Identify what you found interesting about the articles/notes given below and give an example of how you would apply what you leaned to a new client you just acquired that is opening a new business and wants to know which type of business to open. Consider any new changes passed within the most recent tax reform, the Tax Cuts and Jobs Act (TCJA), beginning in 2018, which adds a newly qualified business income deduction (section 199A) for pass-through entities. Be sure to support your comments with information you find in the library or the IRS code.

Overview

Welcome to Federal taxesand your new business. We'll providea basic summaryof what you need to knowabout successfullyoperating your businessand provide youwith some of the resourcesfor additionalinformation.

Specifically,we'll explain the purposeof the employer identificationnumber,describe basic recordkeepingrequirementsfor tax purposes,define basic bookkeepingand accounting methods,explain the forms ofbusiness organizations,and finally,suggest how to selectthe paid taxpreparer.

Before we begin, however,we want to remind youthat you need to also understandyour stateand local tax reportingrequirementsin additionto the federalrequirementswe will be describinghere.

Employer Identification Number (EIN)

Let's start first with the Federal EmployerIdentification Number or EIN.

An EIN identifies tax returns filed with the IRSand, as a business owner, you may be required to get an EIN.

You will need an EIN if you pay wages,have a self-employed retirement plan,operate your business as a partnership or corporation,or if you're required to file any of these tax-returns:employment,excise,fiduciary,or alcohol, tobacco, and firearms.

Your type of business may not be required to attain an EIN,but you may need an EIN for dealing with other businesses,including banks,that require an EIN to set up business accounts.

The IRS will give you an EINeven if you don't need it for IRS purposes.

The fastest and easiest way to get an EIN is online.

Just go to www.irs.govand type in the keyword EIN.

From there you'll find out more informationincluding the application.

The EIN assignedis the permanent Federal Employer Identification Numberfor your business.

This EIN may be cancelledif the nameor social security numberof the principal officerdo not match the social security administration recordsor if your business already has an EIN.

Recordkeeping

Now, let's discuss recordkeeping for your business.

As a business owner you must keep receipts, sales slips,invoices, records for cash receipts, and expenditures,bank deposit slips, canceled checks, and other documentsto substantiate items of income, deductions, and credits.

Although it may sound like a lot of work,unless you have records showing the source of your receipts,you may not be able to prove that some are non-businessor non-taxable.

Remember, recording these items will help you pay only the tax you owe.

Now, let's look at how in-depth your records need to beand how long you need to keep them.

Your records must support the claimed amount,the time and the place,the business purpose,and your business relationship to any other person involved.

If your records are incomplete,they may not support your deductions.

You must keep your recordsif their contents may be material in theadministration of any Internal Revenue Service law.

Usually the statute of limitations for an income tax returnexpires 3 years after the return is due or filedor 2 years from the date the tax is paid,whichever is later.

To support items of income or deduction on your tax return,you must keep records until the statute of limitationsfor that return expires.

There are special recordkeeping rulesif the records are connected to a property.

Generally, keep these records until the period of limitationexpires for the year in which you dispose of the property.

You must keep these records to figure any depreciation,amortization,or depletion deductionand to figure the gain or loss when you sellor otherwise dispose of the property.

If you received property in a nontaxable exchange,your basis in that property is the same as thebasis of the property you gave up,increased by any money you paid.

You must keep the records on the old property,as well as on the new property, until the period oflimitation expires for the year in which you dispose ofthe new property.

If you have employees,then you must keep employment tax records, too.

You must keep all employment tax records for at least four years after thedate on which the tax return becomes due or the taxes paid,whichever is later.

There are some circumstances where recordsmay have to be kept longer.

If you change your method of accounting,records supporting the necessary adjustmentsmay be material for an indefinite time.

And as discussed earlier, records that established the basis fororiginal or replacement property must also be kept longer.

If you lost your records due to circumstancesbeyond your control such as a flood or an earthquake,you may substantiate a deduction by reasonable reconstruction.

For more information about recordkeeping,see Publication 583,Starting a Business and Keeping Records.

For information about employment tax records,see IRS Publication 15,Employer's Tax Guide.

You can find these publications at www.irs.gov.

