How big is the U.S. Tax Code?

The number that is generally thrown around is that the tax code runs about 70,000 pages…

The truth is that the actual laws passed by Congress come in at about 2,600 pages. (Apparently the Government Publishing Office sells this in two volumes.)

However, Congress doesn’t come up with the actual tax regulations that have to be followed. The IRS is tasked with interpreting the tax law and developing these regulations which adds up to about 9,000 pages as of 2012.

But wait… There’s more!

Tax law also includes a plethora of past and present case law, revenue rulings, and revenue procedures. So, with all that, the number of pages that a tax professional must consider can easily reach upwards of 70,000!

And, as the winds of political change blow, the Code is constantly changing…

For example, from 2001 to 2012, the tax code changed 4,680 times which averages to about one change per day!

Here’s the deal…

While you can do all the research yourself and get your tax return filed, it’s difficult to discount the value of having an experienced and knowledgeable tax professional on your side. (CPAs are required to perform 20 hours of continuing education every 6 months.)

But whether you’re a weekend warrior and decide to take on your own tax return or decide to hire a CPA, here’s a few highly valuable items to consider…

Individual Income Tax Preparation

Do I need to report this income?

The short answer is YES! The Internal Revenue Code defines Gross Income as: All income from whatever source derived unless specifically stated that all or part is not treated as income.

Receiving a W-2 or a 1099 is not considered a reporting threshold. These forms should be part of the total consideration reported to the IRS as income.

How much is the Standard Deduction for 2023?

State and local tax deductions are limited to $10,000

When deciding to itemize deductions as opposed to using the standard deduction ($24,600 in 2020 when married and filing jointly), the total deduction for state and local taxes is limited to $10,000. This includes income taxes withheld, real estate and property taxes, and DMV fees.

The Miscellaneous Itemized Deduction

The Tax Cuts and Jobs Act of 2017 (TCJA) eliminated the deductibility of miscellaneous itemized deductions such as tax preparation fees, unreimbursed employee business expenses, and investment fees for federal purposes.

However, they may still be deductible for state purposes. It’s important to check your individual state regulations to find out for sure!

Can I deduct Medical & Dental Expenses?

Yes… but there are some limitations:

1. You must choose to itemize deductions which means you’re not taking the Standard Deduction.
2. The qualified medical and dental expenses paid must exceed 7.5% of Adjusted Gross Income. (This is down from 10% in 2019.)

Business Income Tax Preparation

One thing I encounter with new business owners is unfamiliarity with the type of business entity that will best fit the owner’s needs and goals.

Choosing the appropriate entity for your business is crucial.

Your entity choices as a sole business owner include:

• Limited Liability Company (LLC)
• Corporation (C-Corp)
• Subchapter S Corporation (S-Corp)

Limited Liability Company (LLC)

LLCs have been extremely popular for the last 20 years and it is mainly due to the amount of flexibility they offer to the business owner. (And since they became recognized in all 50 states as of 1996.)

An LLC is a hybrid business structure that combines the pass-through taxation advantages of a general partnership with the limited liability of a corporation. However, as a single member (sole owner), an LLC is considered a “disregarded entity” by the IRS and consequently all business income flows through to your personal income tax return as if you were a sole-proprietor.

This single member LLC designation results in a nasty tax trap of 15.3% self-employment tax being applied to Net LLC Earnings…

Bottom line… More taxes paid!

Also, if you happen to reside in the state of California, LLCs will pay an additional fee, above the minimum yearly fee of $800, based on Gross Income… That is income before any deductions!

Fear Not… If you already have an LLC, you can select to be treated as an S-Corp (see below)… But this is important, don’t wait. There are some timing limitations to selecting S-Corp status.

If you postpone too long into the year, you may have to wait until the beginning of the next year to make the S-Corp election.

C-Corporation (C-Corp)

C-Corps are another entity choice which offers the best protection from personal liability, but the tax pitfalls often out-weigh the limited liability benefits for a small business owner.

A C-Corp pays its own tax and currently has a favorable flat Federal income tax rate or 21%. The downside is you, the owner, can only take money out of the corporation in one of three ways:

1. Salary to the owner-employee: Results in a deductible expense for the corporation, but that salary is taxed at the individual rate. Also, of note, both the corporation and the individual will have to pay Social Security and Medicare payroll taxes.
2. Dividend: Dividends payed by the corporation to the owner-shareholder are double taxed once at the corporate level (there is no corporate deduction for dividends paid) and at the shareholder level.
3. Loan: With a loan, clearly, that money needs to be repaid with interest!

Subchapter S Corporations (S-Corp)

S-Corps are generally the most effective entity for smaller businesses with a single owner. S-Corps are superior for several reasons:

1. Provides liability protection to the shareholder/owner like LLCs and C-Corps.
2. There is no Federal income tax on corporate earnings. The income “passes-through” to the owner/shareholder’s individual income tax return.
3. The income from an S Corporation is not subject to self-employment taxes, potentially saving a tax of 15%.
4. The owner/shareholder can (in most cases) take distributions from the S Corporation without penalty… If a reasonable salary is taken.

However, there are some things to consider when deciding on a S-Corp:

1. Only one class of stock… No preferred stock allowed.
2. The number of shareholders can’t exceed 100.
3. Non-resident aliens can’t own shares.
4. Each shareholder must be an individual, an estate, or a qualified trust.
5. Certain limited entities cannot claim S-Corp status.
6. The S-Corp must be a domestic corporation.

None of these restrictions generally affect most new business owners I advise… But knowing is critical to establishing a bullet-proof plan.

Also, keep in mind, this analysis revolves around businesses where the owner is the only shareholder or member (for an LLC). There are certainly situations where these other entities may be a better fit for your business.