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Category: Business Accounting

LLC or S Corp, Which is Best for My Business?

Choosing a business entity can be confusing. If you’re debating between registering as a LLC or S Corp, we can help break down the pros and cons of each so that you can make an informed decision.

Keep in mind as you choose between a LLC or S Corp, what is going to be best for your business now, as well as in the future. You can always change your entity as your business grows, but it doesn’t hurt to look ahead.

What is an LLC?

According to the U.S. Small Business Administration, “A limited liability company (LLC) is a hybrid type of legal structure that provides the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership.”

Liability

An LLC separates a business from the business owner in terms of liability. In the event that they are sued or in debt, their personal assets (home, cars, investments) cannot be touched. Owners of a LLC are only liable for as much money as they put into the company. For example, if you invest $10,000 in your LLC then get into debt for $20,000, you’re only potentially liable for the $10,000.

Because the LLC is separate from the business owner, the owner cannot “pierce the corporate veil,” meaning that they can’t mix personal and business. If the lines become blurred the owner can loose his or her protection.

Taxes

When you’re registered as a LLC, the federal government doesn’t tax your business directly. Instead, they tax your personal income (or the income of all members). You would still take any deductions on your business expenses, but you don’t have to file a separate tax return for your business. Some states may require LLCs to file separate tax returns, so make sure you learn about the laws for your state.

Although you aren’t submitting a separate tax return for your business, the IRS still requires you to pay estimated quarterly taxes for your LLC.

Set up

LLCs are relatively easy to set up. The paperwork is fairly minimal and it usually only costs a couple hundred dollars.

What is a S Corp?

An S Corporation (S Corp), is a type of corporation that meets specific IRS requirements. S Corps have the benefits of a corporation but are taxed as a partnership. In order to qualify as a S Corp, the business must have 100 or fewer shareholders.

Liability

Like a LLC, a S Corp separates business owners from the business. Creditors can only go after the business they can’t touch the business owner’s assets to pay any debts. Shareholders are also only held accountable for their investments in the company.

Taxes

The taxation of a S Corp is what sets it apart from other business entities. When you have a S Corp, you don’t have to pay taxes on the business itself. Instead it is taxed through the income of the shareholders. Any shareholder who works for the must be paid a “reasonable wage.” A reasonable wage is usually fair market value for the position and size of the company. After the wages are paid, the rest of the income from the business is passed onto the shareholders as dividends. The benefit of an S Corp is that dividends are taxed at a vey low rate, if they are taxed at all.

The laws for S Corps are not the same in each state. Be prepared to pay taxes if that is what your state requires.

Set up

Getting a S Corp established takes a lot more than an LLC. Most S Corps spend a considerable amount in attorney and accounting fees. There is a lot of paperwork involved. You must also develop a board and bylaws, issue stock, hold board meetings and keep records of each board meeting.

The IRS also has the following requirements for S Corps

Shareholders must be US citizens
Cannot have more than 100 shareholders (spouses count as separate shareholders)
Can only have one class of stock

Final decision: LLC or S Corp?

Deciding between a LLC or S Corp, it comes down to your business individually; there is no right answer.

That being said, you need to consider the pros and cons of both. LLCs and S Corps have limited liability protection, so you don’t have to weight that option. However, the tax benefits and set up requirements should be considered.

Before you make a big business decision like this, it’s best to involve your accountant and lawyer, they can help you determine what is best for your business.

Frequently Asked Questions:

What is the main difference between an LLC and an S Corp?

The main difference lies in taxation and setup complexity. LLCs offer flexibility and straightforward taxation through personal income, while S Corps provide tax advantages on dividends but require more complex setup and compliance.

How does liability protection differ between an LLC and an S Corp?

Both LLCs and S Corps offer limited liability protection, meaning business owners’ personal assets are protected from business debts and lawsuits. Owners are only liable up to the amount they invested in the company.

What are the tax benefits of an LLC?

LLCs are taxed through the owner’s personal income, avoiding double taxation. Business expenses can still be deducted, but estimated quarterly taxes must be paid. Some states may require separate tax returns for LLCs.

What are the requirements for setting up an S Corp?

