It’s getting to be that time of year again when as business owners, we must gather various financial documents and figures from 2021 so that we can begin preparing and filing our 2021 taxes.
This time of year has got me thinking about various areas from a legal perspective that deals with taxes and finances.
There are so many different topics we could cover under these topics of navigating the law, finances, and taxes, but we have chosen a few that resonate most with business owners we have worked with.
1. Tax Status
Did you know that when you file for an EIN (Employer Identification Number) with the IRS, depending on the entity type you choose, you are assigned a default tax status?
For example, if your business is a limited liability company (LLC) and you are the only owner, you are defaulted to the status of a sole proprietor. Additionally, if there is more than one owner, you are defaulted to a status of partnership. This status is not permanent as the IRS does allow for certain entity types to change their tax status.
A corporation or LLC must file an S-corporation election within two months and 15 days (~75 days total) after the beginning of the tax year the election is to take effect or at any time during the tax year preceding the tax year it is to take effect. Generally, you can only change your election every five (5) years, so it is important that if you are considering changing your tax status, you are aware of the ramifications of such a change or you speak to a tax professional to get some guidance. You may be stuck with the tax change for the next 5 years.
2. Special Rule for Married LLC Owners
In Wisconsin, if a married couple co-owns a LLC as the only owners, the couple can treat the LLC as a disregarded entity for tax purposes, meaning they are treated as a sole proprietor even though there are two members.
Although the LLC from a legal perspective is treated as multi-member LLC and will abide by the rules of a multi-member LLC, the couple is able to negate the default partnership election and elect disregarded entity status.
This benefit is because Wisconsin is a community property state, and the IRS recognizes this and reduces the additional tax reporting requirements that are needed for partnerships.
It is important to note that if an LLC is owned majority by a married couple but has a third owner even if it is a minority owner, the married couple is not able to take this tax treatment and will be required to file as a partnership.
3. Track Expenses and Finances of Your Business
It is important to track those various expenses and other financial data related to your business separate from your personal finances, especially if you have selected your business to have an entity, whether as an LLC or Corporation.
One of the largest benefits of electing to form your business as an LLC or corporation is that as an owner or shareholder, is that your personal assets are shielded from any problems that arise in your business. In order to maintain the protection of an entity selection, you must maintain the expenses and other financial data concerning the business separate from your personal assets and expenses. This is to maintain what is known as the “corporate veil”.
If you do not keep the expenses and other financial data separate, it may allow for a third party to pierce the “corporate veil” and then you as an owner/shareholder would be personally responsible for certain debts and liabilities of the business and it would allow for a third party to come after your personal assets.
Check out the tool we recommend (Hubdoc) for tracking all those receipts!
4. Foreign Registration.
As most business owners have discovered due to COVID-19, the need to have a presence online is essential in business.
While being online can allow your sales market to expand, it may come with additional reporting requirements. Many states require you to register as a foreign entity in that state if your business creates a nexus in that state.
Each state has varying requirements as to what creates a nexus and what requirements you need to fulfill in order to properly register with the state. If you are doing sales across state lines, you will need to discover whether you need to register with that state as a foreign entity.
For the most part, if you are doing very limited transactions in each state, you most likely do not meet the requirements to create a nexus in the state and you do not have to register. That being said, you need to be aware of the requirements for each state you have transactions in because if you are not registered in a state where a nexus exists, you could face various consequences and fines.
Also, you'll need to understand your sales tax obligations for those online sales in other states. Check out this article from Forbes that outlines issues retailers, especially those in Wisconsin, should be on the lookout for in 2022.
If you have questions regarding these areas, we can help! Set up a time to speak with one of us today.