Tag: tax

Sole Proprietorship or Partnership? Navigating Schedule C vs. Form 1065 for Your Startup

The choice of legal structure is a pivotal decision when establishing a new business.  Many business owners opt for a limited liability company or a corporation.  This decision is primarily driven by two factors: (1) the legal structure that offers the most favorable income tax rates and (2) the potential involvement of investors who may seek an equity stake in the business.  These considerations are best discussed with an accountant or lawyer.

Most of our clients establish their businesses as limited liability companies (LLCs) due to the ease of filing the required paperwork.  If there is more than one owner, the LLC will be a partnership in the eyes of the IRS.  If there is only one owner, the IRS views the business as a sole proprietorship, and the owner can file a Schedule C for the business.

Often, clients want to include their spouse or significant other as an owner of their business. This makes sense if the other person is materially involved in the business. In many cases, however, it is a matter of loyalty to their spouse. They share all aspects of their lives and file a joint tax return, so it makes sense that they want their spouse to have ownership of the business.

As a business advisor, my role is to assist business owners in making well-informed decisions about their business, including ownership.  We often delve into the advantages and disadvantages of joint ownership with a spouse who may not be actively involved in the business operations.  This decision is typically influenced by the tax implications of the required tax return.

Schedule C is the appropriate tax return if the LLC has only one owner. It is a simple, two-page form that can be completed in a short period of time.  The business income is determined and is transferred to the 1040.   On the other hand, a partnership LLC must file IRS Form 1065 to document the revenues, expenses, and profits generated by the business.  In most states, ownership of an LLC by both members of a married couple is viewed as a partnership and requires filing the partnership tax return. Form 1065 spans 6 pages and requires details about potential foreign ownership, partners’ distributive share of income, a balance sheet, and more.  After completing Form 1065 and determining the business’s profits, the profits need to be divided between the partners, who are spouses in this case. Each partner must fill out a Schedule K-1 to record their portion of the profits. If the couple is filing a joint return, the profits are combined and entered on their Form 1040.

A quick check of prices charged by accountants to complete these tax forms yielded these average charges:

Schedule C  $192, at an average fee of $150 per hour

Form 1065   $733, at an average fee of $177 per hour Once I demonstrate the additional work and expense involved in making the uninvolved spouse an owner of the business, it becomes easy to decide to have a single owner.

For answers to other questions about starting a small business, please check back regularly for new blog posts and see by recent past blog posts. Also, please consider getting free business assistance from your local Small Business Development Center.

If You Have to File Late, Avoid Penalties and Interest

April 15 is just a few days away. If you won’t be able to mail and postmark your taxes by April 15, you may need to file for an extension. You can request an extension if you need extra time to file your tax return. However, it’s important to note that an extension only gives you more time to file your return; it does NOT mean you have an extension to pay.

All taxes that you owe must be paid by the original deadline. Otherwise, you may be charged a late fee along with an interest. If you fail to file your return on time, you will be penalized with a Failure to File penalty unless you apply for an extension.

Failure to Pay Penalty

A Failure to Pay penalty is assessed on the balance of taxes owed after April 15. The penalty for unpaid taxes incurs a monthly fee of 0.5%, with a maximum penalty of 25% of the unpaid taxes, regardless of whether you filed an extension.

Failure to File Penalty

A Failure to File penalty is assessed based on how late you file and the amount of taxes owed on the due date. This fee is assessed if you do not file your tax return AND you do not request an extension. This penalty is calculated at 5% of the unpaid balance per month and maxes out at 25%.

Both of these penalties may be assessed for the same months. However, the combined penalties will be at most 5% of the taxes owed per month.

In addition to these penalties, the IRS charges interest on past-due amounts. This interest is charged on the taxes owed, the penalty, and the accumulated interest. The more you owe, the higher the interest will be. Interest begins on the day the tax is late and continues until the tax, along with interest and penalties, is paid in full.

