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Take Advantage of the New Estate Tax Law and get Tax Relief

September 20, 2011 By

Estate Tax Law

In December 2010, Congress passed a law that increased the limit of the tax-free wealth that can be transferred by an individual to heirs from $2 million to $5 million. This is an increase of 150% and is significant to any U.S. citizen who has that kind of wealth and is willing to transfer it to his or her children or other beneficiaries. However, this law does not only benefit wealthy individuals. Couples can now take advantage of the new law to plan on their wealth so as to save on taxes. Below are some considerations when making such plans:

Transfer within Spouses

According to the law, an individual can give or transfer wealth to their spouse without paying any taxes. There is no cap to the amount that can be transferred. In essence, this means that a married couple has a tax free limit of $10 million ($5 million for each spouse) to transfer to beneficiaries under the revised Estate Law.

Transfer of Lifetime Limit to Surviving Spouse

Another adjustment that was made to the Estate law was that a surviving spouse could inherit the tax free limit of the departed spouse. In other words, any non utilized limit of the spouse that dies is transferable to the surviving spouse. For example, if a married couple had not utilized any of their tax free limit for estate transfers and one of the spouses dies, the surviving spouse would inherit the unused limit of the deceased spouse and therefore have a limit of $10 million to transfer to children or other heirs. However, if the second spouse died, the only amount of wealth that would be transferred tax free to the heirs would be within the limit of the second spouse, and not both spouses. The law only allows a tax free transfer of the “basic exclusion” upon death, which means the limit of only the person who has died. Any transferred limit is therefore lost.

Using Trust Accounts to Bypass the Law

However, to avoid the surviving spouse losing the tax free limit of the dead spouse once he or she dies, estate lawyers are now setting up family trusts to bypass this law limitation. This is how the trust works: the surviving spouse transfers funds to a family trust to the limit of the tax free balance of the spouse who has passed on. The revenues from the trust are paid to the surviving family members. Once the second spouse dies, wealth within his or her tax free limit can then be transferred either directly to the heirs or to the trust. The wealth that was originally in the trust will not be considered again for the tax free limit as it was transferred to the trust under the limit of the first spouse to die.

Time-line for Estate Law

When setting up trusts and taking advantage of the new limits for the adjusted Estate law, you need to be aware that this law is temporary. The $5 million limit is set to expire in 2012, therefore, reverting back to the former $2 million limit. The rule of transferring the limit of a dead spouse to the surviving spouse will also expire in 2012. However, with the current mood of politicians, it can be projected that that the limit-transfer rule may remain effective post 2012. President Obama has personally vouched to keep this rule beyond its expiration time. Besides this, this rule has become very popular and has gotten a lot of support and experts foresee it becoming permanent in the tax books.

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IRS Help: What to do when contacted by the IRS Criminal Investigation Division

September 8, 2011 By

The IRS implements a meticulous system that seeks to identify all tax offenders. The IRS categorizes tax offenses in two categories. Negligence is when a taxpayer makes an error either by having erroneous figures or mathematical calculations in their tax returns or erroneously misses various entries while filing. Negligence is seen as not being willful in the discrepancies in figures and the IRS only seeks civil charges against those who are negligent. On the other hand, fraudulence involves outright cheating on your taxes. This is a willful act of defrauding the IRS to avoid paying due taxes. This includes crimes such as having two sets of accounting records for fraud purposes, forging receipts and other documentation, altering figures in various tax records, and not filing a tax return with no valid reason. For such crimes, the IRS pursues both civil and criminal charges.

According to an analysis by the IRS, 17% of taxpayers cheat on their tax returns. The main culprits are employment occupations, businesses that are cash intensive, and service industry workers. This includes bar waitresses, lawyers, doctors, construction workers, domestic workers, and way-side shops. However, the IRS prosecutes very few tax cheats. In a recent tax year, the IRS charged 2,472 taxpayers for criminal offenses, which accounted for only 0.002% of taxpayers. However, these statistics should never be an incentive to cheat on your taxes. The IRS is actively increasing its audits to track down and pursue both negligent and fraudulent taxpayers. 2010 statistics show that the IRS has increased audits in all taxpayer groups. Furthermore, when the ax falls your way, the consequences are really not worth the risks on lying on your returns.

