Income Taxes

The first Form 1040 in 1914 was a mere 5 lines of information. Today, the Internal Revenue Code spans 5 volumes with over 700 pages each in 8 point font. This doesn’t include the associated regulations. This section covers the income tax and how the small business entrepreneur deals with proper filing and the associated deadlines.

Constructive Dividends – Definition, Understanding and Application

When a corporation confers an economic benefit upon a shareholder, in his capacity as such, without an expectation of reimbursement, that economic benefit becomes a constructive dividend, taxable as such.   See INTERNAL REVENUE SERVICE NATIONAL OFFICE FIELD SERVICE ADVICE MEMORANDUM FOR DISTRICT COUNSEL, Number 200011003 dated October 27, 1999; specifically Page 4, 3rd paragraph.

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Double Taxation – Not an Issue in Small Business

Double Taxation

In the world of big business corporate earnings are taxed twice under the Internal Revenue Code.  The first layer of taxation occurs with the traditional corporate income tax.  The second tier of taxation happens when dividends are issued to shareholders.  The shareholder pays an income tax at their personal rate. 

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Nondeductible Expenses in Small Business

Nondeductible Expenses

One of the more significant expenses for the small business owners is income taxes.  Since most small businesses are tax pass through entities, it is beneficial to the business to have the least amount of net income in order to reduce the tax obligations of the owner(s).  This is achieved by making sure every dollar expensed is deductible for tax purposes.

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Estimated Tax Payments – Why and How

Estimated Taxes

In the normal taxpayer relationship with the Internal Revenue Service, the taxpayer is an employee and via withholding, taxes are paid the U.S. Government by the employer.  Basically the employer pays the tax after each payroll run on behalf of all the employees and the corresponding mandated matching taxes (Social Security and Medicare).  But in the small business world, this is not the normal relationship.

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Mailbox Rule in Business

Mailbox Rule

There is one tax rule that confuses business owners and it relates to the year-end practice of paying bills and receiving compensation for receivables.  This is referred to as the ‘Mailbox Rule’.  This is strictly a tax issue for cash basis taxpayers.  I’m here to set the record straight! 

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At-Risk Rules – An Elementary Understanding

At-Risk Rules

Code Section 465 of the Internal Revenue Code defines ‘At-Risk’ as the financial value the taxpayer has in jeopardy related to the business activity the taxpayer is invested in as some form of an owner.  Effectively, the taxpayer may only take losses on his tax return contingent on the loss being directly tied to invested dollars with some form of tax basis.

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Phantom Income

Phantom Income

Those small businesses using partnership or S-Corporation formats issue Form K-1 to the respective owners.  When income is assigned to the owner and there is no corresponding cash related to that income, then this income is referred to as ‘Phantom Income’.  In effect, it is assigned income for tax purposes without the corresponding cash to pay the tax liability. 

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Form 1099-C: Cancellation of Debt

Form 1099-C

If you received a 1099-C, the first question you ask is: ‘Do I have to include this in my taxable income?’  Well, the answer is ‘it depends’.  Not what you want to hear but there is a lot of variables involved in answering this question.

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