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Small Business Taxes For Dummies > Book Contents > Flashcards

Book Contents Flashcards

1
Q

Sqmall Business Taxes
What are the 5 main concepts contained in this book?

A

Understanding small business taxes

Ongoing tax jobs

Getting help

The part of tens

Index

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2
Q

What are the 5 main topics contained in the ‘Understanding Small Business Taxes’?

A

Small business taxes 101 (basics)

Making important business decisions

Retirement Accounts and Investments for Small Businesses

Real Estate and Your Small Business

Estate Planning

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3
Q

What are the 5 main topics contained in the ‘Ongoing Tax Job’ section?

A

Keeping track of your small business revenues and costs

Form 1040 filing options

Schedule C: profit or loss from business

The business use of your home

Estimated taxes, self-employment taxes, and other common forms

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4
Q

What are the 3 main topics contained in the ‘Getting Help’ section?

A

Dealing with notices and audits

Keeping Up with and researching tax strategies and rules

Paying for tax help

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5
Q

What are the 3 main topics contained in the ‘The Part of Tens’ section’?

A

Ten+ Useful apps and software packages for small business

Ten often overlooked tax reduction opportunities

Ten resources to turn to after reading this book

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6
Q

Small business taxes 101 (basics)

What are the 5 main topics?

A

Valuing year-round tax planning

Noting how corporate and individual tax reform impacts small business

Considering the SECURE ACT of 2019 and COViD-19 Relief Tax Acts

Contemplating potential upcoming tax law changes

Understanding the different types of taxes you pay and your tax rates

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7
Q

Factoring taxes into small business decisions. What types of decisions (5)?

A

Type of business
Retirement accounts
Spending
Protecting your assets
Tracking your business financials

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8
Q

Valuing Year-Round Tax Planning
Checking out common mistakes
What are the common mistakes (7)?

A

Seeking advice AFTER an important decision

Failing to withhold or submit enough taxes

Missing legal deductions

Forsaking retirement accounts

Not owning real estate

Neglecting the timing of events you can control

Not using tax advisors effectively

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9
Q

How can you prevent the common mistake of seeking advice after an important business decision?

A

Educate yourself
Do further research
Hire a tax advisor

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10
Q

How can you prevent the common mistake of failing to withhold or submit enough taxes?

A

Make estimated quarterly tax payments if self-employed or earn significant taxable income from investments outside retirement accounts

Withhold taxes from your employees and pay the appropriate tax agencies

Utilize the Form 1040-ES ‘Estimated Tax for Individuals’ to calculate your estimated taxes each quarter

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11
Q

Why do small businesses miss legal deductions?

A

They don’t know about them
- take the time to learn about them
- or hire a competent tax advisor at least once

Fearing an audit
- unless you’re hiding something; not taking a deduction is foolish and costly
- a certain number of returns are randomly audited every year

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12
Q

What are the benefits of small business retirement accounts(3)?

A

Tax deductions and tax deferrals

Ability to save money for retirement

Retirement accounts have options to access funds prior to becoming a senior. More to come on this.

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13
Q

What are the benefits of owning real estate?

A

You can deduct your mortgage interest (up to $750,000 of mortgage debt)

You can deduct up to $10,000 on your property taxes combined with your state income tax payments.

Home office - option to take additional expenses on your tax return

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14
Q

What are some examples of neglecting the timing of events you can control?

A

Paying attention to your net income this year and how next year is shaping up; can help you make sound decisions to save on taxes:
- decide best time to make payments and invoice customers

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15
Q

What was the importance of the Corporate Tax Reform in the U.S.?

A

It was long overdue.
Corporations in the U.S. had a much higher income tax rate than overseas corporations.
Resulting in U.S. corporations moving their business overseas.
This wasn’t good for the U.S. economy and labor market.
To get companies to move back to the U.S.:
Congress passed the Tax Cuts and Jobs Act effective in 2018

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16
Q

What impacts do the Corporate and Individual Tax Reforms have on small businesses (9)?

