How An LLC Is Taxed

How an LLC is taxed

Many clients are referred to our office with questions about Limited Liability Company’s taxation. What is an LLC? The Massachusetts LLC law became effective January 1, 1996 with the creation of the Limited Liability Act. An LLC is a form of business organization that is an unincorporated organization having one or more members formed pursuant to Massachusetts General Law chapter 156C. The various tax treatments available to LLC is Schedule C, Corporation, S Corporation, and Partnership. These options can be daunting.

Now that we have all of the legal jargon out of the way, let’s talk tax!

How is an LLC taxed and how will that affect you? I will start with explaining the automatic tax treatment by the IRS and then Tax Elections that are available. An LLC can have one or several members, based upon the number of member(s) the IRS automatically taxes the LLC as a Sole Proprietor if one member; and a Partnership if two members. Therefore, you must be extremely careful when applying for a tax identification number as that is the Form that you inform the IRS as to the number of members in the LLC and in turn the IRS issues a notice with the LLC tax identification number and specific tax return that needs to be filed. In both situations the profit of the Organization is taxed with your individual tax return subject to federal income tax and self-employment tax (subject to IRC limitations), along with Massachusetts income tax.

There are Tax Elections available for a LLC member or members to make with the IRS to have the Organization taxed as a Corporation or S Corporation. You might be thinking at this point how I make it through the maze of IRS Forms to complete this task. To be treated as a Corporation you must file an Entity Classification Election Form with the IRS. To be treated as an S Corporation you must file an Entity Classification Election Form along with Election by a Small Business Corporation (pursuant to Code section 1362). I recommend mailing the executed Forms to the IRS certified and return receipt to prove timely mailing and IRS receipt of the Form. You are correct, it is a long and precise process that you must go through, so please move through it with extreme care.

This process appears confusing on its face. However, if think of the process in terms of how you want to be taxed and what Form you desire the LLC to file, that will provide you with the road map of Forms you must file with the IRS to accomplish your goal. Remember, choosing the correct tax treatment of your LLC will cost you thousands of dollars or save you thousands of dollars.


Thomas D. Terranova, Jr., CPA, PFS, CITP

Terranova & Associates, LLC.


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Affordable Care Act (ACA) Update | Obama Tax Care

On March 6th House Republicans have proposed tax provision changes to the Affordable Care Act (Obama Health Care Tax) to eliminate or delay the 3.8% Net Investment Income Tax, .9% Additional Medicare Tax, Excise Tax on High Dollar Health Plans, 2.3% Medical Devise Excise Tax, Health Insurance Provider Fee, 10% Excise tax on Tanning Services, Employer and INDIVIDUAL mandates.

What does this mean to individuals? The current Obama Health Care TAX that individuals must pay if they do not have minimum essential health insurance will be eliminated! Individuals will no longer have their tax return filings delayed because they do not have the appropriate Form 1095, although specific employer filings have not been addressed at this time.

This update is a major change to the Affordable Care Act and is a step in the direction to correct Obama Health Care Tax that is effecting many individuals.

We will keep everyone posted with any future Affordable Care Act updates as they occur, so hold on to your knickers, as change is afoot in Congress, Senate, and the White House!!


Tom Terranova, CPA

Jit Lee Billings, CPA

Terranova & Associates, LLC


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Unreimbursed Expenses – What are they?

As Employees perform their job as best as they can whilst Employers do all they can to maintain profitability, this results in a crossroad where employees incur unreimbursed expenses. You may ask what unreimbursed business expense will the IRS allow and how is it deducted? These are common questions asked by many. So let us work through this topic so you have a better understanding of this topic.

Unreimbursed expense is ordinary and necessary business related expense that is common and accepted in your line of business that is helpful and appropriate in accordance with IRC 162.

Unreimbursed expenses can include travel expenses include transportation (plane, bus, train … etc.), taxi, limousine, baggage and shipping, car rental, lodging, meals, dry cleaning, telephone, tips, porter, mileage, tolls, parking, trade publications, books, professional development, equipment, supplies, postage, tax preparation fees, tools, and other expenses ordinary and necessary for business travel.

