TAX TALK

TAX TALK

• Business or Hobby?

• Starting a Business: Which Entity is Right for Me?

• Types of Taxes

• Business Expenses

•Tax Benefits of College Costs

TOPICS FOR TODAY:

BUSINESS OR HOBBY?

• What does Business or Hobby mean? How does it affect my wallet?

• General Rule – Profit 3 out of 5 years.

• A few of the Specific Rules Used in an Audit – • Carried on in business like manner.• Time & Effort Expended• You depend on income from the activity for your livelihood• Your losses are due to circumstances beyond your control• Not all must pertain to you, but you should be able to show you are

trying to make a profit…

• Lesson: BE ORGANIZED

STARTING A BUSINESS• Entity Types:• Sole Proprietorships• LLC• Partnerships (multi-member LLC)• Corporations

• Tax ID Numbers : Do you need one?

• How to Register: • MN Secretary of State - http://www.sos.state.mn.us/index.aspx?page=92• IRS - http://www.irs.gov/• MN Revenue - https://www.mndor.state.mn.us/tp/webreg/mMeHowRF/#1

TYPES OF TAXES Income Taxes

2012 Single Tax Brackets:•10-35% Federal Tax (after personal deductions)

- 10% on first $8,700 of taxable income +- 15% on $8,701-35,350 +- 25% on $35,351-85,650 +

- 28% on $85,651-178,650 +- 33% on $178,651-388,350 +- 35% on $388,351 and over

• 5-7.5% State tax (after personal deductions)

TYPES OF TAXES, cont.

Self Employment Taxes•Being self employed means paying your own Social Security and Medicare Tax. • When you work for someone else, they pay half of this tax*.• When self employed, you pay both halves, so almost twice as much:

13.3%•13.3% is calculated on FULL Business Income (after deductions)•Added to Federal Tax on Annual Tax Return

*Employers are actually paying 2% more than employees currently due to Obama’s Payroll Tax Cut (through 2012)

TYPES OF TAXES, cont.

Estimated Tax Payments (Quarterlies)

• IRS wants tax as you earn it

• You don’t have to file tax returns quarterly, just make payments

• Penalty of approximately 3% on underpayment• No penalty if total due is less than $1,000• No penalty if you pay 100% of previous year’s tax equally over four

quarters• No penalty if you pay 90% of current year tax

• Withholding

TYPES OF TAXES, cont.Sales Tax• Sales Tax should be charged on all sales of tangible products• Currently MN does not tax sales of digital goods

• Rate determined by where the sale takes place• Rates range from 6.875-7.775% (Minneapolis is highest)• Collected from customer and paid to state on Quarterly or Annual Basis through their website • Due date differs from income taxes – Annual due Feb. 5th

• Sales Tax Exemption – need to give vendors Exemption Form• Capital Equipment Refund to request refund of taxes paid

Tax on business income can easily be 45%! (But also means you save up to 45% on any business expenses you are able to deduct)

BUSINESS EXPENSES• IRS Definition: • IRC 2005 Sec 162(a) IN GENERAL. --All the ordinary and necessary expenses paid or incurred in carrying on any trade or business.

• Ordinary Expense - common and accepted in your trade or business.• Necessary Expense - helpful & appropriate for your trade or business.

(There are now over 800 pages to further define that sentence)

BUSINESS EXPENSES, cont.

What do Expenses do for a Business/Person’s Tax?

• Expenses don’t decrease your tax dollar for dollar, instead

• They decrease your Taxable Income:• Federal (anywhere from 10 -35%)• State (5.35 - 7.85%)• Social Security Tax (13.3%)

• Business Deductions are like Discounts.Bigger the Income. Bigger the Discount.

The Expense Part of Schedule C

BUSINESS EXPENSES, cont.

Bartering – is it taxable?

• Bartering for business expenses• Bartering for personal

EDUCATION AND TAXES American Opportunity Credit• Tax credit of up to $2,500 per student• Up to $1,000 can be refunded even if NO tax• For first four years of college

Lifetime Learning Credit• 20% credit on first $10,000 of expenses

Tuition and Fee Deduction• Up to $4,000 deduction

Education as Business Expense• Saves Federal, State and FICA taxes• No income limit, no deduction limit

Questions?E-mail me any time! beth@foxtaxservice.com