QUESTIONS & ANSWERS
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1. Who must file IRS Form 8453-S?
If you’re filing your S-Corp Form 1120-S through an intermediate service provider (ISP) and/or transmitter and you’re not using an electronic return originator (ERO) you must file 8453-S. Our Firm is an ERO, thus you would fill out IRS Form 8879-S in order for us to electronically file your 1120-S Return.
2. When do I need a Texas Sales Tax ID Permit?
If you are selling or leasing tangible personal property in Texas or selling taxable services in Texas than you need to apply for a Texas Sales Tax ID Permit and remit the sales tax you collect from your customers to the Texas Comptroller of Public Accounts on a periodic basis.
3. How do I know if an entity is a qualified tax exempt organization to whom I am making a charitable contribution?
IRS provides and maintains an online search tool, for free, called Tax Exempt Organization Search (TEOS) (formerly EO Select Check) that allows users to determine whether an organization is eligible to receive deductible charitable contributions. Visit the site to verify if the entity you are making a charitable contribution to is active.
For tax years 2018-2025, you may be able to deduct 60% instead of 50% of cash contributions to public charities.
4. What is a disregarded entity?
A company such as a Single Member Limited Liability Company (SMLLC) with one member that does not elect to be taxed as a corporation is considered a disregarded entity, meaning it is completely ignored for tax purposes and the taxpayer, the single owner/member, is treated as a sole proprietorship. This means the SMLLC business revenue and expenses are all reported on the individual’s personal tax return.
5. Is there a limit on the number of different type of owners an Limited Liability Company (LLC) can have?
No, there is is no limitation on the different type of owners of LLCs. S Corporations may generally only have U.S. resident individuals or certain types of trusts as shareholders.
6. If we have two members in a LLC, what is our default tax entity?
An LLC with two or more members is taxed as a partnership by default. Meaning, it should file a partnership return (1065). The partnership return will produce a K-1 for each partner. Each partner should report their K-1 amounts on their personal tax return (1040) for that year.
7. What is the difference between an “Accountable Plan” and a “Non-Accountable Plan” with regards to reimbursement of employee expenses by a business?
When an employer and employee have an arrangement in which an employer agrees to reimburse expenses paid by an employee, the expenses is either covered under an accountable plan or non-accountable plan. Amounts paid under an accountable plan are deductible by the employer and not reported as income to the employee. However, amounts paid under a non-accountable plan are deductible by the employer but reported as compensation to the employee. Make sure you have an accountable plan beforehand.
An accountable plan must satisfy the following conditions:
*Expenses covered under the plan must be business related
*Plan must requires employees to substantiate the covered expenses, and
*Plan must require employees who receive advances to return any excess amount over the actual expenses paid for by the employee.
8. How much are business meals deductible for tax purposes?
Generally, you are allowed to deduct 50% of business meal expenses. Unless, the business host a company-wide event in which majority of the employees are present, the cost of food provided maybe eligible for 100% business deduction. Furthermore, working lunches provided by employer on employer property for the convenience of the employer to more than half of its employees is eligible for 100% business deduction. In addition, these meals are not income to your employees and are considered fringe benefits.
9. Should I elect to be taxed as a S-Corporation if I am a SMLLC?
It depends on a number of situations. However, there are benefits of electing to be taxed as S-Corp as you can potentially have on self-employment taxes. However, you do have to subscribe to payroll as you should take a reasonable compensation for the services you provide to your newly elected S-Corp. Refer to this article for more information.
10. What is the Qualified Business Income (QBI) Deduction?
QBI is a new deduction from the Tax Cuts and Jobs Act (TCJA). This deduction allows you to deduct up to 20% of income deduction for sole proprietors and owners of flow-though entities such as S-Corp and partnerships. Find out today if you qualify. This can dramatically reduce your overall tax liability.
11. Can I deduct the value of services I provide to a charitable organization?
No, the value of services you contribute is not deductible as charitable contribution. However, out-of-pocket unreimbursed expense is a deductible contribution. Find out how much you can deduct for expenses incurred in volunteering.
12. What is reasonable compensation?
Reasonable compensation is the amount that would normally be paid for services performed by an individual in ordinary situation.
13. I am a self-employed individual, can I deduct health insurance premiums paid for myself and my spouse?
Yes, a self-employed individual may deduct 100% of amounts paid during the year for health insurance for himself or herself, as well as for his or her spouse. In addition, a self-employed individual may deduct from gross income 100% of amounts paid for health insurance coverage. Note for this purpose, partners in a partnership and 2% or greater shareholders of an S-Corporation who are employees are considered to be self-employed.
