Avoid These Common Tax Mistakes

Nobody’s perfect. Mistakes happen. But if you make a mistake on your tax return, it will likely take the IRS longer to process it. That could delay your refund. The best way to avoid errors is to use IRS e-file. Paper filers are about 20 times more likely to make a mistake than e-filers. IRS e-file is the most accurate way to file your tax return.

Here are eight common tax-filing errors to avoid:

1. Wrong or missing Social Security numbers.  Be sure you enter all SSNs on your tax return exactly as they are on the Social Security cards.

2. Wrong names.  Be sure you spell the names of everyone on your tax return exactly as they are on their Social Security cards.

3. Filing status errors.  Some people use the wrong filing status, such as Head of Household instead of Single. The Interactive Tax Assistant on IRS.gov can help you choose the right status. If you e-file, the tax software helps you choose.

4. Math mistakes.  Double-check your math. For example, be careful when you add or subtract or figure items on a form or worksheet. Tax preparation software does all the math for e-filers.

5. Errors in figuring credits or deductions.  Many filers make mistakes figuring their Earned Income Tax Credit, Child and Dependent Care Credit, and the standard deduction. If you’re not e-filing, follow the instructions carefully when figuring credits and deductions. For example, if you’re age 65 or older or blind, be sure you claim the correct, higher standard deduction.

6. Wrong bank account numbers.  You should choose to get your refund by direct deposit. Be sure to use the right routing and account numbers on your return. The fastest and safest way to get your tax refund is to combine e-file with direct deposit.

7. Forms not signed.  An unsigned tax return is like an unsigned check – it’s not valid. Both spouses must sign a joint return.

8. Electronic filing PIN errors.  When you e-file, you sign your return electronically with a Personal Identification Number. If you know last year’s e-file PIN, you can use that. If you don’t know it, enter the Adjusted Gross Income from the 2013 tax return that you originally filed with the IRS. Do not use the AGI amount from an amended return or a return that the IRS corrected.

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The Individual Shared Responsibility Provision – The Basics

The individual shared responsibility provision requires that you and each member of your family have qualifying health insurance, a health coverage exemption, or make a payment when you file. If you, your spouse and dependents had health insurance coverage all year, you will indicate this by simply checking a box on your tax return.

Here are some basic facts about the individual shared responsibility provision.

What is the individual shared responsibility provision?

Starting in 2014 the individual shared responsibility provision calls for each individual to have qualifying health care coverage – known as minimum essential coverage – for each month, qualify for an exemption, or make a payment when filing his or her federal income tax return.

Who is subject to the individual shared responsibility provision?

The provision applies to individuals of all ages, including children. The adult or married couple who can claim a child or another individual as a dependent for federal income tax purposes is responsible for making the payment if the dependent does not have coverage or an exemption.

When does the individual shared responsibility provision go into effect?

The provision went into effect on Jan. 1, 2014. It applies to each month in the calendar year.

What do I need to do if I am required to make a payment with my tax return?

If you have to make an individual shared responsibility payment, you will use the worksheets located in the instructions to Form 8965, Health Coverage Exemptions, to figure the shared responsibility payment amount due. The amount due is reported on line 61 of Form 1040 in the Other Taxes section, and on the corresponding lines on Form 1040A and 1040EZ. You only make a payment for the months you did not have coverage or qualify for a coverage exemption.

What happens if I owe an individual shared responsibility payment, but I cannot afford to make the payment when filing my tax return?

The IRS routinely works with taxpayers who owe amounts they cannot afford to pay. The law prohibits the IRS from using liens or levies to collect any individual shared responsibility payment. However, if you owe a shared responsibility payment, the IRS may offset that liability against any tax refund that may be due to you.

For more information about the Affordable Care Act and your income tax return, visit IRS.gov/aca.

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Five Key Points about Children with Investment Income

Special tax rules may apply to some children who receive investment income. The rules may affect the amount of tax and how to report the income. Here are five key points to keep in mind if your child has investment income:

1. Investment Income.  Investment income generally includes interest, dividends and capital gains. It also includes other unearned income, such as from a trust.

2. Parent’s Tax Rate.  If your child’s total investment income is more than $2,000 then your tax rate may apply to part of that income instead of your child’s tax rate. See the instructions for Form 8615, Tax for Certain Children Who Have Unearned Income.