Adequate records for the various expenses range from documents such as invoices, checks, and credit card receipts to contemporaneous account book, diary, log, or summary of expenses. A document is considered adequate if it includes the date, amount, place, and essential characteristics of the expense.

There are standard travel, lodging, and meals allowance known as federal “per diem” rate. In this case no supporting documents are needed other than your travel itinerary.

There are times when receipts are not available; a contemporaneous log for expenses under $75 should be adequate.

The IRS calls employer’s reimbursement plan an Accountable Plan. In this situation, reimbursements are not included in the employees W-2. For the Plan to be effective, it must be in writing; your expenses must be for business, provide your Employer with adequate accounting of the expenses within a reasonable amount of time (approximately 30 to 60 days), and refund your Employer within a reasonable amount of time any excess reimbursement you received.

Common professions that have unreimbursed expenses are police, emergency medical services (firefighters and EMT’s), teachers, and construction workers. Each profession has its own idiosyncrasy of expenses, what is common to all is employer contracts and handbooks that detail the employer and employees responsibilities. Let us look briefly at each profession keeping in mind the contracts and handbooks are in effect and must be reviewed before taking unreimbursed expense.

Police Officers dealing with tighter budgets have a myriad of unreimbursed expenses such as: union dues, uniforms, cleaning, continuing education, supplies, ammunition, publications, and safety gear, along with any other ordinary and necessary expense to perform the job. In many contracts/instances, Police do not receive an undisturbed lunch break, as supported by the Christey vs. US; meals are deductible if meal breaks must be in s public restaurant and within the Officer’s patrol route.

Emergency Medical Services (firefighter and EMT) may be union or non-union employees. In either case, they usually have many unreimbursed expenses including: union dues, uniforms, cleaning, insurance, professional development, safety equipment (stethoscope), publications, telecommunication, and any other ordinary and necessary expense to perform the job.

Educators/School Teachers are dealing with budgetary issues creating challenging times; luckily, they may claim unreimbursed expenses including: union dues, professional development, course materials, books, publications, supplies, computer equipment, awards, software and services, paper and all other ordinary and necessary expenses to perform the job.

Construction workers can be union or non-union employees. In either case, they usually have many unreimbursed expenses including: uniforms, cleaning, safety outerwear, tools, safety gear, continuing education, and all other ordinary and necessary expenses to perform the job.

The common issue with unreimbursed expenses for any career is documenting the expense and its necessity for your job.

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The Home Office Tax Deduction – Is It For You?

Let’s get things straight about home office deductions.

In this day and age, many individuals are starting and operating their own small businesses out of their homes and apartments. Against a backdrop of cost cutting and footprint reduction by Corporate America, many employees are required to maintain home offices in order to accommodate flexible work schedules and telecommuting. Per Code Section 280A(c)(5), those who use part of their residence to conduct business have the ability to take a tax deduction for associated expenses incurred for the exclusive business use of their home. These expenses are reported on Form 8829 – Expenses for Business Use of Your Home.

There are a few requirements you have to adhere to in order to qualify for this deduction. First and foremost, the home office must be used regularly for conducting business exclusively. For example, if you converted one of your bedrooms into an office that is used exclusively for business, all of the facets of that room must be used for business purposes. For example, if there is a closet in the room, that closet must also be used for business purposes.

Your home office must also be one of your primary business locations. The code states that your home office does not have to be your only business location, only that it has to be one of your primary business locations. For example, you may have a deduction for a home office in addition to an independent office that you rent.

To further qualify for tax reimbursement, your employer must require that you maintain a home office in order for you to perform your duties as an employee of

their company. Furthermore, your employer may not be reimbursing you for any expenses incurred in using part of your home as a home office, whether in the form of rent or expense reimbursement.

There are two methods of calculating home office deductions: the regular method and the simplified ‘Safe Harbor’ method.

The regular method of claiming the home office deduction requires that you to come up with a list of expenses incurred in maintaining your home. These expenses must be supported by financial records. A portion of these expenses can be determined by calculating the square footage of your home office vs. the total living square footage of your home. For example, if it costs you $10,000 to maintain your home, and the square footage of your home office is 10% of the total living area of your home, then you may deduct $1,000 as a home office deduction. The costs of maintaining your home includes, but is not limited to, mortgage interest, insurance, taxes, repairs, utilities and other expenses.

