NEW IRS Charitable Contribution Regulations

The U.S. Department of the Treasury and the Internal Revenue Service today issued final regulations that require taxpayers to reduce their charitable contribution deductions by the amount of any state or local tax credits they receive or expect to receive in return.

 

The final regulations are effective on Aug. 12, 2019 and require that a taxpayer making tax-deductible contributions must reduce the federal charitable contribution deduction by the amount of any state or local tax credit that the taxpayer receives or expects to receive in return.

 

The IRS example is if a state grants a 70 percent state tax credit pursuant to a state tax credit program, and an itemizing taxpayer contributes $1,000 pursuant to that program, the taxpayer receives a $700 state tax credit. A taxpayer who itemizes deductions must reduce the $1,000 federal charitable contribution deduction by the $700 state tax credit, leaving a federal charitable contribution deduction of $300.

 

However, the regulations provide exceptions for dollar-for-dollar state tax deductions and for tax credits of no more than 15 percent of the amount transferred. Thus, a taxpayer who makes a $1,000 contribution is not required to reduce the $1,000 federal charitable contribution deduction if the state or local tax credit received or expected to be received is no more than $150.

Posted in Colorado, IRS, Taxes

Members of LLC’s paying themselves through Payroll Risks

Since most people are familiar with being paid wages and receiving a W-2 each year, when forming an LLC, they may still expect to be paid wages.  However, LLC members can take guaranteed payments or distributions.  In fact, there are risks for LLCs whose members wish to run payroll for themselves in an LLC.  These risks, however, do not apply to S Corporations.

 

Treating partners in an LLC as employees can create a number of tax problems.  The IRS has repeatedly opposed treatment that a partner may be both a partner and an employee of the same partnership.

 

In July 1969, the IRS concluded that, for employment tax purposes, a partner may not be both a partner and an employee in the same partnership.

In Rev. Rul. 69-184, the IRS publicly ruled that a partner may be either a partner in a partnership or an employee of a partnership, but not both, for employment tax purposes.

 

In 2012, a district court reviewed a case where taxpayers tried to treat themselves as employees for some, but not all, of the LLC’s earnings by paying themselves wages.  The court, citing Rev. Rul. 69-184, held that the taxpayers should have treated all of the LLC’s income as self-employment income, rather than characterizing some of it as wages. “Because Plaintiffs did not elect the benefits of corporate-style taxation under Treasury Regulation § 301.7701-3(a), they should not have treated themselves as employees,” the court said.

Thus the court held that a partner may not be both a partner and an employee of the same partnership.

 

Besides not following the IRS and court rulings, partners treated as employees run the risk of FICA taxes being over or under paid.

If a partnership decides to treat partners as employees for payroll tax purposes, there is a risk that not all of the partner’s allocable share of partnership income will be reported on Form W-2, because the partnership tax return will not be completed until months after the Form W-2 must be filed with the IRS, and the partnership will not have final numbers to use when it prepares the Form W-2. If a partner is treated as an employee of a partnership and FICA taxes are paid on the partner’s behalf based on the earnings of that partnership, then the partner may overpay employment taxes if the partner’s other self-employment activities have an overall net loss.

 

Employer-paid benefits are also treated differently from a tax standpoint.  Whereas employees can exclude from income certain employer-paid benefits, partners may not exclude those benefits when the partnership pays them. Health, welfare, and fringe benefits paid on behalf of a partner are generally not excluded from the partner’s income as they are for an employee. The value of the benefits are therefore included in the partner’s gross income. A partnership choosing to treat a partner as an employee has to be extra careful to include the amount of employee benefits paid on the partner’s behalf in the partner’s income.

 

It is important to note that S Corporation treatment is different from LLC treatment.  Self-employment tax differs significantly for shareholders of S corporations and partners in partnerships. Generally, as long as an S corporation pays its shareholders reasonable compensation, any S corporation earnings flowing to the shareholders above and beyond that reasonable compensation are not subject to self-employment tax. Conversely, partners in a partnership generally pay self-employment tax on 100% of their earnings flowing from the partnership.

 

Posted in IRS, Taxes

LLC Considerations with Partners

My friend and I want to form an LLC.  Should be both be members/owners, or should one of us be the owner and just pass on 50% of the money to the owner?

