Common questions

Let’s clear up all of your questions.

Taxes

Extensions

  • An extension allows additional time (typically about six months) to file your tax return

    The extension period typically extends the due date by six months, shifting it from April 15th to October 15th for individual returns and March 15th to September 15th for most business returns.

    An extension does not grant extra time to pay any taxes owed. Be sure to estimate and pay by the original due date to avoid penalties.

  • Anticipate and pay any taxes owed by the original due date - an extension grants you additional time to file, but not additional time to make payments. Making a payment by the due date helps avoid any late penalties.

    Plan ahead - consider consulting us for year-end tax planning to ensure you are in the best financial position possible heading into tax season.

  • If you are missing forms or documentation, filing an extension ensures your return is complete before submission.
    If we anticipate delays in completing your return, we will extend it automatically and provide payment recommendations to avoid penalties.

  • if you did not owe taxes on last year's return and have no significant changes to your current return, you may not need to send in a payment with your extension.
    If your tax position is relatively the same as last year, pay the same as what you owed in taxes last year. If you overpay, the overage will be refunded to you when your return is filed.

  • Online - https://www.irs.gov/payments
    By Mail - Submitting a check or money order

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  • Three years. In almost all cases, you can shred or throw away any documents such as W-2s, 1099s or other forms or receipts three years after you file your tax return. The IRS recommends keeping returns and other tax documents for three years (or two years from when you paid the tax, whichever is later.)

  • Tax Related Web-sites/phone numbers: IRS www.irs.gov IRS Get Refund Status IRS Inquiry Phone: (800) 829-1040

  • Under the IRS passive activity loss rules, income is classified into three main categories:

    • Active income includes wages, commissions, bonuses, profits from a business in which the taxpayer materially participates, gains from the sale of assets used in an active trade or business, and income from intangible property if the taxpayer’s personal efforts significantly contributed to its creation.

    • Portfolio income covers most interest, dividends, annuities, and royalties, as well as gains from selling property that generates this type of income.

    • Passive income comes from trade or business activities in which the taxpayer does not materially participate, such as limited partnerships or S corps, and includes all rental activities, even when the taxpayer materially participates (with some exceptions for real estate professionals).

Estimated Payments

  • Estimated tax payments are periodic payments made to the IRS and state tax authorities on income that isn’t subject to withholding, such as self-employment earnings, rental income, interest, dividends, and capital gains.

  • You are required to make estimated tax payments if:

    • You expect to owe at least $1,000 in taxes after subtracting withholding and credits.

    • Withholding and credits will cover less than 90% of your total tax liability or less than 100% of the previous year’s tax liability (110% for higher-income taxpayers).

  • Estimated tax payments are due quarterly on the following dates:

    • 1st Quarter: April 15

    • 2nd Quarter: June 15

    • 3rd Quarter: September 15

    • 4th Quarter: January 15 of the following year

    If a due date falls on a weekend or holiday, the payment is due on the next business day.

  • You can calculate estimated taxes by:

    • Using Form 1040-ES, which includes worksheets to estimate your income, deductions, and credits.

    • Reviewing your prior year’s tax return as a starting point.

    • Consulting with your tax advisor for personalized assistance.

  • Failing to make estimated tax payments or underpaying can result in penalties and interest charges from the IRS and state tax authorities, even if you are owed a refund when you file your tax return.

  • You can pay estimated taxes through:

  • Yes, you can adjust your estimated payments if your income changes significantly. For example, if you earn more or less than expected, you can recalculate and adjust future payments accordingly.

  • You may avoid penalties if:

    • You had no tax liability in the prior year.

    • Your total withholding and estimated payments equal or exceed your prior year’s tax liability or 90% of your current year’s tax liability.

    • You qualify for an unusual circumstance exception (e.g., natural disaster).

  • Yes, many states require estimated tax payments if you expect to owe a certain amount. Check with your state’s tax agency or consult your tax advisor for specific requirements.

