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Tax Savvy for Small Business

Publication Date November 2008
Edition 12
ISBN 9781413309034
Pages 400 pp
Forms 3 forms
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Description

The essential tax-strategy book for entrepreneurs who call themselves "boss."

Named a "Best Tax Book" by Entrepreneur magazine

Develop the best tax plan for your small business, learn the ins and outs of the tax code and create comprehensive strategies to get back the most from the IRS. Understanding the tax system is vital to the health of every small business. Virtually every decision a business makes has tax consequences that can affect its bottom line -- and the IRS is always watching.

Tax Savvy for Small Business provides essential information that will free up your time and money for what counts -- running your business effectively. It explains how to:

  • deduct current and capitalized expenses
  • write off up to $108,000 of long-term assets each year
  • compare different business structures
  • take advantage of fringe benefits
  • keep records that will head off trouble with the IRS
  • get tax breaks from business losses
  • deal with payroll taxes
  • negotiate payment plans for late taxes
  • handle an audit
  • get IRS penalties and interest reduced
  • maximize retirement funds
  • use retirement funds as a tax break

The 12th edition of Tax Savvy for Small Business is completely updated and provides the latest tax breaks, rules, forms and publications. You'll also find a list of the top 25 business deductions -- the best deductions to take and how to claim them, trouble-free.

Forms

  • IRS Publications List
  • Forms Checklist and Due Dates
  • Quick and Easy Access to IRS Tax Help and Tax Products (Publication 2053-A)

Table of Contents

I. Your Tax Savvy Companion

Part 1: The Basics

1. Tax Basics

  • How Tax Law Is Made and Administered: The Short Course
  • Where to Find Tax Rules
  • Marginal Tax Rate and Tax Brackets
  • The Alternative Minimum Tax (AMT)

2. Deductible Business Expenses and Income

  • What Is a Deductible Business Expense?
  • Is It a Current or Future Year Expense?
  • Top 25 Deductions for Businesses
  • The General Business Credit
  • Vehicle Expenses
  • How and Where to Claim Expense Deductions
  • What Is -- And Isn't -- Income?

3. Writing Off Business Assets

  • When Various Expenses May Be Deducted
  • Section 179: Expensing Business Assets
  • Depreciating Business Assets
  • Tax Basis of Business Assets
  • Leasing Instead of Buying Assets
  • When You Dispose of Business Assets: Depreciation Recapture Tax
  • Tax Errors in Depreciation

4. Bookkeeping and Accounting

  • Why You Need a Bookkeeping System
  • Should You Hire a Bookkeeper?
  • Manual or Computer System?
  • What Kinds of Records to Keep
  • How Long Records Should Be Kept
  • Bookkeeping Methods of Tracking Income and Expenses
  • Timing Methods of Accounting: Cash and Accrual
  • Accounting Periods: Calendar Year or Fiscal Year

5. Business Losses and Failures

  • Unincorporated Business Losses
  • Incorporated Business Losses

6. Tax Concerns of Employers

  • Employer Identification Numbers
  • What Are Payroll Taxes?
  • Reporting and Depositing Payroll Taxes
  • Classifying Workers: Employee or Independent Contractor?
  • Misclassifying Employees as Independent Contractors
  • IRS Filing and Payment Requirements for Employers
  • Record Keeping for Your Workers

Part 2: The Structure of Your Business

7. Sole Proprietorships

  • What It Means to Be a Solo -- From a Tax Perspective
  • To Be or Not to Be -- A Solo
  • Solo Income and Expenses
  • Solos' Tax Forms: Schedule C Is Your Friend
  • What If My Solo Biz Loses Money?
  • How Solos Are Taxed
  • Record Keeping for Solos
  • When a Solo Closes Up Shop
  • Death of a Solo
  • Outgrowing the Solo

8. C Corporations

  • Types of Corporations
  • How C Corporations Are Taxed
  • Tax Benefits of C Corporations
  • Incorporating Your Business
  • The Importance of Issuing Section 1244 Stock
  • Taking Money out of a C Corporation
  • Tax Pitfalls of C Corporations
  • Dissolving a C Corporation

