Business – M Hernandez Income Taxes Bookkeeping

November 26, 2020

What is the difference between IRS Form 1099-NEC and Form 1099-MISC?

Beginning with tax year 2020, the 1099-MISC has been redesigned due to Form 1099-NEC. Employers will no longer report nonemployee compensation, such as payments to independent contractors, on Form 1099-MISC.

Form 1099-NEC

This tax year 2020, employers must use Form 1099-NEC to report nonemployee compensation, if the following criteria is met.

Payment made to someone who is not your employee.
Payment made for services of your business
Payment made to an individual, a partnership, or an estate.
Payments made of $600 or more during the year.

This nonemployee compensation are payments made to independent contractors, fees paid for professional services such as of attorneys and accountants, and commissions paid to nonemployee salespersons that are subject to repayment but not repaid during the calendar year.

Form 1099-NEC must be given by employers to the individual and filed to the IRS by January 31, 2021.

Form 1099-NEC example:

Source: Internal Revenue Service

Form 1099-MISC

This tax year 2020, employers must use Form 1099-MISC to report payments made if the following criteria is met.

At least $10 in royalties or broker payments in lieu of dividends or tax-exempt interest.
At least $600 in the following:
- Rents.
- Prizes and awards.
- Other income payments.
- Generally, cash from a notional principal contract to an individual, a partnership or an estate.
- Medical and health care payments.
- Payments to an attorney.
- Section 409A deferrals.
- Nonqualified deferred compensation.

Form 1099-MISC must be given by employers to the individual by January 31, 2021 and filed to the IRS by February 28 or March 31st if filed electronically.

Form 1099-MISC example:

Source: Internal Revenue Service

November 9, 2020December 10, 2020

Business Expenses for IRS Reporting

The general rule for deducting business expenses are the costs of carrying on a trade or business and are usually deductible if the business is operated to make a profit.

For an expense to qualify as a deduction come tax time, the expense must be both ordinary and necessary.

Qualified Business Expense Test

Is the expense ordinary and commonly accepted in your industry?
Is the expense necessary and helpful in operating your trade/business?

An expense does not have to be essential to be considered necessary. Even though an expense may be ordinary and necessary, you may not be allowed to deduct the expense in the year you paid or incurred it. In some cases, you may not be allowed to deduct the expense at all. Therefore, it is important to distinguish business expenses and include them into the following 3 categories.

Cost of Goods Sold (COGS)
Capital Expense
Personal Expense

Learn More about the different type of categories in a different post.

IRS-Publication-535-1 Download

September 9, 2020December 10, 2020

How to form a California LLC

Once a month I get a a new business owner that wants to create an LLC because someone told them that an LLC protects you from liability. Most of the time as a small business owner, we loose focus on where we are starting and we focus on where we are going to be in 5 years. While, I encourage planning for the future, we first we need to remember where we want to start. If you are new to the business world, we must learn to crawl before we consider ourselves an Olympic athlete. With that, I always have a set of questions I ask new business owners to a better idea of where the business owner is currently at in determining the best fit for the business.

Keep in mind that your business has is setup to have a legal entity and a tax entity. If you decide to create an LLC as a legal entity, you can choose to have your LLC taxed as a Sole Proprietary or as a Corporation. But more on that at a later post. For now let us focus on reasons and non-reasons to set-up a LLC as a legal entity.

Top Reasons for an LLC (Legal Entity)

Own Rental Property
- Consider having a category of properties over one LLC per property.
Need Asset Protection
- Looking to protect assets from the operations of the business. Such as lawsuits from contractors or clients.
Partnership
- Highly recommend as each business partner is protected from the actions of another partner.

Top Reasons NOT To Create an LLC (Legal Entity)

Tax Savings
- LLC does not save taxes in itself
  - In Fact, in California you must pay a minimum of $800 a year in taxes
  - Self Employment Tax still applies (Unless your Tax Entity is a Corporation)

Follow these steps to create/form your California LLC.

Check to see if your business name is unique and available to use
Look into creating an EIN. Not necessary but highlight recommended before starting an LLC.
Fill out Form LLC-1 and file it at California Secretary of State. Plus pay a filing fee of $70 and $ 5 certification fee
1. When choosing the LLC. Decide the abbreviation form you prefer to use after your business name.
  1. LLC
  2. L.L.C
  3. Limited Liability Co.
  4. Limited Liability Company
  5. Ltd. Liability Company
  6. Ltd. Liability Co.
2. Provide the business address (No PO BOX)
3. Decide the Legal Entity (Not the same as tax entity)
  1. Individual
  2. Corporation
4. Decided Member Management (Who will manage the LLC)
  1. Member Managed
  2. Owner Managed
Prepare Operating Agreement
1. The agreement should include guide on members percentage, voting powers, rights and responsibilities to each entity, profit/loss distribution, rules for meetings and votes, buy out and buy sell provisions to help when members leave or wants to join.
2. Fee plus state filling fees.
File Form LLC-12 the Biennaial Report to update the state of LLC Status
Annual state Tax payment of $800. If net income is over $250,000, then additional fees may apply.

