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    45 Replies Latest reply on Mar 12, 2008 9:35 AM by clnshirtz

    Event: Tax tips for your small business

    SBC Team Guide
      Community Members,

      Please join us in welcoming Barbara Weltman to your Small Business Online Community. Barbara is one of the nation's leading authorities on taxes and small business and she is here today to answer your questions about business taxes. Today Barbara will be using the screen name bigideas4biz

      About Barbara:

       


      Barbara Weltman is a contributing writer for Inc.com, PINK magazine and New York Enterprise Report, and is a sought-after media commentator who has been featured in The New York Times, The Wall Street Journal, The Washington Post, Reuters, Forbes.com, Marketwatch.com, WABC-TV, Fox News, CNNRadio and CNBC. Barbara is also a top selling author and has written the titles "The Rational Guide to Building Small Business Credit" which features a foreword by Dun & Bradstreet, "J.K. Lasser's Small Business Taxes" and "The Complete Idiot's Guide to Starting a Home-Based Business."

       

       

      Barbara's also publishes the highly-popular newsletter, "Big Ideas for Small Business". The online publication addresses the unique needs and interests of the small business community and explores market-impact issues such as health insurance, energy costs, and employee retention. For more information about Barbara log on to http://www.barbaraweltman.com/

       

       

      Logistics for events:

       


      Please start posting tax related questions to Barbara Weltman. Remember the community guidelines; stay on topic and be professional.

       


      The event will be moderated to queue the questions for our guest. After a question is posted it may be delayed and/or moved into a queue. You do not need to repost. Your question has been received but is in a queue waiting for the guest to respond to.

       


      Barbara will attempt to answer as many questions as possible; however she may not get to all questions.

       


      We will start with a few of the advance questions that many of you have posted, along with tax questions posted in the last week.

       

       

      Prior to relying on any legal, tax or financial advice or recommendations provided herein, you are advised to consult with your attorney, financial adviser and/or tax professional to verify the information provided and to determine the applicability of any federal, state or industry specific laws and/or regulations that may apply to you. Bank of America or Barbara Weltman shall have no liability for legal, investment, finance and/or tax decisions based on the information provided.
        • Re: Live Q&A with Barbara Weltman from 2-5PM Going On Now
          SBC Team Guide
          Our first question comes from user Noel Building and the user asks:

          I don't currently provide health insurance for my employees but I'd like to give my employees a monthly stipend to help them go to the doctor or pay medical cost but I don't want them to pay taxes on the money. A colleague of mine told me that if I could somehow pay into an HSA for these employees, they would not have to pay taxes on the stipend. Is this true? If not how do I get my employees money for health care without them paying taxes on the money?
            • Re: Live Q&A with Barbara Weltman from 2-5PM Going On Now
              BigIdeas4Biz Newbie
              You might consider using a health savings account (HSA), which is an arrangement that combines a high-deductible (low cost) health plan with a savings-type account. The employer can pay the cost of the insurance and/or make contributions to the HSA; whatever the employer pays is deductible and not taxable to the employees. Alternatively, the employer can arrange for the insurance, with the employees paying for it themselves via an arrangement that lets them use pre-tax dollars for this purpose. To learn more, see IRS Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans, at http://www.irs.gov/.
              1 of 1 people found this helpful
            • Re: Live Q&A with Barbara Weltman from 2-5PM Going On Now
              SBC Team Guide
              Barbara, the next question comes from user BDS INC and the he asks:

              I own a property management company and I have had tenants break their leases on home rentals. Since my business expected full revenues from those rental agreements, can I write off the rent I didn't collect as bad debt?
              • Re: Live Q&A with Barbara Weltman from 2-5PM Going On Now
                SBC Team Guide
                Great answers Barbara,

                User MagPublisher asks:

                I volunteer my services to a local non profit organization, designing and writing their monthly newsletter. I know I can declare expense I incur like image fees, etc. to create the newsletter, but is their anyway to "bill" my time, so that I can declare my time as a donation?
                • Re: Live Q&A with Barbara Weltman from 2-5PM Going On Now
                  SBC Team Guide
                  Barbara our next question comes from Luckiest, the community's top contributor and he asks:

