If you plan on filing an extension, be careful. The due date for extended returns will be October 15, not 17.

While we’re at it, here’s another date for you: January 17. That’s the first day you can e-file your returns.

Now, at the risk of sounding like mother hen, there’s no reason you have to wait until any of these dates to actually prepare your return. And by all means, don’t wait until April 17 to call your tax accountant for an extension. It drives them crazy. Trust me on this.

You see, choosing an entity takes care and consideration and no entity qualifies as one-size-fits-all. So while an S corporation may be awesome for your neighbor (and his mom), the same may not be true for you.

When is organizing your company as an S corporation ideal? And just what makes them so awesome?

For starters, S corporations, unlike regular corporations, aren’t subject to double taxation. Regular corporations pay tax on income, and then you, as a shareholder, pay tax on the profits distributed to you (known as dividends). S corporations don’t pay income tax (though they may be subject to other taxes). The income is simply “passed through” to each individual shareholder, who then reports his share of income on his personal income tax return. The corporation can then distribute profits to each shareholder tax free (so long as there’s sufficient basis). Therefore, any amount distributed by the corporation to each shareholder is only subject to tax once.

This pass through nature of the S corporation is one of the reasons the entity can be ideal in some tax planning situations.

Here’s one situation where an S corporation may be ideal:

For some companies, particularly in the early years, the company may be operating at a loss. Each individual shareholder gets their share of this loss (assuming there is enough basis), which can then be deducted on their personal income tax return. This can be used to offset income that otherwise would’ve been taxable. And since S corporation owner-shareholders are supposed to pay themselves a reasonable salary, this loss can even be used to offset the wages paid to you by your company. Awesome, indeed.

There’s more… S corporations are eligible for Section 1244 treatment. So, let’s say this startup of yours is unsuccessful and the stock is later disposed of at a loss. This loss is allowed to be categorized as an ordinary loss, instead of what normally happens: treating the loss as a capital. Categorizing it as a capital loss means you can only net it against other capital gain or be limited to a $3,000 annual deduction. Being allowed to categorize the loss as ordinary means that the entire amount can be deducted at once.

Here’s another:

Quite the opposite of the above scenario, your company is very successful and actually has quite a bit of cash on hand. Your company’s future is looking pretty good. With a regular corporation, if you were going to distribute some of this wealth to shareholders, it would be ideal to be able to classify this as salary and not as dividends. Why? Because salaries, unlike dividends, are deductible to the corporation and they are taxable as ordinary income to the shareholder. The IRS, being the IRS and all, is obviously aware of this and is notorious for reclassifying unreasonably high compensation as dividends.

However, with S corporations, this isn’t necessarily an issue. And organizing as such minimizes any issues you’d have with unreasonable compensation. You either pay this as a salary (deductible by the corporation) or as distributions (not deductible by the corporation, but not taxable to the individual shareholder either).

The above situation is especially ideal when the corporation is a personal service corporation (PSC). PSCs are those companies that:

1. At least 95% of the the time spent by the company’s employees is devoted to services in either the health (including veterinary), law, engineering, architecture, accounting, actuarial science, performing arts, or consulting, and
2. At least 95% of the stock is held directly (or indirectly) by either the employees performing these services or retired employees who did perform these services or their estates, or any other person that in the two-year period starting with the date that such an employee died, acquired that individual’s stock because of his death.

That was a mouthful.

So, if my company was organized as a regular corporation, I’d be considered a PSC. So would my family physician, my dog’s vet, the architect that designed the building I live in, that ballet company… you get the idea.

This is important because PSCs are subject to a flat tax of 35%. That’s right, no graduated rates for PSCs. It would therefore be beneficial for the company to be organized as an S Corporation. Not only does the S Corporation get rid of that dreadful flat tax of 35%, it is free to distribute enough of the accumulated cash to each shareholder to pay the tax they’d be subject to (remember: income of the S corp. is passed through to each shareholder).

Let’s look at a few situations where you’d probably want to stay away from an S corporation.

