Happy New Year, Gang. Just a reminder to start getting your receipts together and get a folder ready to store your copies of your W-2s, stock transactions, real estate trades and all the other good documentation that you will need in order to do your taxes. If you want me to do your return drop me a line and I would be more than happy to help you.
Have a safe healthy, happy and sane year and thanks for following me.
Kim Greenblatt, Enrolled Agent
Ready for Tax Season
Questions coming in about Sole Proprietorships:
“Kim, you’ve touched on Self Employment Tax before. What else can you tell me? Do I really need to pay income tax on my net profit? That sounds lousy. Thanks!”
My answer is that I can tell you lots. You do have to pay income tax on your net profit and you should write to your Congress person about your tax feelings though in this current Depression I am not sure what you will get back as an answer.
Not only do sole proprietors need to pay income tax on their business net profit, but they need to pay self-employment tax (SE tax), which is the equivalent of social security and medicare taxes. The tax rate is 12.4%, which represents both the employee and employer contribution, on 92.35% of their net income from self-employment. The tax is added on the Form 1040 as an additional tax after figuring income tax. However, you can also be eligible to deduct one-half of their contribution as an adjustment to income.
Statutory employees do not pay SE tax because their employers must treat them as employees for social security and medicare tax purposes and withhold these taxes from their wages.
Certain business people are exempt from paying SE tax. These folks are:
• An Executor or administrator of an estate, unless the client is a professional fiduciary or works for a business held by the estate
• Certain newspaper carriers
• Notary public
• Clergy who have applied to and received approval from the IRS because of conscientious objection to public insurance due to religious belief.
So please make sure that whenever you are collecting your income from your biz that you take into account your SE tax. Trust me, the IRS will be looking for it and they aren’t bashful about getting you to pay it.
Question from a reader:”What is material participation in a business, specifically a sole prop?”
A business person materially participates when they are involved in the business in a regular, continuous, and substantial way. If the proprietor
does not materially participate, any loss from the business is considered a passive loss. Passive losses can only be deducted if there is passive income in the same year.
A sole proprietor materially participates in a business if one of seven
tests is met:
1. Worked more than 500 hours during the tax year.
2. Participates more than anyone else.
3. Participated more than 100 hours, and no one else participates
more.
4. Activity is a significant participation activity, and participation
exceeds 500 hours during the year.
5. There has been participation for any five of the previous ten years.
6. The activity is a personal service activity in which the taxpayer
has materially participated for any three preceding tax years.
7. Based on the facts, there is participation in the activity on a regular,
continuous, and substantial basis for more than 100 hours.
Send me an email if you have any more questions or you may want to check out The Schedule C instructions. There are more details there.
Question from a reader:”In a partnership, am I always a limited partner?”
The biggest gotcha is that when you are investing in a friend’s business also as a partner that you clearly understand if you are a limited or unlimited partner. You need to talk to your partners about that and look at the K1 that you get as part of your partnership. A general rule of thumb is to always understand a business before you get into it. Besides today’s column is about sole props and I just snuck your question in because I had some space.
Question from a reader:’What about the Form 2106?”
My answer is to check out my previous post here. You generally cannot use both a Schedule C or a Form 2106 and the link has more information for you there.
Question from a reader:”What is the best accounting method that I should use in starting up by business?”
My response is that it depends on your type of gig but I would suggest that you try to keep it simple at first and go with what most people go with, namely keep it on a cash basis at first unless you have reason to do otherwise.
August 06 2009
Also, please don’t quite go anywhere yet. Having some tax issues or tax questions? Any problems with trying to make it through the financial Depression we are in that is making you depressed? Please read on.
I am expanding my practice and taking on new tax clients. If you are interested in having somebody who is a successful businessman and tax professional with integrity review your returns discretely and see if your tax guy or gal is doing a good or goofy job, please drop me an email or post a comment with your contact information and time.
I have experience in international business, small businesses, partnerships, multi-state tax returns (they can get complicated) and anything else you can probably think of.
I also do business consulting and have ran several businesses (still running a few) myself so you are in good hands.
If you are looking for a day job, part time work, suggestions for saving money or investing, please check out my book, Practical Money Making, that is listed right after his paragraph in this very post. There are some great suggestions and ways to survive the Depression we are in.
Interested in any of my books? You may want to make a stop over here. Please click through to purchase my books and some other interesting items that actually ARE on sale.