  • First-time filers and newly self-employed individuals may need to begin making estimated payments. It’s essential to estimate your income carefully and set aside funds for taxes to avoid surprises at year-end.

  • At Prisma Tax Group, we’re here to help you navigate estimated taxes. Contact us to:

    • Determine if you’re required to make estimated payments.

    • Calculate accurate quarterly payment amounts.

    • Avoid penalties and maximize tax efficiency.

Limited Liability Companies

  • The short answer is no. An LLC draws a line between your business and personal assets in case you’re ever sued or go bankrupt. There are no tax savings just from forming an LLC. But if you’re making money, entering into contracts, care about privacy, want to build business credit, or could potentially benefit from an S Corp election, you should consider forming an LLC.

  • You should consider forming an LLC (limited liability company) if you are concerned about personal exposure to lawsuits arising from your business. For example, if you decide to open a store-front business that deals directly with the public, you may worry that your commercial liability insurance won't fully protect your personal assets from potential slip-and-fall lawsuits or claims by your suppliers for unpaid bills. Running your business as an LLC may help you sleep better because it instantly gives you personal protection against these and other potential claims against your business.

    Not all businesses can operate as LLCs, however. Businesses in the banking, trust, and insurance industry, for example, are typically prohibited from forming LLCs.

  • The moment you start earning self-employment income, you’re considered a sole proprietor, a term often used interchangeably with freelancer or independent contractor. An LLC creates a legal boundary so that if something goes wrong in your business, your personal finances aren’t at risk.

    You can still deduct business expenses against your self-employment income with or without an LLC.

  • While the S-corporation's special tax status eliminates double taxation, it lacks the flexibility of an LLC in allocating income to the owners.

    An LLC may offer several classes of membership interests while an S-corporation may only have one class of stock.

    Any number of individuals or entities may own interests in an LLC. However, ownership interest in an S-corporation is limited to no more than 100 shareholders. Also, S-corporations cannot be owned by C-corporations, other S-corporations, many trusts, LLCs, partnerships, or nonresident aliens. Also, LLCs are allowed to have subsidiaries without restriction.

  • An LLC operating agreement allows you to structure your financial and working relationships with your co-owners in a way that suits your business. In your operating agreement, you and your co-owners establish each owner's percentage of ownership in the LLC, his or her share of profits (or losses), his or her rights and responsibilities, and what will happen to the business if one of you leaves.

  • Although most states' LLC laws don't require a written operating agreement, you shouldn't consider starting business without one. Here's why an operating agreement is necessary:

    • It helps to ensure that courts will respect your personal liability protection by showing that you have been conscientious about organizing your LLC.

    • It sets out rules that govern how profits will be split up, how major business decisions will be made, and the procedures for handling the departure and addition of members.

    • It helps to avert misunderstandings between the owners over finances and management.

    • It keeps your LLC from being governed by the default rules in your state's LLC laws, which might not be to your benefit.

  • Although a corporation's failure to hold shareholder or director meetings may subject the corporation to alter ego liability, this is not the case for LLCs in many states. In California for example, an LLC's failure to hold meetings of members or managers is not usually considered grounds for imposing the alter ego doctrine where the LLC's Articles of Organization or Operating Agreement do not expressly require such meetings.

  • While LLC owners enjoy limited personal liability for many of their business transactions, it is important to realize that this protection is not absolute. This drawback is not unique to LLCs, however -- the same exceptions apply to corporations. An LLC owner can be held personally liable if he or she:

    • personally and directly injures someone

    • personally guarantees a bank loan or a business debt on which the LLC defaults

    • fails to deposit taxes withheld from employees' wages

    • intentionally does something fraudulent, illegal, or clearly wrong-headed that causes harm to the company or to someone else, or

    • treats the LLC as an extension of his or her personal affairs, rather than as a separate legal entity.

    This last exception is the most important. In some circumstances, a court might say that the LLC doesn't really exist and find that its owners are really doing business as individuals, who are personally liable for their acts. To keep this from happening, make sure you and your co-owners:

    • Act fairly and legally. Do not conceal or misrepresent material facts or the state of your finances to vendors, creditors, or other outsiders.