3. Parent’s Return.  You may be able to include your child’s investment income on your tax return if it was less than $10,000 for the year. If you make this choice, then your child will not have to file his or her own return. See Form 8814, Parents’ Election to Report Child’s Interest and Dividends, for more.

4. Child’s Return.  If your child’s investment income was $10,000 or more in 2014 then the child must file their own return. File Form 8615 with the child’s federal tax return.

5. Net Investment Income Tax.  Your child may be subject to the Net Investment Income Tax if they must file Form 8615. Use Form 8960, Net Investment Income Tax, to figure this tax. For more on this topic, visit IRS.gov.

Refer to IRS Publication 929, Tax Rules for Children and Dependents, for complete details on this topic.

Please call or email if I can help with anything.

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Leaving Assets to Your Heirs: Income Tax Considerations

An inheritance is generally worth only what your heirs get to keep after taxes are paid. So when it comes to leaving a legacy, not all property is created equal–at least as far as federal income tax is concerned. When evaluating whom to leave property to and how much to leave to each person, you might want to consider how property will be taxed and the tax rates of your heirs.Leaving Assets to Your Heirs: Income Tax Considerations

An inheritance is generally worth only what your heirs get to keep after taxes are paid. So when it comes to leaving a legacy, not all property is created equal–at least as far as federal income tax is concerned. When evaluating whom to leave property to and how much to leave to each person, you might want to consider how property will be taxed and the tax rates of your heirs.

Favorable tax treatment for heirs

Roth IRAs

Assets in a Roth IRA will accumulate income tax free and qualified distributions from a Roth IRA to your heirs after your death will be received income tax free. An heir will generally be required to take distributions from the Roth IRA over his or her remaining life expectancy. (Of course, your beneficiaries can always withdraw more than the required minimum amounts.) If your spouse is your beneficiary, your spouse can treat the Roth IRA as his or her own and delay distributions until after his or her death. So your heirs will be able to continue to grow the assets in the Roth IRA income tax free until after the assets are distributed; any growth occurring after funds are distributed may be taxed in the future.

Note:  The Supreme Court has ruled that inherited IRAs are not retirement funds and do not qualify for a federal exemption under bankruptcy. Some states may provide some protection for inherited IRAs under bankruptcy. You may be able to provide some bankruptcy protection to an inherited IRA by placing the IRA in a trust for your heirs. If this is a concern of yours, you may wish to consult a legal professional.

Appreciated capital assets

When you leave property to your heirs, they generally receive an initial income tax basis in the property equal to the property’s fair market value (FMV) on the date of your death. This is often referred to as a “stepped-up basis,” because basis is typically stepped up to FMV. However, basis can also be “stepped down” to FMV.

If your heirs sell the property with a stepped-up (or a stepped-down) basis immediately after your death for FMV, there should be no capital gain (or loss) to recognize since the sales price will equal the income tax basis. If they sell the property later for more than FMV, any appreciation after your death will generally be taxed at favorable long-term capital gain tax rates. If the appreciated assets are stocks, qualified dividends received by your heirs will also be taxed at favorable long-term capital gain tax rates.

Note:  If your heirs receive property from you that has depreciated in value, they will receive a basis stepped down to FMV and will not be able to claim any loss with respect to the depreciation before your death. You may want to consider selling depreciated property while you are alive so that you can claim the loss.

Not as favorable tax treatment for heirs

Tax-deferred retirement accounts

Assets in a tax-deferred retirement account (including a traditional IRA or 401(k) plan) will accumulate income tax deferred within the account. However, distributions from the account will be subject to income tax at ordinary income tax rates when distributed to your heirs (if there were nondeductible contributions made to the account, the nondeductible contributions can be received income tax free). An heir will generally be required to take distributions from the tax-deferred retirement account over his or her remaining life expectancy. (Of course, your beneficiaries can always withdraw more than the required minimum amounts.) If your spouse is the beneficiary of the account, the rules may be more favorable. So your heirs will be able to defer taxation of the retirement account until distribution, but distributions will generally be fully subject to income tax at ordinary income tax rates.

Note:  Your heirs do not receive a stepped-up (or stepped-down) basis in your retirement accounts at your death.

Even though distributions are taxable, your heirs will nevertheless generally appreciate receiving tax-deferred retirement accounts from you. After all, they do get to keep the amounts remaining after taxes are paid.