A

Corporate income tax rate reduction and simplification

Reducing individual income tax rates

20% deduction for pass-through entities

Better equipment expensing rules

Increasing maximum depreciation deduction for automobiles

Limiting interest deductions

Reducing meal and entertainment deductions

Eliminating the health insurance mandate

Revising rules for net operating losses

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17
Q

Explain why they implemented the 20% deduction for pass through entities.

A

Pass through entities would end up paying in more than the new 21% corporate income tax rate.

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18
Q

Explain how the 20% deduction for pass through entities work.

A

Net income x 20% = your deduction

Net income - your deduction = taxable income (at your originally set rate)

It ends up dropping your rate below the 21% corporate rate.

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19
Q

What rules did the Tax Cut and Jobs Act bill expand to help businesses enjoy better equipment expensing?

A

Businesses can now deduct up to 1 million dollars annually

This can now be used to purchase used equipment as well.

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20
Q

What was the significance of increasing the maximum depreciation deduction for automobiles?

A

The new tax bill had more than tripled the amount of auto depreciation allowed!

These limits increase annually with inflation.

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21
Q

What companies are impacted by the limiting interest deduction and how are they impacted?

A

Companies that on average over the prior three years have annual gross receipts exceeding $25 million

Interest costs are capped at 30% of the businesses EBITDA. (earnings before interest, taxes, depreciation and amortization).

It’s even more restrictive effective 2022; capped at 30% of the businesses EBIT. (Earnings before interest and taxes).

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22
Q

What is another name for Affordable Care Act?

Who passed this?

What did it mandate?

What happened to this in 2019?

A

Obamacare

Congress while Obama was in office. Republicans vowed to repeal it.

It required people to have or buy health insurance coverage otherwise they would face a tax penalty.

This mandate was eliminated and the penalty tax disappeared.

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23
Q

What does NOL stand for?

A

Net operating loss

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24
Q

What rules for NOL’s were revised?

A

Can no longer be carried back for two years.

May be carried forward indefinitely until they’re used up.

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25
Q

What is the NOL limit each year?

A

80% of your taxable income can be eliminated with your NOL.

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26
Q

What does SECURE stand for?
(In the bill SECURE Act of 2019)

A

Setting Every Community Up for Retirement Enhancement

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27
Q

What are the five things small business owners should be aware of regarding the SECURE Act?

A

Owners are eligible for up to $5,000 in tax credits when starting a new retirement plan

More part-time workers can participate in company 401K plans

Parents w/a qualified birth/adoption can withdraw $5,000 penalty-free from their retirement account.

Required minimum distributions (RMDs) from retirement accounts begin at 72, not 70.5

You can make traditional IRA contributions past age 70.5 as long as you continue earning employment income.

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28
Q

What types of new retirement plans are eligible for the $5,000 tax credit?

What small businesses are eligible?

A

401(k)
Profit sharing
SEP plan
SIMPLE plan

Small employers with up to 100 employees

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29
Q

Part time workers and participating in company 401(k) plans.

How were they eligible previously and how does it work now?

A

Previously they had work at least 1,000 hours per year

Now they have to work at least 500 hours over three consecutive years.

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30
Q

What should you be paying attention to when contemplating potential upcoming tax law changes?

A

What party controls both chambers of Congress (House and Senate) as well as the Presidency?

Bigger changes tend to happen when the same party controls all of them.

Democrats - for higher tax rates

31
Q

How do you determine your total tax?

A

Get out your state and federal tax returns. On each of these is a total tax line.

Add the totals together; that’s your total taxes.

It is probably one very large expense!

32
Q

What is taxable income?

A

Amount of income on which you actually pay income taxes.

33
Q

What are the two reasons you don’t pay taxes on your total income?

A

Not all income is taxable.

You get to subtract deductions from your income.

34
Q

Example of interest income that is not taxable.

A

Municipal Bonds (loans that you make to state and local governments as a bond buyer)

35
Q

What are the two types of deductions when reporting taxes?