California Form LLC-1 Download

LLC Import Notations

An LLC is not just filing a paper with California state. Treat the LLC formation and maintain the operations of the business as a corporation to keep the same type of protection. Check my blog for my post on Corporation and asset protection.

An LLC can be structured to have multiple LLC’s. The Mother LLC and all baby LLC under. More on creating multiple LLC’s on a different post.

Keep in mind when creating your business LLC, that you keep in mind the states processing time.

May 23, 2020December 10, 2020

California state tax numbers

Once you have the EIN, you will also need to get a California tax numbers in order to pay for a variety of state business taxes.

Business tax numbers in California are often confused with the Employer Identification Number. The EIN is a separate number that is used to federally register a business with the Internal Revenue Service (IRS) and may be needed in addition to state tax numbers.

The most common reasons a California business will need to register for a state business tax numbers include:

Sales Tax – Businesses selling products and certain services are required to collect sales taxes and will need to register with the California Department of Tax & Fee Administration. Often paid Quarterly.
Employees Taxes – Businesses with employees will need to register with the California Employment Development Department to get a Withholding Tax Number and Unemployment Number to pay for payroll taxes. Often paid Monthly.

May 16, 2020December 3, 2020

California Employer Identification Number (EIN)

Starting a business. It’s time to register and get a California Employer Identification Number (EIN) and California state tax ID numbers. The Identification Numbers are used to register a business with the federal and state government in order to pay sales taxes, payroll taxes, and withhold taxes from employee wages.

Let’s dive in and see when they are required, when you need to use them, how to get them and the cost of getting them.

Employer Identification Number (EIN)?

The Employer Identification Number, EIN, also known as the FEIN or Federal Employer Identification Number. The FEIN is a unique 9 digit number that identifies a business, similar to a social security number.

The EIN is needed for California business entities that are sole-proprietorship, single-member LLC (with employees) registered as a partnership, corporation, or multi-member LLC, trust, estates, real estate mortgage investment conduits, and non-profit organizations. The EIN is optional for sole-proprietorship and single-member LLC’s that do not have employees, the owner’s social security can be used instead.

EIN Required:
To hire employees, paying payroll taxes, income tax withholdings, create a 401(k), purchase existing business, create a partnership or LLC, file bankruptcy, unemployment taxes, and to prevent identity theft.

EIN Uses:
You can open up a business bank account, apply for a business license and permits, and filing tax returns.

Apply for an EIN

Visit the Internal Revenue Service (IRS) website, during normal working days and hours.

It takes less than 30 minutes to file the EIN online. The EIN will be given within minutes.

Other options, include by mail and fax. Download the form and follow the instruction provided on SS-4 form.

COST: Free

Information to Provide for an EIN

Make sure you have the following information to make the process smoother and faster.

Legal Business Name and Address
Name(s) of the owner(s) or principal officer(s)
Name(s) and contact information of the owners, directors, officers or members
Type of business and what description of products/services the business does
Date the business was started or acquired
Closing month of the entity’s accounting year (Recommend December 31st)
Number of employees expected to be hired
Contact information

Multiple EIN

If you already have an EIN for your small business but want to have multiple ones for different parts of your business, here are some tips. You can only create one (1) EIN per day.

Reasons to have multiple EIN is to separate your business entities. For example, a real estate agent can have one EIN for his rental property business, a EIN for his real estate agent business, and even a EIN for his construction business. Just note, that each EIN should have its own bank account to help separate your revenue and expenses. Otherwise, come tax time, you will be spending hours gathering everything and possibly loosing valuable qualified deductibles.

April 10, 2020December 10, 2020

How to File a Secretary of State SI-550 NC Form

A business that is a corporation must file form SI-550 NC every year with a filling fee of $25.

Here is the process/instructions in filling the California Secretary of State Statement of Information.

Find new applications online at State of California Site.
Changes to information in a previously filed Statement of Information can be made by filing a new Form SI-550. If there has been no change in any of the information contained in the previous complete Statement of Information a Statement of No Change (Form SI-550 NC) may be used.
Status of Corporation: Filing Form SI-550, the corporation must be active or suspended/forfeited on the records of the California Secretary of State.
Fees: Fees vary and payments are made by check payable to the Secretary of State.
Copies: To obtain a copy or certified copy of this filed Statement of Information, include payment for copy fees and certification fees at the time this Statement of Information is submitted. Copy fees are $1.00 for the first page and $.50 for each attachment page.
For certified copies, there is an additional $5.00 certification fee, per document.
Processing Dates: For current processing dates, go to www.sos.ca.gov/business/be/processing-dates.
Hard Copy Forms: Type or print legibly in black or blue ink. Complete the Statement of
Information (Form SI-550) as follows.

