How to Avoid Paying Corporate Income Tax

If you have a business that’s incorporated, take a close look at your structure, and see if you should reorganize yourself as an S-Corp, if you’re not already.  C-Corporations pay Federal Income Tax, but S-Corps don’t.  The way to switch over to an S-Corporation is to file IRS Form 2553 Election by a Small Business Corporation.

How To Become an S-Corporaton

First, see if you qualify.  Of course all corporations would file form 2553 and become S-Corps if they could, so they could avoid paying federal corporate income taxes.  Here’s how to tell if your corporation qualifies:

  1. Your corporation can issue only one class of stock.
  2. It is a domestic, not a foreign corporation.
  3. It has 100 or less shareholders.  Any more, and you must remain a C-Corporation.  This is a top reason why many businesses cannot become S-corporations.  Any company that goes public, for example, will pretty much instantly disqualify themselves.
  4. Shareholders can only come in the form of estates, individuals, exempt organizations or certain trusts but not all types of trusts.
  5. There can be no nonresident alien shareholders.
  6. Your corporation cannot be a bank that uses a certain type of accounting for bad debts (see IRS.gov for more info), an insurance company that gets taxed under subchapter L, a corporation that is treated as a possessions corporation, a domestic international sales corporation, or even if it used to be but has now changed, it’s disqualified.
  7. You must adopt a tax year that’s defined a specific way according to what the IRS wants.

If you meed these guidelines, then get yourself a copy of IRS Form 2553 Election by a Small Business Corporation.  It’s available on the IRS website at http://www.irs.gov/pub/irs-pdf/f2553.pdf.

Timing is everything.  You must submit Form 2553 by March 15 of the year, for it to take effect that year.  If you miss the March 15 deadline, you can still file but it won’t take effect until next year.

How S-Corporations are Taxed by the IRS

Well, as we said before, they’re not.  However, the S-Corporation passes its profits to the shareholder(s), by definition.  If you are the sole shareholder of your own S-corporation, then profits are paid to you like a paycheck.  You will simply report that amount on your 104o individual income tax return and pay income tax that way.

So what’s the difference?  Not all income after adjustments is taxed when you’re an S-Corporation.  Only the part that you pay to your shareholder(s).  Other “profit” can be ploughed back into the business, tax-free.

 

 

If You Send Your Money Abroad, Don’t Forget to Tell the IRS

Got travel plans for your money?  Feel like dabbling in foreign real estate?  Worked abroad and got a foreign pension?  Well the IRS needs to know about it if it’s worth more than a certain threshold amount.  That goes even if it has no effect on your tax liability at all.  How do you inform the IRS of your Foreign financial assets?  Use IRS Form 8938, available for download at the IRS website.

How to Avoid Filing IRS Form 8938

  1. Hire someone.  Finding and downloading Form 8938 is simple.  Filling it out is another matter.  This is clearly a form where help from a tax specialist comes in handy. One way to avoid filling it out is to have a professional do it for you.  We don’t recommend paying someone to file your taxes for you very often, but for this form, it may be worth it for some people.
  2. Keep you foreign assets below $50,000.  But hold on: if your total foreign financial assets are worth less than $50,000 you don’t have to file Form 8938 at all.  This is for an individual filer.  For married filers filing jointly, the threshold amount is higher.
  3. If you don’t even have to file a federal income tax return, then you are also exempt from having to file Form 8938 as well.
  4. Do your taxes online with software.  If you use commercial tax prep software like Turbo Tax, then the software will fill it out for you, after you answer questions and supply data from several of your tax documents and other financial documents.  The manner in which tax software asks questions takes the sting out of answering, since it’s so much more user-friendly than the scary-looking form itself.
  5. Keep it in a US bank.  If you keep your foreign money in a US domestic financial institution, or a foreign branch of a US financial institution then you won’t have to include it on Form 8938.

 

 

 

IRS W-9

Tax Form Filling

If you are an independent contractor, you’ll be asked to fill out an IRS Form W-9 whenever you start a new job.  This is so your employer officially gets your name, address, and taxpayer ID number for tax-filing purposes.  Usually for an individual the taxpayer ID is the Social Security number.  For your business, it may be the taxpayer ID number, Employer ID number if it’s a corporation, or your Social Security number if you operate your business as a sole proprietor.

If you only expect to be making less than $600 for your employer for the year, they won’t be requires to issue you a 1099 .  Therefore, you shouldn’t need to fill out the IRS Form W-9.  If you are handed a W-9 form in this situation, ask the employer what tax forms you’ll be getting.  The only authentic reason for requesting a Taxpayer ID is for submitting IRS forms.  If they don’t have a good answer then your suspicions should be raised.