9. S Corporations

  • An Overview of S Corporations
  • Should You Choose S Corporation Status?
  • Tax Reporting for S Corporations
  • How S Corporation Shareholders Are Taxed
  • Social Security and Medicare Taxes
  • Electing S Corporation Status
  • Revoking S Corporation Status
  • Dissolving an S Corporation

10. Partnerships

  • Partnership Tax Status
  • Tax Reporting by Partnerships
  • Tax Obligations of Partners
  • Partnership Losses
  • Partnership Contributions
  • Getting Money out of a Partnership
  • Partnership Expenses
  • Selling or Transferring a Partnership Interest
  • Ending a Partnership

11. Limited Liability Companies

  • Taxes
  • Comparing LLCs With Other Entities
  • The Limited Liability Company (LLC)
  • Terminating a Limited Liability Company

12. Qualified Personal Service Corporations

  • Qualified Personal Service Corporations (QPSCs)
  • QPSCs & Taxes
  • Fringe Benefits
  • Potential Tax Problems
  • Transferring Shares
  • Dissolving a Qualified Personal Service Corporation

Part 3: Thinking Small

13. Family Businesses

  • The Legal Structure of a Family Business
  • Income Splitting Lowers Taxes
  • A Spouse in the Business
  • Preserving a Family Business After Death

14. Microbusinesses and Home-Based Businesses

  • Business Expenses Incurred at Home
  • Deducting Part of the Cost of Your Home
  • Calculating Your Home Office Deduction
  • Tax When Selling the Home Office
  • A Microbusiness as a Tax Shelter

Part 4: Fringe Benefits

15. Fringe Benefits

  • How Fringe Benefits Save Taxes
  • Retirement Benefits
  • Motor Vehicles
  • Meals
  • Travel and Lodging
  • Clubs and Athletic Facilities
  • Association Dues and Subscriptions
  • Health Benefits
  • Day Care Benefits
  • Education Benefits
  • Gifts, Rewards, Discounts, and Free Services for Employees
  • Adoption Assistance
  • Special Benefits for C Corporation Employees Only

16. Retirement Plans

  • Advantages of Retirement Plans
  • Overview of Retirement Plan Types
  • Details About Each Type of Retirement Plan
  • Where to Go for a Retirement Plan
  • Potential Tax Problems With Retirement Plans
  • Withdrawing Money From Retirement Plans
  • Closing Your Business and Your Plans

Part 5: Buying or Selling a Business

17. Buying a Business

  • Buying the Assets of a Business
  • Buying Shares of Stock
  • Assigning a Price to Business Assets
  • State and Local Transfer Taxes

18. Selling a Business

  • Reporting the Sale of a Sole Proprietorship
  • The Importance of an Arms-Length Deal
  • How to Protect Yourself From IRS Challenges

Part 6: Dealing With the IRS

19. When You Can't Pay Your Taxes

  • If You Owe Less Than $25,000
  • Getting More Time to Pay
  • Paying in Installments
  • What to Expect When the IRS Gets Serious
  • Dealing With a Monster Tax Bill
  • When the IRS Can Take Your Assets

20. Audits

  • Who Gets Audited?
  • How Long Do You Have to Worry About an Audit?
  • How the IRS Audits Small Businesses
  • The Auditor's Powers
  • Should You Get Audit Help?
  • Preparing for Your Audit
  • What to Bring to an Audit
  • Don't Rush a Field Audit
  • What Auditors Look for When Examining a Business
  • How to Behave at an Audit
  • How to Negotiate With an Auditor
  • Your Options After Getting an Audit Report
  • When Your Audit Is Final

21. Appealing IRS Audits

  • IRS Appeals
  • Contesting an Audit in Court

22. Penalties and Interest

  • Common Reasons for Penalties
  • Interest on Tax Bills
  • Understanding Penalty and Interest Notices
  • How to Get Penalties Reduced or Eliminated
  • How to Get Interest Charges Removed
  • Designating Payments on Delinquent Tax Bills

23. Help Beyond the Book

  • Finding Answers to Tax Questions
  • Finding and Using a Tax Pro

24. Answers to 25 Frequently Asked Tax Questions

G. Glossary

A. Appendix

  • IRS Publications List
  • Forms Checklist and Due Dates
  • Quick and Easy Access to IRS Tax Help and Tax Products (Publication 2053-A)

Index

Sample Content

  • Chapter 1: Tax Basics

Introduction

Take it from one small business owner to another: Operating a business without tax savvy is like skydiving without a parachute -- certain to end in calamity. Many business failures stem from ignoring the record keeping and taxes. Like it or not, the government is always your business partner.