A

Standard deduction - typically around $12,000 (because you’re a living, breathing human being)

Itemized deduction - if your itemized deductions (mortgage interest and property taxes) exceed what you would get from the standard deduction.

36
Q

What is your marginal tax rate defined as?

A

The rate that you pay on the so-called “last dollars “ you earn.

37
Q

How does graduated income tax work?

A

You generally pay less tax on your first, or lowest, dollars of earnings and more tax on your last, or highest, dollars of earnings.

38
Q

How does the progressive tax system work?

What is considered your marginal tax rate?

A

The first x amount of dollars you make is taxed at the x tax rate (lowest).

The next x amount of dollars you make is taxed at the x tax rate (moderate).

The final x amount of dollars you make is taxed at the x tax rate (highest).

So on and so forth through the tax brackets.

The final tax bracket you end up owing taxes on is considered your marginal tax rate.

39
Q

How can you utilize your marginal tax rate to make educated personal financial decisions?

A

You have the opportunity to make some extra money; using your marginal tax rate you can determine how much of the money you make will be allocated to taxes.

You can quantify the amount of taxes that you save by reducing your taxable income:

Decrease your income w/pre-tax contributions to retirement accounts

Increasing your deductions

40
Q

In 1969 Congress created a second tax system: AMT

What does AMT stand for?

What does this second tax system ensure?

A

Alternative Minimum Tax

That high income earners who also have high deductions need to pay at least a minimum amount of taxes on their income.

41
Q

How do higher-income earners know if they have to pay the AMT?

What form can they use to determine their AMT?

What consequences could you receive for not doing the AMT?

A

They have to figure out the tax they owe both under and out of the AMT system: then pay the higher of the two.

Form 6251 “Alternative Minimum Tax - Individuals”

IRS will calculate a bill for the additional tax, interest and possibly late payment penalties.

42
Q

What are the different types of Employment (Payroll) Taxes?

A

Federal income tax withholding
State income tax withholding
Social Security
Medicare
Federal Unemployment tax
State Unemployment tax

43
Q

EFTPS stands for what?

What is it?

A

Electronic Federal Tax Payment System

A system that enables the transfer of funds from your bank account to the U.S. Treasury.

44
Q

Form 941 “Employer’s Quarterly Federal Tax Return”

How often does it need to be filed?

Why?

A

Quarterly

Annual employment taxes exceed $1,000

45
Q

Form 944 “Employer’s Annual Federal Income Tax Return “

How often does it need to be filed?

Why?

A

Annually

Your annual employment taxes are less than or equal to $1,000

46
Q

Making Important Business Decisions

What are the two big decisions that come up in the early days, months, and years of your business venture?

A

The type of business entity you’ll operate under.

The benefits your business may consider for yourself and your employees.

47
Q

The business type you decide to operate under impacts what (3)?

A

Your liability exposure

Your tax reporting requirements

The income taxes you and your business will owe.

48
Q

What are the different types of business entities?

A

Sole proprietor
Partnership
LLC
C corporation
Being taxed as a S Corporation

49
Q

What are the advantages of sole proprietorships (4)?

A

Simplest tax rules and record keeping

Low cost to establish and discontinue

High flexibility to switch to other entity forms

Good retirement options

50
Q

What are the tax rules for sole proprietorships?
- how are taxes reported
- how does it compare to being incorporated

A

You report your business income and expenses on Schedule C of IRS Form 1040.

Net income/losses carry over to your personal income tax return.

Schedule C is easier to complete than corporate tax forms.

51
Q

How does the IRS identify an activity as a hobby and not a business?

A

If it shows a loss for three or more of the last preceding five tax years.

52
Q

What are the disadvantages of sole proprietorship (5)?

A

Liability exposure

Only one owner is permitted

Estate issues

You’re taxed on all profits, even if you don’t want to take them all out of the business.

Increased audit risks.