IRS W-9 vs W-2

If your business is hired to provide services, then the W-9 is used.  If you as an individual are hired to perform services for a company or person, same thing.  They will issue you a 1099-MISC if you are paid more than $600 during the year.  The W-9 form is not used, however, when you are hired as a regular employee at a place of business.  In that case, the W-2 form is used since you will be a regular, permanent employee.

The main difference is that with the W9-form, the information taken is not used to take out withholding from your paycheck.  On the other hand a regular employee filling out a W-2 form will most likely have withholding on their paycheck.

The IRS W-9 Form Contains Sensitive Personal Data

Since the IRS W-9 asks for sensitive personal data, make sure you’re filling it out under the correct circumstances.  Do you know why you’re filling it out and for whom?  Did your known employer hand you the form or did you get a W-9 in the mail and asked to mail it somewhere you don’t recognize?  Here’s what IRS Form W-9 asks for:

  1. Your complete name
  2. Your complete address
  3. Your Social Security Number
  4. Your business type (sole proprietor, corporation, etc)
  5. Your signature

Since the info is personal, don’t send your IRS W-9 as an attachment in an email.  In fact don’t send any sensitive information in an email attachment because this not a secure way to send information.  Hand delivery is the best, or use snail mail.

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IRS Form 4506

Tax forms

Need a copy of an old tax return from the IRS?  Use IRS Form 4506 to request a copy of your tax returns back as far as the IRS has them for you.  Submit the form and they’ll go digging around in their archives for you to produce a complete copy of your old tax returns dating as far back as possible.  As you can imagine, this takes a little effort…things weren’t always digitized!   That’s why there’s a charge involved: $50 per copy.

You can request as many as you like…the form itself holds lines for eight years.  If you want copies of your tax returns for more than eight years, simply fill out another copy of IRS Form 4506.

Now, make sure that a complete copy is what you actually need.  IRS Form 4506 is for when you need everything…attachments like W2s, 1099s, etc.  Sometimes, depending on the situation, you don’t need the whole thing.  Sometimes all you need is a Tax Transcript.  This shows just the important parts like line totals, AGI, and tax paid.  Usually that’s what lenders want to see.  In that case, you’d use a different tax form: IRS Form 4506-T.  That one is free, so find out what you need and don’t pay $50 unless you really have to.

Here’s a direct link to the official IRS Form 4506 on the IRS website.  Directions are included on the second page but it’s really quite simple to fill out.

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IRS Form 8606

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When you save for retirement, you have a lot of choices- most people choose some form of an IRA.  That’s Individual Retirement Account, which is usually a combination of stocks and bonds.  There are tax incentives for contributing to IRAs, most of which are tax deductions.  Sometimes, however, a contribution to your IRA is not tax deductible so we have IRS Form 8606 to report that.  Here’s how it works.

What Makes an IRA Nondeductible

Traditional IRAs are retirement savings vehicles that allow the investor to contribute up to a certain amount of money each year.  Those contributions are tax-deductible…up to that limit.  Currently the limit is $5500.

If you contribute more than $5500 to your Traditional IRA, you will have to tell the IRS about it using IRS Form 8606.

Roth IRAs are similar to Traditional IRAs but the tax savings come at the other end of the time line.  Instead of deducting your contributions, you get to withdraw the money tax-free.  So, you pay taxes on the income that goes towards your Roth IRA contribution but you get to avoid paying income tax on the money when you withdraw the money in retirement.

If you contribute more than $5500 to your Roth IRA, you will have to tell the IRS about it using IRS Form 8606.

Likewise, if you do make these “nondeductible” contributions to your traditional IRA, you’ll have to pay income tax on that amount when you take it as a distribution.  Once you’re over the limit of IRA contributions for a particular year, there’s no tax savings at either end.

Conversions to Roth IRAs.  You can take your Traditional IRA, the one whose contributions were tax-deductible, and decide later that you wish you’d started a Roth instead of a Traditional.  Well that’s possible and it’s called a conversion.  Once you’ve turned your IRA into a Roth, you’ll get to take distributions (in retirement of course) as tax-free income.  But the IRS doesn’t let you get away with paying absolutely no tax at all.  You would use IRS Form 8606 to report the conversion.  The form will also calculate how much in taxes you’ll be paying upon the conversion.

IRS Form 8606 is quite simple: you merely report how much you paid in nondeductible contributions or in conversions, enter a few calculations and you’re done.  Take a look here for more info.

