Small Business Tax Workshop
Patricia M. Ritzert, Esq.,
M.Tax, LL.M. (Tax)
Our Attorneys
John R. Climaco
David M. Cuppage
Margaret M. Metzinger
Joseph M. Muska
John A. Peca
Patricia M. Ritzert
Stewart D. Roll
Scott D. Simpkins
Thomas J. Tarantino
Dennis R. Wilcox
Practice Areas
ERISA Contracts
Employment Law
Executive Compensation
Corporate Transactions
Financial Institutions
Municipal Bonds, Insurance Coverage, Mergers and Acquisitions
Professional Malpractice
Securities Transactions
Types of Business Forms
SOLE PROPRIETORSHIP
PARTNERSHIP
CORPORATION
SUBCHAPTER S CORPORATION
OHIO LIMITED LIABILITY COMPANY
Sole Proprietorship
Single owner
Business income, expenses, and transactions should all be tracked as if the
business were a separate entity.
Only business expenses are deductible from business income.
Keep a log of business mileage when using a personal vehicle.
Optional safe harbor for business use of the home
Rev Proc. 2013-13
Sole Proprietorship
• Under the safe harbor method, taxpayers determine their allowable deduction for business use of a residence by multiplying a
prescribed rate by the square footage of the portion of the taxpayer's residence that is used for business purposes.
• The current prescribed rate is $5.
• The allowable square footage is limited to 300 square feet.
• A taxpayer may elect from tax year to tax year whether to use the safe harbor method.
• Except as provided in Rev. Proc. 2013-13, a taxpayer electing the safe harbor method for a tax year can't deduct any actual
expenses related to the qualified business use of that home for that tax year. The safe harbor method doesn't apply to an
employee with a home office that is reimbursed for expenses related to qualified business use of the home. A taxpayer may
not deduct any depreciation for a tax year in which the safe harbor method is used.
• Rev. Proc. 2013-13 provides rules to determine a depreciation deduction for a subsequent tax year in which actual expenses
are used.
• the amount of the deduction computed using the safe harbor method can't exceed the gross income derived from the
qualified business use of the home for the tax year, less business deductions described in the revenue procedure. Rev. Proc.
2013-13 also provides guidance for taxpayers sharing a home, taxpayers with more than one qualified business use of the
same home for the same tax year, and taxpayers with qualified business uses of more than one home for a tax year.
Report Sole Proprietorship Net Profit on
Schedule C to Form 1040
A separate Schedule C should be completed for each business.
[See Schedule C]
The net profit or loss shown on Schedule C will be entered on your personal Form
1040 line 12. Schedule C is a part of and is submitted to the IRS with the Form
1040.
[See Form 1040]
The income or loss is taxed as a part of your personal income, with the additional
requirement that you pay self employment tax, which substitutes for the
employer’s portion of social security and Medicare tax (15.3%).
Sole Proprietorship
Sec. 1 Tax imposed
(a) Married individuals filing joint returns and surviving spouses
There is hereby imposed on the taxable income of-(1) every married individual (as defined in section 7703) who makes a single return jointly with his spouse
under section 6013, and
(2) every surviving spouse (as defined in section 2(a)), a tax determined in accordance with the following
table:
If taxable income is:
The tax is:
Not over $36,900
15% of taxable income.
Over $36,900 but not over
$5,535, plus 28% of the
$89,150.
excess over $36,900.
Over $89,150 but not over
$20,165, plus 31% of the
$140,000.
excess over $89,150.
Over $140,000 but not over $35,928.50, plus 36% of the
$250,000.
excess over $140,000.
Over $250,000.
$75,528.50, plus 39.6% of the
excess over $250,000.
Sole Proprietorship
(b) Heads of households
There is hereby imposed on the taxable income of every head of a household (as defined in section
2(b)) a tax determined in accordance with the following table:
If taxable income is:
The tax is:
Not over $29,600
15% of taxable income.
Over $29,600 but not over
$4,440, plus 28% of the
$76,400.
excess over $29,600.
Over $76,400 but not over
$17,544, plus 31% of the
$127,500.
excess over $76,400.
Over $127,500 but not over
$33,385, plus 36% of the
$250,000.
excess over $127,500.
