Business Tax FAQs
What are the deductibility rules for meals & entertainment?
In order to deduct meals & entertainment expenditures there must be a determination of purpose. Why am I incurring these expenses? The general rule is the expenses must be ordinary, necessary, and directly related to the purpose for which you are wanting a deduction. For example; meals incurred while making a pit stop on the way to a client serves no business purpose and is not deductible, but dining with your client (which usually serves a business purpose) is deductible to your business. You or an employee must be present. If an employee or you is traveling overnight there are additional rules to deduct meals consumed that are not with a client.
Entertainment expenses are an expense commonly used to create “goodwill.” These generally are event expenses, shows, ball games, etc. You do not necessarily need to be present to be able to deduct. The general rule for these expenses is they must not be extravagant or lavish.
The deductibility percentage is limited to 50% of the incurred expenses. There are special rules that can qualify for 100% deductibility. For more information on meals & entertainment please click here.
Should I be a Partnership or S-Corporation
Whether you are starting a business or looking at switching entity formations, you need to consider the advantages and disadvantages for each. There is no one entity that is superior to one another. The purpose of the taxpayer determines the entity structure that is better desired to operate their company from an accounting and tax perspective.
Common Partnership Advantages and Disadvantages
- Flexibility. A partnership can make special allocations or distributions among partners for non-pro-rata shares of income and deductions.
- Simplicity. For tax purposes, a formal partnership agreement is not required. A verbal agreement is generally all that is required to form a partnership. DWD recommends written partnership agreements for clarification on allocations.
- Flow-through income. Income and deductions from a partnership flow through to the partners’ tax returns.
- Liability. A general partner is liable for debts of the partnership, including debts that have been incurred by another person. To avoid this disadvantage usually a state formed Limited Liability Company (LLC) is recommended.
- Self-employment tax. The distributive share of income from a partnership is subject to SE tax for general partners.
- Commitment. Getting out of a partnership may be more complicated than starting one. A partnership agreement can restrict selling or transferring of a partnership interest.
Common S-Corporation Advantages and Disadvantages
- Liability. An S corporation can be set up under state law with the same liability protection as a regular C corporation.
- Self-employment tax. An employee-shareholder is paid as any other employee with taxes withheld from payroll. However, net income passing through from an S corporation is not subject to payroll or self-employment tax.
- Flow-through income. Income and deductions from a partnership flow through to the shareholders’ tax returns.
- Flexibility. S corporation may have only one class of stock. All shareholders must have equal rights to distributions. Special allocations are not allowed.
- Regulations. An S corporation must have an operating agreement. Corporations must hold board meetings, shareholder meetings, and keep corporate minutes. Corporations are subject to federal and state regulations.
- Ownership. Shareholders are limited to individuals, estates, certain trusts, and certain charities. Corporations and certain partnerships are ineligible to own stock.
Additional resources can be found on our blog:
Limit Liability and Cut Taxes with an LLC
Why Use a Partnership Instead of an S-Corp?
Understanding the Benefits of S-Corps
What is a like-kind exchange?
Often in our client’s business, they have the opportunity to sell some of their property to a 3rd party and with highly appreciated fixed assets this could result in large gains and subsequently substantial taxes. Fortunately, congress, as far back as 1921, realized that in order to stimulate growth something needed to be enacted to allow investors to invest their gains to acquire additional investment property. Broadly defined then, it is now known as our §1031, like-kind exchange.
In order to qualify for a §1031 exchange you must meet these conditions:
- You must exchange your property, not sell it, for another one.
- You must hold both the property traded and the property received for business or investment purposes.
- The properties must be of similar nature, character, or class, regardless of quality or grade. For example, improved real estate can be traded for unimproved real estate.
- The properties cannot be certain excluded property, including stocks, bonds, notes, securities, evidences of debt, or partnership interests and the properties must not be held primarily for sale.
Because like-kind exchanges can become complicated there are many additional rules and factors that come into play. Please click here for additional information.
Do I need an employer identification number (EIN)?
DWD recommends that a taxpayer which is formed under any legal formation other than a sole proprietor apply for an employer identification number (EIN). In fact, if you are a trust (except grantor trusts), estate, corporation, or partnership, you are required to have an EIN. Applying for an EIN is free.
In addition to the above requirement, an EIN is required if you answer yes to any of the following questions.
- Do you have employees?
- Do you file any employment, excise, sales, alcohol, tobacco and firearm forms?
- Do you withhold taxes on income, other than wages, paid to a non-resident alien?
- Do you have a Keogh plan?
Are you involved with any of the following types of organizations?
- Trusts, except certain grantor-owned revocable trusts, IRAs, Exempt Organization Business Income Tax Returns
- Real estate mortgage investment conduits
- Non-profit organizations
- Farmers' cooperatives
- Plan administrators
Please click here for more information and how to apply for an EIN.
What transportation expenses are considered deductible?
Deductible transportation costs are those costs, other than commuting costs, of transporting a person from one place to another in pursuit of a trade or business or an income-producing activity while that person is not away from home overnight or for a period requiring sleep or rest.
Examples of deductible transportation costs include the expense incurred in traveling by plane, train, bus and taxi, and the business-related portion of the cost of operating and maintaining an automobile or other operating costs, including parking and tolls.
Instead of actual expenses, a taxpayer can choose to deduct standard mileage for their automobile expenses. Generally, for mileage to be deductible, the transportation must not be commuting mileage. Commuting mileage is defined as the miles from your home to your main place of work. Your deduction is determined by multiplying your business mileage by the standard mileage rate. You must have a mileage log of your qualified business mileage prior to claiming the deduction. The link below has the updated 2017 standard mileage rates.
2017 Standard Mileage Rates