Taxes

 

 

Our professional staff has significant experience in the area of taxation.  We prepare tax returns for all types of personal and business entities, as described below:

 

Individual Income Taxes

 

Individuals must file personal income tax returns annually by April 15 (unless extended until October 15).  Individuals are cash-basis taxpayers and must use the calendar year.  Recent changes in tax laws signed by President Bush have resulted in reduced tax rates, larger tax credits, lower phase-outs and other changes scheduled for implementation over the course of the next ten years.  One area that has not changed is the Alternative Minimum Tax, which, unfortunately, will now impact substantially more taxpayers.

 

We mail tax organizer and questionnaire forms to all of our clients prior to the end of the year.  These forms assist our clients in gathering the necessary data for the preparation of complete and accurate tax returns.  We assist our clients in identifying all legal and appropriate tax deductions in order to minimize tax liabilities.  As the famous saying goes, “there is no legal requirement to pay higher taxes than you are legally obligated to remit.”

 

Sole Proprietorships

 

Sole proprietorships are the simplest business form since they are not separate tax or legal entities but, rather, extensions of the individual taxpayer that owns them.  A taxpayer is a sole proprietor if they are self-employed and are the sole owner of an unincorporated business.  The business has no existence apart from the owner.  Its liabilities are the owner’s personal liabilities.  There is no special return to file for the sole proprietorship.  The owner reports all transactions of the business in their own individual income tax return via Schedule C.

 

Advantages of a sole proprietorship include:

·           Low organizational costs

·           Legal, accounting and administrative fees are lower

·           Administration is less complicated

·           No separate tax returns required to be filed (included with Form 1040)

 

Disadvantages of a sole proprietorship include:

·           Personal liability

·           Inability to income split

·           Limited fringe benefits

·           Self-employment tax, requiring the payment of employee and employer social security taxes.

·           Limited retirement plans

 

Partnership Income Taxes

 

Provisions for the taxation of partnerships require the filing of an information return.  Income and deductions flow through to, and are reflected on, the tax returns of the partners.  The IRS Code prescribes the consequences of many different sorts of transactions involving partnerships and partners but allow substantial flexibility so that the parties can often achieve the tax results they desire.  Tax Form 1065 is filed for Federal purposes while Tax Form 565 is filed for California purposes.

 

While a partnership must figure its total income and file Form 1065 that provides information on partnership income or losses for the year, the partnership itself is not subject to income tax.  A partnership does not make estimated tax payments.  However, the partners may have to make payments of estimated taxes, both Federal and State.  A partner’s distributive share of income from a partnership is usually included in figuring net earnings from self-employment.  If an individual partner has net earnings from self-employment of $400 or more for the year, the partner must figure self-employment tax on Schedule SE of Form 1040.

 

S Corporation Taxes

 

Similar to partnerships, all items of income, deduction, credit, gain and loss are passed through on a pro-rata basis to the individual S Corporation shareholders.  In short, the S Corporation is taxed like a partnership; it pays no taxes, and its income and deductions pass through to the shareholders.  In other respects, however, S Corporations are taxed like C Corporations.  Tax Form 1120-S is filed for Federal purposes while Tax Form 100-S is filed for California purposes.

 

Advantages of an S Corporation include:

·           No double taxation.  Profits are allocated to shareholders and are only taxed at individual rates

·           Losses are currently deductible by shareholders

·           An S Corporation is specifically exempted from the accrual method of accounting and can therefore us             the cash method of accounting despite the nature of the business

·           Provides a corporate shield for liability purposes for taxpayers without the potential liability problems of a             partnership

 

Disadvantages of an S Corporation include:

·           Because there is no corporate tax rate, nonqualified deferred compensation plans are not permissible

·           No opportunity to accumulate corporate earnings in a lower corporate tax bracket

·           The 80% dividends received deduction is lost

·           All income, except long-term capital gains, received by the corporation is taxable to the shareholders             whether or not they are currently distributed

 

C Corporation Taxes

 

For purposes of Federal income taxes, the corporation is recognized as a separate tax paying entity.  This causes, in the case of most corporations, double taxation.  Income is taxed first to the corporation that earns it, and secondly to the shareholders when the earnings and profits are distributed to the shareholders (when the earnings and profits are distributed as dividends and/or when the corporation is liquidated).  Tax Form 1120 is filed for Federal purposes while Tax Form 100 is filed for California purposes.