Tax knowledge has powerful money-saving potential. It can give you a fatter bottom line than your competitors who don't bother to learn. For instance, there are several ways to write off car expenses. The right choice can mean a few thousand more after-tax dollars in your pocket each year.

Tip Small business or independent contractor? Self-employed people often ask whether they are a "business." The IRS says "yes." Whether you run a flower shop or work at home as a website designer, you're a small business. This includes all kinds of self-employed people, from independent contractors, consultants, and freelancers, to the guy who owns the pizza parlor down the street.

Resources The IRS does not require or issue business licenses. Whether you need any kind of license depends on your state and local authorities. For small business start-up issues, see The Small Business Start-Up Kit, by Peri Pakroo (Nolo).

How Tax Law Is Made and Administered: The Short Course

Think of this section as a high school government lesson, only try to stay awake this time -- it could mean money in your pocket.

The federal government. Visualize a three-branched tree. Congress, the legislative branch of the federal government, makes the tax law. The executive branch, which includes the Treasury Department, administers the tax law through the IRS. The judicial branch comprises all the federal courts, which interpret the tax laws and overrule the IRS when it goes beyond the law.

The power to tax incomes was granted by the 16th Amendment to the U.S. Constitution; the first Income Tax Act was passed in 1913. Contrary to what fringe groups and con artists contend, income tax law and the IRS are legal and are not going to go away.

The code. Tax law begins with the Internal Revenue Code (referred to throughout this book as the tax code or IRC). Congress enacts and revises the tax code. The president signs it (usually), and it becomes law. One major reworking of the IRC was officially called the Tax Reform Act, but was known to tax pros as the Accountants' and Tax Attorneys' Relief Act. The tax code is now over 8,500 pages of exceedingly fine print.

The IRS. The Internal Revenue Service (IRS) is a division of the Treasury Department. It is headed up by the Commissioner of Internal Revenue, a presidential appointee. The IRS is charged with enforcing the tax code.

The IRS is headquartered in Washington, but it is doubtful you will ever deal directly with anyone there. The real work is done at IRS satellite offices.

The courts. The United States Tax Court interprets the tax laws and decides disputes between the IRS and taxpayers and interprets the tax code. It is pretty easy to go to tax court in most cases, even without an attorney. Tax disputes are also decided in U.S. District Courts and the Federal Court of Claims, but these require payment of the disputed tax first, unlike in the tax court. All decisions in those courts, for or against you, may be reviewed by higher courts, meaning the various U.S. Courts of Appeal and the U.S. Supreme Court. The exception is "small case" tax court decisions; see Chapter 21 for details.

See, that wasn't all that bad, was it? Now, venture forth into the rest of the book and may the small business gods be with you.

Warning Tax laws are ever-changing. While we try our best to keep this book up to date, Congress is forever tinkering with the tax code. Some changes are made retroactive, others become law on the date they are signed by the president, and some won't be effective until the next year or further into the future. Also, federal court decisions, which interpret the tax code, are released throughout the year and may change what is written here. Your best strategy is to make sure you have the most current edition of this book (check Nolo's website for updates to this book) and check with your tax adviser to see if anything has changed in your tax world.

Where to Find Tax Rules

How to research tax law questions is covered in Chapter 23. Here's a brief description of the main sources of federal tax law.

Federal statutes. Congress enacts tax laws, called codes, which make up the Internal Revenue Code. Each tax provision (called a "code section") has its own number and title. For example, IRC § 183 refers to tax code Section 183, titled "Activities Not Engaged in for Profit."

IRS publications. When Congress makes tax laws, it paints with a fairly broad brush. It's then up to the Treasury Department (the IRS is a part of it) to determine how the tax code is to be applied. The details are filled in by IRS publications, such as Treasury Regulations. These "regs" are numbered in the same order as their related tax code sections, but preceded by the numeral "1." For example, the regulation explaining IRC § 183 is Reg. 1.183. (Not all IRC sections have corresponding regulations.)