Toxic or underwater assets

Your heirs might not appreciate receiving property that is subject to a mortgage, lien, or other liability that exceeds the value of the property. In fact, an heir receiving such property may want to consider disclaiming the property.

Always nice to receive

Life insurance and cash

Life insurance proceeds received by your heirs will generally be received income tax free. Your heirs can generally invest life insurance proceeds and cash they receive in any way that they wish. When doing so, your heirs can factor in how the property will be taxed to them in the future.

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Claiming a Tax Deduction for Medical and Dental Expenses

Your medical expenses may save you money at tax time, but a few key rules apply. Here are some tax tips to help you determine if you can claim a tax deduction:

You must itemize.  You can only claim your medical expenses that you paid for in 2014 if you itemize deductions on your federal tax return. If you take the standard deduction, you can’t claim these expenses.
AGI threshold.  You include all the qualified medical costs that you paid for during the year. However, you can only deduct the amount that is more than 10 percent of your adjusted gross income.
Temporary threshold for age 65.  If you or your spouse is age 65 or older, the AGI threshold is 7.5 percent of your AGI. This exception applies through Dec. 31, 2016.
Costs to include.  You can include most medical and dental costs that you paid for yourself, your spouse and your dependents. Exceptions and special rules apply. Costs reimbursed by insurance or other sources do not qualify for a deduction.
Expenses that qualify.  You can include the costs of diagnosing, treating, easing or preventing disease. The costs you pay for prescription drugs and insulin qualify. The costs you pay for insurance premiums for policies that cover medical care qualify. Some long-term care insurance costs also qualify. For more examples of costs you can and can’t deduct, see IRS Publication 502, Medical and Dental Expenses. You can get it on IRS.gov/forms anytime.
Travel costs count.  You may be able to claim travel costs you pay for medical care. This includes costs such as public transportation, ambulance service, tolls and parking fees. If you use your car, you can deduct either the actual costs or the standard mileage rate for medical travel. The rate is 23.5 cents per mile for 2014.
No double benefit.  You can’t claim a tax deduction for medical expenses you paid for with funds from your Health Savings Accounts or Flexible Spending Arrangements. Amounts paid with funds from those plans are usually tax-free. This rule prevents two tax benefits for the same expense.
Use the tool.  You can use the Interactive Tax Assistant tool on IRS.gov to see if you can deduct your medical expenses. The tool can answer many of your questions on a wide range of tax topics.
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Ten Facts That You Should Know about Capital Gains and Losses

When you sell a capital asset the sale results in a capital gain or loss. A capital asset includes most property you own for personal use or own as an investment. Here are 10 facts that you should know about capital gains and losses:

1. Capital Assets.  Capital assets include property such as your home or car, as well as investment property, such as stocks and bonds.

2. Gains and Losses.  A capital gain or loss is the difference between your basis and the amount you get when you sell an asset. Your basis is usually what you paid for the asset.

3. Net Investment Income Tax.  You must include all capital gains in your income and you may be subject to the Net Investment Income Tax. This tax applies to certain net investment income of individuals, estates and trusts that have income above statutory threshold amounts. The rate of this tax is 3.8 percent. For details visit IRS.gov.

4. Deductible Losses.  You can deduct capital losses on the sale of investment property. You cannot deduct losses on the sale of property that you hold for personal use.

5. Long and Short Term.  Capital gains and losses are either long-term or short-term, depending on how long you held the property. If you held the property for more than one year, your gain or loss is long-term. If you held it one year or less, the gain or loss is short-term.

6. Net Capital Gain.  If your long-term gains are more than your long-term losses, the difference between the two is a net long-term capital gain. If your net long-term capital gain is more than your net short-term capital loss, you have a net capital gain.

7. Tax Rate.  The capital gains tax rate usually depends on your income. The maximum net capital gain tax rate is 20 percent. However, for most taxpayers a zero or 15 percent rate will apply. A 25 or 28 percent tax rate can also apply to certain types of net capital gains. 

8. Limit on Losses.  If your capital losses are more than your capital gains, you can deduct the difference as a loss on your tax return. This loss is limited to $3,000 per year, or $1,500 if you are married and file a separate return.

