Be a domestic corporation
  • Have only allowable shareholders including individuals, certain trust, and estates and
    may not include partnerships, corporations or non-resident alien shareholders
  • Have no more than 100 shareholders
  • Have one class of stock
  • Not be an ineligible corporation i.e. certain financial institutions, insurance companies, and domestic international sales corporations.
If anyone of these requirements are not met the "S" corporation status will be revoked by the IRS. For example, if your company was operating as an "S" corp and added 10 new shareholders so that the total amount of shareholders now exceed 100, then the "S" corporation status can be revoked.

An "S" corporation owners are called shareholders, and each shareholder includes his or her share of the corporation's income or loss on his or her tax return using Form 1040 and Schedule E. If you do business as a "S" corporation, the corporation will need to complete Form 1120S for and a 1120 Schedule K-1 for each shareholder. The corporation will be liable for paying employment taxes if it hires employees, and certain excise taxes. Since the corporation is a seperate legal entity, the shareholder(owner) does not have to pay self employment taxes. Some of the forms you will need for employment taxes are Form 940, Form 941, Form 943, and Form 8109-B.

The advantages of doing business as a "S" corporation are:

  • Corporate losses can be passed through to the shareholders, and as a shareholder, you may be able to take the loss against income that appears on your personal return.
  • You can have the protection of limited personal liability without having to pay corporate taxes.
  • You can minimize self-employment tax and FICA tax.
The disadvantages of doing business as a "S" corporation are:

  • Numerous regulations and requirements must be upheld by an S Corporation.
  • Like a C Corporation, it can be costly to set up and follow corporate formalities.
  • Close scrutiny by the IRS of shareholder-employees, who must receive reasonable compensation.