 

Advantages of a C Corporation include:

·           As a separate taxpayer, it can be used to split income between itself and its owners, with potentially lower             overall tax rates as a result

·           Deduction for fringe benefits for its employees/owners, such as medical insurance or medical             reimbursement plans, disability insurance, or group term life insurance

·           Ability to elect a fiscal tax year

·           Ability to deduct up to 80% of the dividends they receive from investments in other domestic corporations

 

Disadvantages of a C Corporation include:

·           Required use of the accrual method of accounting with large inventory

·           Earnings are subject to double taxation where income is paid out in dividends

·           Potential personal holding company tax on interest, dividends rents and royalties

 

Accumulated Earnings Tax Trap

A corporation can accumulate its earnings for use in possible expansion or for other bona fide business reasons.  However, if a corporation allows earnings to accumulate beyond the reasonable needs of the business, it may be subject to an accumulated earnings tax.  We can assist your business in setting up the proper documentation to successfully defend against an audit by tax authorities.

 

Limited Liability Companies (Partnerships/Corporations)

 

An LLC is a non-corporate business that provides its members with limited liability, a single tax and the option to participate actively in the entity’s management.  The Internal Revenue Service does not recognize and LLC as a distinct entity.  Although exhibiting the corporate characteristic of limited liability, the entity is usually treated as a partnership for Federal and California tax purposes.  Tax Form 1065 is filed for Federal purposes while Tax Form 568 is filed for California purposes.

 

When a limited liability company/partnership is treated as a partnership for tax purposes, it can provide several benefits:

 

Advantages of an LLC include:

·           Pass-through of tax attributes under the partnership tax rules

·           Limited liability to all members

·           Control over the business by the members without the risk that management participation will cost             members their limited liability

·           Freedom from S corporation eligibility requirements

 

Disadvantages of an LLC include:

·           Some state statues, such as California, severely restrict the types of businesses that may elect to form             as an LLC

·           Managers who are actively involved in the management of the LLC will be subject to self-employment tax

·           California LLC’s are required to pay the $800 minimum franchise tax plus a “gross receipts fee” that is             based on total income (even though the LLC may have a net loss for tax purposes)

 

Because of these negative attributes, we generally advise clients to NOT form an LLC in California.

 

Trusts

 

A trust return is required when a legal entity is formed for an individual or an estate.  Such entities include charitable remainder trusts, split interest trusts, revocable living trusts, complex trusts, simple trusts and estates.  Tax Form 1041 is filed for Federal purposes while Tax Form 541 is filed for California purposes.

 

 

Non-Profit Entities

 

Organizations created under Internal Revenue Code Section 501(c)(3) must file an annual information return with the Internal Revenue Service.  Beginning in the year 2000, the IRS expanded form 990 and its related Schedule A to include new schedules for purposes of disclosing contributions from major donors.  Tax Forms 990, 990 Schedule A and 990 Schedule B are filed for Federal purposes while Tax Forms 199 and RRF-1 are filed for California purposes.

 

Not-For-Profit entities do not pay any income taxes, but may be subject to sales tax (for sale of inventory items) and unrelated business income tax (UBIT).  The imposition of these taxes will require the filing of separate tax returns.  California requires a $10 fee payable to the Franchise Tax Board and, if assets/receipts are greater than the specified limit, a fee ranging up to $300 to the California Attorney General.

 

 

 

 

 

Copyright © 1999 - 2009 Regalia & Associates

Last Modified January 5, 2009