Item Instruction Tips

(1) Enter the name of the corporation exactly as it appears on file with the California Secretary of State, including the entity ending (ex: “The Workout Gym, Inc.” or “Jose’s HVAC Company”).
(2) Enter the 7-digit Entity Number Issued by the California Secretary of State.
(3A) Enter the complete street address, city, state and zip code of the corporation’s principal executive office.
(3B) Enter the complete mailing address, city, state and zip code of the corporation, if different from Item 3a.
(3C) Enter the complete street address, city and zip code of the corporation’s principal office in California, if any and if different from Item 3a. Complete this item 3c only if the address in Item 3a is outside of California.
(4) Enter the name and complete business or residential address of the corporation’s:
a. Chief Executive Officer (i.e. president), Secretary and Chief Financial Officer (i.e. treasurer).
(5A) California Stock and Agricultural Cooperative Corporations ONLY: Enter the name and complete business or residential address of the corporation’s current director(s).
(5B) California Stock and Agricultural Cooperative Corporations ONLY: Enter the number of vacancies on the board of directors, if any.
(6) The corporation must have an Agent for Service of Process. There are two types of Agents that can be named: • an individual (e.g. owner, director or any other individual) who resides in California with a physical California street address; OR a registered corporate agent qualified with the California Secretary of State. An Agent for Service of Process is responsible for accepting legal documents (e.g. service of process, lawsuits, subpoenas, other types of legal notices, etc.) on behalf of the corporation.
(6A & B) If Individual Agent: Enter the name of the agent for service of process and the agent’s complete California street address, city and zip code. If an individual is designated as the agent, complete Items 6a and 6b ONLY. Do not complete Item 6c.
(6C) If Registered Corporate Agent: Enter the name of the registered corporate agent exactly as registered in California. If a registered corporate agent is designated as the agent, complete Item 6c ONLY. Do not complete Items 6a and 6b
(7) Describe the general type of business that is the principal business activity of the corporation.
(8) Type or print the date, the name and title of the person completing this form and sign where indicated.

Additional Information to filing Form SI-550

(OPTIONAL) Submission Cover Sheet: To make it easier to receive communication related to this document, including the purchased copy of the filed document, if any, complete the Submission Cover Sheet. For the Return Address: Enter the name of a designated person and/or company and the corresponding mailing address. Please note that the Submission Cover Sheet will be treated as correspondence and will not be made part of the filed document.

Legal Authority: General statutory filing provisions are found in California Corporations Code sections 1502 and 2117 and Food and Agriculture Code section 54040. All statutory references are to the California Corporations Code, unless otherwise stated. Failure to file this Statement of Information by the due date will result in the assessment of a $250.00 penalty. (Sections 2204 and 2206; California Revenue and Taxation Code section 19141.

FTB Suspension/Forfeiture: If the corporation’s status is FTB suspended/forfeited, the status must be resolved with the California Franchise Tax Board (FTB) for the corporation to be returned to active status. For revivor requirements, go to the FTB’s website at ftb.ca.gov or contact the FTB at (800) 852-5711 (from within the U.S.) or (916) 845-6500 (from outside the U.S.). SI-550 – Instructions (REV 12/2020) 2020 California Secretary of State bizfile.sos.ca.gov

March 16, 2020December 10, 2020

California Business License

There is no state of California business license. There are counties/cities that require licenses. Check your local city to see what requirements are needed to register for a business license.

Los Angeles – Businesses located in or have employee conducting business in the City limits of Los Angeles will need to complete a New Business Registration and obtain a Business Tax Registration Certificate with the Office of Finance.

Baldwin Park – Form can be downloaded or can receive the application over the counter and the fee is $133.00. Application and fee can be mailed in or can be paid over the counter in between the hours of 7:30 a.m. to 5:45 p.m.

Covina – The City of Covina is pleased to support and partner with businesses located within our jurisdiction. To determine whether a business is located within the City limits, check the street address. If the address is 2999 or lower, the business location is in the City. If the address is higher than 2999, but has a Covina CA mailing address, the location is in an unincorporated area of Los Angeles County. While some of the resources listed here are provided regardless of location, others are specific to either the City or the County.

Applications for a City of Covina (street addresses 2999 or lower) business license are available from the Finance Department at City Hall, or online in PDF fillable format. For questions regarding Business Licenses, call (626) 384-5512, or visit the Finance Department, Covina City Hall, 125 E. College St., Monday through Thursday, 7:00am to 6:00pm.

West Covina – The easiest and fastest way to apply for a new business license or renew your current license is using the online filing method. To begin, simply click on the “start now” button located on the right of this page. From the main menu please select the “apply” option to submit a new application for your business.

If you need further assistance applying for a business license, you are welcome to contact us at WestCovina@hdlgov.com or by phone Toll-Free at (626) 513-0043. Office hours are Monday-Friday 8:00 a.m. to 5:00 p.m.”

Azusa – The Business Licensing Division is responsible for Issuing business licenses, Verifying ownership and other related information as requested, and answering questions related to taxation and requirements for operating a business.To schedule an appointment, please call the Business License Division at (626) 812-5249. During normal business hours Monday – Thursday 7:00 a.m. to 4:00 p.m.