Most new businesses start with no thought about legal structure. In the eyes of the IRS, the default structure is a "sole proprietor," in which your business profits are taxed on your personal tax return. This can serve you well to start, but there are several reasons you may want to consider incorporating as your business grows.
Of course, there are other business structures other than sole proprietorships and corporations. The right structure for your business depends on your unique situation.
Recently the IRS certified 84 organizations as Certified Professional Employer Organizations (CPEO). This is the first group that was approved as part of the CPEO program. But what is a CPEO, and why does it matter?
Certified Professional Employer Organizations typically handle many payroll administration and tax reporting tasks for their business clients. Essentially, they hire the employees of their clients so that they can handle the taxes and payroll for those employees. This is called “co-employment”.
In some cases, there have been abuses by PEOs. Usually this takes the form of the PEO withholding from an employee’s paycheck, but keeping that money for themselves. The IRS created the CPEO program in response to these abuses. In 2014, the IRS started a voluntary certification program for PEOs. After the IRS receives the required surety bond from an approved CPEO applicant, the IRS will publish that CPEO’s name, address, and effective date of certification on their website.
Certification affects the employment tax liabilities of both the CPEO and its clients. A CPEO is normally treated as the employer of any individual performing services for a client of the CPEO and covered by a CPEO contract between the CPEO with the client, but only for wages and other compensation paid to the individual by the CPEO.
To become and remain certified under the new program, CPEOs must meet tax compliance, background, experience, business location, financial reporting, bonding, and other requirements.
When you incorrectly claim your favorite hobby as a business, it's like waving a red flag that says "Audit Me!" to the IRS. However, there are tax benefits if you can correctly categorize your activity as a business.
Why does hobby versus business activity matter?
Chiefly, you're allowed to reduce your taxable income by the amount of your qualified business expenses, even if your business activity results in a loss.
On the other hand, you cannot deduct losses from hobby activities. Hobby expenses are treated as miscellaneous itemized deductions and don't reduce taxable income until they (and other miscellaneous expenses) surpass 2 percent of your adjusted gross income.
Here are some tips to determine whether you can define your activity as a business. These are common characteristics of a business:
The IRS will consider all these factors to make a broad determination whether you operate your activity in a business-like manner. If your business doesn't fit with the guidelines above, it might be a hobby. Each case is unique, and you should seek out professional advice on making this determination. If you need help ensuring you meet these criteria, reach out to schedule an appointment.
As an employee, can you ever deduct the cost of a sporting event or other ticket on your expense report? Surprisingly, the answer can be yes, but only if you know and abide by the rules.
The Accountable Plan
If your employer uses accountable plan rules for reimbursing expenses, the IRS will not only provide the ability for you to be reimbursed by your employer for your qualified expenses, it will also allow your employer to deduct the expense on their corporate tax return. To be a qualified expense, three rules must be met:
Applying the Rules
To apply these expense deduction rules to a sporting event:
What Can Go Wrong?
As you can imagine, the IRS looks closely at those who deduct entertainment as a qualified business expense. Here are some things to watch for:
The fate of a Labor Department rule extending mandatory overtime pay to workers by doubling the eligible salary cap is uncertain under the new presidential administration.
The rule introduced by the Labor Department under the direction of former President Barack Obama increases the salary cap for workers eligible to receive mandatory overtime to $47,476. It extends mandatory overtime, or time-and-a-half pay, to workers primarily in managerial or administrative roles in the retail, restaurant, and nonprofit industries.
Opponents of the rule won a court injunction blocking it in November 2016. The case may be abandoned altogether depending on the priorities set by President Donald Trump's new administration. Until the case is resolved, the previous salary cap of $23,660 remains in place.
As a business owner, the number of people you employed during the last year determines which portions of the health care law apply to your business. If you have fewer than 50 full-time employees, including full-time equivalent employees, there are three key items you should know about how the Affordable Care Act affects you.
If you offer employer-sponsored, self-insured health coverage to your employees, you will use Form 1095-B, Health Coverage Information Return to report information to covered individuals about each person enrolled in coverage. The deadline for filing this form with the IRS is February 28, 2017, or March 31, 2017 if filing electronically. The deadline for furnishing this form to the covered individual is March 2, 2017, which is a 30-day extension from the original due date of January 31.
You may be eligible for the small business health care tax credit if you meet all of the following conditions. You:
Shared Responsibility Payment
If you employ fewer than 50 full-time employees, including full-time equivalent employees, you are not subject to the employer shared responsibility provisions.
The IRS has announced the 2017 standard mileage rates. These rates can be (but are not required to be) used to calculate the deductible expenses of using a vehicle for business, charitable, medical or moving purposes.
The standard mileage rates for the use of a vehicle in 2017 will be:
The business mileage rate was reduced half a cent per mile and the medical and moving expense rates each fell 2 cents per mile from 2016. The charitable rate is designated by law and will not change.
The standard mileage rate for business is based on a yearly study of the fixed and variable expenses of operating a vehicle, unlike the rate for medical and moving purposes, which is based solely on the variable expenses.
Using these rates is optional. You can always calculate the actual cost of using your car instead.
When your job isn't typical, your taxes aren't either. There are a lot of benefits to starting your own business, or providing a service through Uber or a similar company, but it also means you have more to deal with this upcoming tax season.
In addition to seeking out professional advice, there are also free resources available to help you navigate the tax-filing process. Sole proprietors and independent contractors can get helpful information from the IRS Small Business and Self-Employed Tax Center. This resource includes online tools such as the Tax Calendar for Businesses and Self-Employed, which has key tax dates and necessary actions for each month of the year.
For those who provide services to consumers, such as rides in personal vehicles for a fee, e.g. Uber, or the use of property, such as apartments or homes for rent, e.g. Airbnb, the IRS created the Sharing Economy Resource Center. It has tips such as:
As an employer, your size – for purposes of the Affordable Care Act – is determined by the number of your employees. If you hire seasonal or holiday workers, you should know how these employees are counted under the health care law.
Employer benefits, opportunities and requirements are dependent upon your organization’s size and the applicable rules. If you have at least 50 full-time employees, including full-time equivalent employees, on average during the prior year, you are an ALE (Applicable Large Employer) for the current calendar year. However, there is an exception for seasonal workers.
If you have at least 50 full-time employees, including full-time equivalent employees, on average during the prior year, your organization is an ALE. Here’s the exception: If your workforce exceeds 50 full-time employees for 120 days or fewer during a calendar year, and the employees in excess of 50 during that period were seasonal workers, your organization is not considered an ALE. For this purpose, a seasonal worker is an employee who performs labor or services on a seasonal basis.
The terms seasonal worker and seasonal employee are both used in the employer shared responsibility provisions, but in two different contexts. Only the term seasonal worker is relevant for determining whether an employer is an applicable large employer subject to the employer shared responsibility provisions.