Some things to consider as to how you decide are:

-EIN

If your LLC has more than one member, it must obtain its own IRS Employer Identification Number (EIN).  If you form a single member LLC, you could use the social security of the owner (however, we don’t recommend using a social security number for a business).

-Dissolution

If both of you are members/owners of the LLC, then if one decides to leave the business, the LLC will be most likely dissolved. (A new LLC can be formed.)   If the LLC is under one member/owner, if the other individual leaves, then the LLC will stay intact and the member/owner can contract with someone else.

-Payroll/Employee

If the LLC has one owner and gives 50% of the profits to the other individual, there is a chance that the IRS could consider the other individual as an employee and not an independent contractor thereby requiring that the LLC pay the individual through payroll (and force the LLC to pay unemployment taxes, etc.)  In addition, if the IRS considers the individual to be an employee, the LLC could be assessed back taxes, penalties, and interest.  If both of you are set up as members/owners of the LLC, then there is no concern about employees v contractors.

-Taxes

If there is a single member/owner of the LLC, then it’s simple since the IRS will treat the LLC as a sole proprietorship and as such the LLC itself does not pay taxes. All profits and losses of the LLC would be reported on the member/owner personal income tax return on (Schedule C) and file it with his/her 1040 tax return.

If the LLC has multiple members/owners, the IRS will treat the LLC as a partnership.  This could be more expensive for tax preparation.  The LLC wouldn’t pay taxes, but each member/owner would be taxed on their share of the profits via their personal tax returns (attaching Schedule E). The LLC would need to file Form 1065 (as all partnerships do) with the IRS. The LLC would give each member/owner a Schedule K-1, showing each member’s/owner’s share of LLC income, credits and deductions.

 

Posted in IRS, Taxes

How to Form an LLC in Colorado

  1. Choose a Name for Your LLC

 

Under Colorado law, an LLC must contain the words or abbreviation “limited liability company,” “ltd. liability company,” “limited liability co.,” “ltd. liability co.,” “limited,” “l.l.c.,” “llc” or “ltd.,”Limited Liability Company,” “Limited Company,” or the abbreviation “L.L.C.,” “L.C.,” “LLC,” or “LC.” The word “Limited” may be abbreviated as “Ltd.,” and “Company” may be abbreviated as “Co.”

 

Your LLC’s name must be distinguishable from the names of other business entities already on file with the Colorado Secretary of State. Names may be checked for availability by searching the Colorado Secretary of State business name database.

 

An available name may be reserved for 120 days by filing a Statement of Reservation of Name with the Colorado Secretary of State. The form must be filed online at the Secretary of State website with the applicable fee.

 

  1. File Articles of Organization

 

A Colorado LLC is created by filing articles of organization online with the Colorado Secretary of State. You can view and download a sample articles of organization form on the Secretary of State’s website.

 

The articles must include the LLC’s name and address; the name and address of LLC’s registered agent, the name and address of the person forming the LLC whether the LLC will be run by a manager or members, and a few other details.

 

The articles of organization must be filed online with the applicable filing fee.

 

  1. Appoint a Registered Agent

 

Every Colorado LLC must have an agent for service of process in the state. This is an individual or business entity that agrees to accept legal papers on the LLC’s behalf if it is sued. The agent should agree to accept service of process on behalf of the limited liability company prior to designation. The registered agent may be (1) an individual who is a full-time resident of Colorado, (2) a Colorado business entity with its principal place of business in Colorado, or (3) a foreign entity authorized to do business in Colorado and that has a usual place of business in the state.

 

  1. Prepare an Operating Agreement

 

An LLC operating agreement is not required in Colorado, but is highly advisable. For help creating an LLC operating agreement, you can contact us, a lawyer, or find examples online. If an operating agreement is created, it need not be filed with the Articles of Organization.

 

  1. Obtain an EIN

 

EIN: If your LLC has more than one member, it must obtain its own IRS Employer Identification Number (EIN), even if it has no employees. If you form a one-member LLC, you must obtain an EIN for it only if it will have employees or you elect to have it taxed as a corporation instead of a sole proprietorship (disregarded entity). You may obtain an EIN by completing an online application on the IRS website. There is no filing fee.

 

  1. Register with Colorado Department of Revenue.

 

Business Licenses: Depending on its type of business and where it is located, your LLC may need to obtain other local and state business licenses.