To avoid getting in trouble and paying penalties:

  1. File your tax return on time and pay any tax owed by the due date.
  2. If you cannot file your taxes by the deadline, you can avoid a Failure to File penalty by requesting an extension.
    a. The extension must be filed by the due date.
    b. The extension gives you to October 15 to file.
    c. File form 4868 or use IRS Free File to apply for an extension.
    d. You need to enter an estimation of your 2023 tax liability and the amount of
    payments you made in 2023 through withholdings and estimated tax payments.
    e. Include payment for the balance to avoid late penalties and interest. If you cannot pay the balance in full, pay as much as possible.
    f. Estimating high and overpaying is much better than subjecting yourself to late penalties and interest.
    g. It is much better to estimate high and overpay than subject yourself to late penalties and interest.
  3. If you are unable to pay the balance when you file the extension, you should pay as much as you can and apply for a payment plan that will allow you to pay the remaining balance over time.
    a. Apply for a short-term plan if you can pay your taxes owed within 180 days.
    b. Apply for a long-term plan to make monthly payments over some time greater than 6 months.
    c. Set-up fees are applied to long-term plans; this fee is significantly lower if payments will be made by direct deposit.
    d. If payments are made by credit card, a fee will be charged.
    e. You may be able to apply for a payment plan online, depending on how much you owe. Online setup requires a computer using a supported browser and a cell phone that receives text messages.
    f. If you cannot apply online, you will need to complete Form 9465, Installment
    Agreement Request.
    g. For more information on applying for an IRS payment plans, go to
    https://www.irs.gov/payments/online-payment-agreement-application

If you cannot pay your taxes on time, you must establish a payment plan with the IRS. If you do not follow these steps, the IRS can levy your salary, bank accounts, or property. You do not want to get into that situation.

Filing a Final Tax Return

Losing a loved one to death is one of the most challenging circumstances in life. The IRS will require the deceased person’s representative to file a final tax return to add insult to injury.

My father passed away early in the year, and I had not completed his tax return for the previous year. I had to file it for him. A year after his passing, I had to file a final return for him as he had received social security and retirement benefits in his last year of life. These were emotional experiences for me. If you are in this position this year, you have my sincerest sympathy, and I hope this information makes the experience less stressful for you.The return must be filed by your loved one’s surviving spouse or representative.

If you are the one filing, follow these steps.

  1. Gather all tax documents for your loved one as you would prepare your tax return.
  2. All income received up to death must be included on the final tax return. If the deceased person was elderly, their income likely included: (1) retirement benefits, (2) social security, (3) IRA distributions, (4) Interest and dividends, and (5) investment Income
  3. If they were younger and still working, they will receive a W-2 or 1099 from those they worked for in the final year of life.
  4. If filing electronically, you must check the box “Taxpayer Died Before Filing.”  If filing a paper return, write “Deceased” along with the taxpayer’s name and date of death across the top of the return. You do not need to include a death certificate or other proof of death.
  5. If the deceased person was married, the surviving spouse can file Married Filing Jointly or Married Filing Separately for the year of death.
  6. All credits and deductions for the deceased person were eligible for still apply.
  7. The appointed representative must sign the return for the deceased individual. The spouse must also sign the return if the person has a surviving spouse. If no representative was appointed and the person did not have a surviving spouse, the person handling the estate should sign the return as a personal representative.
  8. A personal representative should complete Form 1310, Statement of Person Claiming Refund Due for a Deceased Taxpayer. A court-appointed representative can skip Form 1310 but should include a copy of the court order showing their appointment.
  9. If the deceased person is due a refund, the representative must agree to distribute the refund to the person’s heirs in accordance with their will. If the deceased person has a tax liability, the personal representative must pay it from the estate asset.

You can use the IRS’s Interactive Tax Assistant (ITA) to help you determine how to file for your specific situation:  https://www.irs.gov/help/ita/how-do-i-file-a-deceased-persons-tax-return

If you have not yet filed your tax return, check back next week for tips on filing your return yourself.

Do I Have to File a Tax Return this Year?

If you are currently retired and living on a small, fixed income or barely making enough money to support your family, you might wonder whether you need to file a tax return this year. The answer is most likely “Yes.”

In 1789, Benjamin Franklin famously said, “In this world, nothing can be said to be certain, except death and taxes.” That has not changed much. Filing a tax return is a requirement of life for nearly every American.