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IRS Form 6251

Successful accountant

If you claim a lot of deductions on your federal tax form, and if you make a pretty good income then there’s a chance that you may have to pay the Alternative Minimum Tax.  IRS Form 6251 is used to calculate this, and should be attached to your 1040 when you submit your taxes to the IRS before April 15.

Who Has to Pay the AMT?

Let’s start with who doesn’t have to pay the AMT.  If your AGI (Adjusted Gross Income) is less than $51,900 then you are exempt from the Alternative Minimum Tax.  That’s for an individual, for tax year 2013.  For married filing jointly the exemption amount is $80,800 and the AMT exemption amount for married filing separately is $40,400.

Each year the AMT exemption amount goes up slightly.  As with most IRS figures involving income, this is to keep up with inflation.

Now, for  list of things that will cause you to have to pay the AMT…

  1. If you claim any general business credit on your 1040 then you must pay the AMT.
  2. If you claim the qualified electric vehicle credit you must pay the AMT.
  3. If you claim the credit for prior year minimum tax you must pay the AMT.

There are also more complex ways to qualify for the AMT, which can be discovered only by filling out IRS Form 6251.  The more deductions you claimed on your income tax form, the more likely you are facing paying the AMT.  Itemized deductions are not allowed, either.  Essentially, the AMT is your tax when most deductions are stripped away.   The home mortgage interest deduction is also limited.  This is to ensure that wealthier and savvy taxpayers aren’t deducting away their federal tax responsibilities.

IRS Form 6251 is for individuals to calculate and file the AMT with their regular tax form, the 1040.  Corporations are also subject to the Alternative Minimum Tax but use a different form: IRS Form 4626.

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IRS Form 8332

Family

IRS Form 8332 is a form used for parents who share custody of a child.  The IRS gives tax breaks to parents, and other people who have dependents.  However, when the parents split then only one of them can claim a child (or children) on their federal tax form as a dependent.  This automatically goes to the custodial parent.

Use IRS Form 8332 to Change Who Gets to Claim a Child as a Dependent

If the two parents decide between them, they can reverse that automatic assignment of custodial parent claiming the child as a dependent.  They would use IRS Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent.  

Claiming a child as a dependent means you get an exemption and therefore your taxes will be lower.  To claim the child, that child must have lived with the person claiming him/her for ta least half the year.  When parents are separated or divorced and live apart, the custodial parent is the one with whom the child lived for the greater amount of time.

If the parents decide that they want the other parent to claim the child as a dependent, and this is usually done for financial reasons, all they have to do is fill out IRS Form 8332.  In this situation, the custodial parent is filing IRS Form 8332 as a Release of Claim to Exemption for Child by Custodial Parent.  Only the custodial parent must sign.  The non-custodial parent must attach the form to his or her 1040 form when income taxes are filed.

Using IRS Form 8332 to Take Back The Release of Claim

If the custodial parent changes his or her mind and would like to begin claiming the child as a dependent, then he or she would fill out the same IRS Form 8332, only this time it’s a Revocation of Release of Claim to Exemption for Child by Custodial Parent.  In this case, Part III is filled out.

For IRS Form 8332 and its attached instructions, go here to the IRS website.  You can download the PDF and mail it to the IRS.

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IRS Form 4868

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IRS Form 4868 is the Application for Automatic Extension of Time to File U.S. Individual Income Tax Return.  Use this short and simple form to get an extra six months to file your taxes with the IRS.  You can download it from the IRS website here, then fill it out and mail it to them.

File IRS Form 4868 Electronically

If you use commercial software to file your income taxes, go ahead and buy it as soon you decide you want to file IRS Form 4868.  Begin the program…register, give your basic identifying information, and soon after those steps you’ll be asked whether you want to file for an automatic six-month extension.  The software will connect with the IRS system electronically and submit IRS Form 4868 for you.  No need to download, print and mail the form yourself.

File IRS Form 4868 to Get More Time, But You Still Have to Pay on Time

If you will end up owing taxes to the IRS rather than getting a refund, you still must pay taxes by April 15.  What you do is you estimate how much you’ll owe, and pay the IRS by April 15.  Then later when you finally do calculate your taxes and submit your 1040 or whatever form you use, you make adjustments.  If you estimated too high, you’ll get it back.  If you estimated too low, you’ll just pay some more when you file.

You can make your estimated tax payment with a credit or debit card.  Alternatively you can use the IRS’s electronic payment system to have the money taken directly out of your bank account.  This systems is called EFTPS (Electronic Federal Tax Payment System).  You can register online, but make sure you start that registration process well ahead of time since it takes a while to set it up.