 

  1. File Periodic (Annual) Reports

 

Colorado LLCs must file a Periodic Report with the Colorado Secretary of State each year. The report must be filed online at the Secretary of State website. The filing fee is $10. The periodic reports are due during the three month period beginning on the first day of the anniversary month of the month when the LLC was formed. For example, if you formed your SMLLC on June 15, the report would be due each subsequent year between June 1 and August 31. You can also file the report up two months early. You may sign-up for email notification from the Secretary of State to alert you when the Periodic Report is due.

Posted in Colorado

Receipts on Form 1099-K

Business owners may have received IRS Form 1099-Ks from most of the Payment Processors used during 2018. The Form 1099-K reports the gross proceeds received from Payment Processors, over the course of the year, which includes credit card companies, PayPal, Square, and similar organizations.

The Form 1099-K was created as a tool for the IRS to find taxpayers who are earning but not reporting income.  However, there would likely be few circumstances where the amounts reported on 1099-K for any business exactly matches the gross receipts reported on its tax return.

Therefore, the receipt of Form 1099-K likely raises the question of how best to report this information to the IRS on the business tax return. Because gross amounts are reported on this form, they will include all items related to a sale transaction, including sales tax and gratuity, which may not constitute income to the business.

An additional complication to this process involves the reporting requirements themselves: Not every Payment Processor will be required to provide a Form 1099-K. Compliance is only required when the Payment Processor has, for a specific retailer, more than $20,000 in sales and more than 200 transactions. A single transaction of more than $20,000, or more than 200 transactions totaling less than $20,000, may result in the restaurant owner not receiving a Form 1099-K from the Payment Processor in question.

Owners should report gross receipts on their tax return as they have in the past – resisting the urge to match what the Form 1099-K lists as gross receipts.  Credit card gross receipts reported on the Form 1099-K, less taxes and tips and other non-income payments, should equal the credit card gross receipts reported on the tax return.  This, plus any cash sales, should equal the total gross receipts reported on the return.

Owners should also keep accurate records to support the gross receipts included on their annual return.   While the amounts and transaction dates may not tie exactly to the 1099-K, the total should be within reasonable proximity to the total included in the restaurant owner’s books.

Finally, the IRS has indicated they are aware of the special circumstances for businesses, where the amounts reported on the Form 1099-K will include items that do not constitute income to the business. They understand that discrepancies between the tax return and Forms 1099-K are often explainable. However, if there are large discrepancies, the IRS may ask for more information from the taxpayer to support these differences. Therefore, having the information readily on hand to support claimed income will minimize the burden of response, should the business owner receive such a request.

Posted in IRS, Taxes

Auto Expenses

For taxes, you can either use the standard mileage deduction or the actual expenses, but not both methods.  The standard mileage deduction includes depreciation so you can’t claim depreciation as an additional deduction under this method, but you can claim depreciation separately if you decide to track actual expenses (instead of the standard mileage deduction).

Standard Mileage Rate

With the standard mileage rate, you take a mileage deduction for a specified number of cents (determined by the IRS) for every business mile you drive. To figure out the deduction, multiply your business miles by the applicable standard mileage rate.

The standard mileage rate requires you keep track of how many miles you drive for business and the total miles you drive. You also need the date of the trip, your business destination and business purpose.

However, if you use the vehicle solely for business and can prove it, then you’ll just need to keep track of the beginning mileage and ending mileage for the year (since all the miles in between will be business related.)

If you choose the standard mileage rate, you cannot deduct actual car operating expenses. That means you can’t deduct maintenance and repairs, gasoline and its taxes, oil, insurance, vehicle registration fees nor depreciation.

Generally, you’ll be better off using the standard mileage rate if you drive a smaller, old or an inexpensive car, particularly if you drive many business miles.   This is because you get the same fixed deduction rate no matter how much the car is worth. Because the standard mileage rate factors in depreciation, an inexpensive car might benefit more from it than an expensive vehicle

Actual Expenses

Instead of using the standard mileage rate, you can deduct the actual cost of using your car for business, plus depreciation. This requires much more record keeping , but you can potentially get a larger deduction with the actual expense method.  This method requires you keep detailed records of every single expense.  You’ll want to keep careful track of all the costs you incur for your car during the year, including:

  • gas and oil
  • repairs and maintenance
  • depreciation of your original vehicle and improvements
  • car repair tools
  • license fees
  • parking fees for business trips
  • registration fees
  • tires
  • insurance
  • car washing
  • lease payments
  • towing charges
  • auto club dues

The actual expense method will likely provide a larger deduction if you drive a larger more expensive car or an SUV or Minivan. This is especially true if you have a more expensive vehicle or don’t have a lot of business miles per year.