9. Carryover Losses.  If your total net capital loss is more than the limit you can deduct, you can carry over the losses you are not able to deduct to next year’s tax return. You will treat those losses as if they happened in that next year.

10. Forms to File.  You often will need to file Form 8949, Sales and Other Dispositions of Capital Assets, with your federal tax return to report your gains and losses. You also need to file Schedule D, Capital Gains and Losses with your tax return.

For more information about this topic, see the Schedule D instructions and Publication 550, Investment Income and Expenses. You can visit IRS.gov to view, download or print any tax product you need right away.

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Tax Planning for the Self-Employed

Self-employment is the opportunity to be your own boss, to come and go as you please, and oh yes, to establish a lifelong bond with your accountant. If you’re self-employed, you’ll need to pay your own FICA taxes and take charge of your own retirement plan, among other things. Here are some planning tips.

Understand self-employment tax and how it’s calculated

As a starting point, make sure that you understand (and comply with) your federal tax responsibilities. The federal government uses self-employment tax to fund Social Security and Medicare benefits. You must pay this tax if you have more than a minimal amount of self-employment income. If you file a Schedule C as a sole proprietor, independent contractor, or statutory employee, the net profit listed on your Schedule C (or Schedule C-EZ) is self-employment income and must be included on Schedule SE, which is filed with your federal Form 1040. Schedule SE is used both to calculate self-employment tax and to report the amount of tax owed.

Make your estimated tax payments on time to avoid penalties

Employees generally have income tax, Social Security tax, and Medicare tax withheld from their paychecks. But if you’re self-employed, it’s likely that no one is withholding federal and state taxes from your income. As a result, you’ll need to make quarterly estimated tax payments on your own (using IRS Form 1040-ES) to cover your federal income tax and self-employment tax liability. You may have to make state estimated tax payments, as well. If you don’t make estimated tax payments, you may be subject to penalties, interest, and a big tax bill at the end of the year. For more information about estimated tax, see IRS Publication 505.

If you have employees, you’ll have additional periodic tax responsibilities. You’ll have to pay federal employment taxes and report certain information. Stay on top of your responsibilities and see IRS Publication 15 for details.

Employ family members to save taxes

Hiring a family member to work for your business can create tax savings for you; in effect, you shift business income to your relative. Your business can take a deduction for reasonable compensation paid to an employee, which in turn reduces the amount of taxable business income that flows through to you. Be aware, though, that the IRS can question compensation paid to a family member if the amount doesn’t seem reasonable, considering the services actually performed. Also, when hiring a family member who’s a minor, be sure that your business complies with child labor laws.

As a business owner, you’re responsible for paying FICA (Social Security and Medicare) taxes on wages paid to your employees. The payment of these taxes will be a deductible business expense for tax purposes. However, if your business is a sole proprietorship and you hire your child who is under age 18, the wages that you pay your child won’t be subject to FICA taxes.

As is the case with wages paid to all employees, wages paid to family members are subject to withholding of federal income and employment taxes, as well as certain taxes in some states.

Establish an employer-sponsored retirement plan for tax (and nontax) reasons

Because you’re self-employed, you’ll need to take care of your own retirement needs. You can do this by establishing an employer-sponsored retirement plan, which can provide you with a number of tax and nontax benefits. With such a plan, your business may be allowed an immediate federal income tax deduction for funding the plan, and you can generally contribute pretax dollars into a retirement account. Contributed funds, and any earnings, aren’t subject to federal income tax until withdrawn (as a tradeoff, tax-deferred funds withdrawn from these plans prior to age 59½ are generally subject to a 10 percent premature distribution penalty tax–as well as ordinary income tax–unless an exception applies). You can also choose to establish a 401(k) plan that allows Roth contributions; with Roth contributions, there’s no immediate tax benefit (after-tax dollars are contributed), but future qualified distributions will be free from federal income tax. You may want to start by considering the following types of retirement plans:

  • Keogh plan
  • Simplified employee pension (SEP)
  • SIMPLE 401(k)
  • Individual (or “solo”) 401(k)

The type of retirement plan that your business should establish depends on your specific circumstances. Explore all of your options and consider the complexity of each plan. And bear in mind that if your business has employees, you may have to provide coverage for them as well (note that you may qualify for a tax credit of up to $500 for the costs associated with establishing and administering such a plan). For more information about your retirement plan options, consult a tax professional or see IRS Publication 560.

