Tax Preparation
Moving to California? We specialize
in multi-state tax returns and relocation income tax planning...
Q. I am thinking
of incorporating my company. What are some of the issues I need to consider?
A. There are quite a few things to consider. First of all, there
are two types of corporations: A regular "C" corporation which is taxed
on the profits it generates, and an S corporation which is not subject
to tax at the corporate level for federal purposes but is subject to a
1.5% rate of tax by the State of California (for corporations doing business
in California). A "C" corporation is generally taxed according to a graduated
corporate tax schedule, a portion of which is illustrated below (for taxable
incomes of up to $10,000,000). Note that there are three additional tax
brackets for taxable incomes over $10 million which are not presented
below:
| 0 to $50,000 |
15% |
| $50,000 to $75,000 |
25% |
| $75,000 to $100,000 |
34% |
| $100,000 to $335,000 |
39% |
| $335,000 to $10,000,000 |
34% |
You should be aware that "Personal Service Corporations" are
taxed at a flat rate of 35%.
Q. My tax return shows quite a large estimated
tax penalty. Is there some way I can reduce the penalty?
A. Possibly. You may benefit by using the annualized income installment
method of calculating the estimated tax penalty. Under this method, you
may be able to show how the penalty should be smaller because the income
that generated the penalty was not received until later in the year. Income
is normally assumed to be received equally throughout the year. IRS Publication
505 can be helpful in completing what can be a fairly complex Form 2210.
Q. Should I incorporate in Delaware?
A. If you plan to do business in the State of California, then
you will have to pay fees to California. If you are a small or medium sized
business based in California, check out the benefits of incorporating in
Delaware before going ahead with that decision. There can be benefits
to incorporating in Delaware, but if your company will not realize anyof
those benefits, why pay fees to two states? You can see California's
schedule
of fees for foreign corporations on their website.
Q. My company maintains a fairly large inventory of items
for sale throughout the year. Which method
of accounting is my company required to use, the cash method or the accrual
method?
A. According to Internal Revenue Regulation §§ 1.446-1(c)(2),
"In any case in which it is necessary to use an inventory the accrual
method of accounting must be used with regard to purchases and sales
unless otherwise authorized..." A company can change its method of accounting
by requesting permission from the Internal Revenue Service. The IRS has
recently issued guidelines which are intended to make it easier for companies
to change their method of accounting (Refer to Revenue Procedure 97-37).
Q. I owe the IRS quite a bit of money
and at the rate I am going it will probably take years to pay them off.
How does an Offer in Compromise work?
A. An Offer in Compromise refers to a program created by the IRS to
collect tax on accounts that either will not be collected in the
foreseeable future or may not be collected at all. The IRS will
consider a taxpayer's "offer" to settle the account immediately
for less than what is due. When considering a taxpayer's offer
to settle a tax debt for less than the amount due, the IRS will
consider a number of factors. The following types of issues will
be considered by the IRS when considering an Offer in Compromise:
Will the taxpayer's ability to pay the tax due increase in the
near future? Is the taxpayer insolvent? How long will the taxpayer
take to pay the oustanding tax under the current payment arrangement?
Does the taxpayer have assets available with which to settle the
tax debt? How is the taxpayer's health? You can get a copy of
Form 656 by calling the IRS at 1-800-829-3676. Also, check out
the IRS
website for the mechanics of filing an offer.
Q. We have not filed tax returns for
several years and are now looking to get everything caught up. How do we
go about getting the whole situation straightened out without the IRS demanding
immediate payment for thousands of dollars?
A. You can first have all of your returns prepared to see if
you owe tax. If you determine that tax is due, you can request a monthly
payment arrangement with the IRS. The amount of the monthly payment will
depend on your income and living expenses. When you establish the payment
arrangement, the IRS will normally mail you a payment reminder each month
until the entire amount of tax is paid.