As a side note, any depreciation taken as a deduction reduces the cost basis of your home. While this might not matter on a day to day basis, it might affect you when you sell your home. The deduction, as computed under the regular method, also has gross and net income limitations, and excess deductions not taken may be carried forward to future years.

As you can see, claiming the home office deduction involves quite a bit of work: gathering the financial documents, computing the total expenses for each category, calculating the square footage of your home office vs. your home. As a remedy, the IRS introduced the ‘Simplified Safe Harbor method’ in 2013 pursuant to Revenue Procedure 2013-13. The goal of this method is to simplify the calculation of the home office deduction and also to streamline the documentation requirements related thereto. Using a prescribed rate of $5, taxpayers can compute their home office deduction by using the set rate and applying it to the allowable square footage of your home office (up to 300 square feet). For example, the maximum home office deduction using this method is $5 x 300 or $1,500. By using this method, taxpayers are released from the documentation requirements of the regular method. It is important to note that this deduction cannot exceed the net profit of the business, and cannot be carried forward. You may also not deduce depreciation.

Once you determine the best method to compute your home office deduction, you may use your selected method on your timely filed, original federal income tax return for that tax year. Once you have used either method, you may not make a change for that same tax year. You may change methods from year to year, however.

A special allocation rule exists for home based daycare businesses that do not exclusively use a specific area of the home for business purposes. In this case, the Internal Revenue Service allows you to use the total number of business hours to allocate and compute a home office deduction.

Contact us for further details on how to claim this deduction. As more and more people start their own small business, and as Corporate America keeps cutting costs and reducing their footprint, this deduction will be used more and more often. We can help you sort through the complex Internal Revenue Code and apply the best deduction for you.

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What To Do If Identity Tax Fraud Happens To You

Identity tax fraud can happen to anyone. We’ll help you be prepared.

Are you who you say you are?

A number of new clients have come to my office for assistance with dealing with the tax repercussions of having their identity stolen. Identity thieves use stolen identities to perpetrate fraud in many ways, one of which is to file a fraudulent tax return and claim a refundable credit.

This is usually done early in the tax filing season, from mid-January to early February. Often, this fraud is not discovered until the individual files the real tax return, only to be told by the Internal Revenue Service that a return has already been filed. In most cases, this delays the processing of the legitimate return, which means that you may not receive your refund for several months.

What many people do not know is that the IRS is working diligently to reduce fraudulent tax returns (Yes they are on your side!). The IRS issues taxpayer alerts regarding identity theft scams on their website and YouTube. Through the joint efforts of the IRS, State Tax Agencies, and taxpayers reporting stolen identities the IRS hopes to continue reducing fraudulent tax returns filed.

Photo Identification

The IRS has implemented a new requirement this year to help combat the problem: photo ID. Tax return preparers are now required to ask for photo identification when preparing tax returns. Failure to do so will result in a delay when processing your return.

So bring your photo identification with you to your tax appointment, as you will be asked to provide this to your tax return preparer.

Other scams

This time of year, it is not unusual to see tax-related emails from your employer’s human resources department. Be careful when opening these emails, and be specially wary of opening any attachments. Phishers have been known to send emails requesting recipients to download or confirm their personal information. If you work in human resources, you might get an email from an employee requesting a copy of their W2.

What you should do if your identity is stolen

You can help the IRS and State Tax Authorities if you have experienced identity theft by communicating with them. Contact the IRS to obtain an Identity Protection Personal Identification Number (IP-PIN) and completing Form 14039 Identity Theft Affidavit. Complete Form Identity Theft Affidavit with the MA DOR. Complete Form IC3 – Internet Crime Complaint Center with the FBI and report it to the local Police.

If your identity is stolen, you should contact the IRS, MA DOR, FBI, and local Police as indicated above. In an attempt to stop further financial damage you should contact the three Credit Reporting Agencies (Equifax 866-349-5191, TransUnion 877-322-8228, and Experian 888-397-3742) to report the identity theft and lock your credit report. Each Credit Reporting Agency offers a host of services to monitor your credit, one service you should consider that is relatively inexpensive is a “Credit Lock”, a “Credit Lock” requires a personalized PIN and fee (in some cases) to lock and unlock your credit with each Credit Reporting Agency.

