A limited liability company (LLC) is one of the most popular business entity forms. An LLC can elect to be treated as a sole proprietorship, a corporation or an S corporation. These options for a LLC can be confusing. Tax planning rules are often difficult to follow, but proper adherence is required to ensure the best tax situation. Consider sole proprietorships:
Business tax planning can be one of the more challenging aspects to running a sole proprietorship company. Sole proprietors have to report net income or loss from the business on their personal income tax returns. Following are eight important rules that you, as a sole proprietor, should be aware of for tax planning purposes:
1. You can deduct 100% of your health insurance costs as a trade or business expense. Your deduction for medical care insurance won't be subject to the limitation on your medical expense deduction, which is based on a percentage of your adjusted gross income in other cases.
2. Your residence can save you money on your tax bill. If you work from a home office or store product samples or inventory at home, you may be entitled to deduct a portion of certain costs related to maintaining your home.
3. Your income won't be subject to withholding tax. However, you will be required to pay estimated taxes quarterly. We can work with you to minimize the amount of your estimated tax payments while avoiding any underpayment penalty.
4. For income tax purposes, you will report your income and expenses on Schedule C of your Form 1040. You will pay taxes on the net income whether or not you withdraw cash from the business. Your business expenses will be deductible against gross income.
5. You will be required to pay self-employment taxes (social security and medicare). The actual amounts are subject to change. Check with your tax preparation professional for current updates.
6. You will have to maintain complete records of your income and expenses in order to take the full amount of your entitled deductions. Certain types of expenses, such as automobile, travel, entertainment, meals, and home office expenses, are subject to special recordkeeping requirements or limitations on their deductibility.
7. If you hire any employees, you will have to withhold and pay over various payroll taxes. Don’t forget this and get stuck with an unexpected tax bill!
8. You should consider establishing a qualified retirement plan. The advantage of a qualified retirement plan is that amounts contributed to the plan are deductible at the time of the contribution, and aren't considered income until the amounts are withdrawn. A tax professional can advise you on the types of plans available.
Are you interested in learning more about tax preparation services? Charles P Myrick CPA is recognized as one of Washington DC’s top accounting firms for small businesses. Contact us for additional information regarding the tax aspects of sole proprietorships, or if you need assistance in satisfying any of the reporting or recordkeeping requirements. (202) 789-8898