Criminal investigations conducted by the IRS are handled by the IRS Investigations Department. The department has special agents who investigate various potential tax cheats and prosecute taxpayers once they have enough evidence to build a case. If you are ever contacted by one of these special agents, you should be aware that you are being investigated for criminal charges. Here is what to do if you find yourself in such a situation:

  • Ask for Identification – If you are approached by an individual or team of people claiming to be special agents from the IRS Investigations Department, you should ask them for a business card or identification. If the contact is on email or telephone, do not divulge any information whatsoever to them. There are many identity theft scams that are circulating and their aim is to steal your information for malicious use. Besides this, receiving a business card is good for future reference when contacting or referring to the IRS agent assigned to your case.
  • Do Not Answer Questions – After they identify themselves and give you a business card, ensure that you do not give any information about your taxes. The Fifth Amendment in the U.S. Constitution gives you a right to not bear witness against yourself in a criminal case. This means that the agents have no right to get you to talk in any way, concerning your taxes or any other matter that may incriminate you.
  • Beware of the Witness Trap – You should also be careful about the witness trap. The IRS Investigations Department special agents will usually tell you that they are not investigating you but rather, they want you to be a witness in a case. Once they gather enough evidence, they then seek criminal charges against you. Therefore, even if they tell you that they are not investigating you, do not give them any information.
  • Seek Legal Counsel – Next, you should consider seeking legal counsel to get help on how to handle the situation. Your attorney will advise you on what to do and he or she will represent you in criminal claims for your IRS problems.

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IRS Payment Options if you are Unable to Pay Taxes Due

September 2, 2011 By

If you find yourself in a situation where you are unable to meet your due taxes before the tax deadline, do not despair. There are available options that you can take advantage of to ensure that you do not agitate Uncle Sam. Here is what to do if you find yourself in such a situation:

File a Tax Return

Ensure that you file a tax return, even if you are unable to pay off the due taxes immediately. There are worse consequences if you do not file the return. Not filing amounts to more tax troubles and may even surmount to criminal implications.

Consider Various Options for Paying your Due Taxes

Once you have filed your tax returns, you need to plan on how you will pay the taxes due. Depending on the amount of taxes that are owed, you may consider the following options for delayed payments:

  • Request for Short Delay – If you will have the funds to pay the taxes within 120 days, then you may call the toll-free IRS number and request for a short delay. The IRS customer service representatives handling such issues are permitted to make an interest and penalty free extension of up to 120 days if you provide a good reason for the delay.
  • Installment Agreement – If the amount you owe is below $25,000.00 and you are not able to pay it all in one lump-sum, you can apply for an installment agreement under the Online Payment Agreement service available on the IRS website. You can also call the toll-free IRS number to set up this installment agreement. The installment agreement is automatic for any taxpayer who owes below $25,000.00 and you can determine the installments to pay as long as you will repay within the required period. This installment agreement also has an extra advantage – you will not be requested to provide financial statements or any further paperwork. However, you will need to pay interest on the taxes due and late payment penalties. The interest rate for tax debt to the IRS is currently at 4% and is subject to change every three months. The late fee is currently 0.25% for Installment Agreements and 0.5% for tax debts outside IRS payment agreements.
  • Consider Borrowing – You can also consider taking a loan to clear your due taxes. However, you will need to compare the amount to pay if you took up a loan against making late payments through installments. Depending on your loan terms, you can check if the loan interest will amount to more than what the IRS will charge in interest and lateness fees. If the loan interest rate is less than that of the IRS’s deal, then it would be advisable to take the loan and pay off your taxes. However, if it is cheaper to take the IRS Installment Agreement, you should not be hesitant as there is no recourse to taking the agreement.
  • Prioritize Between State and Federal Taxes – If you owe both Federal taxes and State taxes, you should also do a comparison of the charges to be levied if you are late on either of the taxes. You can then pay off the taxes that bear more charges in interest and late fees and place an installment agreement with the tax authority with lower charges.
  • Seek Professional Help – If you owe over $25,000.00 or are still unsure about how to handle your tax dilemma, you may consider seeking help from a tax professional on what to do regarding which option to select.