14. What is the difference between and employee vs an independent contractor?
Per IRS, you generally are not an employee unless you’re subject to the will and control of the person who employs you as to what you’re to do, and how you’re to do it.
15. Is Severance pay included in my taxable income? Furthermore, is severance pay subject to Federal withholding tax, FICA taxes, and FUTA tax?
Severance pay is income to you and should be included in your gross income. Further, severance payments are subject to federal income tax along with FICA (SS and Medicare) tax and FUTA taxes. However, only employers pay for FUTA and not employees.
16. Is Unemployment benefits taxable to an individual?
Yes, unemployment benefits are considered wages and fully taxable. You should receive a 1099-G indicating the amount of unemployment benefit income to report on your personal 1040 federal tax return.
17. Do I have to file a federal tax return?
No, not every one is required to file a federal tax. If your income for the year is less than your standard deduction than you may not be required to file a return this year.
18. If I have a L-1 Visa (non-immigrant working visa) what are my federal income tax requirement for U.S. derived income?
This is a complex question and answers may be unique to your situation. We recommend you schedule an appointment with us here to discuss your specific situation. Nonetheless, if you stayed in US for more than half the year and worked as an employee, you are more likely than not will be qualified as a Resident Alien for tax purposes. Which could mean you would file your return as a normal Resident Alien and be subject to the same laws and regulation. You may obtain a Social Security Number from the Social Security Administration office. Your Social Security number will allow your employer to deduct payroll taxes when they provide a paycheck to you.
19. What is a tax credit?
A tax credit reduces your actual taxes. For each dollar of tax credit you can reduce your taxes by that amount. Meaning if you have $500 in tax credits you can reduce your taxes by $500. There are two types of credits. A refundable credit and a non-refundable credit. Per IRS, a nonrefundable tax credit means you get a refund only up to the amount you owe and a refundable tax credit means you get a refund, even if it’s more than what you owe.
20. What is a tax deduction?
A tax deduction is a IRS deduction that you can subtract from your income to calculate the amount of tax you owe to IRS. For example, your medical insurance premiums that you paid qualify for an IRS deduction expense. Thus, you can subtract your medical expenses from your income to calculate the amount of taxes you owe.
21. Do I have to file an IRS Form to get an automatic extension to file my tax return (1040) later?
Yes, you file Form 4868, to request an automatic extension of 6-months from IRS to file your tax return.
22. Do I have to make tax payments on the original due date of my return, such as 4/15/XX?
Yes, you should make your pay the amount of tax you owe by the original due date of your tax return even if you have requested an automatic 6-month extension to file your return using Form 4868. If you don’t, per IRS you will owe interest on unpaid tax and may own penalties.
23. What is my tax status if I temporary live and work in USA?
Your tax status can be anyone of the following depending on multiple factors:
- Resident Alien
- Non-Resident Alien
- Dual-Status Alien
Schedule an appointment with us to discuss your case and find out if you need to file a US Federal and State tax return(s). Not filing a return and paying taxes may potentially jeopardize your legal status.
24. What is the difference between earned income and un-earned income. How do they relate to Gross Income?
Earned income = Per IRS, earned income includes all the taxable income and wages you get from working.
Unearned income = comprises of income and benefits you received that are not part of earned income.
Gross income = is the total of earned and unearned income.
Below are some examples of earned and unearned income to help you relate to the concepts.
Examples of Earned Income | Examples of un-Earned Income | Included in Gross Income calculation |
1 – Salary | 1 – Taxable Interest income | Y = BOTH |
2 – Wages (hourly employee) | 2 – Ordinary Dividends | Y = BOTH |
3 – Tips | 3 – Capital Gain Distributions | Y = BOTH |
4 – Professional Fees | 4 – Unemployment Compensation | Y = BOTH |
5 – Sch C income (Net earnings from Self-employment | 5 – Taxable Social Security Benefits received | Y = BOTH |
6 – Taxable Fellowship Grant | 6 – Pension payments received | Y = BOTH |
7 – Taxable Scholarship Grant | 7 – Annuities payments received | Y = BOTH |
8 – Disability retirement benefits until you reach minimum retirement age. | 8 – Distribution of un-earned income from a Trust | Y = BOTH |
9 – Alimony | Y | |
10 – Child Support | Y |
25. If my employer provides as a benefit, day care services, is that taxable income to me?
If your employer pays for day-care expenses of your child over a certain dollar amount (5K) than that amount is taxable income to you. The entire cost of providing the benefit to you is deductible to the employer
27. How are fringe benefits paid to S-Corporation employees who are not shareholder(s) treated?
In most cases, fringe benefits paid to S-corp employees who are not shareholders, or who own 2% or less of the outstanding S corporation stock, are tax free. They may be excluded from the employees’ wages and are deductible as fringe benefits by the S-corp.
