Frequently Asked Questions for Individuals, Small Businesses, Self-Employed, Other Businesses.

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Must a partnership or corporation file an information tax return or income tax return even though

the partnership or corporation had no income for the year?

 

 Partnerships and corporations have different tax requirements for filing information returns or tax returns.

Partnership filing requirements:

  • A domestic partnership must file an information return, unless it does not receive gross income, or pays/incurs any amount(funds) treated as a deduction for a credit for federal tax purposes.

  • A foreign partnership must file an information return if :

  1. The partnership has gross income effectively in connection with the conduct of trade business within the U.S.

  2. The partnership has gross income derived from sources in connection with the U.S., or the

  3. Partnership making election, for example amortization organizational expenses. i.e. equipment, property, plant (fixed assets).

Corporation filing requirements:

  • A domestic Corporation and S-Corporations (Sub-Chapter/S-Corp.) must file an income tax return whether it has income or no income unless it’s exempt from filing under IRS sections 501.

  • A foreign corporation must file an income tax return if it:

  1. Engages in trade or business within the U.S. even if the income earned is not effectively connected to conduct with the U.S. during the taxable year.

  2. Has income, gains/losses treated as if effectively connected with conduct or trade or business within the U.S. which is subject to taxation under subtitle A of the IRC relating to taxable income.

What is the difference between W-2 income and 1099 misc. income?

Form W-2, which is called a Wages and Tax Statement. This form is used to report wages, tips, and other compensation which is paid to an employee. It is also used to report an employee’s income and social security taxes withheld and other information (retirement, dues, medical insurance payments). This form is also reported to the IRS and both State and local Revenue entities including the Social Security Administration.

Form 1099 Miscellaneous. This form us used by payers to report payments made to a person/company of a trade or business to whom is not an employee.  This form is also used to report payments of $10.00 or more in gross royalties or $600 or more in rents for other specified purposed. These payments are also reported to the IRS and to the person or business receiving the payment(s).

As a sole proprietor (S-Corp.) can I write off personal expenses paid out my business account?

Can I include the money used for personal expenses as part of my business income?

When it comes to deducting personal expense paid out of the business account, you can only include this in your business income when your business has earned the income. You cannot write these personal expenses off as business expense because they are not considered to be ordinary and necessary cost for carrying on the trade of your business. Personal, living, and family expense are typically not deductible. As a rule of thumb, Keep your business and person accounts separate to make record keeping an easier task.

If I start my business as a sole proprietor can I elect to change my business entity to a corporation, partnership?  

Yes, business entities can be change by filling out for 8832 Entity Classification Election. There are other forms to fill out depending the change in election type. Form 2553 Election by Small Business Corporation to make an election as an S-Corp.

 

What is my filing Status? How do I choose?

Your filing status must be determined before deciding whether you are required to file a tax return. There are five (5) filing statuses.

  • Single

  • Married Filing Joint

  • Married Filing Separately

  • Head of Household

  • Qualifying Widow(er)

Single filing status : You must file single if you are unmarried and you do not qualify for any other filing status.

Married Filing Joint: You can file MFJ if you are married and both you and your spouse agree to file a joint return.

Married Filing Separately : You can file MFS if you are married. This filing status is only good if you want to be personally liable for your tax. Please note no Earned Income Credit is awarded under this filing status and you will have a lower exemption amount.

Head of Household Status: You may choose head of household status if you are unmarried/living apart from your spouse and meet the test for Head of Household status such as income test, you paid more than half the cost  of keeping up your home for the year, and you have a qualifying person living in your home for more than half the year and not paying rent.

 

Who Qualifies as a dependent?

According to IRS Publication 501 there are three (3) types of qualifying persons:

  1. A child – an unmarried son/daughter living with you with was 18 years of age at the end the year who didn’t provide more than half of his own support and does not qualify as anyone else’s qualifying person on someone else’s tax return. Because this person is single, he/she is your qualifying person for filing status Head of Household.

  2. A child/adult – unmarried and under age 25 or older at the end of the year and his/her gross income was less than $5,000. You may claim a child over aged 25 or older IF this child has been medically proven to have a physical/mental disability and not able to provide more than half of their own support.

  3. A Relative can be considered a Qualifying person and can be claimed as a dependent on your tax return if the

 

 

Is there an age limit on claiming my child as a dependent?

To claim your child as your dependent, your child must meet either the qualifying child test or the qualifying relative test:

  • To meet the qualifying child test, your child must be younger than you and either younger than 19 years old or be a "student" younger than 24 years old as of the end of the calendar year.

  • There's no age limit if your child is "permanently and totally disabled" or meets the qualifying relative test.

In addition to meeting the qualifying child or qualifying relative test, you can claim that person as a dependent only if these three tests are met:

  1. Dependent taxpayer test

  2. Citizen or resident test, and

  3. Joint return test