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Tax Basics For Setting Up A Business

Starting a new business can seem overwhelming for new entrepreneurs or even seasoned professionals. The IRS has resources to help new business owners understand the tax responsibilities of running a business.

Here are a few things any entrepreneur needs to do when starting their business.

Choose a business structure:

The form of business determines which income tax return a business needs to file. The most common business structures are:
Sole proprietorship: An unincorporated business owned by an individual. There’s no distinction between the taxpayer and their business.
Partnership: An unincorporated business with ownership shared between two or more members.
Corporation: Also known as a C corporation. It’s a separate entity owned by shareholders.
S Corporation: A corporation that elects to pass corporate income, losses, deductions and credits through to the shareholders.
Limited Liability Company: A business structure allowed by state statute. If a single-member LLC does not elect to be treated as a corporation, the LLC is a “disregarded entity,” and the LLC’s activities should be reflected on its owner’s federal tax return as a sole proprietorship.

Choose a tax year:

A tax year is an annual accounting period for keeping records and reporting income and expenses. A new business owner must choose either:

Calendar year: 12 consecutive months beginning January 1 and ending December 31.
Fiscal year: 12 consecutive months ending on the last day of any month except December.
If an individual files their first tax return using the calendar tax year and later begins business as a sole proprietor, becomes a partner in a partnership, or becomes a shareholder in an S corporation, they must continue to use a calendar tax year unless they get IRS approval to change it or meet one of the exceptions listed in the instructions to Form 1128, Application To Adopt, Change, or Retain a Tax Year.

Apply for an Employer Identification Number:

An EIN is also called a Federal Tax Identification Number. It’s used to identify a business. Most businesses need one of these numbers, but some don’t. For example, a sole proprietor without employees who doesn’t file any excise or pension plan tax returns doesn’t need an EIN. The EIN checklist on IRS.gov can help business owners know if they need an EIN.

It’s important for a business with an EIN to keep the business mailing address, location and responsible party up to date. EIN holders should report changes in the responsible party to the IRS within 60 days.

Have all employees complete these forms:

I-9, Employment Eligibility Verification U.S. Citizenship and Immigration Services
W-4, Employee’s Withholding Allowance Certificate

Pay business taxes:

The form of business determines what taxes should be paid and how to pay them.

Visit the state’s website:

Prospective business owners should visit their state’s website for info about state tax requirements.

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Keeping Vital Records Safe Can Make Disaster Recovery Easier

Natural disasters can strike without warning. Sometimes even the most diligent taxpayers are left without the important personal and financial records they need. People may need documentation for tax purposes, federal or state assistance programs or insurance claims.

Here are some steps that can help them reconstruct their important records.

Tax records:

  • Taxpayers can get free federal tax return transcripts immediately using Get Transcript on IRS.gov.
  • They can also order transcripts by calling 800-908-9946 and following the prompts.
  • People who use a tax professional to file taxes should keep their contact information in a safe place.

Financial statements:

Financial statements from credit card companies or banks are usually available online. People can also contact their bank to get paper copies of statements.

Property records:

  • Homeowners may be able to contact the title company, escrow company or bank that handled the purchase of their home or other property to get documents related to their home.
  • Many property records are available online from tax assessors or other government agencies. Check local government websites for information.
  • Taxpayers who made home improvements can get in touch with the contractors who did the work and ask for statements to verify the work and cost. They can also get written descriptions from friends and relatives who saw the house before and after any improvements.
  • For inherited property, taxpayers can check court records for probate values. If a trust or estate existed, taxpayers can contact the attorney who handled the trust.
  • Insurance companies often keep records related to property maintained in a home. Taxpayers should keep their property insurance contacts handy.
  • Car owners can research the current fair-market value of most vehicles via resources available online and at most libraries. These include Kelley’s Blue Book, the National Automobile Dealers Association and Edmunds.
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Homeowners: Review House-Related Deductions and Programs

The summer months are a popular time to buy or sell a house. New homeowners should put reviewing the tax deductions, programs, and housing allowances they may be eligible for on their move in to-do list.

Deductible house-related expenses:

Most home buyers take out a mortgage loan to buy their home and then make monthly payments to the mortgage holder. This payment may include several costs of owning a home. The costs the homeowner can deduct are:

  • state and local real estate taxes, subject to the $10,000 limit.
  • home mortgage interest, within the allowed limits.

Taxpayers must itemize their deductions to deduct home ownership expenses.