You can also go to irs.gov and search usingthe key word "recordkeeping."

Bookkeeping Systems

Many people who operate their own one-person businessnever bother to set up a business bookkeeping system.

Their personal checking account serves as both a personaland a business account.

The IRS, however, recommends that you opena separate business bank account.

There are two types of bookkeeping systems:single entry and double entry.

The single entry system is the simplest to keep:with the single entry system, you record a dailyand a monthly summary of business income,and a monthly summary of business expenses.

This system focuses on the business's profitand loss statement,and not on its balance sheet.

Although a single entry system may not be a comprehensive accounting method, it provides sufficient information on income and expenses for tax purposes. The double entry system is more complex:it has built-in checks and balances,it is self-balancing,and is more accurate than the single-entry system.

Because all businesses consist of an exchangeof one thing for another,double entry bookkeeping is used to show this two-fold effect.

Accounting Methods

Once you've selected a bookkeeping system,you also need you also need to select an accounting method.

Your accounting method is a set of rules that you use to decide when and how you report your income and expenses.

The two most commonly used accounting methods are the cash method and theaccrual method.

On your tax return, you must use thesame accounting method you use to keep your records.

Under the cash method, you report all income in the year you receive it.

You usually deduct expenses only in the taxyear in which you pay them.

Under the accrual method,you report income in the year you earn it,regardless of when you receive payment.

You deduct expenses in the year youincur them whether or not you pay them that year.

Businesses that have inventory for sale to customers mustgenerally use an accrual method for sales and purchases.

However, many small businesses with gross receiptsaveraging less than 10 million dollars a yearmay use a cash method for sales and purchases.

For more informationon the differences between the cashand the accrual methods of accounting,see IRS Publication 538, Accounting Periods and Methods.

There are computer software packages that are very useful,relatively easy to use,and require very little knowledge of bookkeeping and accounting.

Be careful,if you use software, you must be able to produce records fromthe system to support what is on your tax return.

And always keep a backup copy in a safe place.

Types of Business Structures

Now, let's turn our attention tobusiness structures.

Early in the life of your small business, you'llneed to decide on the structure of ownership.

There are five common types ofbusiness organizations.

Sole Proprietorship,Partnership,Corporation,S Corporation,and Limited Liability Company.

Let's look at the advantages and disadvantagesof each.

Sole Proprietorship

A sole proprietorship is the simplest type of businessorganization. It is an unincorporated business that oneperson owns. The business does not exist apart from itsowner and it is the owner who assumes the risks of thebusiness to the extent of all of his or her assets, evenif the owner does not use his or her personal assets inthe business. Additionally the ability to finance thebusiness, known as capital, is limited to whatever theowner can come up with including loans from financialinstitutions of which the owner is personally responsible.

A sole proprietor files his or her taxes using aSchedule C, Net Profit from Business. The Schedule C isincluded with the 1040 to report the profit or loss fromoperating the business. The sole proprietor also filesSchedule SE, Self-Employment Tax to Report the SocialSecurity and Medicare Taxes on net profits of the currentyear's threshold. If you or your spouse jointly own andoperate an unincorporated business in a non-communityproperty state and share in the profits and losses, youare partners in a partnership and not a soleproprietorship. So you should not use a Schedule C butthere are exceptions to this. For example, if you and yourspouse wholly own and operate an unincorporated business ascommunity property under the community property laws of astate, you can treat the business either as a soleproprietorship or a partnership. There's another exceptionfor qualified joint ventures for spouses. If you and yourspouse each materially participate as the only members ofa jointly owned and operated business and you file a jointincome tax return for the tax year, you can make a jointelection to be treated as a qualified joint ventureinstead of a partnership. This allows you to avoid thecomplexity of partnership Form 1065, US Return ofPartnership Income, but still gives each spouse credit forSocial Security earnings on which retirement benefits are based.