Have you read my book, “Bad Tax Idea, Good Tax Idea“? Please order it today. The tips inside can save you hundreds if not thousands of dollars! Tax planning should be done year round and not just two weeks into January or later.
Part of all the proceeds from the sales of that book go to Rett Syndrome research. One girl is born with Rett Syndrome worldwide every fifteen minutes. My daughter Arianna has Rett.
Kim Isaac Greenblatt
August Sole Prop Questions
As a follow up to the articles I have been touching on from a business perspective on the Swine Flu epidemic and scare of a potential pandemic, here are some statistics:
1. Did you know that in the Untited States of America that yearly around 30,000 plus people die from the flu? A lot of them are elderly or infants.
2. As of this article, the peanut butter poisoning still is (or was) a greater death threat than the Swine Flu in terms of fatality.
3. If this is so serious, how come the U.S. doesn’t close the borders to Mexico if only for a few days? Sure people will still come through but you can at least play the percentages to cut down on traffic. Other countries are tightening things to the point that they don’t want anybody at all from the United States visiting them for awhile.
4. Did you know that the best way for avoiding the flu is ducking from a sneeze and washing your hands?
5. As Cousin Barry says, “If you have any pigs at home, kill them, cook them well and eat the bacon.” He is joking of course but you get the idea.
6. If things do get weird for awhile, make sure that you have enough food and water at home to handle things. Keep anywhere from 3 days to at least a week’s worth of food ready and have cash to cover any emergencies. You never know how nuts things might get for the short term.
Be safe and if we have moved into pandemic stages if you are reading this please keep your head, don’t use any anti-flu treatments until you are sick and have to otherwise they won’t work.
Also – here is a late breaking bit of news for people in Los Angeles:
Business Tax Penalty Amnesty is kicking in on Friday. If you haven’t registered your small business (and that is for all of my Schedule C clients and readers out there in the Los Angeles area), you have a break for a little bit of time but you need to file. You will still have to pay your taxes but there won’t be any penalties. The glorious city of Los Angeles, for the second time in five years (and I suppose it is because they realize that we are in a Depression), is starting a three-month tax amnesty program on Friday, with the hopes of bringing in $10 -$15 million in extra revenue.
The program was authorized earlier this year by Mayor Antonio Villaraigosa and the City Council as a way to recapture unpaid taxes for business, telephone, utility, commercial tenant occupancy, transient occupancy and parking. I think it is a decent idea. This way they can get people from under the radar to pay their taxes and people who have been balking won’t get penalties – but remember, you still need to pay your taxes.
Here are a few more of the particulars:
Businesses with incomes of $100,000 or less do not pay any business taxes. That affects most of the small businesses that I know of.
The city of LA has begun advertising the program, which runs through July 31 and requires taxpayers to pay all unpaid taxes, without having to pay interest or penalties. City officials said those costs could be as much as a whopping 40 percent more than the tax bill. Once the program expires, the very same city officials said they will begin a range of enforcement programs that will include an additional 10 percent penatly, a whistleblower program, expanded audits — including on-site investigations — and possible revocation of permits. I’ve done my part, gang. You have been notified! If you haven’t filed, you have been told that you could do so now without any penalties as long as you pay your taxes.
It doesn’t take much time to fill out the forms and for most of you who are making less than $100,000 a year in income, I don’t get why you are waiting. Please take care of business so you can move forward without this hanging over your head. Okay, I think I’ve beaten this horse to death, don’t you? Or would the appropriate comment be “beaten this swine to death?” Just kidding animal rights people. I love my horses and pigs. Wait. That may not have come out right…
Be healthy and safe.
Apr 30 2009 Mid Day
If you are looking for a day job, part time work, suggestions for saving money or investing, please check out my book, Practical Money Making, that is listed right after his paragraph in this very post. There are some great suggestions and ways to survive the Depression we are in.
Interested in any of my books? You may want to make a stop over here. Please click through to purchase my books and some other interesting items that actually ARE on sale.
Have you read my book, “Bad Tax Idea, Good Tax Idea“? Please order it today. The tips inside can save you hundreds if not thousands of dollars! Tax planning should be done year round and not just two weeks into January or later.
Part of all the proceeds from the sales of that book go to Rett Syndrome research. One girl is born with Rett Syndrome worldwide every fifteen minutes. My daughter Arianna has Rett Syndrome and we are working to do all we can to make her life easier and find a cure in her lifetime. Boys born with the Rett gene generally die at birth.
Kim Isaac Greenblatt
Swine Flu Reality Check