Over $250,000
$77,485, plus 39.6% of the
excess over $250,000.
Sole Proprietorship
(c) Unmarried individuals filing (other than surviving spouses and heads of households)
There is hereby imposed on the taxable income of every individual (other than a surviving spouse as
defined in section 2(a) or the head of a household as defined in section 2(b)) who is not a married
individual (as defined in section 7703) a tax determined in accordance with the following table:
If taxable income is:
The tax is:
Not over $22,100.
15% of taxable income.
Over $22,100 but not over
$3,315, plus 28% of the
$53,500.
excess over $22,100.
Over $53,500 but not over
$12,107, plus 31% of the
$115,000.
excess over $53,500.
Over $115,000 but not over
$31,172, plus 36% of the
$250,000.
excess over $115,000.
Over $250,000.
$79,772, plus 39.6% of the
excess over $250,000.
______________________________________________________________________________
* Tables are adjusted annually by the Secretary of the Treasury
Year 2014 Inflation-Adjusted Tax Tables and 'Kiddie Tax' (Rev. Proc. 2013-35)
Year 2013 Inflation-Adjusted Tax Tables (Rev. Proc. 2013-15)
Partnership
A partnership is formed by means of an agreement among partners. The agreement will
define the relative interests of the partners. Considerable latitude exists for partners to
define their relative interests in assets, income, deductions, losses, cash, etc. The
partners may share in these items in varying proportions. For example a partner might be
allocated 50% of the cash flow, but only 30% of the profits.
PASS-THROUGH TAXATION --- A partnership is not a taxpaying entity.
IRC sec. 701.
Sec. 701 Partners, not partnership, subject to tax.
•
A partnership as such shall not be subject to the income tax imposed by this chapter.
•
Persons carrying on business as partners shall be liable for income tax only in their
separate or individual capacities.
Partnership
The Partnership does calculate income as an entity, and it prepares a tax form for filing – Form
1065. However, it does not pay income tax with the form.
Rather, it sends reports called “K-1” to each partner. The K-1 informs the partner of the income, loss,
deductions, gain, or credits, etc. which are “passed through” the entity to that partner.
The partners then transfer the “passed through” items – which are bits of tax-relevant information – to
their personal income tax returns.
These are referred to as the “separately stated items”. Rules related to the treatment of those passedthrough items are then applied by the partners as individuals, if they are individuals.
For example, if a partner has an amount of charitable contributions passed through to him, he will
determine for himself whether his total charitable contributions (those he made directly and those
passed through from the partnership) exceed the limits of what he may deduct (those limits are a
percentage of individual’s income), based upon his total income. This determination is made
independently from the other partners.
Partnership
[Look at Form 1065]
[Look at Schedule K-1. Note the separately stated items on p. 2]
Limits apply to the deduction of losses passed through from a partnership. Three limitations are:
Losses may only be deducted to the extent of a partner’s basis in his partnership interest. Each partner’s
basis is calculated independently of other partners.
Losses may not be deducted in excess of the amount a partner has “at-risk” in the partnership. This can vary
from partner to partner.
“Passive” losses can only be deducted from passive income on an individual’s personal tax return.
Partnership
Some partners might be able to use deductions or losses passed through to them against income or
gains, and other partners might not be able to use them. This is the nature of “pass through” taxation.
Although the income or profits of a partnership are subject to tax only at the partner level, there is a
trade-off. The taxable income (or loss) of a partnership is reported on a K-1 for each partner for each
year, and must be included in the personal incomes of each partner, regardless of whether the
partnership actually distributes cash to the partners.
This contrasts with the corporate scheme, in which the dividends paid by a corporation to a
shareholder are not taxed until they are declared and paid. So the trade-off is that only one level of
tax will be paid, but that tax will be due sooner than under the corporate scheme. Operating losses
are, of course, also passed-through and accounted for in the year they occur. (IRC sec. 706 Taxable
years of partner and partnership). Under §706, the individual partners will include the income of the
partnership in their income for their taxable year in which a partnership year has ended, or for the
partnership year which ends at the same time as their taxable year (calendar year for individuals).
[Refer to Form 1040. Partnership income or items of income or loss are reported on various lines of
the Form 1040.]
