Tax Filing in the US
Year-end is a period of great stress, especially for the start-ups. In this article, we have tried to list out some major points which are useful for the first time filers. Also for the old filers who want to know in detail about their tax filing in the US. Check out this two scenarios which will help you in a better filing.
Cases for Tax Filing in the US
Scenario 1: Sole Proprietor
Tina earns about $30,000 from her part-time wildlife photography business. She is now going to file her business tax for the first time. For this, she is dealing with a tax adviser to find out how to file the tax and write off.
Filing Tax as a Sole Proprietor
The business in which Tina is dealing is a Sole proprietorship, that means she is the only owner of her business and no one accompanies her. This shows that Tina needs to file her taxes together in all using a Schedule C (Profit or Loss from a Small Business) with her Form 1040 instead of filing a separate business tax return. In line 1 (“Gross receipts or sales”) of Schedule C, Tina will report all the income she’s earned throughout the taxation year.
Since Tina is self-occupied, she requires to track her income from all sources as well as anything that of mentioned by the client on form 1099. She has to pay all the taxes on her net income, so she needs to mention all her expenses in Schedule C to reduce the taxes.
Ways for sole proprietors to save on taxes
Lucy is working from home, so she is able to lessen some of her housing costs on a Form 8829 (Expenses for Business Use of Your Home) which includes rent or mortgage payments, insurance, and utilities.
It doesn’t matter if she uses or not, or how much area does she use of her office. How she uses her home office. After consulting with her accountant, she found that she can write off 5% of her home expenses.
She also has the right to apply claim for the equipment she has bought for the business purpose. She can make them as depreciated items. In Tina’s case, this means the new Handycam she bought last month. She’ll fill out a Form 4562 to get the true value of her laptop.
Tina is working from home and has to drive to meet her clients at the place of their choice, so her accountant tells her that she can deduct some of her car expenses. She can use the current standard mileage rate to calculate her expenses, which calculates fuel, insurance or repairs, etc. This exemption would not be applicable if she would have traveling to and fro by any transport from a rented office.
Scenario #2: Partnership
James and 4 of his friends started a financing services company at the beginning of this year. Their business was sharing an equal partnership. James was previously a sole proprietor, so every time he just paid taxes according to that rules. But now for the first time, he has to pay partnership tax. So he has asked an accountant for help.
Filing Taxes as a Partnership
Partnership taxation procedure has two parts. Income from the business reports itself on Form 1065. And the individual partners each have to file a Schedule K-1 form based on their share of the business.
James and his partners will give their accountant a Profit and Loss Statement. It shows the net income or loss, revenue sources, and deductible expenses. They will provide proper balance sheets for the beginning and end of the year. No tax will be calculated or paid from the 1065 form. This is because partnerships are considered “pass-through” businesses. In this, the taxes pass through the individual owners.
Related Topic: What exactly is Double Entry Accounting?
Each partner needs to provide the accountant their genuine partnership agreement so that their personal shares of the information captured in 1065 can be recorded in their Schedule K-1. It is also necessary for them to show their shares of the profit, losses, capital, and liabilities at the beginning and end of the tax year. Also, their share of income and any money paid out to each partner.
The 1065 and Schedule K-1 get sent to the IRS together, while the partners’ personal tax returns are filed separately.