The IRS Deductions Blog

Archive for October, 2009

Do you know what sole proprietorship is? A sole proprietorship is a business which has only one owner. It is a “sole” proprietor in the sense that the owner has no partners. A sole proprietorship essentially means a person does business in his own name and there is only one owner. A sole proprietorship is not a corporation, it does not pay corporate taxes, but rather the person who organized the business pays personal income taxes on the profits, making accounting much simpler.

Most sole proprietors will register a trade name “Doing Business As”. This allows the proprietor to do business with a name other than their legal name and also allows them to open a business account with banking institutions.

A sole proprietorship has an authority to hire any number of employees because the law makes no distinction between you, the sole proprietor, and the business. Sole proprietorship has also an authority to hire independent contractors of their own choice.

Whether the proprietor has zero or 100 employees or independent contractors, it doesn’t make any difference. If you are the sole owner, your business will still be a sole proprietorship.

There are several advantages associated with operating as a sole proprietor. Starting a business as a sole proprietor brings two tax advantages. The first advantage is avoidance of double tax.

Double tax can occur if you carry out your business through a corporation. Corporations are considered as separate entities consisting of many partners or owners. As a result the corporation owners will pay tax on their individual income and the corporation will pay tax on any profits made by the company. As a sole proprietor, you will not pay double tax on your business income because the law makes no difference between you, the sole proprietor, and your sole proprietorship and the business income is treated as your personal income.

The second tax advantage of sole proprietorships is that you can deduct your business losses to the extent of your total income that you may have from all sources, including interest, dividends, and profits.

Operating as a sole proprietor also has some drawbacks. A business organized as a sole proprietorship faces difficulty in raising own capital since shares of the business cannot be sold. Hiring employees may also be difficult. This form of business will have unlimited liability, therefore, if the business is sued, it is the proprietor’s who will be responsible.

The second disadvantage is that as a business grows, the risks accompanying the business also tends to grow. To minimize those risks, a sole proprietor has the option of forming a limited liability company.

The principle disadvantage of sole proprietorships is that you are personally responsible for all the debts and the reason for this is that the law makes no distinction between you, the sole proprietor, and your sole proprietorship authorities.

Another disadvantage of sole proprietorship is that you may have to pay high income taxes. You cannot take any tax deduction for your health or life insurance whilst operating as a sole proprietor. A full deduction for your health insurance and a deduction of life insurance policy are offered to corporations, so long as all employees of the corporation are offered the insurance.

In this competition of different businesses, every business is different from each other i.e one thing giving advantage to you may be a disadvantageous thing for the other business. Selecting the best business structure will depend on the factors including your type of business, tax situation, and industry liability among others. Your selection of business structure will have legal and personal applications and therefore it is always advisable to seek professional help in such matters. Getting on the track from day one will take you further and ease your problems in the long run.

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State offers tax help on unemployment

The Indiana Department of Workforce Development has launched a Web page to help Hoosiers report unemployment income on their 2009 income tax returns.

Tax Tips from the IRS – Standard Deduction for Non-Itemizers

Question: I bought my mom a car as a gift, although it was titled in her name. Can I deduct the sales tax on my taxes?

I made the check payable to the dealer for the amount of the car; however, the dealer listed her as the “buyer” on all the paperwork. She does not itemize, so the sales tax deduction is worthless to her. It’s a gift to her either way, but could I construe the gift as being the car (since I made the check payable to the dealer) versus the money?

Answer: Had you bought the car in your name and then gifted it, you would have a deduction. It sounds however that you gifted the deduction to her.
The result may be true, but it also seems unfair as a result of a technicality.
You may a case for claiming the deduction, but it isn’t a strong one. You could try, and if you get examined, just cave in. If you don’t get examined, then you win.
The above advice is solely because I think you have a case. Otherwise, I would not recommend it. Just so you understand I’m not trying to cross any lines, just resolving doubt in your favor.

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Nail down tax breaks now that might not be around next year

Doing some year-end tax planning could be productive this year so you can nail down a host of tax breaks that might not be around next year unless Congress extends them.