Answer: Setting up an S Corp involves more complexity and costs, including attorney and accounting fees. It requires establishing a board, issuing stock, holding board meetings, and meeting IRS requirements such as having no more than 100 shareholders and only one class of stock.

When should I consider consulting a professional when deciding between an LLC and an S Corp?

It’s advisable to consult an accountant and lawyer when making this decision. They can help you understand the pros and cons specific to your business and ensure compliance with state and federal laws, optimizing your business structure choice.

What is a Joint Return?

A joint return is a tax return filed on the behalf of a married couple. Filing a joint return means that both parities share the tax liability. A joint return is also referred to as married filing jointly.

Only legally married couples can file a joint return. In order to file a joint return for any year you have to have been married on or before the last day of the year. If your spouse dies, the widowed spouse can still file a joint return for that year. However, going forward they would have to file a single return. If you get divorced at any point in the year you cannot file a joint return for that year.

Couples filing a joint return may benefit from:

Lower tax rates
Higher standard deduction
All information for a couple reported on one return, rather than having to file individually

Joint Return Scenarios

Joint Return: Newlyweds

Jason and Isabel were married on New Year’s Eve of 2016. When it came time to pay their 2016 taxes, they discussed what kind of tax return they should file with their accountant. He suggested a joint return. Even though they weren’t married for very much for 2016, they were still married on the last day of the year and they qualified for a joint return. However, if Jason and Isabel had been married at midnight, it would have been considered a 2017 wedding and they would have had to file single for 2016.

Joint Return: Widowed

Joel recently lost his wife of 10 years. When he goes to file taxes for the year, he can still file a joint return. However, after this year he would no longer qualify for a joint return. He does have a few options on filing returns. Joel can file as single, head of household or surviving spouse. He can discuss with his accountant which would provide the most benefits for him and his dependents.

Joint Return: Divorce

Ivan and Jessica were married for most of 2016; however, they divorced in November of 2016. Even though they were married for a majority of the year, they must both file single tax returns for 2016 and going forward until they remarry.

Frequently Asked Questions:

1. What is a joint return?
A joint return is a tax return filed on behalf of a married couple, where both spouses share the tax liability. It is also known as “married filing jointly.”

2. Who is eligible to file a joint return?
Only legally married couples can file a joint return. You must be married on or before the last day of the tax year to qualify. Widowed spouses can file jointly for the year their spouse passed away, but must file single thereafter.

3. What are the benefits of filing a joint return?
Couples filing a joint return may enjoy lower tax rates, a higher standard deduction, and the convenience of reporting all their information on one return instead of filing separately.

4. Can a couple who got married at the end of the year file a joint return?
Yes, as long as you were married on or before December 31st of the tax year, you can file a joint return, even if you were married late in the year.

5. What happens if a couple divorces during the tax year?
If a couple divorces at any point in the year, they cannot file a joint return for that year. Both must file as single or head of household, depending on their circumstances.

What Business Records You Should Keep for Tax Purposes

Keeping business records for tax purposes can be completely overwhelming, but it’s critical in order to keep your business safe if you’re ever audited. The most overwhelming part of keeping business records is knowing what records are important. We’ll go through the Internal Revenue Service’s (IRS) recommendations on what to keep and how long to keep it.

What Kind of Business Records Should You Keep?

First, we need to identify what business records are important to keep. You should keep records showing your income and expenses, as well as any proof of tax deductions you plan to take. The IRS has a few recommendations on what to keep.

Income Records

Proving income is pretty straightforward. You’ll want to keep records so that you can accurately pay your taxes.

Income records include:

Cash register tapes
Receipt books
Invoices
Deposit information (cash and credit sales)

Expense Records

Keeping records of your expenses is an important part of bookkeeping so that you can take deductions and lower your taxable income.

You’ll want to keep records (such as receipts or invoices) showing the following expenses:

Loss of income (cancelled checks, unpaid invoices)
Travel
Business meals
Transportation
Gifts

Asset Records

If you plan on deducting any of your assets you’ll also want to keep records on them. Business assets range from office furniture to equipment and even property. You’ll have to calculate the depreciation of each asset and the gains of any asset sold. In order to do that you’ll want to keep records on the following:

When and how you acquired the asset
Purchase price
Cost of any improvements
Deductions taken for depreciation
How you used the asset
When and how you disposed of an asset
Selling price of asset
Expenses associated with the sale of assets

How Long to Keep Business Records

In most cases the IRS recommends you keep your business records for a minimum of three years.