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Top 10 IRS Tax Deductions and Tax Credits in 2011

September 1, 2011 By

The 2012 April tax season that accounts for the 2011 tax year may seem far and most taxpayers may not be overly concerned with their taxes at the moment. However, being conscious of tax matters as the year goes by ensures that you not only have a smooth tax time as you draw close to the next tax season, but also capitalize on the available tax opportunities. The major way in which taxpayers get tax savings from their returns is through tax credits and tax deductions. Below are 10 of the most common tax deductions and credits that you may qualify for in the 2011 tax year.

1. Charity Donations

Donations are the easiest and one of the most common tax deductions. The tax code allows for a tax deduction of donations made to any qualifying tax-exempt organization. In 2011, the IRS released a list of the organizations that had lost their tax exempt status due to non compliance with various regulations. A taxpayer therefore, needs to verify that an organization is qualified as tax exempt to be able to qualify for the tax deduction. For donations above $250.00, you will need an acknowledgment from the organization that you have donated to as support documentation for the tax deduction. For non-cash contributions above $500.00, you will need to file Form 8283, “Non-cash Charitable Contributions Form”. Non-cash items that are above a given threshold will also require a valuation from a qualified appraiser.

2. Child Care Tax Credit

The Child Care Credit is given to parents or guardians who spend money to have their children or qualifying dependents taken care of while they are out working. The credit can be claimed for regular child care or even for a summer day-camp. The amount to claim depends on one’s income and the number of children. The allowed credit ranges from 20% to 35% of one’s income. The credit also has an annual cap of $3,000.00 for a single child and $6,000.00 for more than one child.

3. Mortgage Interest

The mortgage interest tax deduction allows homeowners who are paying for a mortgage to claim a deduction on the mortgage interest paid on their primary residence and qualifying second home. Various rules govern the qualification of primary residence and second home and you will need to ensure that your homes qualify before deducting these expenses. Besides mortgage interest, you can also deduct the real estate taxes paid on non-business property.

4. Medical Expenses

Various medical expenses can be tax deductible for taxpayers who choose to itemize their tax deductions. The qualifying deductions are subject to a threshold of the excess of 7.5% of one’s Adjusted Gross Income. The expenses include travel related to medical care, out-of-pocket medical expenses, and health insurance premiums. For out-of-pocket expenses, there are various items that qualify and you can get a comprehensive list of qualifying medical expenses from the IRS website.

5. Health Savings Account

Contributions to a Health Savings Account (HSA) are also tax deductible. However, the HSA must be a qualify one for the tax deduction. Interests earned from the account are also not taxable. However, for a HSA to qualify, it must be a high-deductible health plan.

6. Work Related Expenses

There are various work related expenses that are IRS tax deductible. Various training expenses, business travel (excluding travel from home to the office), qualifying work uniforms and work clothing, and qualifying entertainment expenses for potential clients are tax deductible, subject to various IRS rules. These expenses only qualify for deductions if they were not reimbursed by the employer.

7. Home Offices

For people who work from their homes, they can deduct various home expenses that are related to their home office. You will need to determine and apportion the home expenses that are attributed to the home office to deduct the costs. The expenses include rent, insurance, mortgage, repairs and maintenance, other related utilities, and depreciation.

