LLC's and the Self Employment Tax

The answer is clear if you are a passive member, your share of the profit is not subject to self employment tax. Otherwise, there is uncertainty in the tax code, and as a managing member of an LLC you may be subject to the tax. You may want to pay yourself a reasonable guaranteed payment subject to the tax for your services in that situation.

LLC or SUB S

An LLC is more flexible than a Sub S corporation because any entity can be a member, there can be different classes of stock, there can be any number of members, and the profits can be allocated to the members in any way. A Sub S corporation has one great advantage though. You can save on payroll taxes because any profits above a reasonable salary for the owner escapes self employment taxes. Not so in an LLC where all profits are generally subject to self employment taxes.

Business Gifts

Deductions for business gifts are limited to $25 per person per year. The costs of engraving, mailing, and gift wrapping are not included in the limit. This is a very low limit and has not been updated for inflation for a very long time. Sometimes it is more appropriate to deduct a gift as entertainment such as tickets to a sporting event, but then you can only deduct 50%.

50% Limit on Meals

The 50% limit only only applies to meals associated with a business such as business travel or income producing property (rental). However, medical or charitable meals are 100% deductible if they otherwise qualify.

Medicare Part B

This is the part you pay for each month which is withheld from your social security payment. If your income is less than $85,000 and you file a single return, or if your income is less than $170,000 and you file a joint return, then the monthly premium is $99.90. If you make over those amounts, then your monthly premium increases from $139.90 to a maximum of $319.70 for 2012. It is like a little mini tax return.

Can you deduct the cost of an MBA degree?

Maybe. If you are already in business, and go back to school to get an MBA that is related to what you are already doing, then you should be able to deduct the costs. Also your company can't require you to get the MBA to keep your job. The IRS doesn't like this deduction one bit and will argue it qualifies you for a new business or profession. You will have to be able to refute that with the facts and circumstances of your situation. If you immediately leave your company upon graduation, and take a new job in a different industry, that will hurt your case. The MBA has to maintain or improve your skills used in your current job. An employee would take the deduction as a miscellaneous itemized deduction subject to the 2% of adjusted gross income threshold.

IRS Tax Notices

It is never pleasant to receive one of these in the mail. What should you do? The first thing you don't do is ignore it. It won't go away on its own, and it will likely escalate to even more unpleasantness if left unanswered. Don't panic either. Many times the notices are incorrect and have an easy fix with a simple explanation. The best approach is to notify your tax preparer and have them respond. Usually you have 30 days from the date of the notice before more penalties and interest are added and the process escalates. A call to the IRS can usually get you more time to respond if the answer is complex and requires a lot of work. Also you have to be patient with getting closure on the notice. It might take six months or longer to receive a resolution from the IRS after you have responded to them.