As mentioned before, S corporations are pass-through entities, so the income is reported on each individual shareholder’s personal income tax return. Depending on the marginal tax rate, sometimes the tax can be cheaper when using the corporate tax rates than the individual. So it would make more sense to be organized as a regular corporation and have the corporation pay the tax.

Another situation is with fringe benefits. Fringe benefits of closely-held companies are normally taxable to an S corporation’s shareholder-employees. Again, another situation where you’d probably want to be a regular corporation.

Another reason you may want to stay away from S corporations is if you are looking for investors. Investors prefer regular corporations because S corporations aren’t allowed to have more than 100 shareholders, and they are limited to one class of stock, which means… no preferred stock.

Now, this obviously isn’t all inclusive. The point is, don’t just go out and form an S Corporation (or any entity for that matter) because someone told you to. The important thing to do before you create your entity is have some kind of understanding of the direction your company will likely head in and what’s important to you (investors, flexibility, lower income tax, etc.) and chose an entity based on that. And for goodness sake go talk to a decent tax accountant. Who probably isn’t your neighbor.

Would you try to figure out why it was deposited into your account? Or whether the funds actually belonged to you?

Or would you say nothing and just hope no one would notice there was a mistake made?

Or would you go out and spend it on your student loans, car payment, and foreclosure debt?

If you asked Stephen McDow, he probably would have answer yes to that last one.

You see where I’m going with this, right? McDow had $110,000 deposited into his account. He wasn’t expecting the money, and I’m willing to bet that not so deep down he knew that the money didn’t belong to him. Turns out that the money that was deposited into Mr. McDow’s account was actually a refund belonging to another taxpayer. Apparently, that taxpayer provided her accountant with information for a Citibank account that was closed in 2004. Citibank later reissued that account number to Mr. McDow.

After obtaining an e-mail address for McDow, the taxpayer had her attorney send him an e-mail with instructions to return the money. To which he responded that he’s already spent some of it—on student loans, a car loan, and a home loan, to be specific.

Mr. McDow apparently offered to make monthly payments, but let’s just say that that offer wasn’t accepted since the rightful owner reported the theft to the police.

McDow has since been arrested.

Who knows what was going through his head, but I just find it hard to fathom that someone can have that much money deposited in their account and not try to ensure that it really did belong to them. It’s one thing if you’re expecting it, but quite another to have that money mysteriously appear in your bank account one day.

Also, I guess I also don’t understand how someone who is expecting such a significant refund doesn’t bother to verify that the account number is correct before giving it to her accountant. The account was closed in 2004. I get that nowadays we rarely use checks and payments are withdrawn from your account automatically, but it was closed in 2004. 2004.

Apparently finders aren’t keepers.

After that I needed a vacation.

After my vacation I needed motivation to get back to writing. And to work in general.

Now, I’m back. Refresh and renewed.

The 2010 tax season was probably my most hectic. That’s not a complaint, though. Believe me. It proved to be really difficult to keep up with blogging and answering questions while I had returns and engagements to deal with.

And after tax season was finished, I had even more work to do. After that was done, I finally took a much-needed vacation. We went to visit family in Italy for what had to be the shortest two weeks ever. As I said, I’m back now, refreshed, and ready. Vacation will do that do you (after you get over the jet-lag, of course).

I’m gotten quite a few e-mails with questions, and quite frankly I am a bit surprised by the amount of e-mail I’ve received. I’ve tried my best to respond to as many as I could, but I haven’t posted any of those questions here. If you’ve sent me an e-mail and I haven’t responded, my apologies. I’m working my way through my inbox… and will hopefully get to yours eventually. Please keep in mind that I could just be waiting for a more appropriate time to respond to your inquiry.

Apparently people are confused.  And I think most of the confusion has to do with the fact that individual tax returns aren’t actually due until April 15 (this year they are due April 18). Because of this, quite a few people, especially those that haven’t filed a corporate tax return before,  assume that the corporate tax return due date is also April 15. 

Corporate tax returns are in fact due March 15. (that’s today!)
So if you haven’t filed your corporate tax return as yet, either finalize the filing or do yourself a favor and file an extension using Form 7004, please.