53
Q

Explain the liability exposure of sole proprietorships.

A

You don’t receive the protection that a corporate structure provides corporations.

Liability insurance may be an option depending on the type of business you operate.

54
Q

Sole Proprietorship
Only one owner is permitted. Drawback?
Exception?

A

You can not provide ownership stakes to key employees.

Ownership can be shared with a spouse as long as they work in the business. Both need to file a Schedule C and pay Social Security.

55
Q

Sole Proprietorship
Estate Issues
Drawback?

A

The business structure does not survive your passing.

Survivors cannot easily continue with the company.

56
Q

Sole Proprietorship
Taxed on all profits
Drawback?

A

You end up paying personal income tax on all of your earnings even if you want to leave some of it in the company.

57
Q

Sole Proprietorship
Increased audit risks
Drawback?

A

IRS knows that it finds more tax mistakes and fraud with solo businesses so it tends to audit them at a higher rate.

58
Q

Technically speaking; what is a corporation?

A

A legal entity separate from its founders, managers, and employees; it’s owned by its shareholders.

59
Q

What is the number one benefit for having a C Corporation?

A

It provides the most financial protection to its shareholders.

60
Q

Why do many small businesses choose to start a S Corporation instead of a C Corporation? (3)

A

Cheaper to start

Easier to maintain

Have just one level of taxation compared with the two levels of taxation for C Corporations.

61
Q

What kind of protection do Limited Liability Companies provide? (2)
Without what?

A

Numerous corporate-like benefits

Chief among them liability protection

Without some of the costs and downsides

62
Q

What are the downfalls of incorporating? (8)

A
  • Takes time
  • Costs money
  • Most administrative hassles
  • Fees to incorporate
    -Each state levies an annual fee that you must pay even if you have no business income that year.
  • Higher Legal Costs
  • Higher Accounting Costs
  • More Complex tax rules and filing requirements
  • The dreaded 1120 U.S. Corporation Tax Return
63
Q

If you’re on the fence on whether to incorporate; should you?
Why?

A

No; keep it simple

Start as a sole proprietor
Purchase insurance to secure the liability advantage

64
Q

What does the corporate veil provide you?

A

A separation from your business assets and liabilities and your personal assets and liabilities.

65
Q

How does a company maintain the corporate veil protection?

A

You must follow the ground rules.

66
Q

When taking out loans from banks for you business; does the corporate veil protect your personal assets?

A

No; typically banks will require you to provide a personal guarantee on the loan; therefore it negates that protection.

67
Q

What are the ground rules for protecting the corporate veil?

A

You need to keep corporate records

Hold annual meetings

68
Q

What could pierce the corporate veil?

A

gross negligence
bad faith
not keeping corporate records
not holding annual meetings

69
Q

If liability is a concern when deciding whether to incorporate or not; what should you look into first?
Why?

A

Looking into liability insurance

Insurance is superior to incorporation as it pays claims.

70
Q

What do property/premises liability insurance policies cover?

A

Incase someone slips and breaks a bone or two.

71
Q

How does the double taxation work in a C corporation?

A

You get taxed at the 21% corporate tax rate when the business makes those profits.
Then when you go to pay yourself a dividend on the companies profits; you get taxed again at the personal income tax rate.

72
Q

What is the tax-deductible advantage of a c corporation?
Examples

A

The company can deduct payments made for employee benefits.
Owners are considered employees in a c corp
Examples:
health insurance
long-term-care insurance
disability insurance
up to $50,000 of term life insurance

73
Q

What are the rules regarding tax-deductible benefits with a unincorporated businesses?

A

Owners are NOT considered employees
Benefits for employees can be deducted
Owners can ONLY deduct for:
Pension Contributions
Health Insurance
Can be deducted on the front of the Form 1040

74
Q

Can you claim losses on your personal tax return when unincorporated?

A

You can only claim losses on already earned profits. Unincorporated companies cannot utilize the NOL’s.

Small Business Taxes For Dummies (1 decks)

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