What is an LLC (Limited Liability Company)?


FREE Income & Expense Excel Spreadsheet 2019 (Formula protected) 

 FREE Income & Expense Excel Spreadsheet 2018 (Formula protected)

Many business owners are experts in their field and leave the bookkeeping and tax matters to a professional, but they are not always cheap. For those who are already in business and are expanding and to those who are thinking of starting a business, here is some information that might help you decide on a business structure. 
 
An LLC is the least complex business structure. Starting an LLC gives you the perk of pass-through taxes, limited liability (obviously), and legal protection for your personal assets, one does not have to be a US citizen or permanent resident. Plus the added benefit enhanced credibility and looking more legit than the other guys. Note that an LLC is not a separate taxable entity. What does this mean? 

Let me explain. LLCs are great because they are flexible when it comes to determining how you want to be taxed. You have the option of taxing your LLC like a sole proprietorship, a partnership or a corporation by filing the appropriate forms with the IRS.

Once you have registered for an LLC, if you don’t do anything else, the IRS will automatically classify your LLC as either a sole proprietorship or a partnership depending on how many members (owners) the LLC has. If you are the only member in your LLC then the IRS will tax your LLC as if it were a sole proprietorship in which case you will file the LLC earnings in Schedule C with your Form 1040. If there are more than one members in your LLC, the IRS will treat it as a partnership where in the LLC will file Form 1065 and partners will receive a Schedule K-1 from the LLC and then report their share of earnings stated in Schedule K-1 in their individual tax returns. If husband and wife are the only members of LLC, they are still treated as a partnership here in NC, however, if the LLC of husband and wife is located in community property state, they have the option to be taxed as disregarded entity, meaning husband and wife can both file Schedule C avoiding having to file Form 1065 Partnership.

For example, if your LLC is yours and yours alone and you make $15, 000 profit, you will pay your share of taxes in your tax return. On the other hand, if your LLC has 3 partners with an equal share of the company, each partner will receive their share of earnings and deductions reported in Schedule K-1, each partner will have to include $5,000 share of income in each of their tax returns and that income will be subject to self-employment tax.
In both of these scenarios, unlike W2 income, no taxes are withheld. It would be wise to set aside some earnings to cover your tax liability comes tax season. 

Let’s look at the other options of changing the tax identity of your LLC. Some LLCs elect to be taxed as corporations (like a C-Corp or S-Corp). But why? The most common reason is that their business wants to keep a hefty amount of their profits in their LLC and these so-called “retained earnings” are generally taxed at a lower rate than they would be on a personal 1040 tax return. Income is taxed at corporate level, and again at the hands of shareholders when they receive it as dividends. That’s called double taxation. One of the reasons why many small to mid-size company go for S- Corp.

To elect corporate taxation, you'll have to file an “Entity Classification Election” (IRS Form 8832.) On it, there should be a section in which you can elect to be taxed as a corporation. If you choose to be taxed as an S-Corp, you will also need to file IRS Form 2553 “Election by a Small Business Corporation within 2 months and 15 days from beginning of tax year or you can file the election any time before the tax year for the status to be in effect.” Owners of LLC in S-Corp becomes an employee and must receive “reasonable salary” within the company’s industry. So payroll taxes are withheld from W2, and additional income is received as distributions. 

An LLC Operating Agreement is a Legal document that outlines the ownership and member duties of your Limited Liability Company. Although it is not required for an LLC to file an Operating Agreement in NC, it is highly recommended.
·         If you have business partners (Multi-Member LLC):
An operating agreement will help prevent misunderstandings by setting clear expectations about partner roles and responsibilities.
·         If you are the sole owner of an LLC (Single Member LLC):
Creating an operating agreement brings credibility to your LLC. This helps to ensure courts uphold limited liability status of your LLC.
You can find a sample of an LLC Operating Agreement (Member Managed) at                 www.dbtaxsolutions.blogspot.com