    • Fund your LLC adequately. Invest enough cash into the business so that your LLC can meet foreseeable expenses and liabilities.

    • Keep LLC and personal business separate. Get a federal employer identification number, open up a business-only checking account, and keep your personal finances out of your LLC accounting books.

    • Create an operating agreement. Having a formal written operating agreement lends credibility to your LLC's separate existence.

    A good liability insurance policy can shield your personal assets when limited liability protection does not. For instance, if you are a massage therapist and you accidentally injure a client's back; your liability insurance policy should cover you. Insurance can also protect your personal assets in the event that your limited liability status is ignored by a court.

    In addition to protecting your personal assets in such situations, insurance can protect your corporate assets from lawsuits and claims. Be aware, however, that commercial insurance usually does not protect personal or corporate assets from unpaid business debts, whether or not they're personally guaranteed.

  • If you’re making a consistent profit, you can elect S Corp status, and that’s where the tax savings come into play.

  • This is a common misconception. The short answer is no, not unless you’re running a tech startup or have a specific legal strategy.

    For almost all small business owners, it’s best to form your LLC in the state where you live, to avoid double paperwork and unnecessary complications.

    Income is taxable in the state where it’s earned, not the state where the LLC was formed.

  • Yes, absolutely.

    Open a business bank account linked to your EIN, not your SSN. This keeps your bookkeeping clean and helps protect your LLC’s legal status by separating personal and business finances.

    Also, don’t forget to update your W-9s with your LLC information so that 1099s are issued to your business at year-end.

Incorporation

  • A corporation is a legal entity that exists separately from its owners. Creation of a corporation occurs when properly completed articles of incorporation are filed with the correct state authority, and all fees are paid.

  • All corporations start as "C" corporations and are required to pay income tax on taxable income generated by the corporation. A C-corporation becomes an S-corporation by completing and filing federal form 2553 with the IRS. An S-corporation's net income or loss is "passed-through" to the shareholders and are included in their personal tax returns. Because income is NOT taxed at the corporate level, there is no double taxation as with C-corporations. Subchapter S-corporations, as they are also called, are restricted to having no more than 100 shareholders.

  • An attorney is not a legal requirement for incorporating a business in any state except South Carolina, where a signature by a South Carolina attorney licensed to practice in the state is required on articles of incorporation. In every other state, you can prepare and file the articles of incorporation yourself. However, if you are unsure of what steps your business should take and you don't have the time to research the matter yourself, a consultation with a good corporate attorney is often well worth the money you spend.

  • We will request your two top name choices. We will check these as part of your order. If neither of these is available, we will contact you for other name choices.

  • The primary advantage of incorporating is to limit your liability to the assets of the corporation only. Usually, shareholders are not liable for the debts or obligations of the corporation. So if your corporation defaults on a loan, unless you haven't personally signed for it, your personal assets won't be in jeopardy. This is not the case with a sole proprietorship or partnership. Corporations also offer many tax advantages that are not available to sole proprietors.

    Some other advantages include:

    • A corporation's life is unlimited and is not dependent upon its members. If an owner dies or wishes to sell their interest, the corporation will continue to exist and do business.

    • Retirement funds and qualified retirement plans (like 401k) may be set up more easily with a corporation.

    • Ownership of a corporation is easily transferable.

    • Capital can be raised more easily through the sale of stock.

    • A corporation possesses centralized management.

  • While LLC owners enjoy limited personal liability for many of their business transactions, it is important to realize that this protection is not absolute. This drawback is not unique to LLCs, however -- the same exceptions apply to corporations. An LLC owner can be held personally liable if he or she:

    • personally and directly injures someone

    • personally guarantees a bank loan or a business debt on which the LLC defaults

    • fails to deposit taxes withheld from employees' wages

    • intentionally does something fraudulent, illegal, or clearly wrong-headed that causes harm to the company or to someone else, or

    • treats the LLC as an extension of his or her personal affairs, rather than as a separate legal entity.