How to Get an IRS Extension Without Filing IRS Form 4868

If you use EFTPS to pay your estimated tax on IRS Form 4868, you can skip filing the paper Form 4868.  A six-month extension will be automatically filed for you when you make the tax payment through EFTPS.  For more on this, see the instructions for IRS Form 4868, which are attached to the form itself.

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IRS Form 1120

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Filing an income tax return for your corporation is required every year by March 15.  IRS Form 1120 is the U.S. Corporation Income Tax Return.  If you’re new to the world of corporations and taxes, you may want to have an accountant file IRS Form 1120 for you the first year.  There are complex details of business tax accounting which, unless you’re trained, you’ll have a hard time understanding the first time around.

IRS Form 1120: The Basics

Probably the most important thing you need to know in order to fill out IRS Form 1120 is how much you’ll be paying the officer(s).  Since this depends on how profitable the business was, there’s quite a bit of accounting to be done before IRS Form 1120 can be filled out.  Hopefully any corporation is keeping good records so it’s just a matter of pulling reports.

The aim of any good accountant you’re paying is to make sure your business doesn’t pay too much in taxes.  He or she will show you ways to reduce your tax burden, like some of the following activities:

  1. charitable contributions
  2. business use of vehicle
  3. employer contributions to employee retirement funds
  4. foreign tax credit
  5. other business tax credits*

Then, after your accountant has showed you all the ways in which you can save money, and how to fill out IRS Form 1120, you can try it yourself the following year.  Between the accountant’s prior year form, and the help of tax software like TurboTax, you have a chance at saving some money by filling out IRS Form 1120 yourself.

*Business Tax Credits on IRS Form 1120

Here are some of the business tax credits you may not know about.  You may be able to claim some of them.

  1. Work Opportunity Credit.  Use IRS Form 5884, Work Opportunity Credit, for businesses that hire workers who have problems getting jobs.  This would include veterans, a member of a family who has been receiving Temporary Assistance for Needy Families for a long time, a food stamp recipient, someone who lives in a Rural Renewal County or an Empowerment Zone, and ex-felon, a Social Security recipient, or a summer youth employee.  Just for hiring these less-desirable employees, your business can get a tax credit on their wages.
  2. The General Business Credit.  This can be used to carry back or carry forward any unused credit.
  3. Low-Income Housing Credit.  If your business operates low-income housing then there’s a tax credit.
  4. Disables Access Credit.  The amount your business spends on making your place of business accessible to the disabled will figure into a tax credit.  Generally it’s about half, with maximum of $10,000.

These are only some of the credits you can claim on IRS Form 1120.  The see the entire list of Business Tax Credits, go to the IRS website’s page for that.

To see IRS Form 1120 go here.  For the instructions, go here.

The best way to file Form 1120 is through an accountant.  If you’re on a budget, then Commercial tax software will substitute very nicely.

A Useful Tool for Saving Money While in School

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The IRS loves it when taxpayers go to college.  There are several ways to save on your federal tax bill when you pay for tuition for you or your dependents or spouse.  The most popular tax savings are always in the form of tax credits.  The American Opportunity Tax Credit and the Lifetime Learning Tax Credit are top of the list simply because they are credits.  But they have rules, limitations and qualification standards that not everyone can meet.  That’s where IRS Form 8917 Tuition & Fees Deduction comes in.

The Tuition and Fees Tax Deduction

You can deduct the amount you paid for tuition and qualified expenses.  You must have paid these bills during the tax year.  If you make too much money this deduction is not for you…$80,000 MAGI is the cutoff limit.  And, there’s no double dipping…if you claim the deduction on IRS Form 8917 the you cannot also claim the other Eduction Credits mentioned above for the same expenses.

Qualified Education Expenses

Tuition definitely counts, and so do fees that are absolutely necessary for enrollment.  Money you pay for required books is also tax deductible.  If the student is required to purchase equipment then that’s covered on IRS Form 8917 as well.  The only hitch with the required books, supplies and equipment is that they are only tax deductible if the college or university made the student purchase them through the school.

Athletic fees are deductible only if they are required by the college.  Same goes for student activity fees.

Of course personal expenses are not tax deductible.

If you pre-paid tuition at the end of the calendar year for the first semester or trimester of the following year, that tuition money paid can count for the competed year because it was paid during the tax year, even though the actual courses took place the following year.  In other words, it matters when the tuition was paid, not when the class took place.