Take full advantage of all business deductions to lower taxable income

Because deductions lower your taxable income, you should make sure that your business is taking advantage of any business deductions to which it is entitled. You may be able to deduct a variety of business expenses, including rent or home office expenses, and the costs of office equipment, furniture, supplies, and utilities. To be deductible, business expenses must be both ordinary (common and accepted in your trade or business) and necessary (appropriate and helpful for your trade or business). If your expenses are incurred partly for business purposes and partly for personal purposes, you can deduct only the business-related portion.

If you’re concerned about lowering your taxable income this year, consider the following possibilities:

  • Deduct the business expenses associated with your motor vehicle, using either the standard mileage allowance or your actual business-related vehicle expenses to calculate your deduction
  • Buy supplies for your business late this year that you would normally order early next year
  • Purchase depreciable business equipment, furnishings, and vehicles this year
  • Deduct the appropriate portion of business meals, travel, and entertainment expenses
  • Write off any bad business debts

Self-employed taxpayers who use the cash method of accounting have the most flexibility to maneuver at year-end. See a tax specialist for more information.

Deduct health-care related expenses

If you qualify, you may be able to benefit from the self-employed health insurance deduction, which would enable you to deduct up to 100 percent of the cost of health insurance that you provide for yourself, your spouse, and your dependents. This deduction is taken on the front of your federal Form 1040 (i.e., “above-the-line”) when computing your adjusted gross income, so it’s available whether you itemize or not.

Contributions you make to a health savings account (HSA) are also deductible “above-the-line.” An HSA is a tax-exempt trust or custodial account you can establish in conjunction with a high-deductible health plan to set aside funds for health-care expenses. If you withdraw funds to pay for the qualified medical expenses of you, your spouse, or your dependents, the funds are not included in your adjusted gross income. Distributions from an HSA that are not used to pay for qualified medical expenses are included in your adjusted gross income, and are subject to an additional 20 percent penalty tax unless an exception applies.

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Starting a business and choosing an entity type

Choosing an Entity, a question I get alot!

What is an entity?

To start a business, you must first decide what form your business will take–in other words, you must choose an entity. You, the business owner, create the entity. You give the entity its existence and its name. It may live independently of you. It may sue or be sued. It may even be fined if it behaves illegally. Depending upon its type, the entity may be taxed on its income. A business entity is usually, though not always, a group of persons joined together for a particular purpose–an organization. A corporation and a partnership are examples of business entities. Though such entities may have many owners, each is nonetheless considered a single entity, separate from its owners. (A sole proprietorship, however, is considered an extension of the owner.)

What are the primary attributes of the various entities?

In choosing your entity, you must carefully consider the attributes of each type of entity. Which of these attributes you seek for your business will determine the entity you choose. The seven primary attributes are as follows: formalities of existence, limited liability, pass-through tax treatment, centralized management, sharing profits and control, continuity of life, and the free transferability of interests.

Formalities of existence

Some types of entities are simple and inexpensive to form and maintain. To establish a sole proprietorship, for example, all you need to do is start your business. Contrast this to a corporation, which must file documents with the state, adopt rules for self-government, elect corporate managers (the board of directors), and hold shareholder meetings. If you do not wish to spend a lot of money forming or maintaining your business, consider an entity that has few formalities of existence, such as a sole proprietorship, for example.

Limited liability

An entity offers limited liability if an owner can lose nothing more than his or her investment. In other words, the owner’s personal assets are insulated and cannot be used to satisfy the entity’s liabilities (debts). So, if you do not wish to put all of your personal assets at risk, think about an entity that offers limited liability, such as a corporation, for example.

Pass-through taxation

In a pass-through entity, only the owners are taxed, not the entity. For example, when a partnership (a pass-through entity) earns and/or allocates profits to the partners, the partners are taxed, not the partnership. (Certain publicly traded partnerships are taxed like C corporations rather than as partnerships.) Contrast this to a C corporation, which is a separate taxpaying entity. With a C corporation, the same profits may be taxed twice. The corporation is taxed on its profits when earned. Then the shareholders are taxed when (or if) these profits are distributed to them as dividends. This is known as double taxation, the avoidance of which is usually a primary reason for choosing a pass-through entity. If you plan to have the profits of the business distributed as soon as they are earned, or if you are interested in starting a business that will permit you to deduct business losses from your personal income, you should consider a pass-through entity, such as a partnership or S corporation, for example.