Preventive measures you should take to protect your credit is lock your credit with each credit reporting agency, at least annually if not quarterly obtain a copy of your credit report to review it for accuracy and unknown accounts, lock your mail box, watch for acceptance or rejection letters from credit card company’s you did not apply for, shred your mail when you dispose of it, secure your wireless networks, install a firewall, disable remote management of your router, disconnect from the internet or turn off your computer when not using it, install anti-virus software on your computer and update it regularly, disconnect or cover your computer camera when not in use, back up your data on an external hard drive regularly, use complicated passwords, regularly change your passwords, on mobile devices use finger print and complicated passwords to log into the device, be careful with the apps you down load, install anti-virus software, and turn off your GPS when not being used. Social Networks you should opt for maximum privacy, only accept invitations from people you know, do not past personal data on you site such as social security number, date of birth, telephone, bank, and credit card account numbers. On Line purchases should only be completed with known vendors. This list is not totally comprehensive but is a first good step to protecting your identity.

We all do our best to monitor our credit card and bank activity by reviewing our monthly statements in detail. If you see a suspicious entry, be sure to investigate immediately. The credit you are saving is your own.

Whilst we all do our best to monitor all of our monthly statements and credit reports, the unscrupulous predators do their best to take advantage of any one they can. So do your best to be mindful of this fact during your everyday life when using the internet, your mobile device, paying a bill with a credit card or check.


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Federal 1095 Health Insurance Form and Your Tax Returns


So you’ve received your W2s, your interest and dividend 1099s, your mortgage interest statement and other tax documents. You made an appointment to see your tax preparer, and you’re eagerly anticipating the dollar amount of your tax refund.

“Did you get form 1095?”


“What form 1095?” You respond, mystified. “I have my health insurance form right here, see?”. “No, the one that you get under ACA (Obamacare). We need the information on your tax returns. You get that from your employer.”

So you call your employer, and HR gives you the run around.

“You can file without it”,

“We don’t do that”,

“We expect that this will be available in early March.”

Meanwhile, you’re planning to go on vacation to a nice sunny beach somewhere, and you really, really want to get your taxes filed so your refund can be waiting for you when you get back. Just in time to pay that credit card bill. You know, the one with the vacation charges on it.

Now what do you do? Well, it helps to understand what it is. Form 1095 is issued as a result of complying with ACA (Affordable Care Act, nicknamed Obamacare), which was enacted in 2010. Although it’s been around for a while, and were implemented in stages over past 2 years, 2016 is the first tax year it is being fully implemented. For some people, that means that you’ve heard about it, but haven’t really been affected by it.

It doesn’t help that there are 3 versions: 1095-A, 1095-B, 1095-C. If you got your health insurance via a health insurance marketplace, you should get a 1095-A. If you have minimum essential coverage, you get 1095-B. If your employer is an Applicable Large Employer, and they offered you coverage, you get 1095-C.

1095-A (Heading)

1095-B (Heading)

1095-C (Heading)


So the million dollar question is: Do I need this to file my tax return? And what about Trump’s executive order on January 20, 2017?

Let’s get one thing clear. The ACA is enacted law. The executive order isn’t. So yes, you do need the 1095. At least until the executive order becomes enacted law.

On February 15, 2017, the Internal Revenue Service published an article “Individual Shared Responsibility Provision” on their website, stating that, on the one hand:

“… Taxpayers should continue to file their tax returns as they normally would.”

On the other hand:

“… The IRS has decided to make changes that would continue to allow electronic and paper returns to be accepted for processing in instances where a taxpayer doesn’t indicate their coverage status.”

But, the IRS further states,

“… taxpayers may receive follow up questions and correspondence at a future date, after the filing process is completed.”

So, in essence, you can file your returns without the form 1095, but don’t be surprised if you get a notice from the IRS a few months later. If your return should have included a healthcare penalty that wasn’t calculated, you’ll be required to pay that back with penalties and interest.

Maybe you shouldn’t have ordered that second martini…


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