8. Qualifying Retirement Savings

Contributions to various qualifying retirement accounts such as 401(k) accounts and IRAs are also tax deductible. For the 2011 tax year, the cap on the contributions to these retirement accounts is $16,500.00. For senior citizens above the age of 50, the tax exempt limit goes up to $37,500.00.

9. Education Expenses

The tax code also allows for tax deduction of various education-related expenses. For the 2011 tax year, there is a cap of $4,000.00 for tax deductions of tuition-related expenses. You can also claim the American Opportunity Tax Credit if you qualify for it.

10. Student Loans

Interest paid on student loans is also tax deductible subject to an annual cap of $2,500.00. This applies only to the interest and not the principal. However, to qualify for this tax deduction, you must be earning an income of less than $70,000.00 for single taxpayers or $145,000.00 for married taxpayers who file their taxes jointly.

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Filing Federal Income Tax is Getting Easier – and it’s Free

August 24, 2011 By

The IRS is making it easier for taxpayers to file their federal income tax returns. This year, you may be able to file your 2010 taxes using free tax software directly through the IRS website.

If you made $58,000 or less in 2010 in taxable income, you will definitely be able to find tax software that you can use on the IRS website. The software is available to certain taxpayers, depending on income, state of residency, and age. You will find the software at http://www.irs.gov/freefile. Some filing options are also available in Spanish.

Once you select which third party company you want to use, you will be directed away from the IRS website and to that company’s website. There, each software program has step-by-step processes to follow to complete your tax return. The software will ask you questions to qualify you for the appropriate tax form, which it retrieves for you to fill out. It will also help you find some tax breaks, such as the popular Earned Income Tax Credit.

98% of Free File users have been satisfied with the product and recommend its use to others. 30 million tax payers have used Free File since 2003. If you combine Free File with direct deposit, you may receive your return in as few as 10 days!

Free File uses secure technology to protect taxpayer information. If you make more than $58,000 or are comfortable filling out the forms on your own without the assistance of tax software, the IRS offers Free Fillable Forms. These forms, also available at http://www.irs.gov/freefile, do not come with software assistance, but do basic math calculations. While some Free File software companies offer state tax return assistance, Free Fillable Forms do not. However, e-filing with this method is free and suits the do-it-yourself taxpayer who prefers paper tax filing.

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IRS Removes Controversial Two Year Limitation on Innocent Spouse Relief

August 23, 2011 By

The IRS has made a historic removal of a two year limitation rule the Innocent Spouse Relief starting July 2011. This removal of the 2-year rule applies for most qualifying taxpayers seeking to get protection under the relief. Prior to this tax code change, those seeking to be relieved from tax obligations through the Innocent Spouse Relief had to do so within two years from when the IRS contacted the spouses for collection. In practice, many spouses who were innocent to the tax liability because they were either unaware of the due taxes or were in abusive marriages (and could not refuse signing because of duress or pressured influence) could not qualify for relief because of the time limitation. One reason for this is that if the IRS contacted the “guilty” spouse for collection, he or she may conceal this from the other “innocent” spouse and thus, the innocent spouse would remain unaware of the collection process. When the “innocent spouse” finally becomes notified of the back taxes being collected, often times, it would be past the two year time limit and therefore, too late to claim the relief. However, with the removal of the 2-year time limit, many innocent spouse will now get their relief with no time constraints.

Time Limit Still Applies for Some

The IRS however, maintained that the two year rule will still apply for spouses who became aware of the IRS collection within the two year time frame and did not take any action. This rule however, will not apply for any spouse who is or was in an abusive marriage.

About Innocent Spouse Relief

The Innocent Spouse Relief is a tax relief provided to spouses who file taxes jointly with their partner. The current rules for the relief were introduced into the tax code in 2002. According to the tax code, when a couple files taxes jointly, they are both held responsible for the information in the tax return and should an issue arise from the tax return, they are both held liable individually (and the IRS can collect the back taxes from either or both of the spouses). However, under the Innocent Spouse Relief, if a spouse is unaware of false information claimed on the tax return (and the IRS discovers the false information in the returns), the spouse can be absolved from the consequential tax liability that may arise. The innocent spouse will need to file IRS Form 8857- “Request for Innocent Spouse Relief Form” and provide an explanation of their innocence in the tax liability. If there is enough evidence to show that the spouse could have been unaware of the due taxes or forced to sign the tax returns against his or her will, the IRS will relieve the spouse of the taxes due.

