business corporation (S corporation). The difference between the C and S corporations is the way in which income of the business is taxed to the owner (which is explained in detail in Part 1). There is another form of business organization called a limited liability company (LLC). Limited liability companies with 2 or more owners generally are taxed like partnerships even though their owners enjoy protection from personal liability. The important thing to note is that each form of business organization will affect what deductions can be claimed and where to claim them. Part 1 also explains tax years and accounting methods that businesses can select.
Part 1 contains another topic of general interest to all businesses. It covers important recordkeeping requirements and suggestions to help you audit-proof your return to the extent possible and protect your deductions and tax credits. In the course of business you may incur certain expenses, but unless you have specific proof of those expenses, you may not be able to claim a deduction or credit. Learn how to keep the necessary records to back up your write-offs in the event your return is questioned by the IRS.
Part 2 details how to report various types of income your business may receive. In addition to fees and sales receipts – the bread-and-butter of your business – you may receive other types of ordinary income such as interest income, royalties, and rents. You may have capital gain transactions as well as sales of business assets. But you may also have losses – from operations or the sale of assets. Special rules govern the tax treatment of these losses. The first part of each chapter discusses the types of income to report and special rules that affect them. Then scan the second part of each chapter, which explains where on the tax return to report the income or claim the loss.
Part 3 focuses on specific deductions and tax credits. It provides you with guidance on the various types of deductions you can use to reduce your business income. Each type of deduction is explained in detail. Related tax credits are also explained in each deduction chapter. In the first part of each chapter, you will learn what the deduction is all about and any dollar limits or other special requirements that may apply. As with the income chapters, the second part of each deduction chapter explains where on the tax return you can claim the write-off. The answer depends on your form of business organization. You simply look for your form of business organization to learn where on the return to claim the deduction. The portion of the appropriate tax form or schedule is highlighted in certain instances. As a practical matter, returns prepared on a computer automatically populate the appropriate form or schedule, but it's helpful to see where your write-offs end up on the return. For your convenience, key tax forms for claiming these deductions have been included. While the forms and schedules are designed for the 2017 returns, they serve as an example for future years. Also, in Chapter 22, Miscellaneous Business Deductions, you will find checklists that serve as handy reference guides on all business deductions. The checklists are organized according to your status: self-employed, employee, or small corporation. You will also find a checklist of deductions that have not been allowed.
Part 4 contains planning ideas for your business. You will learn about strategies for deferring income, boosting deductions, starting up or winding down a business, running a sideline business, running multiple businesses, and avoiding audits. It also highlights the most common mistakes that business owners make in their returns. This information will help you avoid making the same mistakes and losing out on tax-saving opportunities. You will also find helpful information about electronic filing of business tax forms and how to use the Internet for tax assistance and planning purposes. And you will find information about other taxes on your business, including state income taxes, employment taxes, sales and use taxes, and excise taxes. Finally, you will see how to work with a tax professional and what to do if you are audited.
In Appendix A, you will see a listing of information returns you may be required to file with the IRS or other government agencies in conjunction with your tax obligations. These returns enable the federal government to crosscheck tax reporting and other financial information. Appendix B covers tax penalties that can apply if you fail to do something you were supposed to do, or if you do it wrong or do it late. Appendix C contains a checklist of tax-related corporate resolutions to help you keep your corporate minutes book up to date. Appendix D is a list of dollar limits and amounts in certain tax rules that are adjusted annually for inflation to help you plan ahead.
Several forms and schedules as well as excerpts from them have been included throughout the book to illustrate reporting rules. These forms are not to be used to file your return. (In many cases, the appropriate forms were not available when this book was published, and older or draft versions of the forms were included.) You can obtain the forms you need from the IRS's website at www.irs.gov or where otherwise indicated.
Another way to stay abreast of tax and other small business developments that can affect your business throughout the year is by subscribing to Barbara Weltman's Big Ideas for Small Business®, a free online newsletter geared for small business owners and their professional advisers, and my “Idea of the Day®” (via e-mail) at www.barbaraweltman.com. The Supplement to this book, which covers developments after September 1, 2017, can be found at www.jklasser.com and my website www.barbaraweltman.com. For those who want to learn about tax responsibilities in starting up and running a business, check out my online courses listed on my website.
This book has been in print for nearly 25 years and has tracked dramatic changes in tax law and business operations. For those who are using it for the first time, the book is a resource guide for handling taxes effectively as well as for making financial decisions and using business practices to increase your bottom line. For those who are perennial readers, you will see that while much in the book is unchanged, it has been updated and expanded to reflect new tax rules and additional comments on tax strategies and business practices. For tax practitioners, I recognize that there are no citations, and that there are some issues that are unsettled. I invite your comments on any areas in which you disagree with my presentation and for ways to make improvements in future editions (send comments to [email protected]).
I would like to thank Sidney Kess, Esq. and CPA, for his valuable suggestions in the preparation of the original tax deduction book and Elliott Eiss, Esq., for his expertise and constant assistance with this and other projects.
Introduction
Small businesses are vital to the U.S. economy. They employ nearly half of the country's private sector workforce and contribute more than half of the nation's gross national product. Small businesses created 64 % of all new jobs over the past 15 years.
For the 2015 tax year (the most recent year for statistics), there were more than 24.7 million sole proprietorships in the United States. About one out of every 6 Form 1040 filers had a sole proprietorship that year. Another 7.8 million filers reported income from partnerships and S corporations. And the numbers of small businesses are growing.
Small businesses fall under the purview of the Internal Revenue Service's (IRS) Small Business and Self-Employed Division (SB/SE). This division services approximately 57 million tax filers, including 9 million small businesses (partnerships and corporations with assets of $10 million or less), more than 41 million of whom are full-time or partially self-employed, and about 7 million filers of employment, excise, and certain other returns. The SB/SE division accounts for about 40 % of the total federal tax revenues collected. The goal of this IRS division is customer assistance to help small businesses comply with the tax laws.
Toward this end, the Small Business Administration (SBA) has teamed up with the IRS to provide small business owners with help on tax issues. The SBA provides tax information for start-ups at www.sba.gov; search “taxes.”
There