As an oversimplified example, assume that shareholder A is in the 35 percent individual tax bracket and is the sole shareholder of XYZ corporation. XYZ is a C corporation in the 34 percent corporate tax bracket. As a C corporation (not a pass-through entity) with $100,000 in profits and assuming no deductions, XYZ’s corporate tax would be $34,000 (34 percent of $100,000). The remaining $66,000, if distributed to shareholder A as a dividend, will be taxed again at 15 percent: 0.15 x $66,000 = $9,900 in taxes. When combined, the tax rate for the corporation and the shareholder would equal 43.9 percent for a total of $43,900 in taxes.

If instead XYZ were an S corporation (a pass-through entity), only the shareholder would be taxed. Shareholder A would pay $35,000 (35 percent of $100,000) in income tax. Total taxes paid on the $100,000 would be $8,900 less than it would in the scenario above.

For tax years beginning prior to January 1, 2003, dividends were taxed as ordinary income. In an attempt to mitigate some of the burden of double taxation, various pieces of legislation provide that dividends received by an individual shareholder from domestic corporations and qualified foreign corporations are taxed at the rates that apply to capital gains. Most recently, in general, the American Taxpayer Relief Act of 2012 permanently extended the preferential income tax treatment of qualified dividends and capital gains, and established new rates for higher-income taxpayers. Capital gains and qualified dividends are now generally taxed at 0% for taxpayers in the 10% and 15% tax brackets; at 15% for taxpayers in the 25% to 35% tax brackets; and at 20% for taxpayers in the 39.6% tax bracket. Also, as a result of the Affordable Care Act of 2010, an additional 3.8% Medicare tax applies to some or all of the investment income for married filers whose modified adjusted gross income exceeds $250,000 and single filers whose modified adjusted gross income is above $200,000.

Centralized management

Some entities permit centralized management; others do not. An entity has centralized management if a person or a relatively small group of persons is responsible for management decisions. A corporation has centralized management because the board of directors is responsible for making all management decisions. In most instances, because each partner in a partnership is bound by (responsible for) the decisions of other partners, a partnership typically does not have centralized management. In a limited partnership, general partners are responsible for management decisions. If you only plan to give a few people decision-making power, which usually results in quicker decisions, then you should choose an entity with centralized management.

Flexibility in sharing profits and control

Some entities are more flexible than others in sharing profits and control with their owners. A C corporation can generally sell its stock to any willing buyer (barring shareholder agreements to the contrary). The number of owners is unlimited. A C corporation may issue classes of stock with differing rights regarding the distribution of corporate profits to shareholders (e.g., preferred stock). An S corporation can issue stock with different voting rights, but all stock must have equal rights regarding the distribution of profits. Shareholders of an S corporation must meet eligibility requirements, and the maximum number of shareholders is 100. If you would like to have control over how profits are distributed and who has control over the corporation, you should choose an entity that allows you to do so. A partnership has considerable flexibility to regulate the sharing of profits and control.

Continuity of life

Some entities can “live” forever. This is called continuity of life. An entity does not possess this attribute if the death, bankruptcy, retirement, insanity, or resignation of an owner can cause it to end (dissolve). A sole proprietorship generally ends at the death of the sole proprietor (no continuity of life). A corporation typically has continuity of life because it remains a corporation despite the purchase and sale of shares and the resulting change in shareholders. A partnership, on the other hand, does not technically possess continuity of life because the withdrawal of a partner results in dissolution of the partnership (though not necessarily the business operation). Though the other partners may choose to continue the business, the old partnership no longer exists and a new one is formed. Continuation of the business can be planned for, so this isn’t necessarily a real problem, just something you may want to be aware of and consider.

Free transferability of interests

You should consider the ease with which ownership interests may be transferred. Free transferability of interests exists when owners are permitted to sell their ownership interests to others without restriction. For example, if you would like to be able to sell your ownership interest at any time without restriction (barring shareholder agreements to the contrary), you might think about a C corporation, which allows shareholders to buy and sell stock freely to any individual or entity. If this is not important to you, however, you may be content with an S corporation, which has some legal restrictions on the sale of stock that set eligibility criteria and limit the number of shareholders. Some forms of partnership or corporation are restricted by statute to specific professions, which could limit your ability to sell (or buy) an ownership interest without harm to the entity structure and its treatment under the law and the tax code.

