Taxes and Your Martial Arts Studio

Taxation and Your Business

In my first business class in college the teacher pointed out that nothing was ascertain as deathand taxes. This unfortunately is very true and your business is certainly no exception to the rule.

You will be taxed it will seem to the point of exhaustion from the local, state, and federal levels. You as a business owner will have to by force of compliance become sort of an armchair expert on taxation and should for your own benefit, for as long as you are engaged in business and/or living taxes will be your constant companion.

Who are you likely to pay first is a question often asked? Everyone is the answer but we’ll first consider the largest collector of your moneys, the federal government. The federal government takes the lions share of your tax dollars in the form of income and social security taxes. As a business owner you are surely to find life more difficult than when you were just getting that weekly paycheck.

As a business owner you are still as a person paying taxes on what you earn in the form of salaries or profits and in turn get the delight of becoming an adhoc tax collector as well.

The legal form of business you have chosen to participate in will have a major bearing on the responsibilities that apply to your new enterprise.

Sole Proprietorship. In this aspect you’ll recall that the owner and the business are insepa- rable. If you have chosen this form you’ll be required to file your annual federal tax return on the Form 1040.

You’ll all so be required to file a separate Schedule C (Profit or Loss from Business or Profes- sion – Sole Proprietorship) and a Form 4562 (Depreciation and Amortization).

As a sole proprietor you’ll also be required to estimate what your income for the next year. With this you guessed it more paperwork. You get to submit Form 1040 ES (Declaration of Estimated Tax for Individuals). The estimated tax must be paid four times a year and the IRS will provide you with instructions and the reporting requirements.

Partnership. As with the sole proprietorship, your tax liability is assessed only for earned incomes of the individual partners and not against the business directly. You are required to complete and submit form 1065 (U. S. Partnership Return of Income) No payments accompany its submission. You must also file Schedule K-1 (Partner’s Share of Income, Credits, Deductions, Etc.)And as with a sole proprietorship each partner files an estimated tax.

Corporation. If you selected this form of ownership, sit back and make yourself comfortable

we have much more to cover as your problems are much more complicated.

As a corporation you’ve chosen the safest of all legal entities but this safety does have its costs.

If have not yet consulted an attorney familiar with our type of business structure in the martial arts and I do suggest you find one who is, certain suggestions they might have as to your personal and business protection may have merit.

Another necessary player in the game of business is an accountant, one preferably knowledge- able in the areas of taxation and filing requirements since our business is usually pretty light on the asset side other than signed contracts, which we’ll cover in depth in another section. The two people you must certainly never lie to is your attorney and your accountant. They’ll inmost instances know how to cool the hot water you may have gotten yourself into and are worth all the money you’ll pay them.

Business people in general are noticeably skeptical of lawyers and of there value. That is warranted when you might be paying one up to $200 an hour for his advise, you want him to get to the point and talk fast. Better to pay an attorney early in the game to help you get started right than pay for his services because a friend told you really don’t need one, friends are usually wrong but it is America, you decide.

As a corporation you’ll be filing Form 1120 (US Corporation Income Tax Return), your firm operates on the calendar year basis, the return is due before March 1 5.

At present corporations are required to pay federal income taxes on profits for the year ac- cording to a three bracket system:

TAXABLE INCOME

Not over $50,000
Over $50,000 but not over $75,000
Over $75,000
Over this $75,000 level they pay a flat rate of

With respect to accumulated earnings:

TAX RATE

15% 25% 34% 34%

A corporation is permitted to accumulate its earnings for use in possible expansion or for other bona fide business reasons. However, if a corporation allows earnings to accumulate beyond the reasonable needs of business, it may be subject to an accumulated earnings tax.

Subchapter S Corporation. You may elect to be taxed as an S corporation and thereby avoid the usual type of taxation process of a corporation. In this instance, you report your income and taxable dividends much the same as does a partnership.

To gain this status as an S corporation, you must file Form 2553 (Election by a Small Business Corporation). Tax returns are filed on Form 1120S (US Income Tax Return for an S Corporation)

Social Security Taxes

In the provisions of the Federal Insurance Contributions Act (FICA), your employees are cov- ered by specific insurance. To pay for this coverage, social security taxes are levied on both the employee and employer. The employer is responsible for the collection of the tax from the employees by withholding, the same way the employee income tax is withheld.

FICA and withheld income taxes are reported and paid together. Within one month after the end of each calendar quarter. You report these taxes on Form 941 (Employer’s Quarterly Federal Tax Re- turn). You must accompany each deposit with a federal tax deposit(FTD) coupon.

Unemployment Tax

The employer is also subject to federal unemployment tax(FUTA) if he or she has paid more than $1500 or more during any quarter of the calendar year or if one or more employees were working at least once each week during each of twenty calendar days. Deposits are reported on Form 940 ( Employer’s Annual Federal Unemployment Tax return) on or before January 3l.

State and Local Taxes

Tax rates and other specifics differ greatly from locale to locale across the country. Prominent among taxation is the state tax on income, and sales taxes. State and local income taxes are directly tied to the amount of income you report on your federal income taxform.

Business’ who retail products are responsible for collecting sales taxes on goods sold to cus- tomers and in turn paying the state and local amounts due the respective taxation authorities.

Depreciation

Business property with a useful life of more than one year is subject to depreciation. This involves deducting, each year, some portion of that properties cost.

Property can be tangible or intangible. Buildings, machinery, equipment, furniture, automobiles and the like are considered tangible property; they can be seen and touched. Franchises are examples of intangible property. land, is property that can never be depreciated because it appreciates in value and can be enhanced by many methods to increase its value.

To be depreciated, business property must meet three basic requirements:

1. Be used in business
2. Have a determinable useful life of more than one year.
3. Be something that wears out, decays, gets used up, becomes obsolete, or loses value from natural causes.

To depreciate an item of property you first use the MACRS (modified accelerated cost recover system), a more detailed description can be given by your accountant or through IRS Publication 534.