While we’re on the subject of extensions, plthis would be a good time to point out that an extension is only an extension of time to file, not an extension of time to pay. So, if your return is on extension, and you end up with a balance due when you file the actual return, you may not be assessed a failure-to-file penalty, but you will get hit with the failure-to-pay penalty, which is currently .5%. Oh, and let’s not forget about interest.

So, what are you waiting for? Go file that return—or extension!

In 2010 a previous employer informed that they were forcing me to take my 401K contributions out of their plan and roll it into another IRA of my choosing. According to their rules, I had enough capital in the account such as they couldn’t force me to take an early distribution, but not so much that they couldn’t force me out of the employer-subsidized account.

I procrastinated getting in the necessary paperwork with instructions as to which provider to transfer funds to. The funds were subsequently sent to E-trade securities, LLC. rolled into an IRA rollover account. I then had E-trade perform an ACAT transfer to my preferred carrier.

I also moved other assets from UBS to AIG/Valic. However, in this instance, I requested UBS disburse me an early distribution check, due do the fee-free transaction. I immediately mailed the capital to AIG via personal check after the EFT disbursement from UBS cleared my checking account.

Now, it appears that I should be receiving a few Form 1099 as well as Form 5498. I’ve currently already received the 1099 forms but no 5498′s. How does this affect my filing? Are there any special tax forms that need to be prepared? How do I account for these transactions, although all funds/distributions were completely rolled into qualifying IRA plans, given the fact that I’m being told that the Form 5498 won’t be sent until after May31st and the 2010Tax deadline is April15th? Wheh!

I say:

First, I feel like I should apologize since David’s been waiting quite a while for a response—he may have even received those 5498s already.

So, Davide, my apologies. This year, tax season started with a bang. And it started out with really complex returns that took more research than normal, so sleep has been very hard to come by. But, alas, here’s my response, and I hope it helps.

Employers are required to give those individuals that participate in their plans an option to have an eligible rollover distribution paid directly to a traditional IRA, so long as the amount of the distribution isn’t less than $200.

Let me explain what a Form 5498, IRA contribution Information, is. Like it’s name suggest, it reports information on contributions, rollovers, conversions, and recharacterizations to both you and the IRS. It also reports the FMV of the account at the end of the year, which is needed mostly for required minimum distribution purposes and in calculating the taxable portion of an IRA distribution.

The amounts of each distribution is reported to you and the IRS on Form 1099-R. So on Form 1040, you report the total distribution shown on line 16a, and the taxable amount on line 16b for all except distributions from an IRA—those distributions get reported on line 15a, with the taxable portion on like 15b. You’ll know if they belong on line 15 if the IRA checkbox in box 7 of the 1099-R is checked.

If all the distributions were rolled over to a retirement account, whether directly from one trustee to the next, or through a complete distribution to you and then transferred to another account then the amounts shouldn’t be taxable.

I’ve given you a pretty quick and dirty response to qualified plan distributions. Your age, whether they were rolled over within 60 days of the distribution, and a number of other factors can come into play. You should definitely check with your accountant regarding how these distributions will affect your specific tax situation.

Disclaimer: like any decent tax professional will tell you, since you’re not currently a client of mine—though you can be—it’s almost impossible to provide complete and accurate tax advice over the internet without being aware of the taxpayer’s entire situation; therefore, I suggest you consult your tax professional before relying solely on any information provided on this site.

My 16-year-old son earned $1,250.00 in modeling income this year. He was issued a 1099-MISC and his income was reported in Box 7. Does he have to report this income and pay a self employment tax?

Initially when I first started reading your e-mail, I thought it was going to be a kiddie tax issue. Thank Goodness it’s not. To answer your question, in one word, yes.

For dependents — and at 16, I imagine he’s still someone’s dependent — a return is usually not required unless any of the below apply:

• Unearned income (think dividends, interest, etc.) was over $950.
• Earned income was over $5,700
• Gross Income exceeded the larger of $950 or earned income (not to more than $5,400) plus $300

And since the income your son received is considered earned income, and it wasn’t more than $5,700, on that front he’s fine.