Here are a few items you need to consider when registering for LLC.
·         Choose a legal name and you may choose to reserve it with the State for $20
·         Choose your business structure
·         Who will manage your LLC (Member Managed/ Manager Managed)
·         Choose an agent, this could be you or someone who holds an office on regular hours
·         Draft and file Articles of Incorporation with NC State, filing fee is $127
·         Have an Operating Agreement as an “internal document”, NC does not require filing of OA, but it is recommended.
·         NC state require LLCs to file Annual report due on April 15th for $200
·         EIN (Employer Identification number) for LLCs that will have employees. Additionally, banks require EIN in order to open a business bank account.
·         Apply for business licenses or certificates in your industry
 
I find the following websites helpful for learning more about LLCs in NC. It’s called the LLC University. It gives mini lessons/videos on different aspects of LLC.

Business Link North Carolina is an association of volunteers solely to help entrepreneurs with starting a business, business structure, licenses and permits, business forms, etc. There services are at no cost. 

SCORE Association previously known as the “Services Corps of Retired Executives” is the nation’s largest network of volunteer, expert business mentors providing mentorship, workshops, and educational resources to aid business owners. Again, their services are at no cost.

I hope this information is helpful to you. If you have more questions about LLCs you can contact me at dbtaxsolutions@hotmail.com.








Tax Cut & Jobs Act and YOU


A new year brings new tax laws.  The only thing constant in tax world is change. Here are some notes to give you some idea on how the new tax laws affect you.

Personal Exemptions – (See 1040 Line 42, 1040A Line 26) In prior years you are able to claim exemptions for yourself, spouse, and any dependents, but in the new law there are no deductions for personal exemptions.

Standard Deductions – (See 1040 Line 40, 1040A Line 24) Generally speaking, if you normally file using standard deductions, then the new tax laws are likely favorable for you. Taxpayers can take a standard deduction or itemize their deductions whichever provides a larger benefit. Under the new tax law, the standard deduction amounts are almost doubled, and the itemized deductions allowed have been scaled back. The chart below illustrates the standard deductions by filing status for 2017 and the amounts under the new law for 2018.

FILING STATUS

2017

2018
Single & Married separate

$6,350

$12,000
Head of household

$9,350

$18,000
Married filing joint

$12,700

$24, 000
Additional: ELDERLY  & BLIND




Joint /Surviving spouse

$1,250

$1,300
Others

$1,550

$1,600

Itemized Deductions – (See 1040 Schedule A) Let’s look at some changes to various itemized deductions.
  • Medical Deductions – (Schedule A – Line 4) Individuals can still deduct their medical expenses to the extent they exceed a percentage of their income (AGI). This income limit has been reduced from 10% to 7.5% of AGI for years 2017 and 2018 and returns to 10% in 2019. 
  • Taxes – (Schedule A – Line 9) In the old law, taxpayers were allowed to deduct state and local income taxes, or sales tax if larger, real property taxes, and certain personal property taxes. You can still deduct these under the new law, but here is the catch - the overall tax deduction is limited to $10,000.
  • Home Mortgage Interest – (Schedule A – Lines 10-12) In past years, a taxpayer could deduct the interest on up to $1 million of acquisition debt for the purchase of the taxpayer’s first and second homes. In addition, taxpayers were allowed to deduct the interest on up to $100,000 of home equity debt. The new law reduces the $1 million limit on home acquisition debt to $750,000 ($375,000 for married separate filers) for first and second homes, except the lower limit won’t apply to indebtedness incurred before December 15, 2017. That is, the $1 million cap continues to apply to acquisition mortgages on a primary and second residence already in existence prior to December 15, 2017. However, starting with 2018 returns, the new law does not permit a deduction for any equity debt, which can have an adverse impact on individuals who have used their home equity to pay for costs of tuition, travel, cars, and other purposes. 
  • Donations to Charities – (Schedule A – Line 19) The only change here was that it increased the general 50% of income (AGI) limit on charity deductions to 60%. 
  • Casualty and Theft Losses – (Schedule A – Line 20) There will be no personal casualty losses will be allowed in 2018 except those incurred in a federally declared disaster area. 
  • Job Expenses and Certain Miscellaneous Deductions – (Schedule A – Line 27) This category is no longer deductible under the new tax law. 
Tax benefit for parents -Taking away exemptions deductions for dependents doesn’t seem fair for large families. However, this loss and more should be made up for by the expanded Child Tax Credit, which is available for qualified children under age 17. Specifically, the bill doubles the credit from $1,000 to $2,000, and also increases the amount of the credit that is refundable to $1,400.
In addition, the phaseout threshold for the credit is dramatically increasing.