The IRS requires that you keep records for three years after the due date of the tax return or the date you filed the tax return, whichever is later. The period of limitations to file an amendment is three years; however the IRS can audit you up to six years later. After that you are no longer required to have your tax return or documentation.

Even if these tax deadline pass, make sure that your insurance company or creditors don’t require you to keep these records longer.

Download our FREE guide: What Business Records You Should Keep for Tax Purposes and keep it at your desk as a reminder.

Frequently Asked Questions

1. What types of business records should I keep for tax purposes?

You should keep records that show your income, expenses, and any proof of tax deductions you plan to take. Specifically, you should keep income records like cash register tapes, receipt books, invoices, and deposit information. For expenses, keep receipts or invoices related to loss of income, travel, business meals, transportation, and gifts. Additionally, maintain records for any business assets, including details on purchase price, depreciation, and the sale of assets.

2. How long do I need to keep my business records?

The IRS recommends keeping your business records for at least three years. Specifically, you should retain records for three years after the due date of the tax return or the date you filed the tax return, whichever is later. While the IRS can audit you up to six years after filing, it’s generally safe to discard records after this period, unless your insurance company or creditors require you to keep them longer.

3. Why is it important to keep records of my business assets?

Keeping records of your business assets is crucial if you plan to deduct their depreciation or if you sell them. You’ll need to document when and how you acquired the asset, the purchase price, any improvements made, deductions for depreciation, how the asset was used, and details about its sale. Accurate records ensure you can correctly calculate depreciation and report any gains from sales.

4. What should I do if I’ve lost a record that the IRS might require?

If you’ve lost a record, it’s essential to try to reconstruct it. Contact the source of the document (such as the vendor or bank) to obtain a duplicate. If that’s not possible, you should create a record of the event or transaction as accurately as possible, noting the date, amount, and purpose, and explain why the original record was lost.

5. Can the IRS audit me after the three-year record retention period?

Yes, while the IRS typically audits within three years, they can extend this period to six years if they identify a significant error in your tax return, such as underreporting income by more than 25%. Therefore, it’s advisable to keep records for at least six years to be fully prepared for any potential audit.

What are My Mileage Deduction Options? Plus a Free Mileage Log

If you’re a small business owner who drives a lot for work, then claiming a mileage deduction on your taxes is a great way to save money.

There are two options when you’re claiming a deduction for mileage. You can choose to claim a standard mileage deduction or you can calculate the actual costs of using your vehicle for business.

The IRS announced the 2017 standard milage rate as:

53.5 cents per mile for business miles driven, down from 54 cents for 2016
17 cents per mile driven for medical or moving purposes, down from 19 cents for 2016
14 cents per mile driven in service of charitable organizations

Mileage deductions can be taken for business, charitable, medical and moving purposes.

There are two important factors to track if you want to use a mileage deduction. First, you need to track your actual miles. This is important so that you know how much you can deduct at tax time. Second, you need to track the reason for your trip.

Take John, for example, John is a real estate agent who drives his car to show houses. John tracks of how far he goes and what the purpose for the trip was. That way when it comes time to pay taxes John knows exactly how much he can deduct. John tracks the purpose of each trip as well. If the IRS ever audits John he has proof that the miles he claimed were for business purposes.

To help you out we’ve create a Free Mileage Log so that you can keep track of your miles. Grab our Mileage Log and keep it in your car so you can mark down each of your business trips.

Do I Need to File My Self Employment Taxes on My Gross or Net Income?

When you are self employed, you are responsible to pay taxes towards social security, income and Medicare. Usually, these taxes are covered in part by an employer; however, if you are self-employed you are responsible to pay them yourself. You should set aside 30% of your income for self employment taxes.

What is the difference between gross and net income?

In order to determine if you need to pay taxes on your small business and what those taxes are, you have to understand the difference between gross and net income.

Gross income is the total amount of money you earned before taxes or other adjustments are considered.