                  Question. Social Security Benefits - If we (my wife and I) put our Social Security Benefits into an Individual Retirement Account (IRA), does that save us from being taxed on the Social Security?
                    • Re: Live Q&A with Barbara Weltman from 2-5PM Going On Now
                      BigIdeas4Biz Newbie
                      IRA contributions must be based on earned income--from a job or self-employment (there are some limited exceptions, such as for alimony). Social Security benefits are not viewed as earned income for this purpose. Also keep in mind that for traditional IRAs, contributions cannot be made once you reach age 70-1/2; there's no age limit for Roth IRA contributions. For more information, go to IRS Publication 590, Individual Retirement Arrangements, at www.irs.gov.
                      1 of 1 people found this helpful
                    • Re: Live Q&A with Barbara Weltman from 2-5PM Going On Now
                      SBC Team Guide
                      Our next question comes from username Joseph and he asks:

                      I want to find out how can I file my income tax this year if I don't have a 1099 from my last employer. Can I just claim the money I deposited in my bank account? How can I do this filings? What would be the ramification on my part without having a 1099?
                        • Re: Live Q&A with Barbara Weltman from 2-5PM Going On Now
                          BigIdeas4Biz Newbie
                          Are you an employee or an independent contractor? If you are an employee and did not receive a W-2 form from your employer, don't let this stop you from filing a return. You should know what your wages were for 2007 by your last pay stub for the year. However, you should contact the IRS; it will help you prepare a substitute W-2 form to attach to your paper return. If you are an independent contractor who didn't receive a Form 1099 for work performed, again don't let this stop you from filing a return. You should have been keeping records of the payments you've received. Always report the income you received.
                        • Re: Live Q&A with Barbara Weltman from 2-5PM Going On Now!
                          SBC Team Guide
                          Barbara, our next question comes from another of our top contributors, Ed O'Gee and he asks:

                          This year we contracted two workers who were recently incarcerated, to do some manual work for our firm. These guys were paid as contractors, but my question is, I know what I paid them is included in our overall labor costs, but is my firm also eligible for a tax credit since we provided work to recently released ex-offenders?
                            • Re: Live Q&A with Barbara Weltman from 2-5PM Going On Now!
                              BigIdeas4Biz Newbie
                              A business may be eligible to claim a tax credit, called the work opportunity credit, if they hire people from certain disadvantaged groups (which includes ex-felons). The credit usually is a percentage of first-year wages for each eligible employee. However, in order to be able to claim the credit, you must receive certification from your state agency that the workers qualify. This is done by completing within a timely manner IRS Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit; without this form no credit is allowed. To learn more about this tax credit, see the instructions to IRS Form 5884, Work Opportunity Credit, at www.irs.gov.
                            • Re: Live Q&A with Barbara Weltman from 2-5PM Going On Now!
                              SBC Team Guide
                              Barbara, the next question come from RenRankins9 and the user asks:

                              I recently started working for someone who owns his own business, but I'm considered independent contract labor, or a "sub-contractor." I have to file my own taxes quarterly, and I need to know what percentage of my checks I need to set aside to pay said taxes. I live in Texas, so only Federal and self-employment taxes apply. Could someone please tell me the rates?
                                • Re: Live Q&A with Barbara Weltman from 2-5PM Going On Now!
                                  BigIdeas4Biz Newbie
                                  You only pay federal income tax and self-employment tax on your net earnings from self-employment (not on the gross payments you receive). You need to figure your net earnings (essentially your profits) by subtracting allowable deductions from your fees and payments. You can learn about how to figure your net earnings from self-employment by going to IRS Publication 334, Tax Guide for Small Business, at www.irs.gov.
                                  Then, once you know your net earnings, you'll have a better idea of how much money you'll need to set aside for taxes. The federal income tax rates range from a low of 10% to a high of 35%. In addition, self-employment tax is 15.3% on net earnings up to $97,500 in 2007 ($102,000 in 2008), plus 2.9% on net earnings over these limits; one half of the self-employment tax is deductible. Bottom line, there's no hard and fast way to know what percentage of your earnings that you need to set aside for taxes. Best bet: Read up on estimated taxes so you learn about the minimum payments to make in order to avoid penalties (see IRS Publication 505, Tax Withholding and Estimated Taxes).
                                • Re: Live Q&A with Barbara Weltman from 2-5PM Going On Now!
                                  SBC Team Guide

