FAQs

Right off the bat I would tell you that unless you have a profitable business that’s already making money, you should just do an LLC for now. Once you have consistent revenue and you can afford the incorporation fees and the lawyer’s fees you’ll probably rack up setting that up, you can get a C Corp.

People typically create a C Corp because it provides them protection to their personal assets in case the company were ever to get sued. The LLC’s is still a very good option because it still gives you a high level of protection as long as you clearly define what’s business and what’s personal. In order to do this you’ll have to make sure to set up a separate bank account for the LLC and not fall into the temptation of using your personal bank account because it’s “easier”.

As far as taxes, if you have a LLC, that is what is called a passthrough entity. Meaning that the profits are “passed through” the company to your personal return.

When filing your taxes, if you have an LLC, you just include that info in your own tax return. Depending on if you have a partnership (you’ll file form 1065 Partnership Return) and then you include it in Schedule C on your 1040. If it’s just you as the owner, then you just have to do Schedule C. A CPA will probably charge you between $250-$750 to do this for you. You can also do it on your own using TurboTax or H&R Block Online.

In terms of protection, the C Corp will give you the most protection. A C Corp very clearly sets itself as a separate legal entity so if the company were ever to be sued, they won’t be able to go after your personal assets. So they may be able to sue you for the value of the company but you’ll never have to worry about them taking away your personal house. Typically used by multi-million dollar companies.

A C Corp, gets taxed at two levels: At the C Corp’s level and then again at the shareholders level. The shareholders will be taxed at Capital Gains which is lower than the regular tax rate you would personally get taxed at.

The S Corp provides the same level of protection as a C Corp. Along those lines, yes a C Corp would give you the highest level of protection but depending on your business, it may be very unlikely someone will sue you. They’ll only sue you if you’re actually making money. And if you’re making money, then you can pay for the lawyer to set up the C Corp.

Unlike a C Corp that gets taxed at the Corp level and again at the individual level, an S Corp “passes through” the income just like an LLC, meaning it only gets taxed once. So it’s really the best of both worlds. But again, I doubt you’ll need that level of protection at this point.

The C Corp and S Corp will require more paperwork at the end of the year when you’re doing your tax return. A CPA will likely charge you between $800-$1,500 to do that return.

To summarize, if you’re just starting out and the risks of you getting sued are low, I would stick to an LLC. It’s cheaper to set up and it’s less hassle at the end of the year to file your return. You only get taxed at your level.

If you’re dealing with multimillion dollar contracts and the chances of you getting sued are high, a C Corp would be ideal. It has a high level of protection. However you get taxed twice (at the C Level and also at your level) and it is also more expensive to set up as well as expensive to file a return at the end of the year.

An S Corp provides the protection of a C Corp and allows you to “pass through” the income to be taxed at your level. However, it’s expensive to set up.

earned cash, here is what you’ll have to do when you prepare your 2014 tax return.

So before I start, I will let you know that you should probably either 1. Use tax software to prepare your 2014 return (probably like $150 for turbotax) or 2. Hire someone to do the tax return for you (around $250-750 depending on who you get).

I’ll provide you with the details to get you informed and maybe even do the tax return yourself. If you rather have someone else do it, that’s fine too. You’ll be knowledgeable enough so someone won’t try to rip you off.

You’ll have to file Schedule C along with your Form 1040. Form 1040 is the regular tax form everyone files. Schedule C is what you file when you have a small business.

1.You’ll have to first get all the revenues you’ve made meaning all the cash you got from the sales you made. If you sold a t shirt for $15, then your revenues are $15.

2. Then you’ll have to figure out your expenses. Expenses include any advertising you paid for, fees your online vendor charged you, facebook ads, costs you paid for designers, etc. Basically anything you paid for because of your business. Don’t forget to include Paypal fees. For this example let’s say your expenses were only paypal fees for $3.

3.In order to get your profit which is what you’ll get taxed on, you get your Revenues and subtract your Expenses. Revenues of $15 – Expenses of $3= $12 of profit. Your taxable business income is only $12 which is also the amount of profit you’ve made. The IRS will only tax you on the $12 you made in profit and not the $15 which was Gross Revenue.

Revenues – Expenses = Profit

Profit is what is taxed by IRS.

If the online business is your only source of income then you’ll only get taxed on that portion. However, if you have another source of income you’ll get taxed on that too.

Again, if you’re using tax software, it’ll walk you through questions and you just have to fill in the blanks with the numbers it’s asking you for.

Right now you should focus on finding out what your 1. 2014 Revenues were, 2. Your expenses for 2014, and 3. how much profit you made. Even if it turns out you didn’t make a profit, make sure to file a return since you may be able to use that loss to reduce any other tax you may owe.

1.You will probably be able to itemize. This means that you will be able to take a deduction for things like donations, and more importantly in your case, mortgage interest. At the end of the year you’ll receive Form 1099 from your lender where it will show how much interest you have paid on your mortgage. It may also include the property tax you’ve paid. Make sure to include those in your tax return. It will more likely than not help reduce the amount of tax owed.

2. Home Office Deduction: Since you’re running an internet based business, I’ll assume you do most of your work from home. In this case you can probably use the Home office deduction. This means that you’ll be able to take some of your home expenses and convert them into business expenses. There are several methods (described here: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Home-Office-Deduction) however, the easiest one is where you take the total of your expenses and figure out how much of that is for business. You then take that percentage as a deduction. For example, if you pay $100 a month a month for internet access and you calculate that maybe 35% of the internet use is for business, then you’re able to count $35 ($100 * 35%) a month as a business expense. You can do that for anything that you use for your business. Especially now that you have a house, you may have a little home office you use solely for business. Let’s say that room is 10% total of your house and your monthly mortgage is $2,760. That means that every month you can take $276 ($2,760*10%) as a business expense.