Corporation
A corporation is taxed as a separate tax-paying entity.
Sec. 11 of the Tax Code:
(a) Corporations in general.
A tax is hereby imposed for each taxable year on the taxable income of every corporation.
(b) Amount of tax.
(1) In general. The amount of the tax imposed by subsection (a) shall be the sum of-(A) 15 percent of so much of the taxable income as does not exceed $50,000,
(B) 25 percent of so much of the taxable income as exceeds $50,000 but does not exceed
$75,000,
(C) 34 percent of so much of the taxable income as exceeds $75,000 but does not exceed
$10,000,000, and
(D) 35 percent of so much of the taxable income as exceeds $10,000,000.
In the case of a corporation which has taxable income in excess of $100,000 for any taxable year, the
amount of tax determined under the preceding sentence for such taxable year shall be increased by
the lesser of (i) 5 percent of such excess, or (ii) $11,750. In the case of a corporation which has taxable
income in excess of $15,000,000, the amount of the tax determined under the foregoing provisions of
this paragraph shall be increased by an additional amount equal to the lesser of (i) 3 percent of such
excess, or (ii) $100,000.
Corporation
Corporations deduct losses and recognize income without passing them through to their stockholders.
Owners can be employees and/or creditors in addition to being stockholders.
Stockholders are responsible to pay the tax on the corporate earnings only to the extent those
earnings are paid to them as dividends (exceptions exist – accumulated earnings tax; personal holding
company tax – beyond the scope of this workshop0. Payments to stockholders, in their capacity as
stockholders (i.e. not as employees or creditors) will be treated as dividends to the extent of the
earnings and profits of the corporation.
See example of the effect of double taxation.
Corporation
Dividend income is reported to the stockholders on Form 1099 DIV.
Dividends are not deductible by the corporation.
The Internal Revenue Service has the authority to re-characterize payments to
stockholders as dividends if, for example, compensation paid to a stockholder as
salary, interest or rent is excessive and unreasonable.
This income is included on the Form 1040 on Schedule B.
Losses of a corporation do not flow through to its stockholders. Stockholders
do not risk losing more money than they paid for their stock.
S Corporations
Becoming a Subchapter S Corporation is elective.
See Form 2335.
• S Corporations may not have more than 100 stockholders (a family counts as
one),
• the stockholders must be human beings (with some exceptions for qualifying
trusts and exempt organizations)
• none of whom is a non-resident alien,
• must be a corporation formed under the laws of a state or of the United
States, and
• The corporation cannot have more than one class of stock (i.e. common)
[Note the nature of common stock. Note the signature lines on Form 2335.]
S Corporation
The S Corporation avoids with double taxation of regular corporations (“C
Corporations”)with a few exceptions.
• An S Corp that was a C Corporation prior to filing its election will still
generate taxable dividends when distributions to its stockholders are
deemed to have come from the earnings and profits generated by the
corporation before it elected to become an S Corporation.
• An S Corp will be taxed at the highest corporate rate on gains realized on the
sale of property within 10 (or 7) years after it became an S Corp, to the
extent that those gains result from the appreciation in value of property
owned by the corporation at the time it elected S Corp status.
S Corporation
With certain exceptions, the tax effects of income and loss of S Corporations flow through to their
stockholders every year, regardless of whether dividends are paid to the stockholders. Similar
limitations apply to the deduction of S Corporation losses as to partnership losses, such as not
deducting losses in excess of basis.
The flow-through items are reported to S Corporation stockholders on Schedule K-1 to the S
Corporation tax return on Form 1120S.
See Form 1120S.
See Schedule K-1.
Ohio Limited Liability Company
Under the Federal tax system, entities that are “eligible entities” may choose to
be taxed under the sole proprietorship scheme, the partnership scheme, the ‘C’
corporate scheme, or the S corporate scheme.
In Ohio limited liability companies are “eligible entities.” Owners of limited
liability companies are given limited liability under state law, like stockholders in
corporations. This means that creditors of the LLC cannot collect payment from
the assets of the owners, but only from the assets of the LLC. The owners are at
risk only for the amount of their investment.
Federal tax law allows the following choices.
Ohio Limited Liability Company
Eligible Entity
Sole
Proprietor
Partnership
Corporation
S Corporation