I know as a Newport Beach Tax Attorney, right now, tax returns are probably the furthest thing from your mind…

With all the celebrating and gift giving, the last thing you want to think about is filing your taxes.

Unfortunately, we all know that once January 2nd rolls around, tax season for small business owners will be here before we can finish the chorus of “Auld Lang Sein”…

And if you have any tax questions, now is the time to ask them – before the insanity of tax season officially begins and it’s easier to get an audience with Queen Elizabeth than to get your accountant on the phone.

In an effort to get you thinking about what you need to pull together for your taxes, here is a list of some of the top questions the IRS receives from small business owners.

You may have some of the same concerns:

1.        If a married couple owns a business together, can the business be classified as a sole proprietorship or does it have to be a partnership?

In order to be a sole proprietorship, the business would have to be owned by either the husband or the wife, but not both.  The other spouse would work for the business as an employee.

However, if the couple files a joint tax return, they can elect to conduct the business as a joint venture.  In order to qualify as a joint venture, they both have to participate materially in the venture and they must divide the items of income, gain, loss, deduction, credit and expenses according to each of their interests in the joint venture.

2.         What’s the difference between a W-2 and a Form 1099-MISC?

Both of these forms are information returns.  W-2’s are used by employers to report         wages, tips, and other compensation paid to the employee as well as any deductions for Social Security.  A Form 1099-MISC is used to report payments made in the course of a trade or business to another person or business that is not an employee.  This form is provided both to the person paid and to the IRS.

3.         How do I know if a person is an employee or an independent contractor?

This is a tricky question, but ultimately it’s based on who has the right to control how, when, and where the person performs the services they’re paid for.  It has nothing to do with how the person is paid, how often the person is paid, or whether they work full or part-time.  The three things to consider when making this determination are: behavioral control, financial control, and the relationship between the parties.

4.         Does my corporation or partnership have to file a tax return if we had no income for the year?

A domestic partnership has to file an income tax return unless it neither receives gross income or pays or incurs any amount treated as a deduction or credit for federal tax purposes.

A domestic corporation has to file an income tax return regardless of whether it received taxable income or not.

5.         Am I liable if my employees receive tips and don’t report them to me?

As an employer, you have a liability to withhold and pay Social Security and Medicare tax on your employees’ reported tips to the extent that wages or other employee funds are available.

Employees who receive tips as part of their compensation are required to report their cash tips to their employers at least monthly if they receive $20 or more in the month.  If the employee does not report the tips to you, it places you at risk of possible assessment of the employer’s share of the Social Security and Medicare taxes on the unreported tips.

If your business is a large restaurant or beverage establishment (i.e., you have more than 10 employees on a typical day and food and beverages are consumed on your premises), you are required to allocate tips if the total tips reported to you are less than 8% of gross sales.  Report the allocated amount on the employee’s W-2 at the end of the year.

6.         I have a small company, do I need a tax ID number?

If you are a sole proprietor, don’t have any employees and you don’t file any excise or pension tax returns, you don’t need a tax ID number.  You can use your social security number.  However, if you are not a sole proprietor and you do have employees, you need to have a tax ID number.  It’s easy to obtain and you can do it all online.

7.         If I pay personal expenses out of my business bank account, do I count the money as part of my income or can I write off these expenses?

Include the money in your income.  You would not write off these amounts as expenses.  Only those expenses directly related to your business can be deducted from your income as business expenses.  The IRS recommends against mixing business and personal accounts as it makes it much easier to keep good, clean records.

8.         Are there limits on what I can deduct for meals while traveling on business?

Meal expenses are only deductible if your trip is overnight or long enough that you need to stop for sleep or rest to properly perform your duties.  Instead of keeping records, you can use a standard meal allowance.  The amount allowed varies according to where and when you travel.  The deduction for unreimbursed business meals is limited to 50% of the cost that would otherwise be deductible.

We hope this list has made you think about any possible questions you have for your tax professional.  Now is the time to ask, before the tax season insanity begins.  Knowing the answers to your questions ahead of time will make it much easier to pull the proper information together and make filing your tax returns easier for everyone involved.

If you’re an independent entrepreneur or you’re considering taking the leap to business ownership, call me, your neighborhood Newport Beach tax attorney today to schedule your comprehensive LIFT™ (legal, insurance, financial and tax) Foundation Audit.  As your personal legal advisors we will help you make sure you’re on solid footing with your paperwork before it gets to the IRS. Normally, this session is $1250, but if you mention this article and we still have room on our calendar this month, we will waive that fee.