One of the most important decisions to make when starting a business is the legal form (sole proprietorship, corporation, limited liability company, etc.) in which you will operate. And as your business grows, you may want to change forms to accommodate more owners, a different capital structure, or shield your growing wealth from business liability.
Sole proprietorship―The business and the owner are legally the same. From the IRS’s perspective, the business is not a taxable entity. Instead, all of the business assets and liabilities and income are treated as belonging directly to the business owner.
Limited liability company (LLC)―A separate legal entity created by a state filing. Under state laws, LLC owners are given the liability protection that was previously afforded only to owners of a corporation (shareholders).
C corporation―A separate legal entity created by a state filing. The C corporation, also called the “regular” corporation, is subject to corporate income tax. Income earned by a C corporation is normally taxed at the corporate level using the corporate income tax rates. C corporation income is also subject to what is called “double taxation,” when the income of the business is distributed to the owners in the form of dividends, because dividends are taxable.
S corporation―A separate legal entity created by a state filing. The S corporation is a corporation that has filed a special election with the IRS to be treated like a partnership (or LLC) for tax purposes. Therefore, S corporations are not subject to corporate income tax. Instead, their income is subject to what is often called “pass-through” taxation, where the income or loss of the business is passed through the company to the owners (shareholders).
At Huddleston Tax CPA’s we can assist you to weigh the tax considerations and help you to choose the correct entity for your business activity.
Can I Deduct my home office?
If you use part of your home for business, you may be able to deduct expenses for the business use of your home. The home office deduction is available for homeowners and renters, and applies to all types of homes.
Expenses can be divided into two categories: direct and indirect expenses. Direct expenses apply only to the area designated as your home office, used exclusively and regularly for business purposes. Painting, wall repairs, or other maintenance applying only to that area will be fully deductible expenses.
Indirect expenses involve the maintenance of your entire home, such as your utility bill. These expenses are deductible to the percentage of your home that is used for business (if your home office is 10% of the square footage of your home, you can deduct 10% of all indirect expenses).
Can I deduct my vehicle?
Daily transportation expenses you incur while traveling from home to one or more regular places of business are generally nondeductible commuting expenses.
If you use your car for business purposes, you ordinarily can deduct car expenses. You generally can use one of the two following methods to figure your deductible expenses.
- Standard mileage rate.
- Actual car expenses.
If you want to use the standard mileage rate for a car you own, you must choose to use it in the first year the car is available for use in your business. Then, in later years, you can choose to use either the standard mileage rate or actual expenses. There certain restrictions and limitations, when taxpayers are not allowed to use standard mileage rate. Give us a call to schedule a consultation to learn more about vehicle expenses.
Retirement Plan for Real Estate Agents
As a real estate agent you have many retirement plan options available to you. These retirement plan options generally provide current tax benefits while also offering tax deferred growth for your retirement accounts.
- Individual Retirement Accounts (IRAs): You and a spouse may be able to contribute up to $5,500 each into an IRA account for 2016 ($6,500 if age 50 or over). This includes both Traditional and Roth IRA’s for real estate agents.
- Simplified Employee Pensions (SEP) or Solo 401(k): You can contribute up to 20% of your net self-employment income to a maximum contribution of $53,000 for 2016.
The Solo 401K Plan offers a self-employed realtor the greatest retirement, tax, and investment advantages compared to a Traditional IRA, SEP, or SIMPLE IRA. A Solo 401K plan offers the same investment opportunities as a Self Directed IRA LLC, but without having to hire an IRA custodian, create an LLC.