What are the primary types of entities from which you can choose?

Your choice of entity is especially important to Uncle Sam when it comes time to pay taxes. Some businesses are taxed as separate entities while others are not. When an entity is taxed separately, it is said to be subject to double taxation. For example, the C corporation is taxed when it earns profits, and then the owner-shareholders are taxed when those profits are distributed to them in the form of a dividend–a double tax.

Some businesses are not taxed as separate entities, however. Instead, these entities pass the profits or losses on to the owners, who report the income on their personal tax returns. From a tax standpoint, entities can be categorized as either double-tax or pass-through (single-tax) entities. Some entity forms are allowed an election to be taxed as one form or another. The C corporation is a double-tax entity. By definition, sole proprietorships (SP), general partnerships, limited partnerships, S corporations, limited liability companies (LLC), and limited liability partnerships (LLP) are pass-through entities, although an LLC can elect to be taxed as a corporation. (Certain publicly traded partnerships are taxed like C corporations rather than as partnerships.) Professional corporations (PC) may be either, depending upon whether an S election is filed.

Double-tax entity

  • C corporation–This entity consists of one or more owners. These owners–who purchased stock (a “piece” of the business) from the corporation–are known as shareholders. This type of entity offers limited liability, centralized management, and free transferability of interests. The shareholders are generally protected from the creditors of the C corporation and only risk the loss of their investments (what they paid for their stocks). The management in a C corporation is centralized in the board of directors, though the shareholders indirectly participate in management by electing directors and voting on certain corporate issues. By definition of law, the shareholders may buy and sell their stocks virtually without restriction (free transferability), although contracts among the owners often restrict this ability.

Pass-through entities

  • Sole proprietorship (SP)–An SP is a one-owner/one-operator business. The primary advantage of this type of business is its simplicity. Generally, a person need only begin doing business to be considered a sole proprietor. The sole proprietorship is not taxed as a separate entity. Instead, the sole proprietor reports the business’s profits and losses on his or her personal tax return. On the other hand, however, the owner is personally liable for all liabilities of the business. If you choose this type of entity, don’t forget to buy liability insurance.
  • General partnership–A general partnership must consist of at least two owners (partners), although there is no limit to the number of partners in the partnership. Forming a general partnership is generally simple and inexpensive. There may be fewer formalities to follow than with a corporation. There is no entity level taxation on the partnership. Instead the individual partners are taxed on the profits. The general partnership doesn’t offer limited liability. Moreover, a general partnership will typically not allow you to freely sell your interest.
  • Limited partnership–A limited partnership combines limited liability and centralized management, often associated with a C corporation, with a pass-through taxation feature. This entity consists of two types of partners: general and limited. Only limited partners receive liability protection. If the limited partners participate in management, their liability protection is lost. Only the general partners can manage the partnership. In return for the ability to manage the partnership, general partners remain personally liable. (Certain publicly traded partnerships are taxed like C corporations rather than as partnerships.)
  • S corporation–Like a limited partnership, an S corporation combines limited liability with pass-through taxation. Unfortunately, an S corporation is limited to 100 shareholders. Although stock with different voting rights may be issued, different classes such as preferred and common are not allowed. Stock ownership is typically restricted to individuals, estates, and certain trusts. If stock is sold to an ineligible shareholder (such as a partnership), the corporation loses its “S” status and the (tax) benefits that go along with it.
  • Limited liability company (LLC)–An LLC with multiple owners can be taxed as either a corporation or a partnership. If taxed as a partnership (the typical choice), an LLC will offer limited liability and pass-through taxation without some of the disadvantages of a limited partnership or an S corporation. For example, owners of an LLC (called members) can contribute to management without compromising their limited liability protection. Unlike an S corporation, an LLC is not restricted regarding the type or number of owners, or the types of stock that can be issued. An LLC with a single owner will be treated like a sole proprietorship for federal income tax purposes if it does not elect to be taxed as a corporation. However, you should be aware that some states do not recognize or permit LLCs with a single owner.
  • Limited liability partnership (LLP)–An LLP is an entity form with similarities to both the general partnership and limited liability companies. This form offers more liability protection to the partners than a general partnership, but sometimes less than an LLC. The LLP is designed for those professions that face malpractice suits, and may be adopted in those states, if available, that don’t allow certain professionals to form LLCs.
  • Professional corporation (PC)–The professional corporation (PC) is a corporation. It is treated as a single entity, it raises its own money by selling stock to shareholders, and it usually handles its profits by either distributing the profits to shareholders or reinvesting the profits in the business. It can assume the basic tax features of either a C corporation or an S corporation. This type of corporation is unique primarily because its shareholders must generally be members of a licensed profession. Each state, by statute, defines the professions that may form a PC.