You are required to file a tax return if:

  1. Your gross income was greater than the applicable standard deduction for your filing status.
  2. You had self-employment income of $400 or more.
  3. You owe taxes.

Keep in mind that gross income is not just income earned from working a job. It includes social security and retirement income, IRA distributions, interest and dividends, capital gains, and any other sources of income you might have.

Let’s look at the example of a 90-year-old widow whose social security and retirement benefits total $23,400 annually. Additionally, she received $157 in interest on her savings and a dividend of $384 from stocks. Therefore, her gross income is $23,941. This amount exceeds her standard deduction of $15,700. Consequently, she must file a tax return for the year. It is likely that she had taxes withheld on these incomes and that she is entitled to a refund. If so, filing is not only required, but it is beneficial.

Even if you are not required to file a tax return, you will want to file if (1) you are due a refund on taxes withheld or (2) if you are entitled to claim a tax credit. The most common tax credits are:

  • Earned income tax credit
  • Child tax credit
  • American Opportunity Tax Credit
  • Credit for Federal Tax on Fuels
  • Premium Tax Credit
  • Health Coverage Tax Credit
  • Credits for Sick and Family Leave
  • Child and Dependent Care Credit

If you are still unsure whether you have to file a tax return, you can use the IRS’s Interactive Tax Assistance (ITA). It has an Interview Tool to help you figure it out. The interview is estimated to take 12 minutes to complete. Remember that the tool is only as good as the answers you provide. Access the interview tool here: https://www.irs.gov/help/ita/do-i-need-to-file-a-tax-return

Free Tax Filing Options

Did you know you may be eligible to file your taxes for free? Several free filing options are available, depending on your age, state of residency, and income. You can find a free tax filing option if your Adjusted Gross Income (AGI) is $79,000 or less.

In order to move forward, you will need to determine your AGI for 2023. This information will help us explore the best options available and make informed decisions. Let’s take a moment to calculate your AGI so we can confidently move ahead.

Step 1:  Calculate your total income by adding up all sources of income you receive. Typical forms of income may include:

  • Wages
  • Retirement income
    • IRA distributions
    • Dividends
  • Capital gains
  • business profits
  • interest earned
  • Investment income 
  • Social security
  • Tips
  • Rental income
  • Dependent care benefits
  • Employer-provided adoption benefits

  • Medicaid waiver payments

    Step 2:  Sum up the adjustments made to your income. These adjustments may include: 
  • Half of the self-employment taxes you paid
  • Self-employment health insurance premiums
  • Applicable donations to IRAs
  • Student loan interest
  • Unreimbursed educator expenses

Your AGI is your total income minus your total adjustments.

IRS File Free

The IRS has collaborated with several tax software providers to offer free access to those who meet the requirements. Each provider has its own set of criteria for eligibility. Please visit the provider’s website to determine if their free service is available in your state. Below is a list of the IRS’s trusted partners and a link to their websites.

1040 NOWAGI < $68,000Any agehttps://www.1040now.net
Drake$17k<AGI<$68kAny agehttps://www.1040.com/
EzTaxReturnAGI < $79,000Any agehttps://www.eztaxreturn.com/
FileYourTaxes$8.5k<AGI<$79k< 65https://www.fileyourtaxes.com/
On-Line TaxesAGI < $45,000Any agehttps://www.olt.com
Tax ActAGI < $79,00020 – 54https://www.taxact.com/
Tax HawkAGI < $45,000Any agehttps://www.taxhawk.com
Tax SlayerAGI < $44,000Any agehttps://www.taxslayer.com/
Comparison Free Tax Filing Options

The IRS has a tool to help you determine which of these trusted partners is right for you: https://apps.irs.gov/app/freeFile/general/

  1. Go to IRS.gov
  2. Click “File your taxes for free.”
  3. Select “Explore Free Guided Tax Software”
  4. If you are a first-time free tax filer, select “Find Your Trusted Partner(s)” to find the right preparer for your situation. Or you may browse all the IRS-trusted partners.
  5. Once you use IRS File Free, you will receive an email from the company you used with a link to file for free next year.

Check back next Tuesday for another tax tip to help you decide whether to itemize your deduction or take the standard deduction.