Which Method To Choose

The only way to know for sure which method is best for you is to keep careful track of your costs the first year you use your car for business. This means tracking your mileage and your actual expenses.  If you do this, then at tax time you can compare which method gives you the higher deduction

You can only make this comparison and choose the method to use the first year you use your car for business. After that, you’re ability to choose which method is subject to restrictions.

If you use the standard mileage rate the first year, you can switch to the actual expense method in a later year.  Then, you can switch back and forth between the two methods after that, subject to certain restrictions.

Conversely, if you don’t use the standard mileage rate in the first year, you have to stay with the actual expense method in future years.

Therefore, if you’re not sure about standard mileage rate vs actual vehicle expenses, it’s a good idea to use the standard mileage rate the first year you use the car for business. This leaves all your options open for later years.

 

Posted in Deductions

Trade Names & DBAs

A trade name is a name, other than the true name, of an entity or individual under which the entity or individual is authorized to transact business or conduct activities.  Sometimes a trade name is referred to as a “doing business as” or “DBA” name

A business (other than a nonprofit entity) or an individual transacting business in the state of Colorado under a name other than the person’s true name is required to file a trade name with the Secretary of State’s Office.

A nonprofit entity may, but is not required to, file a statement of trade name for any name other than its true name under which it does business.

A trade name provides notice that you are using that trade name, but does not prevent anyone else from using the same name. It is not required to be distinguishable from any other trade name or any other name that is on record with the Secretary of State. Any trade name may be registered, even if it is similar to or exactly the same as another name that is in the records.  However, name protection exists under common law and federal trademark law.

A trade name for a reporting entity is effective as long as the entity remains in Good Standing.  A trade name for an individual or a non-reporting entity is effective for approximately one year.

Posted in Colorado

2019 Standard Mileage

The Internal Revenue Service has issued the 2019 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

 

Beginning on January 1, 2019, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

 

  • 58 cents per mile driven for business use, up 3.5 cents from the rate for 2018
  • 20 cents per mile driven for medical or moving purposes, up 2 cents from the rate for 2018
  • 14 cents per mile driven in service of charitable organizations

 

Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.

 

It is important to note that under the Tax Cuts and Jobs Act, taxpayers cannot claim a miscellaneous itemized deduction for unreimbursed employee travel expenses.

 

A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for more than four vehicles used simultaneously.

Posted in Deductions

2019 Colorado Minimum Wage

On January 1, 2019, the Colorado minimum wage increased to $11.10 per hour. For tipped employees, the minimum wage will be $8.08. These rates represent increases from the current levels of $10.20 and $7.18 respectively.

 

The new minimum wage is the result of the passage of Amendment 70 by Colorado voters in the November 2016 election. Amendment 70 requires the minimum wage to increase by 90 cents each January 1st until the rate reaches $12.00 on January 1, 2020.

Posted in Colorado

New Tax Law & Family Tax Credits

The Tax Cuts and Jobs Act (TCJA) doubled the maximum Child Tax Credit, boosted income limits to be able to claim the credit, and created a second smaller credit of up to $500 per dependent aimed at taxpayers supporting older children and other relatives who do not qualify for the Child Tax Credit.

 Child Tax Credit

Higher income limits mean more families are now eligible for the Child Tax Credit. The credit begins to phase out at $200,000 of modified adjusted gross income, or $400,000 for married couples filing jointly and increased from $1,000 to $2,000 per qualifying child.  The credit applies if the child is younger than 17 at the end of the tax year, the taxpayer claims the child as a dependent, and the child lives with the taxpayer for more than six months of the year.   Up to $1,400 of the credit can be refundable for each qualifying child. This means an eligible taxpayer may get a refund even if they don’t owe any tax.

 New Credit for Other Dependents

A new tax credit – Credit for Other Dependents — is available for dependents for whom taxpayers cannot claim the Child Tax Credit. These dependents may include dependent children who are age 17 or older at the end of 2018 or parents or other qualifying relatives supported by the taxpayer

 

Posted in IRS