Now, even if the above criteria aren’t met, as long as your son earned more than $400 of self-employed income, then he’s required to file a return and report self-employment tax.

Self-employment taxes are simply the employer and the employee portion of social security and medicare taxes. Both of which would have been deducted from wages if you receive a paycheck. Your employee would then match these taxes (except for in 2010).

Quick note: When I originally published this post, I neglected to mention the implications of self-employment tax.

Disclaimer: like any decent tax professional will tell you, since you’re not currently a client of mine—though you can be—it’s almost impossible to provide complete and accurate tax advice over the internet without being aware of the taxpayer’s entire situation; therefore, I suggest you consult your tax professional before relying solely on any information provided on this site.

Hello and thank you for your helpful website! I have been unable to find an answer to this question and I hope you can help.

I live in California and work part-time for a small business that is a corporation. I will be moving to Texas and my current employer and I have agreed that I would begin working for myself as an accountant. I will get a business license and be working for the same company as a bookkeeper. I will set my own schedule and help with payroll taxes and basic accounting for the company.

My question is this: Will there be any difficulty in my being a W-2 employee and 1099 Independent Contractor in the same year? For my employer or myself?
Also what forms should I fill out to make sure everything is legal and kosher?

I have researched this subject on irs.gov and I will qualify as a Independent Contractor as far as I can tell. Being the one who dictates how, when and why I do things for the company and no longer an hourly employee answering the phones and setting appointments. Also I may expand in the future to other small business (in Texas most likely) that will allow me the same freedom to work online from home as an accountant or bookkeeper.

First, congratulations are in order. Making the move from employee to self-employed is quite an accomplishment.

It seems like you’ve obviously done your homework on the independent contractor classification. Nowadays, the IRS will tend to look at the level of control you have regarding the work being performed. There are 20 factors that the IRS will consider when determining who qualifies as an independent contractor—from things such as whether you set your own hours, perform the work on your clients’ premises, work for more than one person, etc. The full list with a bit of guidance can be found here.

It sounds like you should be fine, and there is absolutely nothing wrong with you going from an employee to an independent contractor in the same year. I know of a few instances where employees have gone from being employees, to freelancing on the side, to being full-time self employed—all in the same year. In a couple of those situations, their employer ends up being one of their clients.

As for the what you should do, definitely apply for an EIN, if you haven’t already done so—it’s fast, and you’ll have the number in minutes. It also wouldn’t hurt to have some kind of contract or written agreement, such as an engagement letter. Also, give them a signed copy of a W9.

Good luck and enjoy being an entrepreneur!

Disclaimer: like any decent tax professional will tell you, since you’re not currently a client of mine—though you can be—it’s almost impossible to provide complete and accurate tax advice over the internet without being aware of the taxpayer’s entire situation; therefore, I suggest you consult your tax professional before relying solely on any information provided on this site.

The app is called IRS2go, and is available on both the Android marketplace and the iPhone App Store.

The app currently allows you to check the status of your refund, subscribe to IRS news, follow them on Twitter, and it also provides their contact information. I suspect most people will be using it to check the status of their refund.

I’ve tried it, and I must say it’s really simple and easy to use. Not necessarily what I was expecting when I initially downloaded the app.

To check the status of your refund, you simply enter your SSN, filing status (single, head of household, etc.), and exact dollar amount of your refund.

I even used it to check the status of my 2009 refund (though the app prompts you to enter your information for your 2010 return—I suspect that it just pulls the last return you have on file).

The contact option is pretty useful; it not only gives you the contact number for each unit, but also gives you the hours of operation with a link that automatically dials the number (at least in the iphone version).

It’s a win-win situation: you can quickly check the status of your refund—even while waiting in the dentist office— and they get less calls inquiring about refund status.

The returns that are impacted are those that claim deductions on Schedule A (mortgage interest, property taxes, medical expenses, etc.), the higher education tuition and fees deduction on Form 8917, and the educator expense deduction.

Also as previously mentioned, just because the returns won’t be accepted by the IRS until February 14 doesn’t mean that you can’t prepare them before that; you or your tax preparer will just have to hang on to them until then.