Advanced U.S Tax Preparation

The perfect storm of opportunity for bookkeepers, accountants, and tax preparers in The United States has been developing over decades and was accelerated by the covid pandemic. Being forced to run businesses remotely, millions of business owners had no choice but to adapt and started to realize the benefits of outsourcing tasks normally done in-house. They became accepting and willing to assign important financial tasks to individuals they had never met in person. The know, like & trust factor, was finally being accomplished online.

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It only takes 2 simple things to start a business in the USA or anywhere for that matter. First, the idea that you can do something, organize something, teach something.......for a profit. The second thing is to take action, any action. In the United States not only are you in business but come under the direct jurisdiction of federal, State, and Local laws and regulations.

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There are several main legal structures that allow an individual to conduct business in

the United States which are:

● Sole Proprietorship

● Partnership

● LLC

● LLP

● Corporation

● S-Corporation (This is a Corporate legal entity taxed as an S-Corporation)

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Every business must be registered in the state they are physically located. If they start doing business in other states and have “Nexus” they must register and obtain approval from the secretary of state they have nexus to do business in that state as a foreign entity. Nexus can be a complicated issue and every state has its own definition of what constitutes nexus so you must be careful here. Nexus has been argued by states before I started in accounting and mostly has to do with collecting sales tax. We will cover sales tax in a later chapter.

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Sole proprietors can use any account in their name and simply designate it as a business. To open a formal business account the sole proprietor will need to register the business with the county clerk where the business is physically located. This requirement is very hard to enforce so millions of businesses go unregistered with little or no consequences.

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Once an entity is formed it is required to obtain a Federal Tax ID#. Sole Proprietors use

their own social security number and are not required to have a separate tax ID unless

they use a DBA or hire employees. The way to get a Federal Tax ID# is on the IRS

website www.irs.gov or by fax or mail using form SS-4.

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I learned how to do tax returns with an instruction booklet and a lead pencil. It prepared me in a way that computer programs could not. It humanized it and provided a foundation that the past two generations have not experienced. They have gone from learning how to input data on a computer screen to see a finished product. I was able to see how a finished product is actually constructed.

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The first step in all of your accounting and tax endeavors must be an assessment of the current situation. If you are setting up a brand new business you must know the clients’ current tax situation with a clear understanding of their prior years’ tax history.

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The first item to consider is the client’s accounting basis. Unless required to be on an accrual basis for tax purposes you want them to be on a cash basis because you have more discretion on when to pay bills and invoice clients.

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When businesses begin they usually have business transactions that have been commingled with personal accounts. There is really no way around this unless you have a seasoned entrepreneur that has set up a separate account knowing it’s not good to commingle.

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Almost all businesses are using multiple accounts. Not only business checking but platforms such as PayPal and Venmo. Other platforms such as Amazon and Ebay create other accounting challenges and then there are the numerous payment platforms such as Stripe, credit cards...We haven’t really even gotten into Crypto yet but when we do it will pose another problem.

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One of the most asked questions and greatest benefit to having a corporation vs a sole proprietorship is the owner’s ability tomanage how much they take out as salary, distributions of profits, and loan repayments.They can also take expense reimbursements under the IRS radar for items such as home office expenses, fixed asset contributions, and de minimis costs.

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Many times when reviewing a return that somebody else prepared, especially self-prepared returns you will find errors. Errors that go against the client need to be disclosed and advised that if not addressed there is always the possibility that it can be picked up by either the IRS or State/Local Government.

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Federal amendments don’t always affect state returns and sometimes state amendments don’t apply to the Federal return. Each situation has to be addressed independently and each state will have their own forms and rules on how to submit the amendment.

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Practice Return 1 is a beginner-friendly Drake Tax training exercise built around a new Head of Household taxpayer, Ponderosa Pine, with one qualifying child. The return gives students hands-on practice entering W-2 income, confirming full-year health coverage, handling child-related due diligence, and inputting childcare expenses for the child and dependent care credit.