The Scope of the Relief

The IRS receives on average about 50,000 Innocent Spouse Relief applications every year. They however, reject close to 2,000 applications for the lapsing of the two year limitation. However, with this new inclusion to the tax code, many of these victims will now receive justice and get the relief. The IRS has stated that this new rule will take effect immediately and any cases that are still under review will now be considered under this new rule. Any spouse who had been denied the relief because of the time limitation prior to the announcement can now reapply for the relief.

Action towards Removal of the Time Limitation

The removal of the time limitation on the Innocent Spouse Relief came after a spirited campaign by politicians and activist groups. The opponents of the former two year rule argued that the limitation cut off many innocent spouses from getting justice. Earlier in 2011, a group of House Democrats wrote a letter to the IRS commissioner, seeking the IRS remove the two year time limit. This followed many debates and discussions on Capitol Hill and the media that sort to have the IRS remove this rule. After all of these tremendous efforts, the changes have come as a welcome relief to many.

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IRS Taxes that Affect Land Ownership

August 22, 2011 By

Various land related expenses are treated differently depending on the use of the land and whether the land is improved or unimproved. These expenses include land rates, association fees, and other land maintenance expenses.

Unimproved land

In taxation terms, improved land is land that has a structure on it, such as a building. A piece of land is considered unimproved if it has no buildings on it, even if you bring in utilities such as water, electricity, fencing, and/or a sewage system. As long as there is no structures that can be used for economic purposes or personal housing, it is considered unimproved. For unimproved investment property land, one cannot deduct ongoing expenses. However, you may add the cost of the various one-off capital expenses that you apply to the land to the value of the land and depreciate it if it is an investment property (as opposed to a personal property). If it is personal property, you can add the amount of such expenses used to improve the land to the cost of the land, which will increase your cost price of the property if you were to ever sell it. This way, the capital gain on the property will be lowered and you will consequently pay less in capital gain IRS taxes.

Improved Land

Improved land is land that gives you some utility in one form or another. You may have a personal home on the land or some rental or investment property. If it is an investment property, then the land rates and land expenses are an allowable business expenses and are therefore, deductible for tax purposes every year that the expenses are incurred. Most of the land-servicing-expenses are not deductible for personal-use land.

Investment Property Land

For investment property, any association and property maintenance expenses are tax deductible. The details of qualifications of these deductible expenses are contained in the Internal Revenue Code Section 212. These expenses are a miscellaneous itemized deduction and therefore, follow the rules of itemized deductions. This means that you must add all itemized expenses and subtract 7.5% of your Adjusted Gross Income before deduction. You also cannot deduct this through itemized deductions if you are under the Alternative Minimum Tax (AMT). However, for those under the AMT and for those who do not itemize deductions, you can still add these expenses to the cost of the land so as to reduce on the capital gains (in case you ever sell the land). This option is called, capitalizing carrying charges, and is a choice available for those with an investment property. However, if the investment property is unimproved, you can only capitalize the carrying charges for only one year. If you opt to capitalize the charges, you will need to attach a statement to your tax return form explaining the expenses that you are capitalizing in the year you choose to do so.

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Claiming Qualified Long Term Care Expenses as Medical Tax Relief and Deduction

August 19, 2011 By

Under the Federal tax code, long-term care services provided for medical reasons are an allowable expense to deduct. However, according to Sec. 7702B(c)(1) of the Federal law, a licensed physician must prescribe such care as being fundamental for the well-being of the patient. Long-term care deductions allows for people who have chronic diseases and conditions of incapacitation to receive long-term care, including an attending nurse or caretaker, without paying taxes for such services. There are various rules and qualification guidelines that govern the application of this IRS tax deduction.

