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San Jose CPA - Tax Preparation

I am thinking of incorporating my company. What are some of the issues I need to consider?
There are quite a few things to consider. First of all, there are two types of corporations: A regular "C" corporation which is taxed on the profits it generates, and an S corporation which is not subject to tax at the corporate level for federal purposes but is subject to a 1.5% rate of tax by the State of California (for corporations doing business in California). A "C" corporation is generally taxed according to a graduated corporate tax schedule, a portion of which is illustrated below (for taxable incomes of up to $10,000,000). Note that there are three additional tax brackets for taxable incomes over $10 million which are not presented below:

0 to $50,000 - 15%
$50,000 to $75,000 25%
$75,000 to $100,000 34%
$100,000 to $335,000 39%
$335,000 to $10,000,000 34%

You should be aware that "Personal Service Corporations" are taxed at a flat rate of 35%.

My tax return shows quite a large estimated tax penalty. Is there some way I can reduce the penalty?
Possibly. You may benefit by using the annualized income installment method of calculating the estimated tax penalty. Under this method, you may be able to show how the penalty should be smaller because the income that generated the penalty was not received until later in the year. Income is normally assumed to be received equally throughout the year. IRS Publication 505 can be helpful in completing what can be a fairly complex Form 2210.

Should I incorporate in Delaware?
If you plan to do business in the State of California, then you will have to pay fees to California. If you are a small or medium sized business based in California, check out the benefits of incorporating in Delaware before going ahead with that decision. There can be benefits to incorporating in Delaware, but if your company will not realize any of those benefits, why pay fees to two states? You can see California's schedule of fees for foreign corporations on their website.

My company maintains a fairly large inventory of items for sale throughout the year. Which method of accounting is my company required to use, the cash method or the accrual method?
According to Internal Revenue Regulation §§ 1.446-1(c)(2), "In any case in which it is necessary to use an inventory the accrual method of accounting must be used with regard to purchases and sales unless otherwise authorized..." A company can change its method of accounting by requesting permission from the Internal Revenue Service. The IRS has recently issued guidelines which are intended to make it easier for companies to change their method of accounting.

How much can I deduct in the current year if I buy new equipment for my business?
The section 179 deduction is probably what you are thinking of. Under this Internal Revenue Code section you can elect to treat all or part of the cost of property as a currently deductible expense (instead of depreciating it over a period of years). The amount you can expense for assets placed in service in 2003, 2004 and 2005 is $100,000. You should also know that the expensing election deduction cannot exceed the total amount of taxable income derived from the active conduct of a trade or business (which includes salaries and wages). Be aware that the rules for writeoff of an SUV were reduced in October of 2004 to limit the section 179 expense election to only $25,000.

We have not filed tax returns for several years and are now looking to get everything caught up. How do we go about getting the whole situation straightened out without the IRS demanding immediate payment for thousands of dollars?
You can first have all of your returns prepared to see if you owe tax. If you determine that tax is due, you can request a monthly payment arrangement with the IRS. The amount of the monthly payment will depend on your income and living expenses. When you establish the payment arrangement, the IRS will normally mail you a payment reminder each month until the entire amount of tax is paid.

...Hope you have found this helpful! Check back again for more "frequently asked questions!"