3.Make sure you keep track of your business expenses. If possible, open a separate checking account that you use solely for business. This will not only make it easier for you to gauge how much money you’re making/losing, it also makes it way easier when you’re figuring out your business tax return at the end of the year. Otherwise you’ll just have to sit down or pay someone to sit down and go through your bank account trying to figure out if the $35 you spent at Best Buy was for personal use or for business expense. You don’t want to get stuck in that situation.

Although you are not required to file anything if you didn’t have revenues of at least $600 (revenues is money coming in regardless if you made profit), it is beneficial to file since you are able to possibly pass some of those losses to your personal tax return.

If you are able to take losses in your personal tax return, your personal tax due may be lowered. Of course, the only way to determine this is to actually prepare a tax return.

Another reason for filing your tax return is so that, in the off chance the IRS audits you, you will have all your ducks in a row. Sometimes the IRS finds these companies that have not filed and assigns them the amount of tax due based on what they think you’ve had in revenue. The only way to prevent this is by showing them that you did not make any money. The best way to prove this is by filing your tax return.

Yes. I keep all my stuff in Dropbox.com. I just scan it and put it in different folders by year. You get 2MB for free or you can opt for I think like 1TB for $9.99 a month. Cheaper and more convenient than a filing cabinet.

If you don’t have it, don’t worry. You really only need it if you were to get audited. Regardless, you can always get that info from your bank and previous employers if that were the case.

The IRS determines your filing status by seeing what it is on Dec. 31st. So if you are now divorced and plan to stay that way until Dec. 31st at 11:59PM, your filing status for your 2014 tax return will be single or Head of Household if you have dependents.

If you guys were in the $400k income range and now you’re in the $40k, it will definitely go down. I couldn’t tell you the exact number because we have to take into account any itemized deductions, donations, and the type of income the $400k was made up (selling stocks is taxed differently than salary) as well as other items. Currently the Federal Tax rate ranges from 15%-35%. You’ll probably fall in the 15% just as a guesstimate.

My questions are:

1. Now that the house is under a lease to own, will we need to claim the rental income? The rent is $1350. The mortgage is $1100 and the property manager takes $100 so we only see $150 a month.

2. Can we write off the mortgage payments and payments to the property manager?

3. Are we going to end up owing money this year because of the rental income?

Also, when the house finally does close in 2 more years, will we have to pay taxes on the income from the sale?

1. Yes you will have to claim this as rental expense. You will put this on Schedule E of your 1040 tax return. Even if you were just leasing the house, you would have to declare this as income. Here is the Schedule E:http://www.irs.gov/pub/irs-pdf/f1040se.pdf and here are the instructions: http://www.irs.gov/pub/irs-pdf/i1040se.pdf

2. The taxable portion of your income of the rental will be the $150. Since your expenses will be the mortgage and the property manager. One thing you can do to lower the amount of income you will be taxed on is to depreciate the house. This is a little more complicated although it would reduce your taxable income. However, since you’re selling your house, I would not recommend this at this point since it will probably reduce the basis in your house and may result a taxable gain.

If you see Schedule E above, you’ll see that it is pretty straightforward listing your rental income and any expenses which would include any repairs, property taxes, management fees, advertising, and such. When you add all that up, it may turn out that even though you are receiving $150 a month, after expenses you may actually be at a loss. Which leads me to #3

3.I can’t tell just from the info you provided if you will owe taxes or not. You’ll have to take into account your other income and any expenses and deductions that may apply to you. However, if you haven’t been owing any taxes these past few years and your situation hasn’t changed much since then, I doubt netting $150 extra a month will put you in the “I owe a ton of money to the IRS” side.

The best states to incorporate in the USA are Nevada and Delaware.

Some potential advantages of incorporating your business in Delaware include:
• Delaware’s business law is one of the most flexible in the country.
• The Court of Chancery focuses solely on business law and uses judges instead of juries.
• For corporations, there is no state corporate income tax for companies that are formed in Delaware but do not transact business there (but there is a franchise tax).
• Taxation requirements are often favorable to companies with complex capitalization structures and/or a large number of authorized shares of stock.
• There is no personal income tax for non-residents.
• Shareholders, directors and officers of a corporation or members or managers of an LLC don’t need to be residents of Delaware.
• Stock shares owned by persons outside Delaware are not subject to Delaware taxes.
Some potential advantages to forming a corporation or LLC in Nevada include:
• Nevada has no state corporate income tax and imposes no fees on corporate shares.
• There is no personal income tax or any franchise tax for corporations or LLCs (but initial and annual statement fees and business license fees apply).
• Shareholders, directors and officers of a corporation or members or managers of an LLC don’t need to be residents of Nevada.
One must remember that even if you incorporate in either of these states, you may be required by the state in which you reside to also incorporate in that state. Depending on where you are, this may require you to pay certain income or franchise taxes. Make sure to consult with a tax professional or a legal expert before going through with incorporation preparation.

There are actually 5. They are, in no particular order:

Texas, Wyoming, Washington, South Dakota, Nevada,

In these states you do not have to pay an income tax. However, regardless of what state you live, you’ll still have to pay a Federal Income tax.

One thing that people forget, is that even though you may not be paying an income tax, these states still need tax dollars to fund them and their projects. So where does this money come from?

Easy! From other taxes.

These no income tax states typically have a higher sales tax rate and higher property tax rates. The opposite can be said of other states that do have an income tax. Their property and sales tax rates are typically lower than their counterparts.