What's taxable?

[Scottii]

Okay, question about basic business taxes. If I start a for-profit charity that only receives funds through private donations, are all incoming funds taxable, or just the percentage I take for income? Btw, I'm thinking this will be a sole proprietorship. Perhaps there'd be advantages to other business structures? Thanks.

[Scottii]

I should clarify. When I start this, I plan it growing very slowly, tanking maybe 10% to invest in the company with little to no income for myself at first as I have another source of income. The other 90% of the donations will sit in a separate account until there's enough to benefit a recipient, $20,000-$30,000. Will I need to pay taxes on the benefit account, the entire 10%, or what I take as income?

[Scottii]

Looking at IRS 1040, schedule c, line 27b reads "reserved for future use". It seems that any donations sitting in an account for the beneficiary would be deductible under 27b, as well as any of the 10% that can be itemized in growing the business. This leaves the portion that I take as income to be taxable. Did I answer my own question, or am I hallucinating?

[Brian Altenhofel]

Really should talk to an accountant.

[Freelancier]

You really really should talk to an accountant. You're trying to get tax advice on a free forum, so the advice will be worth exactly what you paid for it.

A good accountant will cost you around $400 for a couple of hours of their time to get all your ducks in a row and keep the taxman away from your door. It's soooo worth paying a little now to an accountant instead of having to over-pay later for a tax attorney to get yourself out of trouble.

[Scottii]

Thanks for the responses! Yes, I plan on talking to an accountant before starting the business. Right now I'm in the pre-pre planning stages and just looking for the most basic idea of how taxes work in a small business. I haven't even started raising the startup fundraising yet, which will pay for said accountant.

Just looking for the tax liability of a basic sole proprietorship with with an income stream, money on hold within the company, money working within the company, and paying income for myself. I do know I have to take part of my salary and put 25% aside for various taxes, file quarterly, etc. I'm not looking for all of those details, just the basics.

There must be somebody on this forum that has the wisdom of experience that can give the most basic of answers to the question. I won't quote you on it, promise!

Btw, I've got to disappear for a couple days, I'll check in when I can. Thanks again!

[TAAccounting]

Scottii:

I agree with FreeLancer; a good accountant is worth their weight in gold when it comes to these matter. Now, with that said, here are some things to keep in mind.

1. As a sole-proprietor, you cannot receive a salary of any sort as it is a pass-through entity. This means, your "Net Income" is "Your Income". Which is subjected to 15.3% self-employment tax and whatever your state tax is at (Missouri & Illinois is 6%).

2. To calculate your taxes, simply do the following formula:
Net Income x 92.3% = Taxable Income
Taxable Income x 15.3% = Tax Liability (owed quarter/annually depending on how you choose to do this)

3. If you are determined to have salary, consider doing an LLC elected S-Corp; which gives you a salary with taxes withheld (thus, eliminating your self-employment taxes), and your net income is taxed at the ordinary rate (contact me if you need more explanation on that).

My professional opinion, based on the information at hand -- I would recommend an LLC at first. As you are wanting to start slowly and grow gradually. An S-Corp will cost you a lot more when it comes to tax preparation and filing (more complex). You will need to pay tax on the benefit account as this is not a non-profit; so everything that falls into "Net Income" is taxable.

I hope this helps!

Best Regards,
Tran Nguyen
Accountant
TransActions Accounting LLC (http://www.TAAccounting.com)

[jamesray50]

Hi Scotti,

I don't do taxes or offer tax advise, but I can tell you a little something. First of all, if your business is a sole proprietor you do not pay yourself a salary. Any money you take is a draw, a credit to your equity account. The balance in your equity account will flow through to your personal income tax return. The business will pay taxes on the Net Income (loss). Net income is calculated by subtracting all business expenses from all income received. If there is a loss, no income tax will be due.

Since I don't know anything about your business or the charity I can't say whether the money you will be receiving is taxable income. You really do need the advise of someone who has experience with for-profit charities.

Good luck!

[Scottii]

Thanks TAA and Jamesray50! Great advise! I think I'll take the LLC recommendation to heart. There may be some wisdom in checking out free online business classes before I jump.

[LinForPros]

I think I'll take the LLC recommendation to heart.

Be carefull about LLC/S-CORP election. You will need to pay FUTA tax to the dep of labor. FICA also on W-2 for yourself.
Linforpros - not a tax adviser.