                                  Barbara, username Wingman asked the next question and he wants to know:

                                  I am self-employed and my wife has purchased both health care coverage and extended care coverage for the both of us. Can I deduct the portion of these insurance policies that are attributable to me if that can be determined? I think we can look at her basic coverage for employee only and deduct the additional premiums that is being paid to extend the coverage to me.
                                    • Re: Live Q&A with Barbara Weltman from 2-5PM Going On Now!
                                      BigIdeas4Biz Newbie
                                      A self-employed person can deduct health coverage, but not as a business expense. The premiums are deductible as an adjustment to gross income, which is a personal deduction on page 1 of Form 1040. The policy (both regular coverage and long-term care coverage) can be purchased personally; it need not have been bought by the business. The deduction cannot exceed the net earnings from the business. You cannot take a deduction for any month if you were eligible to participate in any employer (including your spouse's) subsidized health plan at any time during the month. For more information see IRS Publication 535, Business Expenses, at www.irs.gov.
                                    • Re: Live Q&A with Barbara Weltman from 2-5PM Going On Now!
                                      SBC Team Guide
                                      Barbara, the next question comes from LT Lawn Care and the user asks:

                                      I bought into a pre-paid legal plan last year, initially for my personal use but because of a potential law suit that was threatened against my business, I used the service at times for the business as well. My question is can I write the $39.99 a month premium off as a business expense, given I did use the service for my business too?
                                        • Re: Live Q&A with Barbara Weltman from 2-5PM Going On Now!
                                          BigIdeas4Biz Newbie
                                          Only ordinary and necessary business expenses are deductible on your business' tax return, so you'll have to make some reasonable apportionment of the total monthly premium--the part related to business is deductible while the other part usually is not. Base your allocations on how you used the plan throughout the year. For more information, see IRS Publication 535, Business Expenses, at http://www.irs.gov/. If you use the legal services with respect to obtaining personal income (e.g., you're suing for alimony or breach of a personal contract), you may also be able to deduct the related premiums (as a miscellaneous itemized deduction or as an adjustment to gross income, depending on the nature of the legal action).
                                        • Re: Live Q&A with Barbara Weltman from 2-5PM Going On Now!
                                          SBC Team Guide
                                          Community Members,

                                          Great questions so far! Barbara is here to help so if you have additional business tax questions and you want Barbara's opinion don't to hesitate to ask! We will be accepting your questions throughout Barbara's time on the site.
                                          • Re: Live Q&A with Barbara Weltman from 2-5PM Going On Now!
                                            SBC Team Guide
                                            Barbara, our next question comes from sbuser and the user asks:

                                            I recently started a computer consulting company and registered it as an LLC. I am thinking of working for a client pretty soon as a contractor. As a single owner/member of the LLC and as the only working person, should I become an employee (W2) and pay myself salary or treat myself as an independent contractor (1099)? Which one is more beneficial and allows me to pay less taxes?
                                              • Re: Live Q&A with Barbara Weltman from 2-5PM Going On Now!
                                                BigIdeas4Biz Newbie
                                                As an LLC member, you are automatically a self-employed person. A one-member LLC is a "disregarded entity" that reports business income and expenses on Schedule C and pays self-employment tax on net earnings (essentially profits). Taking a draw from the business has no impact on your income taxes or self-employment tax. There is no such thing as "salary" when it comes to a self-employed person because a self-employed person is not an employee. Whether the LLC is the best entity choice (or whether you want to combine entity choices) is discussed in my article on the home page ("Changing to the Type of Entity That Is Right for You").
                                              • Re: Live Q&A with Barbara Weltman from 2-5PM Going On Now!
                                                SBC Team Guide
                                                Barbara,

                                                Our next question comes from user Bluesuit and the user asks:

                                                I sometimes sell things on eBay. This is by no means a business, but more like a hobby for me on the weekends. I have a full time job in which I pay my taxes to Uncle Sam. So, I was wondering if I need to report my earnings made via eBay and pay tax on it
                                                  • Re: Live Q&A with Barbara Weltman from 2-5PM Going On Now!
                                                    BigIdeas4Biz Newbie
                                                    Income from a hobby activity must be reported; there's no exemption in the tax law that makes this income tax free. There's no magic number to reach before having to report your income (there's no dollar amount or total number of sales). However, only report your net income (not the total sales proceeds you receive). Net income is the sales proceeds minus your inventory costs and other business expenses. You can deduct business expenses related to your eBay selling activities, including eBay fees, PayPal fees, shipping materials,etc. You need to figure your inventory costs too unless you have no cost (because you found your items or created them at no expense). Caution: If your total expenses exceed your revenue, then under the "hobby loss rule" (a special tax rule), you can only deduct expenses to the extent of your income from the activity. For more information about hobby income and losses, see information from the IRS at www.irs.gov/newsroom/article/0,,id=169490,00.html.
                                                  • Re: Live Q&A with Barbara Weltman from 2-5PM Going On Now!
                                                    SBC Team Guide
                                                    Barbara,

                                                    The next question comes from user Web123, and the user asks:

                                                    I would like to know how I should prepare my tax return as an individual who is earning money by promoting affiliate programs and various other businesses from home. I also have a full time job--I do this part time to supplement my income. I don't have a business name. I work with many affiliate programs. I want to know if I would need a business name to claim deductions/show income on my Individual Tax return?
                                                      • Re: Live Q&A with Barbara Weltman from 2-5PM Going On Now!
                                                        BigIdeas4Biz Newbie
                                                        Whether you have a full-time or sideline business, you must report your income and expenses. As a sole proprietor, you report income and expenses on Schedule C, which is filed with Form 1040. You do not need a fictitious business name (unless you want one). For example, a freelance writer would report the income and expenses under his/her Social Security number (or employer identification number) on Schedule C; no separate business name is necessary. To learn more, see IRS Publication 334, Tax Guide for Small Business, at www.irs.gov. Note: You may also owe self-employment tax on your net earnings as well as having to file quarterly estimated taxes to cover the tax bill for your sideline business (and the self-employment tax related to it).
                                                      • Re: Live Q&A with Barbara Weltman from 2-5PM Going On Now!
                                                        SBC Team Guide

                                                        Barbara,

                                                        Our next question comes from username Teacup and the user asks:

                                                        Is a car that is purchased for the business, as well as some personal use considered a tax write-off? How does this work?
                                                          • Re: Live Q&A with Barbara Weltman from 2-5PM Going On Now!
                                                            BigIdeas4Biz Newbie

                                                            How to treat the costs of owning and operating a business-owned car that you also personally use depends somewhat on the type of entity you have. For example, if you have a corporation, it can deduct all car expenses (subject to certain limits in the tax law). However, your personal usage of the company car as an employee of the corporation is a taxable benefit to you (there are various ways that the corporation accounts for this usage). For more information about this, see IRS Publication 463, Travel, Entertainment, Gift, and Car Expenses, at www.irs.gov.
                                                          • Re: Live Q&A with Barbara Weltman from 2-5PM Going On Now!
                                                            SBC Team Guide
                                                            Community Members,

                                                            We are headed into our last hour with Barbara Weltman. We have several questions in queue, but there is certainly still time for yours! If you have a business tax question, just reply to the thread and Barbara will give you an answer.
                                                            • Re: Live Q&A with Barbara Weltman from 2-5PM Going On Now!
                                                              SBC Team Guide
                                                              Barbara,

                                                              Our next question was posted by user Pablo14 and the user asked a question that received a great deal of responses from other community members, so we'd like you to weigh in on it. And the question is:

                                                              Does an LLC need to pay Self Employment taxes?
                                                                • Re: Live Q&A with Barbara Weltman from 2-5PM Going On Now!
                                                                  BigIdeas4Biz Newbie