28. How are fringe benefits paid to S-Corporation “Owner-employee,” meaning those individuals who own more than 2% of S-Corp(s) treated?
In most cases, fringe benefits paid to S-corp employees who own more than 2% of the outstanding S corporation stock, are taxable to the shareholder. These so called “owner-employees” are treated like partners in a partnership when it comes to fringe benefits.
29. How are health insurance premiums for 2% Shareholder of a S-Corp treated?
Per IRS guidance, S-Corp may deduct 100% of health insurance premiums that are paid by or reimbursed by the S-Corp to an “owner-employee” as long as the premiums are included in the “owner-employee” W-2 wages. Thus, premiums paid are subject to federal withholding but not FICA as the premiums are considered medical or hospitalization expenses in connection with sickness or accident disability.
The premiums for accident and health insurance paid by an S corporation are treated for income tax purposes like partnership guaranteed payments.
The 2-percent shareholder is required to include the amount of the accident and health insurance premiums in their gross income.
Health Insurance Premiums | S-Corp Business Deduction (Y/N) | Income for Employee-Owner | Income Subject to Federal Withholding | Income Subject to FICA (Social Security and Medicare) Taxes | Self-Employment Health Insurance Deductible | Income and Deduction Off-Set Each Other – No Net Tax |
2% Owner-employee | Y – 100% | Y | Y | NO | Y – Schedule 1, Line 29 (2019) and Line 16 (2020) | Y |
Only employee | Y – 100% | N – Health Insurance premiums paid by employer on your behalf is not income to you as an employee. | N/A | N/A | N/A | N/A |
IRS section 106 allows an employee to exclude from the gross income the premiums paid by employer-provided coverage under an accident and health plan. However, a 2-percent shareholder is not an employee for purposes of IRS section 106, thus the premiums are not excludible from the 2-percent shareholder-employee’s gross income.
30. As an employer, can I deduct as expense for tax purposes the fringe benefits, I provide to my employees?
Yes, generally, employers are allowed deduct full or portion of the value of fringe benefits provided to employees. Providing fringe benefits is a great way to retain employees.
In addition, certain fringe benefits received by an employee is not included in his/her taxable income. Thus, not subject to Federal withholding or Social security or Medicare taxes for both the employer and employee.
31. What type of fringe benefits provided by an employer to an employee is excluded from employee’s income as well as deductible as an expense for the employer?
They include:
- No-additional-cost services
- Qualified employee discounts
- De minimisfringe benefits
- Working condition fringe benefits
- Qualified transportation fringe benefits
- Qualified moving expense reimbursements
- Qualified retirement planning services
- On-premises athletic facilities and
- Qualified military base realignment and closure fringe benefits
What to learn more about the fringe benefits, schedule a meeting with us here, to discuss your specific situation.
32. What are different types of savings account?
Below are three of the most popular savings account with regards to paying for medical expenses.
What is HSA?
HSA stands for Health Savings Account. You or your employer can contribute to HSA your pre-tax dollars to this account simultaneously. It is for people who are enrolled in a HIGH deductible health plan (HDHP). HSA is available to you as an employee or self-employed business owner. You can use your pre-tax contributions later for qualified medical expenses. HSA contribution limits will depend on your health coverage that is for self-only coverage the amount is 3,450 and for family coverage the amount is 6,850. If you don’t use your contributions during the year for qualified medical expenses, the money stays in your account to be used later. You don’t loose your money as you would under FSA.
What is MSA?
MSA stands for Medical Savings Account. You or your employer can contribute to MSA your pre-tax dollars but not both. It is also for people who are enrolled in a HIGH deductible health plan (HDHP). However, MSA aka Archer MSA is only available to self-employed individuals or employees who’s company has 50 for fewer employees. HSA is the newer version of MSA. You can use your pre-tax contributions later for qualified medical expenses. MSA contribution limits are 65% of your plan deductible. If you don’t use your contributions during the year for qualified medical expenses, the money stays in your account to be used later. You don’t loose your money as you would under FSA.
What is FSA?
FSA stands for Flexible Savings Account. You or your employer can contribute to FSA your pre-tax dollars. Employer can contribute upto 500, after which they can contribute dollar for dollar based on how much you contribute up to 2700. With FSA, you loose the balance on your account each year unless the employer allows you to carry over up to 500 each year. You don’t have to be enrolled in a HDHP. Again, if you don’t use the money you contribute in your FSA, you loose it at the end of the year. So, carefully plan how much qualified medical expenses you might incur during the year and make your contributions accordingly.