After you have chosen your entity, be prepared to reassess the choice as your business evolves. Major changes in the work force, sales, profits, or the law may necessitate a change of entity. If, for example, you had chosen an S corporation only to decide years later that you wish to have many more than 100 shareholders, you may have to consider changing your entity to a C corporation.

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3 Quick reasons to choose Murray Tax Services for your tax prep.

Many people pay to have their taxes prepared. You need to be careful when you pick a preparer to do your taxes. You are legally responsible for all the information on the tax return even if someone else prepares it. Here are 3 reasons to choose Murray Tax Services as your tax preparer:
1. Credentials-Kevin Murray is an Enrolled Agent.  Only enrolled agents are required to demonstrate to the IRS their competence in all areas of taxation, representation and ethics before they are given unlimited representation rights before IRS. Unlike attorneys and CPAs, who are state licensed and who may or may not choose to specialize in taxes, all enrolled agents specialize in taxation.
2. Availability-Kevin is available all year long for both clients and prospects.  The part of the tax industry that needs the most improvement is the availability of tax professionals. Kevin is constantly getting contacts from prospects and business partners who have tax questions and can not get in contact with their current “guy.”  He always answers these questions. This is for people that are not clients, just imagine the availability he gives his clients.
3. Service fees-Kevin structures his fees very reasonably. Currently the Murray Tax Services average fee is $180-$200 for a married couple that owns a home.  If you are a small business owner or rental property owner the average is $250. Both of these averages are well below the national averages. $261 and $479 resectively.
If you are looking for a great tax prep experience with someone you can trust, contact and is affordable please consider Murray Tax Services. Call 413-279-1049 or email kevin.murray@murraytaxservices to discuss how we can help. Or check out http://www.murraytaxservices.com or http://www.facebook.com/murraytax or http://www.linkedin.com/in/murraytax/

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Choose the Right Filing Status

It’s important that you use the correct filing status when you file your tax return. Your status can affect the amount of tax you owe for the year. It may even affect whether you must file a tax return. Keep in mind that your marital status on Dec. 31 is your status for the whole tax year. Sometimes more than one filing status may apply to you. If that happens, choose the one that allows you to pay the lowest tax.

Here’s a list of the five filing statuses:

1. Single.  This status normally applies if you aren’t married. It applies if you are divorced or legally separated under state law.

2. Married Filing Jointly.  If you’re married, you and your spouse can file a joint tax return together. If your spouse died in 2014, you often can file a joint return for that year.

3. Married Filing Separately.  A married couple can choose to file two separate tax returns. This may benefit you if it results in less tax than if you file a joint tax return. It’s a good idea for you to prepare your taxes both ways before you choose. You can also use it if you want to be responsible only for your own tax.

4. Head of Household.  In most cases, this status applies if you are not married, but there are some special rules. You also must have paid more than half the cost of keeping up a home for yourself and a qualifying person. Don’t choose this status by mistake. Be sure to check all the rules before you file.

5. Qualifying Widow(er) with Dependent Child.  This status may apply to you if your spouse died during 2012 or 2013 and you have a dependent child. Certain other conditions also apply.

Note for same-sex married couples. In most cases, you and your spouse must use a married filing status on your federal tax return if you were legally married in a state or foreign country that recognizes same-sex marriage. That’s true even if you now live in a state that doesn’t recognize same-sex marriage. Visit IRS.gov for more information.

Visit IRS.gov and click on the “Filing” tab for help with all your federal income tax filing needs. Use the Interactive Tax Assistant tool to help you choose the right filing status. For more on this topic see Publication 501, Exemptions, Standard Deduction, and Filing Information. Go to IRS.gov/forms to view, download or print the tax products you need.

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