Both the IRC and IRS publications are available at most public libraries, larger bookstores, and, of course, IRS offices. The IRC is online at www4.law.cornell.edu/uscode/26 and the regulations on the IRS's website at www.irs.gov.

Court cases. When the IRS and taxpayers go to court, a federal judge can reject the IRS interpretation of the tax law. The judges' published opinions offer guidance on the correct interpretation of the tax code. Look up tax court opinions (from January 1, 1999 to the present) on the tax court's website at www.ustaxcourt.gov or at a law library, courthouse, or law school.

Marginal Tax Rate and Tax Brackets

In our income tax system, the more money you make, the higher your tax rate. Often referred to as your tax bracket, or marginal tax rate, it is the percentage at which the last dollar of income you earn will be taxed.

For example, Janice is single, lives in New York, and reports $100,000 in income on her 2007 tax return; her marginal tax rate, or tax bracket, is 28%. Janice's income tax is figured like this: The first $77,100 of income will be taxed in increments at the 10%, 15%, and 25% tax rates, and the remaining $22,900 will be taxed at 28%. Every additional dollar Janice earns will be taxed at 28% until it reaches more than $160,851 in income, at which point her marginal tax rate, or tax bracket, will jump up to 33%.

If Janice factors in New York state and local income taxes and Social Security and Medicare tax, her true marginal tax rate may exceed 50%!

Tip What's your marginal tax rate? Determine the effect of additional business income or deductions by applying your marginal tax rate. For instance, if your marginal tax rate is 28%, 28¢ of every new dollar you earn goes to Uncle Sam. Conversely, you save 28¢ in federal income taxes on every additional dollar that qualifies as a deductible expense.

[2007 Federal Personal Income Tax Brackets chart] omitted for online sample chapter.

The Alternative Minimum Tax (AMT)

As if the tax code weren't diabolical enough, there is something called the alternative minimum tax (AMT). The AMT is not a business tax but is really a second (alternative) set of tax rates that potentially apply to everyone. The theory of the AMT is that higher-income people who take a lot of tax deductions or tax credits should still have to pay a minimum amount of income taxes. About a quarter of taxpayers with incomes between $100,000 and $200,000, as well as 40% of those earning more than $200,000, are subject to the AMT.

Everyone must figure their income tax under both the regular (marginal) tax rates, and the AMT rates -- and pay whichever is the greater number. Ouch! Fortunately, tax software automatically figures the tax both ways. The AMT is reported on Form 6251, and filed with your individual tax return.

The AMT works to deny upper-income people many tax deductions and credits otherwise allowed on their tax returns. AMT is figured by adding back to their income many of the exemptions, deductions, and credits that lowered their taxable income in the regular system. The AMT is triggered by such things as:

  • net operating loss deductions in a business
  • interest deductions on home equity loans
  • large itemized deductions for state and local taxes
  • foreign tax credit
  • passive income or loss
  • certain installment sale income
  • unreimbursed employee expenses
  • exemptions for dependents
  • child and education tax credits for Hope scholarships and Lifetime Learning
  • interest income on certain tax-exempt bonds, and
  • the exercise of incentive stock options.

The AMT is yet another reason to use a tax pro or a software program like TurboTax (Intuit).

Tip Don't understand tax terms? Check out the glossary at the back of this book for a plain English explanation of the taxese used in this book.

Legal Updates

Here are summaries of important legal or procedural changes that affect the latest edition of this product.

What's New in the 12th Edition of Tax Savvy for Small Business

Overview of What's New

There is updated tax and legal information throughout the book, including new tax rates, deduction and contribution amounts, and eligibility numbers.

The book also covers:

  • First-Year Bonus Depreciation -- the new temporary 50% additional depreciation for certain new long-term assets. (Note this was enacted for tax year 2008 and subsequently extended to tax year 2009.)
  • New "qualified joint venture" ownership option for spouses who co-own a business together.

Who Needs the New Edition?

You need the new edition if you want the most up-to-date tax information for small business owners, including updated tax numbers and rates and legal information.

Chapters Most Affected

There were updates to tax numbers and rates and other minor changes throughout the book.

Forms That Have Changed

IRS Form 1120, U.S. Corporation Income Tax Return.

Estate and Annual Gift Tax Exemptions Raised
Increase in IRS Mileage Rate
Stimulus Measures for Small Business in Recovery Act of 2009