Tax Filing Status Old Phaseout Threshold New Phaseout Threshold
Married Filing Jointly $110,000 $400,000
Individuals $75,000 $200,000
Data source: Tax Cuts and Jobs Act.

If your children are 17 or older or you take care of elderly relatives, you can claim a nonrefundable $500 credit, subject to the same income thresholds.

Furthermore, the Child and Dependent Care Credit, which allows parents to deduct qualified child care expenses, has been kept in place. This can be worth as much as $1,050 for one child under 13 or $2,100 for two children. Plus, up to $5,000 of income can still be sheltered in a dependent care flexible spending account on a pre-tax basis to help make child care more affordable. You can't use both of these breaks to cover the same child care costs, but with the annual cost of child care well over $20,000 per year for two children in many areas, it's safe to say that many parents can take advantage of these credits, both of which remain in place.

Education Credit
Earlier versions of the tax bill called for reducing or eliminating some education tax breaks, but the final version does not. Specifically, the Lifetime Learning Credit and Student Loan Interest Deduction are still in place, and the exclusion for graduate school tuition waivers survives as well.
One significant change is that the bill expands the available use of funds saved in a 529 college savings plan to include levels of education other than college. In other words, if you have children in private school, or you pay for tutoring for your child in the K-12 grade levels, you can use the money in your account for these expenses.

Affordable Care Act
I almost forgot to mention that about the Obama care penalties. Although, the attempt to repeal the Affordable Care Act was unsuccessful, the new tax reform bill repeals the individual mandate, meaning that people who don't buy health insurance will no longer have to pay a tax penalty.
It's worth noting that this change doesn't go into effect until 2019, so for 2018, the penalty can still be assessed.

Depending on where you sit within the tax brackets below, the new tax laws could either be a yay or a nay for you. While everyone might benefit one way or another, the most part of the benefits go to the higher income bracket and more so to businesses as opposed to individuals. The tax brackets reverts back to current level by 2026, however, the business tax cuts are more permanent. 

Rate
    Individuals
     Married Filing Jointly
      Head of HH
10%
    Up to $9,525
     Up to $19,050
      $0 to $13,600
12%
    $9,526 to $38,700
     $19,051 to $77,400
      $13,600 to $51,800
 22%
    $38,701 to $82,500
     $77,401 to $165,000
      $51,800 to $82,500
24%
    $82,501 to $157,500
     $165,001 to $315,000
      $82,500 to $157,500
32%
    $157,501 to $200,000
     $315,001 to $400,000  
      $157,500 to $200,000
35%
    $200,001 to $500,000
     $400,001 to $600,000
      $200,000 to $500,000
37%
    over $500,000
     over $600,000
      $500,000 and up


Data Source: Tax Cut and Jobs Act

This article does not cover all the changes under the new tax laws, including some business changes, such as new deductions for qualified businesses whether it be a Sole Proprietor, Partnership, or S-Corporations. Contact me at DB Tax Solutions, telephone 252-425-6724 if you need help with your tax return or tax planning. Visit my website for more information at www.dbtaxsolutions.blogspot.com