Construction Laborer

IRS Publication 505: Estimated Tax

If you are in business for yourself then you should learn about estimated tax immediately.  Since you are your own boss, there is nobody cutting you a paycheck.  Usually if you work for someone else then whoever cuts the paychecks is responsible for taking some out of each check to send to the IRS.  This covers your Social Security and Medicare tax.  If too much is taken out, you’ll get it back when you file your federal income tax return, in the form of an IRS refund.  If not enough is taken out then you’ll owe more when you file your tax return.

But as a self-employed person there’s nobody performing any withholding at all on your paycheck.  You are the one who is supposed to know what’s going on, and make estimated payments to the IRS every three months.  To do this, learn all about estimated payments in IRS Publication 505, called Tax Withholding & Estimated Tax.

What You Need to Know About Estimated Tax

The publication is 65 pages long, which indicated immediately that tax withholding and/or estimated tax is something the IRS takes very seriously.  But what if it’s your first year turning a profit at your own business, after years of having nothing left over after the bills?  What if, suddenly you’re raking it in, and at the end of the year you report a huge profit on your business?  You’ll discover that after completing your income tax return you’ll owe quite a bit on the income you suddenly made.  You really should have been paying the IRS your quarterly estimated tax payments all year long, or at least beginning when you started bringing in tons of profit.  

Will the IRS get you for not making estimated payments when last year you did so horribly that you didn’t owe any taxes?  The answer is no: if you didn’t owe any taxes last year, then you are off the hook this year for making estimated payments to the IRS.  You can just catch up when you file your income tax return after January 1 of the next year.  But based on your tax return for this year that you did so well, you’ll definitely be making estimated payments next year!

For a look at the complete version of IRS Publication 505, click here and you’ll be taken to the IRS website.

 

Real Estate

IRS Form 1041: Your Estate (or Trust) Has to Pay Taxes Too

The whole point of an estate or a trust is that it becomes  a separate identity when it’s created.  The IRS treats is like it treats a business or an individual taxpayer.  And you know what taxpayers have to do…!  They have to file and pay income tax returns.  So, as your money lives on after you depart this earth and takes on a life of its own as an estate, it will have to pay taxes.  IRS Form 1041 is used to file the tax return for an Estate.  The same form is used to file and pay federal income taxes for trusts.

Who Files IRS Form 1041?

Well usually there is an executor of a will, and that person is the one who takes care of making sure IRS Form 1041 is submitted each year for the estate.  There is almost always a lawyer involved, too, and usually it’s the lawyer who files the form.  Lawyers who specialize in estates are proficient in filing income tax returns for estates.  It’s part of their job.  If the executor is no longer around then there is usually a successor designated in the will, also.  Essentially, it’s the lawyer who sticks around the longest, accompanying the estate form beginning to end.  However, if there’s money involved, you can get the heirs won’t forget about that estate.  But if that happens, there are no heirs and the lawyer goes out of business, then the estate just gets turned over to the State.

Some FAQ’s on IRS Form 1041

  • If the estate has gross income of less than $600 for the tax year, then IRS Form 1041 is not required.
  • One can get an extension of time to file IRS Form 1041.  Fill out and submit Form 7004, Application for Automatic Extension of Time to File Certain Business Income Tax, Information and Other Returns
  • The extension of time to file IRS Form 1041 is six months
  • IRS Form 1041 is due April 15, unless the estate operates on a Fiscal Year calendar. Then it’s due the fifteenth day of the fourth month following the close of the fiscal year.

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Employee

IRS Form 2553: Become an S Corp

Incorporating has its benefits- but one of the downsides to a corporation comes when the business is successful.  When a corporation is successful, the shareholders will be expecting dividends.  The pressure is even greater when the corporation is a publicly traded stock…shareholders will get rid of your stock if you never pay a dividend.

As you know, a corporation is treated as a separate tax identity from the shareholders.  The corporation can enter into a contract just as real person can.  The corporation must also pay income taxes…and not just every year but every quarter!  Yes that’s right a C-corporation pays quarterly income taxes.   Also, taxable income is computed before any business expense deductions are made!  As you know, Business Deductions are a great thing that help reduce taxable income if you are any type of business but a C-Corporation.  Plus, it pays income tax on the revenue, then when that extra revenue is passed on to shareholders, it gets taxed again.  That’s called double taxation.

Why Become an S-Corporation?

To avoid double taxation some corporations elect to become what’s called an S-Corporation.  To do this, IRS Form 2553 is submitted to make the election.  The name of the form is Election by a Small Business Corporation.  By becoming a S-Corporation a business can now participate in what’s called pass through taxation.  That means the profits can be passed through to the shareholders, and the S-corp is not taxed on that money as income.  Great!