Net income is calculated by subtracting your gross income from your expenses. This shows your profits or losses for the period.

How do I determine if I need to pay self employment taxes?

The IRS determined that you are subject to self employment taxes if you:

Own a sole proprietorship
Are an independent contractor
Are a partner in a business
A part of any other self-owned business

The next requirement is that you net $400 or more. This is where our gross vs. net income lesson comes in! If you lost money on your business (your net income is in negative) then you don’t owe taxes, but you should still report your loss to the IRS. If you had a net profit of $400 or more then you must pay self-employment taxes.

How do I file my self employment taxes?

In addition to paying income tax, small business owners also file an annual return and pay quarterly self employment taxes.

Self employment taxes are based on estimations. You determine your quarterly taxes based on your previous year’s earnings. The IRS provides worksheets to help you determine what you should pay each quarter.

If you overestimate or underestimate your earnings, the IRS has forms to help you refigure the next quarter’s taxes.

Quarterly Taxes for 2017 are due:

1st payment : April 18, 2017
2nd payment : June 15, 2017
3rd payment : Sept. 15, 2017
4th payment : Jan. 16, 2018

The IRS requires that you submit an annual return stating how much you paid in social security and Medicare taxes at the end of the year.

You can learn more about self employed taxes with these articles

Which Tax Forms Do I File as a Small Business Owner

4 Forgotten Tax Deductions for Entrepreneurs

FAQ: What Home Office Expense are Tax Deductible?

Income Tax Checklist: What Your Accountant Needs to File Your Income Taxes Copy

It’s everyone’s favorite season! TAX TIME! We’re here to make this the easiest tax season ever.

You won’t be scrambling to find all of the important financial documents you need to file your income taxes, only to have your accountant call and tell you he needs just one more thing. Instead, you can take charge with this comprehensive income tax checklist with everything you’ll need to take to your accountant to get the job done accurately and on time.

Download the printable version here.

Build a Better Business

We want you to succeed in your business ventures. To make that happen, we’ve compiled a series of tutorials on simple ways to build your business. We’ll talk you through your marketing and advertising strategies, hiring and firing employees, effective communication in the workplace, business etiquette, operations, human resources, and of course, accounting. Check out each of the articles in our “Build a Better Business” series to grow your business into a thriving enterprise.

Improve Your Online Presence Part 1: 8 Steps for Reviewing Your Website

Most people will learn about your business online, so you need to make sure that your website up to date. A great website is user friendly, helpful and interesting enough to draw people in. Check out our list of to-do’s to make sure your website is an asset to your business.

Improve Your Online Presence Part 2: Perform a Quarterly Social Media Audit

Social media is essential to marketing and customer service. It’s important to do a social media audit to make sure your information is up to date and that your customers can contact you through it. Planning out content for your social media platforms is another sure-fire way to make sure you don’t neglect it.

Improve Your Online Presence Part 3: Contact Information & Review Sites

Over the life of your business, your web presence increases. It’s important to make sure that your contact information is always up to date so that people can find your business. It’s fairly simple to make sure your website is up to date, but what about the other places your information can be found online?

4 Low Cost and Low Risk Ways to Grow Your Team

Growing your team can seem like a costly and stressful venture, but we’ve outlined 4 ways you can add people to your team without spending a lot of money.

Planning Your Summer Marketing Efforts Part 1: Who, What, When, and Where

Summer is a great time for marketing because there are a lot of events you can attend in order to spread the word about your business. It’s a great time to get out and meet your community. So take stock of the who, what, when, and where of your marketing.

Planning Your Summer Marketing Efforts Part 2: Celebrating Holiday and Events

While summer holidays may mean that your team is in the office less, it’s still a great time to take full advantage of marketing! Use summer celebrations as a way to do a promotion or giveaway. Because people are busier you can also increase your correspondence with your clients. Remind them how you can help out while they’re busy spending time with their friends and families!

Planning Your Summer Marketing Efforts Part 3: Cheap Advertising Tips

You’ve pumped money and man power into your marketing campaigns through attending events and giving away swag. Now it’s time to pull in the reigns and save some money while still boosting your advertising.