Partnership

The second type of business organization is a generalpartnership. A partnership is a relationship between twoor more persons who come together to carry on a trade orbusiness. Each person contributes money, property, labor, orskills, and each expects to share both in the profits orthe losses of the business. Any number of persons may joinin a partnership. The advantages of a partnership are thatit is easy to organize, it has a definite legal status andit may have a greater financial strength than a soleproprietorship. The first disadvantage is that decisionauthority is divided. The other disadvantage to apartnership is that the liability of the partners is usuallyunlimited, unless otherwise stated in the partnershipagreement. That is, each partner may be held liable for allthe debts of the business. For example, if one partnerdoes not exercise good judgment, that partner could causenot only the loss of the partnership's assets, but also theloss of the other partner's personal assets.

Partnerships report profit or losses on Form 1065, US Return ofPartnership Income. Form 1065 summarizes the businessactivity of the partnership. A partnership does not paytax on income from daily operations and all the income, losses,deductions, and credits generated by a partnership passthru to the partners. Each partner gets a Form 1065,Schedule K-1, Partner's Share of Income, Deductions, Credit,etc., and the partners report these items on their personalincome tax returns. Partnerships must still file employmenttax returns and pay employment taxes on employees'compensation. If you would like more information aboutpartnerships see IRS publication 541, Partnerships, as wellas the instructions to Form 1065 and 1040.

Corporation

The third type of business organization is the corporation.

Corporations are treated by the law as legal entities.

That is, the corporation has a life separate from itsowners and has rights and duties of its own. The owners ofa corporation are known as stockholders, or shareholders. Andit may be worth noting, one person can be the soleshareholder of a corporation. Managers of a corporation, mayor may not be shareholders. Forming a corporation involvesthe transfer of money or property or both by theprospective shareholders in exchange for capital stock inthe corporation. For purposes of federal income tax,corporations include associations, joint stock companies,and trusts, as well as partnerships that operate as associationsor corporations. Let's cover advantages and disadvantagesof a corporation. The advantages of a corporation are thatthe stockholders have limited liability for corporatedebts or actions, transfer of ownership is easy, stock canbe sold, and raising capital in expanding the business maybe easier. The disadvantages are that the corporation issubject to tax on its income at the corporate level. Andwhen the income is distributed as dividends, that income istaxed again, at the shareholder level. Owners of acorporation who work in the business are typicallyconsidered employees, are paid a salary, and both thecorporation and the employee pay employment taxes on thatsalary. It is wise to consult an accountant and anattorney specializing in corporate law, as corporations maybe more difficult and expensive to organize than otherbusiness structures. Additionally, the corporate charterfiled with the secretary of your state restrictsthe type of business activities and is subject tomany state and federal controls.

S Corporation

The fourth business structure is the S Corporation.

An S Corporation is a small business corporation,whose shareholders elect to report corporate profits or lossesin the same manner as that of a partnership.

Like partnerships, S corporations do not pay tax.

Unlike S corporations,C corporations are taxed at the corporate level;then, when the income is distributed as dividends,it is taxed again at the shareholder level.

Organizing shareholders of a corporationwho wish to avoid double taxationcan file Form 2553,Election by a Small Business Corporation.

This election must be submitted by the 15th dayof the third month of the first S corporation year.

Let me give an example to help clarify the process.

If your first S corporation tax year begins on January 1st,you must submit Form 2553 by March 15th.

Otherwise, theelection is effective for the next tax year.

The IRS will send you a CP261 notice,Notice of Acceptance as an S Corporation,to let you know it received and approved your election.

You should receive your approval in 60 days.

If you do not, contact the IRS campuswhere you filed your Form 2553.

For more information, see the instructions on Form 2553.

An S corporation does not pay tax on incomefrom daily operations.

All income, losses, deductions, and creditsgenerated by an S corporation pass through to thecorporate shareholders.

The shareholders then report the itemson their personal income tax return.

However, there are situations where an S corporation is subjectto an entity or corporate level tax.

For example, S corporation officer shareholderswho provide services to their corporation,are employees, and their compensationis subject to employment taxes.

By law, officers of corporationsare employees for employment tax purposes,and their compensation is wages.

An S corporation must pay reasonable compensationor wages to a shareholder employeein return for the services the employee provides thecorporation before a non-wage distribution may be made tothat shareholder employee.

In other words, they must be compensated first;then they get the distribution.

An S corporation has the combined advantages and disadvantagesof partnerships and regular corporations.

S corporations file Form 1120-S,US Income Tax Return for an S Corporation.