    This last exception is the most important. In some circumstances, a court might say that the LLC doesn't really exist and find that its owners are really doing business as individuals, who are personally liable for their acts. To keep this from happening, make sure you and your co-owners:

    • Act fairly and legally. Do not conceal or misrepresent material facts or the state of your finances to vendors, creditors, or other outsiders.

    • Fund your LLC adequately. Invest enough cash into the business so that your LLC can meet foreseeable expenses and liabilities.

    • Keep LLC and personal business separate. Get a federal employer identification number, open up a business-only checking account, and keep your personal finances out of your LLC accounting books.

    • Create an operating agreement. Having a formal written operating agreement lends credibility to your LLC's separate existence.

    A good liability insurance policy can shield your personal assets when limited liability protection does not. For instance, if you are a massage therapist and you accidentally injure a client's back; your liability insurance policy should cover you. Insurance can also protect your personal assets in the event that your limited liability status is ignored by a court.

    In addition to protecting your personal assets in such situations, insurance can protect your corporate assets from lawsuits and claims. Be aware, however, that commercial insurance usually does not protect personal or corporate assets from unpaid business debts, whether or not they're personally guaranteed.

  • Most every state requires that a corporation has a registered agent. That agent must have a physical location in the formation state. The registered agent can typically be any person (usually a resident of the state) or any properly registered company who is available during normal business hours to receive official state documents or service of process (lawsuit).

  • Most states allow for one person to act as shareholder, director, and all officer roles.

  • Your corporation is required to have an Employer Identification Number (EIN) also known as your Federal Tax Identification Number so that the IRS can track payroll and income taxes paid by the corporation. But, like a social security number, an EIN is used for most everything the business does. Your bank will require an EIN to open your corporate bank account.

    We provide two EIN services:

    • Basic EIN Service - We prepare and email your SS4 (EIN application) & easy one-page instructions for obtaining your EIN. You need only review, sign and fax or call in the information to the IRS to get your EIN.

    • Full EIN Service - We actually obtain your company's EIN for you.

  • You must have your initial shareholder(s) meeting to elect your director(s), if your director(s) haven't been designated in the articles. Then, you must have your initial organizational meeting of your directors. At this meeting, you will need to elect your officers, adopt your company's bylaws, and issue your stock (among other actions).

Recordkeeping

  • Complete and accurate financial record keeping is crucial to your business success. Good records provide the financial data that helps you operate more efficiently. Accurate and complete records enable you to identify all your business assets, liabilities, income, and expenses. That information helps you pinpoint both the strong and weak phases of your business operations.

    Moreover, good records are essential for the preparation of current financial statements, such as the income statement (profit and loss) and cash-flow projection. These statements, in turn, are critical for maintaining good relations with your banker. Finally, good records help you avoid underpaying or overpaying your taxes. In addition, good records are essential during an Internal Revenue Service audit, if you hope to answer questions accurately and to the satisfaction of the IRS.

    To assure your success, your financial records should show how much income you are generating now and project how much income you can expect to generate in the future. They should inform you of the amount of cash tied up in accounts receivable. Records also need to indicate what you owe for merchandise, rent, utilities, and equipment, as well as such expenses as payroll, payroll taxes, advertising, equipment and facilities maintenance, and benefit plans for yourself and employees. Records will tell you how much cash is on hand and how much is tied up in inventory. They should reveal which of your product lines, departments, or services are making a profit, as well as your gross and net profit.

  • You must have a clear understanding of your firm's long- and short-range goals, the advantages and disadvantages of all of the alternatives to a computer and, specifically, what you want to accomplish with a computer. Compare the best manual (non-computerized) system you can develop with the computer system you hope to get. It may be possible to improve your existing manual system enough to accomplish your goals. In any event, one cannot automate a business without first creating and improving manual systems.