                                                                  Whether an LLC member must pay self-employment tax isn't a simple question. Here's why. A general partner is a self-employed person who pays self-employment tax on his/her distributive share of partnership income. In contrast, a limited partner is exempt from self-employment tax on his/her distributive share of partnership income. The problem is whether to a member of an LLC should be treated as a general partner (subject to self-employment tax) or a limited partner (exempt from this tax). More than a decade ago, the IRS has issued some proposed regulations on this subject; Congress blocked these regulations until July 1998. However, the IRS has taken no formal action since that date. Most tax pros believe that LLC members who actively work for their companies should pay self-employment tax like general partners, while LLC members who are only "silent partners" may be exempt or have only limited exposure for self-employment tax. Bottom line: No one knows for sure and anyone in this situation should discuss the question with a tax advisor.
                                                                • Re: Live Q&A with Barbara Weltman from 2-5PM Going On Now!
                                                                  SBC Team Guide
                                                                  Barbara,

                                                                  User rusty50 asks:

                                                                  I have an insurance business & I own my building. I recently added a 1650 sq foot addition on the building. Can I expense any of the costs related to this building addition on my income taxes? For example, can I expense permit fees, architect fees, or surveying fees?
                                                                    • Re: Live Q&A with Barbara Weltman from 2-5PM Going On Now!
                                                                      BigIdeas4Biz Newbie
                                                                      Expenses related to capital construction (including fees, permits, etc.) are ordinarly added to the cost of the project and then are usually subject to straight line depreciation (e.g., over 39 years for commercial realty). However, there is a way to obtain more rapid depreciation (accelerated depreciation over five years, seven years or other short recovery periods) for certain parts of the construction--if you obtain a cost segregation study, which is an analysis of the components of the addition that can be separately depreciated, you can gain greater write-offs up front. The analysis should probably be performed by an engineer, architect, or realty appraiser (as opposed to a CPA). The IRS has created a cost segregation audit technique guide which details requirements for an acceptable study (go to www.irs.gov/businesses/article/0,,id=134180,00.html). For information on depreciation rules, see IRS Publication 946, How to Depreciate Property, at www.irs.gov.
                                                                    • Re: Live Q&A with Barbara Weltman from 2-5PM Going On Now!
                                                                      SBC Team Guide
                                                                      Barbara,

                                                                      This next question was asked previously by user Tinman and he asked:

                                                                      What is the benefit of leasing a car thru your business as opposed to purchasing a car and claiming business mileage for the tax year? I've heard many say lease the car for a business but have not gotten an answer as to what exactly are the benefits.
                                                                        • Re: Live Q&A with Barbara Weltman from 2-5PM Going On Now!
                                                                          BigIdeas4Biz Newbie
                                                                          The decision to buy or lease a car used for business is not an easy one. There may be a financial advantage to leasing--less cash is needed up front to obtain the car, so leasing helps you drive a more expensive car than you could buy. But if you drive extensively (say more than 15,000 miles a year), leasing may not make sense because of the mileage limits on the lease (and the high cost of going over the limit). Taxwise, it's tricky to say whether leasing or buying is better. Lease payments are fully deductible; a car that is owned usually is subject to dollar limits on how much you can depreciate, which can limit annual deductions. However, a nonpersonal-use vehicle, which is one not usable for personal driving, such as a van outfitted with shelves and a sign on the side, can be fully expensed (i.e., you can deduct the cost of a nonpersonal-use vehicle bought and placed in service in 2008 up to $250,000). Bottom line: The only way to know which is better is to factor in the financial considerations and then run the numbers to see the tax implications for your situation. For information on deducting vehicle expenses, see IRS Publication 463, Travel, Entertainment, Gift, and Car Expenses, at www.irs.gov.
                                                                        • Re: Live Q&A with Barbara Weltman from 2-5PM Going On Now!
                                                                          SBC Team Guide
                                                                          Barbara our next question was asked by FCPainter and the user asks:

                                                                          We paid for one of our employees to attend a Dale Carnegie class. While this education is generally helpful to them, it's hard to say it directly supports what they do day to day (answer phones). Are there limits on what type of education you can deduct as a legitimate business expense?
                                                                            • Re: Live Q&A with Barbara Weltman from 2-5PM Going On Now!
                                                                              BigIdeas4Biz Newbie
                                                                              A company can pay for the educational expenses of an employee and deduct the costs as a business expense. Whether the cost is taxable to the employee (i.e., treated as additional wages) depends on certain things. If the company has adopted an educational assistance plan, up to $5,250 of costs are excludable from the employee's income (regardless of whether the costs are related to the job or not, with some exceptions). If the company does not have such a plan, then job-related costs are not taxable to the employee if the employee would have been able to deduct the costs had he/she paid them (i.e., the courses maintain or improve job skills and the employee already meets the requirements of an employer or applicable law imposed as a condition of employment). To see whether educational expenses paid by the company are subject to employment taxes, see IRS Publication 15-B, Employer's Guide to Fringe Benefits, at www.irs.gov.
                                                                            • Re: Live Q&A with Barbara Weltman from 2-5PM Going On Now!
                                                                              SBC Team Guide
                                                                              Barbara our next question comes from Exclusives Clothing and the user asks:

                                                                              What deductions do small business owners most commonly miss?
                                                                                • Re: Live Q&A with Barbara Weltman from 2-5PM Going On Now!
                                                                                  BigIdeas4Biz Newbie

                                                                                  Small business owners often overlook the little things that can add up to big deductions and big tax savings. Here are some that you should not overlook:
                                                                                  --Incidential travel expenses--dry cleaning and laundry on the road; passport fees, shipping materials to your hotel.
                                                                                  --Tips--paid for parking, cabs, redcaps, etc.
                                                                                  --Bank fees--amounts subtracted monthly from your account.
                                                                                  --Parking and tolls for business driving.
                                                                                  Also check what's new on the return each year. For example, if your business makes, grows, extracts, or constructs something within the U.S., you may be eligible for the domestic production activities deduction. In 2007, it's 6%; in 2006 it was only 3%.
                                                                                  Tip: See IRS Publication 553, Highlights of Tax Changes, at www.irs.gov (the new version of the publication for 2007 isn't posted yet but should be there shortly).

                                                                                   

                                                                                • Re: Live Q&A with Barbara Weltman from 2-5PM Going On Now!
                                                                                  SBC Team Guide
                                                                                  Barbara thanks again for your time today. Our final question of this session is from user nafa_mido and the question is:

                                                                                  What's the legislation regarding the collection and payment of sales taxes in e-commerce businesses? What are owners of e-businesses responsible for?
                                                                                    • Re: Live Q&A with Barbara Weltman from 2-5PM Going On Now!
                                                                                      BigIdeas4Biz Newbie
                                                                                      There is much confusion about sales tax for e-commerce businesses. The Internet Tax Freedom Act Amendments Act of 2007 (yes, this is the real name of the law) creates a moratorium on sales tax through November 3, 2014--but only on Internet access fees (i.e., AOL charges, etc.). There is no federal ban on sales tax on e-commerce sales. States have the right to impose their own sales tax rules. Generally, a seller is only responsible for following the sales tax rules in the state in which he/she is based, which usually means collecting tax on sales to residents within that same state. A number of states, in a quest for more revenue, have been expanding the reach of their sales tax, so things can be complicated. It's best to work with a tax pro to determine your sales tax obligations and avoid penalties (remember it's not you, but your customer, who pays the sales tax; you're only the tax collector responsible for remitting the taxes to the state).
                                                                                    • Re: Live Q&A with Barbara Weltman from 2-5PM Going On Now!
                                                                                      SBC Team Guide
                                                                                      Barbara,

                                                                                      On behalf of the SBOC Team and the members of the Small Business Online Community we wanted to say we truly appreciated your time today and your phenomenal responses to user questions.

                                                                                       

                                                                                       

                                                                                      Community members, while our session with Barbara is now closed, please feel free to discuss today's session and the questions answered. Again, if you'd like more information about Barbara visit her web site at
                                                                                      www.barbaraweltman.com
                                                                                      • Re: Live Q&A with Barbara Weltman from 2-5PM Going On Now!
                                                                                        MKTG.com.au Adventurer
                                                                                        Would love to ask a tax question but am outside US so it does not apply. I wanted to let Barbara know I enjoy reading her contributions in Pink magazine! Even in Australia her words are relevant. Thank you.
                                                                                        • Re: Live Q&A with Barbara Weltman from 2-5PM Going On Now!
                                                                                          Ed O'Gee Adventurer
                                                                                          Thanks Barbara for responding to my question.