Filling out IRS Form 2553 to become an S-Corp also means your business files a tax return once a year rather than four times a year.

If You Fill Out IRS Form 2553, Do it Now!

There are strict timing issues around filing IRS Form 2553.  Your business must file the form withing 75 days of incorporation or the IRS will disregard and consider your business a C Corporation.  The alternative is to file within 75 days of the new year.  For a look at IRS Form 2553 go here to the IRS website.  It’s a short and simple form that can be filled out quickly and mailed in easily to the IRS.  It’s not a form that you should pay someone to fill out and submit for you.

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Small business team

IRS Form 535: Business Deductions Are in Pub 535

Every business  has just one goal when it comes to the IRS.  It’s to show as little profit as possible on the annual income tax return.  That’s not to say that income should be low but rather to get as much deducted off the taxable income as possible.  To do that, you would refer to IRS Form 535, which actually has the title of Publication 535. It’s called Business Deductions and in this you can find every type of deduction for your business that’s allowable by the Internal Revenue Service.

While getting as many expenses as possible into your company’s tax return will help reduce the AGI(adjusted gross income), it may not help a company’s health report when it comes to stockholders.  For example, large expenses will make revenues smaller…if you are spending all the money you make then your business report card isn’t as strong as it would be.  If you are a publicly held company then it will make your stockholders nervous if you are making large purchases.

So, wouldn’t it be nice if your business could make those large necessary purchases, but at the same time impress the stockholders with fewer expenses and larger revenues?  Well you can.  You don’t have to deduct those large expenses for things you expect to last more than a year.  You can do what’s called capitalizing them.  When you deduct these expenses you are expensing them.

Expensing vs Capitalizing Your Expenses

IRS Pub 535 explains that if you capitalize an expense you cannot also deduct it.  Capitalizing means that you will not really show the entire expense on the current year’s tax return.  Rather, you will spread it over the next several years.  This way, you won’t kill your revenue and your bottom line will be much much nicer looking.

You cannot cheat, however, by capitalizing your regular operating expenses.  For example, your business might purchase a ton of copy paper each month.  That is a regular operating expense and must count as a deduction.  It will reduce your revenue but it’s cheating the IRS and your stockholders if you try and hide this expense by capitalizing it.  This is clearly outlined in IRS Form 535 (Publication 535).

For more info on business deductions and capitalizing versus deduction your business expenses consult the IRS Form 535 (publication) page on the IRS website.

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IRS Form 4506

Did you lose your old tax returns?  Do you need a copy of a past year’s IRS tax return?  The IRS keeps full copies of your returns on file and will send you a copy if you request it with IRS Form 4506.

Do you need a tax transcript for a loan or to submit to Financial Aid at your college?  Then you don’t need a full copy of your tax return sent out…you only need a Tax Transcript, which is a different form.  For a tax transcript use IRS Form 4506-T.

IRS Form 4506 is Not The Same as 4509-T

Don’t confuse the two types of copies of your tax returns…one is quick, easy and free and the other is definitely not free and certainly not fast.  IRS Form 4506 costs $50 and yet get a full copy of everything you submitted when you filed your income tax return with the IRS.  It can take more than three months to get your copy, however!

IRS Form 450-T is free and can be requested automatically online at the IRS website.  Just go to IRS.gov and search on “Order a Return or Account Transcript”.

Corporations can request a full copy of past years’ tax returns as well, using the same IRS Form 4506.  Same for partnerships, estates, trusts, etc.

For a look at IRS Form 4506 go to the IRS website here and you can download a copy for mailing in.  Mailing addresses for the following places:

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Alabama, Alaska,
Arizona, Arkansas,

California, Colorado,
Florida, Hawaii, Idaho,
Iowa, Kansas, Louisiana,
Minnesota, Mississippi,
Missouri, Montana,
Nebraska, Nevada,
New Mexico,
North Dakota,
Oklahoma, Oregon,
South Dakota, Texas,
Utah, Washington,
Wyoming, a foreign
country, or A.P.O. or
F.P.O. address

Internal Revenue Service

RAIVS Team
P.O. Box 9941
Mail Stop 6734
Ogden, UT 84409

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For the following states:
Connecticut, Delaware,
District of Columbia,
Georgia, Illinois, Indiana,
Kentucky, Maine,
Maryland,
Massachusetts,
Michigan, New
Hampshire, New Jersey,
New York, North
Carolina,
Ohio, Pennsylvania,
Rhode Island, South
Carolina, Tennessee,
Vermont, Virginia, West
Virginia, Wisconsin
mail your IRS Form 4506 to:
Internal Revenue Service
RAIVS Team
P.O. Box 145500
Stop 2800 F
Cincinnati, OH 45250

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