How To Attract the Right Talent For Your Company

Employees can make or break your business. Like we mentioned in 4 Low Cost and Low Risk Ways to Grow Your Team, it’s important to get the right fit before you hire anyone. These tips will help you make sure that you’re hiring the right people the first time.

Quick Money Management Tips to Build Your Business

If you want to get a better handle on your finances this is the best place to start. With simple steps you can remove the gray areas from your business finances.

Plan for Holiday Success by Hiring Seasonal Employees

The holiday season can be the busiest time for small businesses. While you may not be able to afford another full-time employee, you could definitely use some help around the busiest time of the year. Here are a few best practices to make sure you’re going about it the right way.

How to Create a Succession Plan for Your Small Business

Sure, your small business may be your life right now, but what about when it’s time to move on to something bigger and better? Set up a succession plan now so that your baby is always taken care of.

How to Protect Your Small Business from Theft

Theft can come from many angles, and it happens to more than just brick-and-mortar businesses. Learn how to protect your business from all types of theft.

Goal Setting & Achieving for Small Business Owners

As a small business owner you wear many hats. You oversee your business, work with clients, and you are in charge of continually moving your company forward. You can’t allow yourself to live life without a purpose or everything will fall apart. In order to have a balanced life, small business owners must learn how to set goals.

Why we should set goals

As a small business owner, you need to determine where your business is going. Do you want to grow? Stay the same? Without solid goals it’s impossible to determine if you’re heading in the right direction.

Another benefit of goal setting is that it can simplify the tough decisions. Because you know where you and your business are headed you can easily determine which paths will help you reach your destination.

Now, all you need to do is learn how to set goals and achieve them.

How to set SMART goals

In order to achieve your goals, you need to come up with a comprehensive plan. There are many methods to help you set goals, but the SMART method is great for helping you see your goal all the way through.

The SMART model has you analyze your goal so you can set better goals. When writing your goal make sure it is:

Specific: Be exact in what your goal is. If it’s too vague you won’t be able to accomplish it.
Measurable: How will you define success? You need to be able to track your goal so that you can see progress towards it.
Attainable: It’s great to dream big, but make sure that you aren’t over reaching. If you do feel like your goal is unattainable, set smaller goals that will help you reach your final goal.
Realistic: Do you have the time, resources and knowledge to accomplish your goal?
Time bound: How long will this take you to accomplish? If you don’t see any progress towards your goal you are more likely to give up. Set deadlines and stick to them to accomplish your goal before you run out of steam.

How to achieve your goals

You will never accomplish your goals without devising an action plan, no matter how great of a goal it is. Small goals are just as important, maybe even more important than, the big goals.

To achieve your goals you need to break them down into actionable steps. Use the SMART method to make smaller goals that will lead you to your ultimate goal. Set due dates and evaluate where you are at consistently.

If you’re planning goals for the company, then get your entire team on board and involved in setting them. When the whole company is involved they feel more invested and will do their best to help.

Goal setting doesn’t have to be a huge production with flow charts and extensive tracking. It’s meant to lead you to success. When you feel overwhelmed by your goals, take a step back and see what you can accomplish quickly that will help re-motivate you and your team. Then pursue that goal fearlessly.

FAQs on Goal Setting & Achieving for Small Business Owners

Why should small business owners set goals?

Setting goals provides direction for your business growth and simplifies decision-making processes by outlining clear objectives.

What is the SMART method for goal setting?

The SMART method emphasizes setting goals that are Specific, Measurable, Attainable, Realistic, and Time-bound to ensure clarity and effectiveness.

How can I ensure my goals are achievable?

Assess whether your goals are realistically attainable based on available resources, time constraints, and your capabilities to ensure success.

What steps can I take to achieve my goals effectively?

Break down your goals into smaller, actionable steps using the SMART method. Involve your team in goal-setting and maintain consistent evaluation and progress tracking.

Is goal setting a complex process?

Goal setting should be purposeful and motivating, not overwhelming. Break down goals into manageable tasks and involve your team to foster motivation and productivity.

How to Give this Holiday Season

The holiday season is one of the best times of the year to help those in need. Opportunities to help others seem to be around every corner. Holiday giving is great because everyone benefits from it. You have the opportunity to help people who need it and your donations are tax deductible.

What contributions are tax deductible?