Tax Deduction Tips & Advice : How to Determine if You Can Itemize Tax Deductions

Question: What do you think about a tax deduction for pet owners?

This proposed bill would allow pet owners to deduct up to $3500 of pet-related expenses from their taxes. What do you think? Good idea? Crazy idea? If it works for kids, why not pets? Pet owners should foot their own bill or have fewer pets? What are your thoughts on the issue?

http://www.thehungersite.com/clickToGive/campaign.faces?siteId=3&campaign=HAPPYAct3501

Answer: I’m against it too.
I love my pets, but I believe if you can’t afford a pet in the first place – don’t get it. It is not the governments responsibility to help you pay for a pet – its your own.
Also, I’m worried about irresponsible people getting pets, just to claim the tax deduction.

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Doing Good by Paying Forward

microfinancing . You take a relatively small amount of money and, through an online marketplace of sorts, give or lend it to a specific person or project whose story moves you. (Not all microfinancing…

Tax Credit for Pet Supplies…

Question: I am a nanny, and my employer is giving me 1099 at the end of the year- will I have to pay fed. inc. tax?

I am hoping that I won’t get hit with a huge tax bill at the end of the year. Also- can I make deductions for travel expense, clothing, cell phone, etc.?
My employer told me she would pay for the Social Security and Medicare portions of my taxes; she upped my hourly rate to cover this. Does that mean I’ll only be responsible for federal and state tax, not SS and Medicare? Thanks you everyone!
Roughly ; if I’m making $28,000 a year- my boss is paying ONLY their required half of FICA. I’ll be required for the other half, as well as fed and state income tax…am I understanding this correctly? And can anyone give me a *very* rough estimate as to how much I can expect to be paying? Thank you all very much for your expertise!

Answer: If you haven’t paid anything in as estimated taxes, then yes, you’re going to have an impressive bill at tax time, plus penalties for underwithholding – you still have a couple quarters to get the money sent in.

You said she upped your hourly rate to cover her half of the ss and medicare – so that means you got it, not the IRS, so YOU are the one who will owe both halves to the IRS. That will amount to 15.3% of your net after expenses. This will be in addition to whatever income tax you owe. If you’re single, no dependents, and not much in the way of Deductible Expenses, your tax bill could be around $6700 to the feds for income tax, ss and medicare – that doesn’t include anything you might owe to your state or municipality if they also have income taxes.

If you use your cell phone in connection with your work, then you could deduct at least a portion of it. If it’s the same cell you use for talking to friends, etc, then you would have to prorate it. Clothes, no, not deductible, unless you have to wear uniforms, which isn’t exactly standard for a nanny. And travel expense – if part of your responsibility includes taking the kids to dance lessons, or wherever, then that mileage could be deducted.

Download form 1040ES and make estimated payments for the remaining two quarters to cover your anticipated federal taxes for the year. Check on your state – you might need to make estimated payments there also.

If you are working at the person’s home that you are a nanny for, the way she’s handling it (1099) is NOT correct or really allowed – she should be withholding taxes (income, ss and medicare) from your checks, and submitting the withholding plus her half of ss and medicare to the IRS, and withholding to the state.

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Hewitt on Europe

Euro squeeze brings fresh EU integration impetus

Question: Is accountant fees and/or tax preparation fees, tax deductible?

There were a few years that I didn’t file, and it caught up with me – I paid an accounting firm quite a bit of money to do my returns and help me in negotiating with the IRS. All if fine now, I’m caught up

Is the money I paid to this firm that did my taxes, deductible for that year?
…I do itemize and I’m filing in a later year than this occurred. Last year I had a taxible bonus that threw me into the next tax group and I need to find all the (legit) deductions I can find! Someone told me that the huge fee I paid the tax firm to help me file back taxes, was tax deductible, and I just want to make sure before I proceed…

Answer: Probably not unless you itemize and have a lot of miscellaneous expenses. It sounds like you may have a lot of deductible professional expenses, not just routine fees for tax return preparation.

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Deadline looms for college saving tax deduction

Utah taxpayers have until 5 p.m. Thursday to make tax-deductible contributions to valuable college savings plans.

Tax Help : Is Cost of Tax Preparation Software Deductible?