Qualification Requirements

The long-term medical care can only be claimed by taxpayers who itemize their tax deductions as opposed to using standard deductions. You therefore, need to use the right Form 1040 to benefit from these long-term care expenses and have them deducted. The expenses also need to have support documentation. The person claiming the deduction must maintain the doctor’s statement that prescribed the long-term care, including the diagnosis of the medical condition. Besides the doctor’s statement, one also needs to keep the receipts or payment vouchers for such medical care. All other tax requirements, including withholding of taxes for any employees involved in the long-term care, need to be adhered to.

Itemized Deduction

Itemizing of tax deductions is more complex than taking the standard deductions route. A taxpayer itemizing deductions needs to schedule all the tax-deductible medical expenses that need to be itemized and determine if the expenses exceed 7.5% of his or her Adjusted Gross Income (AGI). Therefore, for itemized expenses to qualify for deduction, a taxpayer must have above this 7.5% threshold in total medical expenses. There is however, no cap or maximum for these itemized deductions.

Case in Point – IRS vs. Estate of Baral

In some instances, the IRS has differed views with taxpayers on what qualifies as long-term care as prescribed by a physician. This was the case for Lillian Baral, who had been diagnosed with dementia. The doctor recommended long-term care and Baral’s brother, who was her financial trustee, employed two caretakers to attend to her. The condition of her illness deteriorated her mental and physical capacity and she finally succumbed to her infirmity in 2008. Due to her condition, she did not manage to file a return in 2008 for the 2007 tax year. Since no tax return was filed, the IRS decided to use their estimate and determined that she had earned incomes of $94,229.00 and had underpaid taxes by $17,681.00. However, in their calculations, the IRS did not allow for the inclusion of her long-term care expense – Baral’s brother had paid $49,580.00 to the caretakers and had also reimbursed expenses of $5,566.00.

The issue was referred to a tax court to determine if the IRS was just in their actions. In the ruling, the court held that the wage payments to the caretakers qualified as long-term care for tax purposes and that the IRS was out of order to have these expenses excluded for tax deductions. The court however, held that the reimbursed expenses could not pass for the deductible of long-term care expenses as there were no receipts (support documentation) to support these expenses.

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Are there IRS Problems with Protecting Taxpayers’ Information?

August 18, 2011 By

One of the issues that have remained at the forefront of the IRS agenda for 2011 is identity theft. Identity theft has been a growing issue for the IRS over the years and especially so, as more people are making the transition from paper filing to e-filing. However, the identity theft crisis with the IRS was highlighted by a several reports in 2011 that drew significant attention towards the way the IRS was handling taxpayers’ information. Could there be IRS problems with protecting taxpayers’ sensitive information?

Government Accountability Office Report on Identity Theft

A Government Accountability Office report on tax-related identity theft that was released early 2011 revealed that there were over 245,000 cases of identity theft in the 2010 tax returns. This may seem like a small number, especially when you consider that about 100 million taxpayers filed electronically in the same year. However, what was alarming about this GAO report was that the cases of identity theft had grown 5-fold only between 2008 and 2010. What was even more disturbing about this report was that the IRS had not prosecuted the tax thieves on a majority of these cases of identity theft.

House Report Hearing on Identity Theft Victims

Following the GAO report, the House Committee on Oversight and Government Reform arranged a meeting with victims of the identity theft to hear their grievances. Many of the victims of the identity theft complained of ill treatment by staff members of the IRS. Following this committee hearing, the IRS came under immense attack on the way it handled issues of identity theft. Some of the victims complained that they had to repeat the same thing over and over again to different IRS staff. Some claimed that they had to constantly follow up with the IRS for many months before they saw their tax refunds.