There are many different ways you can give to charities during the holidays. The most common ways are through cash donations, gifts, service (a time donation.) When you “donate” your time it isn’t tax deductible, but you can deduct any mileage that you used. Cash donations and gifts are tax deductible; it’s best to keep a record of how much you gave, or the cash value of your gift, so that you can deduct it.

If you plan to claim your donations on your taxes, make sure you ask for a receipt from the charity you’re giving it to.

What organizations can I give to?

Before you make a donation to a charity you’ll want to do research and find out which charities are legitimate and how they use their funds. A good rule of thumb is to choose a charity that spends 20% or less on administrative costs. That means that 80% of the profits benefit the cause directly.

In order to get a tax deduction for your charitable donation you have to give to a charity on the IRS’ list of exempt organizations. The IRS states that the following are all qualified:

A sate, local or national government or political party if made exclusively for public purposes;
A community chest, corporation, trust, fund, or foundation, that is organized and operated exclusively for charitable, religious, educational, scientific, or literary purposes, or for the prevention of cruelty to children or animals;
A church, synagogue, or other religious organization
A war veterans’ organization
A nonprofit volunteer fire company
A civil defense organization
A fraternal society, operating under the lodge system, but only if the contribution is to be used exclusively for charitable purposes;
A nonprofit cemetery company if the funds are specifically dedicated to the care of the cemetery as a whole and not a particular lot or mausoleum crypt.

What do I count as personal donation vs. a business donation on my taxes?

As a small business owner, you should be sure to differentiate if you are making the donation on behalf of your company or from yourself. The biggest difference is where the funds come from.

Business donations should not come from your personal accounts. Make sure that you use money from your business accounts so that you can deduct it from your business taxes. There is generally more flexibility in what counts as a charitable contribution from businesses, but be sure to check with your accountant before you claim anything.

When you are ready to claim your donation on your taxes, have your accountant see if you will get more money through an itemized deduction the standard deduction. It can be more beneficial to claim the standard amount in some cases

While tax deductions are a great benefit to charitable giving, it shouldn’t be the only reason you give. Tony Robbins, a multimillionaire, life coach and author said, “Only those who have learned the power of sincere and selfless contribution experience life’s deepest joy: true fulfillment.”

FAQs: How to Give This Holiday Season

What contributions are tax deductible during the holiday season?

Tax-deductible contributions include cash donations, gifts, and certain expenses related to volunteer service, such as mileage. Keep a record of all donations and obtain receipts from the charities to claim these deductions on your taxes.

What types of organizations can I donate to for tax deductions?

You can donate to various organizations such as charities, religious organizations, war veterans’ organizations, nonprofit volunteer fire companies, and certain government or political entities. Ensure the charity is listed on the IRS’ list of exempt organizations to qualify for a tax deduction.

How do I differentiate between personal and business donations on my taxes?

Personal donations come from personal accounts and are deducted from personal taxes. Business donations should come from business accounts and are deducted from business taxes. Always use the appropriate account for the donation and consult with an accountant for accurate tax filing.

What should I consider when choosing a charity to donate to?

Research charities to ensure they are legitimate and effectively use their funds. A good rule of thumb is to select charities that spend 20% or less on administrative costs, meaning 80% of donations go directly to the cause. Verify the charity’s status on the IRS’ exempt organizations list.

Should tax deductions be the main reason for charitable giving?

While tax deductions are a benefit, the primary reason for giving should be to help others and make a positive impact. Sincere and selfless contributions bring deeper joy and fulfillment, as noted by Tony Robbins.

Show Them You Care: Employee Gift Ideas For Every Budget

The holiday season is the perfect time to show your employees how much you appreciate their work and support. Depending on how many employees you have it might be better to do a group gift, like a party, rather than individual gifts. However, an individual gift shows each employee just how valued they are.

There are affordable gift ideas for every price point; even if it means you’re handmaking something for your employees. Just be sure not to go too cheap. It makes employees feel less valued when they can tell you care more about profits than them.

Download the employee gift guide printable here.

Vyde is a licensed accounting firm (CPA) based in Provo, Utah, and members of the AICPA. We provide professional accounting services to businesses and individuals, with a focus on small business bookkeeping and taxes.