The S corporation provides each shareholder a Form 1120-SSchedule K-1, Shareholder's Share of Income Deductions,Credits, etc.

The shareholder uses Schedule K-1 to finishPart 2 on Form 1040, Schedule E, SupplementalIncome and Loss, as well as any other forms and schedulesthe shareholder must file with the individual return.

Limited Liability Company

The final structure we will discuss is limited liabilitycompany, LLC, a legal entity created under state law. TheLLC is separate from its owners, who are referred to asmembers. An LLC can own property, incurs debts, and enterinto contracts. LLC's are popular because owners (members)

are personally protected against the LLC debts, havelimited personal liability for the debts and actions ofthe LLC, and without many of the formalities ofcorporation. Other features of LLC's are more likepartnerships, providing management flexibility and thebenefit of flow through taxation. For federal income taxpurposes, an LLC may be treated as a sole proprietorship, apartnership, or a corporation. Also for federal tax purposes,owners or members of an LLC can make an election to betreated either as a disregarded entity, or a partnership.

If you want to tell the IRS how to treat your business forfederal income tax purposes, you need to file Form 8832,Entity Classification Election. If you do not file Form8832 for tax purposes, the IRS will treat your business asa sole proprietorship, if it has a single owner, or as apartnership, if it has two or more members. Note that eventhough the LLC is treated as a sole proprietorship for taxpurposes by the IRS, the single-member owner of the LLCgenerally maintains limited personal liability protectionfrom the debts and actions of the LLC, unlike an actualsole proprietorship where the owner would be equallyliable for the debts and actions of the soleproprietorship. There are instructions with the form thatexplain the classifications. If you disagree with thedefault classification, you can file Form 8832 to requesta change.

Sharing or Gig Economy

If you earn incomeas a rideshare driver,rental host,or online seller,your business is part of the gig economy.

The gig economy, also called sharing economy,or access economy,is any activity where people earn incomeproviding on-demand work,services, or goods.

Often, it's through a digital platformlike an app or website.

Visit the irs.govGig Economy Tax Center,where you will find general information abouttax issues that arise in the gig economyand how to file your taxes.

Choosing a paid preparer

Now for the last topic for this lesson: choosing a paidpreparer. If you do decide to use a paid preparer,remember, you are still legally responsible for theinformation on your own tax returns. Let's review somepoints you need to be aware of. First, avoid preparers whoclaim they can obtain larger refunds than others. Second,avoid preparers who base their fees on the amount of yourrefund. Also, avoid paid preparers who won't sign the taxreturn or won't give you a copy for your records. Fourth,never sign a blank tax return and never sign a completedform without reviewing it and making sure you understandthe return. Finally, consider whether the preparer willstill be available to answer questions about the returnfor months or even years after the return is filed. Youcan find more tips on irs.gov. Simply type choosing apreparer in the search box. The IRS now has a registrationand certification process for preparers. To ensure that youare working with an honest and reputable preparer, makesure that the preparer has a valid preparer taxidentification number, also known as a PTIN. All preparerswhatever their professional designation must have a validPTIN. There are variations, however, in the type of returnpreparer, the testing they must undergo, their continuingeducation requirements and their practice rights beforethe IRS. For purposes of this video lesson, we'll befocusing on three types of preparers: enrolled agents, CPAs,and attorneys. An enrolled agent is a person who hasearned the privilege of representing taxpayers before theIRS. Most enrolled agents have passed a three-partcomprehensive IRS test covering individual and businesstax returns and client representation rules. They mustadhere to ethical standards and complete 72 hours ofcontinuing education courses over three years. Enrolledagents have unlimited practice rights, which means theyare unrestricted as to which taxpayer they can represent,what types of tax matters they can handle, and which IRSoffices they can represent clients before. To learn moreabout enrolled agents, see Treasury Department Circular 230or visit irs.gov. Type enrolled agent in the search box.

Some individuals become enrolled agents through experienceas a former IRS employee instead of passing the three-parttest. These individuals may be limited in their practicerights to only the matters they have expertise in as aformer employee. Both Certified Public Accountants alsoknown as CPAs and attorneys have their own professionalrequirements for continuing education. Both groups haveunlimited practice rights before the IRS.