TIGTA Report on Information Security in the IRS

To add the proverbial insults to injury, a report released in July 2011 by the Treasury Inspector General for Tax Administration (TIGTA), an IRS watchdog, revealed that taxpayers’ information sent to the IRS was vulnerable to hackers due to some security lapses. According to this report, 2,200 databases used in 13 of the primary IRS software used to process taxes had security lapses that may create loopholes for both internal and external information hackers. These databases operate on some outdated software programs that are not updated in their security features. The report also revealed the IRS did not fully install a security surveillance and compliance testing software that cost $1.1 million. The failure to fully implement this software means that the IRS is not fully aware of the risks that it is exposed to in its information databases. According to the IRS, the incomplete installation of this security software was brought about by complications that arose from multiple implementation of the same software. The report also noted that the database’s management was loosely handled by different offices and that there was no single IRS office that was charged with the duty of configuring and securing these databases.

IRS Response to the TIGTA Report

In response to this TIGTA report, the IRS admitted that indeed, there were security lapses in their information databases. However, it insisted that none of these 2,200 databases contained taxpayers’ information and that the information was safe. The IRS said that these databases were for internal use only and were not accessible from outside the IRS. They also said that in spite of the risks associated with these databases, there had been no information breach. They noted that information security was an ongoing process and that continuous procedures were underway to constantly ensure that taxpayers’ information remains safe. The IRS also agreed to to implement the seven recommendations that were included in the TIGTA report towards ensuring better information safeguarding.

Going Forward

As the IRS continues to receive increasing pressure on its management of identity theft and the handling of electronic taxpayers’ information, the public awaits to see whether this will impact the alarmingly growing trend of identity theft.

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State and Federal Income Tax Requirements for a Business Start-up

August 17, 2011 By

Are you planning to start a business? Well, there are several State and Federal requirements that you will need to meet in order to operate legally. These requirements depend a lot on the type of business entity you settle on for your business. These start-up requirements include both State and Federal tax registration requirements. Below is a list of some tax requirements for various business entities.

Employee Identification Number (EIN)

The Employee Identification Number (EIN) is a tax registration number that identifies employers and tax agents who withhold various taxes on behalf of the IRS. Most businesses require an EIN, especially if they have employees or if they withhold sales taxes. However, sole proprietors that do not employ may operate without an EIN. You can register for an EIN by filling out an online registration form available on the IRS website. You are also required to send an SS-4 to the IRS to accompany the registration form. You will then receive your EIN and you will use it when submitting any withheld taxes to the IRS.

State Business Registration

Various business entities will have different state registration requirements. You can get the details of these requirements by contacting your respective state business registration office or by consulting with a business attorney. In most cases, your business registration will award you a business number that you will be required to provide when filing various State and Federal taxes.

Books of Accounts

The tax authority requires various business entities to maintain various books of accounts as their primary support documentation for their taxes. It is therefore, important to ensure that you set the right books of accounts according to your business entity at the start of your business. This will enable you to be prepared for your State and Federal income tax returns. Generally, sole proprietors will not require detailed accounts but must maintain consistent schedules and records of business transactions. Partnerships, corporations, and limited liability companies will however, require proper double entry books of accounts and clearly indicate partners’ share of profits or dividend distributions to shareholders. The C-Corporation has more complicated books of accounts to keep. You may require the help of an accountant to set up the right account bookkeeping for your business. You can also purchase and install various accounting software that will assist you maintain proper bookkeeping and assist in preparing the taxes for your business.

State Tax Requirements

Various states will have different tax requirements for State taxes. If your business will be a withholding tax agent for sales taxes for example, you will need some tax registration from your State. Various business entities will also have different tax requirements. This is especially so for the business entities created and governed under the State law. These business entities include S-Corporations, C-Corporations and Limited Liability Companies. S-Corporations, for example, require the owner or owners to elect the option in which they will want to file their taxes. They can file their taxes as a sole proprietor, partnership, tax entity, or a Limited Liability Company.

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