Non-deductible payments and expenses:

Homeowners can’t deduct any of the following items:

  • Insurance including fire and comprehensive coverage and title insurance
  • The amount applied to reduce the principal of the mortgage
  • Wages paid to domestic help
  • Depreciation
  • The cost of utilities, such as gas, electricity or water
  • Most settlement or closing costs
  • Forfeited deposits, down payments or earnest money
  • Internet or Wi-Fi system or service
  • Homeowners’ association fees, condominium association fees or common charges
  • Home repairs

Mortgage interest credit:

The mortgage interest credit helps people with lower income afford home ownership. Those who qualify can claim the credit each year for part of the home mortgage interest paid. A homeowner may be eligible for the credit if they were issued a qualified Mortgage Credit Certificate from their state or local government. An MCC is issued only for a new mortgage for the purchase of a main home.

Homeowners Assistance Fund:

The Homeowners Assistance Fund program provides financial assistance to eligible homeowners for paying certain expenses related to their principal residence to prevent mortgage delinquencies, defaults, foreclosures, loss of utilities or home energy services and also displacements of homeowners experiencing financial hardship after January 21, 2020.

Minister’s or military housing allowance:

Ministers and members of the uniformed services who receive a nontaxable housing allowance can still deduct their real estate taxes and home mortgage interest. They don’t have to reduce their deductions based on the allowance.

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Tax Considerations For People Who Are Separating or Divorcing

When couples separate or divorce, the change in their relationship status affects their tax situation. The IRS considers a couple married for tax filing purposes until they get a final decree of divorce or separate maintenance.

Update tax withholding:

When a taxpayer divorces or separates, they usually need to update their proper tax withholding by filing with their employer a new Form W-4, Employee’s Withholding Certificate. If they receive alimony, they may have to make estimated tax payments.

Tax treatment of alimony and separate maintenance:

  • Amounts paid to a spouse or a former spouse under a divorce decree, a separate maintenance decree or a written separation agreement may be alimony or separate maintenance for federal tax purposes.
  • Certain alimony or separate maintenance payments are deductible by the payer spouse, and the recipient spouse must include it in income.

Rules related to dependent children and support:

Generally, the parent with custody of a child can claim that child on their tax return. If parents split custody fifty-fifty and aren’t filing a joint return, they’ll have to decide which parent claims the child. If the parents can’t agree, taxpayers should refer to the tie-breaker rules in Publication 504, Divorced or Separated Individuals. Child support payments aren’t deductible by the payer and aren’t taxable to the payee.

Not all payments under a divorce or separation instrument – including a divorce decree, a separate maintenance decree or a written separation agreement – are alimony or separate maintenance. Alimony and separate maintenance doesn’t include:

  • Child support
  • Noncash property settlements – whether in a lump-sum or installments
  • Payments that are your spouse’s part of community property income
  • Payments to keep up the payer’s property
  • Use of the payer’s property
  • Voluntary payments

Child support is never deductible and isn’t considered income. Additionally, if a divorce or separation instrument provides for alimony and child support and the payer spouse pays less than the total required, the payments apply to child support first. Only the remaining amount is considered alimony.

Report property transfers, if needed:

Usually, if a taxpayer transfers property to their spouse or former spouse because of a divorce, there’s no recognized gain or loss on the transfer. People may have to report the transaction on a gift tax return.

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Tips To Help Taxpayers Make Sure Their Donations Go To Legitimate Charities

When disaster strikes, Americans can always be counted on to help. That help comes in countless ways, but often the easiest way to help is by donating money to charities.

Sadly, criminals are just as likely to answer the call after a disaster or emergency as the millions of people who open their wallets. Scammers solicit donations to fake charities and can pose as employees of legitimate charities or federal agencies to dupe disaster victims trying to get disaster relief.

Although some legitimate charities do contact people out of the blue, people should always be suspicious of unsolicited contact.

Taxpayers donating money should keep a few things in mind:

  • Use the IRS Tax Exempt Organization Search tool to find or verify qualified charities. Donations to these real charities may be tax deductible.
  • Research a charity before sending a donation to confirm that the charity is real and to know whether the donation is tax deductible.
  • Always get a receipt and keep a record of the donation.
  • Review bank and credit card statements closely to make sure donation amounts are accurate.

Keep scammers’ tricks in mind:

  • Legitimate charities do not ask for gift cards, cash, or wire transfers.
  • Scammers may claim to work for the IRS or another government agency.
  • Thieves may pose as a representative of a legitimate charity to ask for money or private information from well-intentioned taxpayers.
  • Scammers can change their caller ID to make it appear they are a legitimate organization calling from a legitimate phone number.
  • Scammers make vague and sentimental claims but give no specifics about how your donation will be used.
  • Scammers set up bogus websites using names that sound like real charities.
  • Bogus organizations often claim a donation is tax deductible when it’s not.

Disaster victims should know:

Disaster victims can call the IRS disaster assistance line at 866-562-5227. IRS representatives will answer questions about tax relief or disaster-related tax issues.

Donating to a charity is a great way to help others after a disaster or emergency. If taxpayers suspect a scam or fraud, they can report it to The Federal Trade Commission.