Selecting A Legal Entity
Registering With Tax Authorities
Accounting & Bookkeeping
Payroll Taxes
Selecting A Year-End
Income & Gross Receipts Tax
Cash Planning & Forecasting
Obtaining Credit & Financing
Insurance
Selecting Professional Advisors
Other Helpful Information
Exhibits
Tax Planning | State Taxes
Eventually you will have to deal with income taxes. The income tax laws are extensive and can be confusing for an individual starting a business. This chapter does not cover all the tax ramifications of a new business; however, it provides some guidance for complying with the laws. A qualified CPA or tax attorney should be consulted when you are dealing with income taxes. Income taxes have a direct result and a potentially significant impact on the cash flow of your business.
Income Tax Forms
Each type of legal entity is required to file a different type of income tax form.
Corporation. A C-corporation is considered a taxable entity and is required to file a federal Form 1120 and a New Mexico Form CIT. Following this chapter is an example of a properly filled out Form 1120.
Partnership and Limited Liability Company. These are not taxable entities. They are treated as a conduit through which taxable income is passed to the individual partners or members for inclusion in their respective tax returns. Both entities are required to file Federal Form 1065. No tax is due with these forms; however, included with the return is a Schedule K-1 for each partner or member which lists the various items of income and credits to be included on the individual's return. These entities are required to file New Mexico Form PTE (pass-through entity).
S-Corporation. An S-Corporation is a type of corporation that is specially treated under the tax laws. The government taxes this type of entity in the same manner as a partnership, with certain exceptions. The tax forms required are federal Form 1120S and New Mexico PTE.
Sole Proprietorship. A sole proprietorship is considered to be a component of the individual's personal tax situation. The tax form required is the Schedule C which is included with the owner's Form 1040. In addition, if the owner’s self-employed profits (including net income from the proprietorship as well as any earned income from pass-through entities) exceed $400, then a Schedule SE must be included which determines the amount of self-employment tax that is due. New Mexico follows these same rules except that the self-employment tax is not levied under New Mexico tax law.
|
Due Date |
The due dates of various forms are: |
|
Corporation |
Form 1120 and NM CIT are due the 15th day of the 3rd month after the end of the tax year. The electronic deposit is due the 15th day of the 4th, 6th, 9th and 12th months of the tax year. |
|
Partnership and Limited Liability Company |
Form 1065 and NM PTE are due the 15th day of the 4th month after the end of the tax year (April 15 for most partnerships and LLCs). |
|
Sole Proprietorship |
Form 1040 and NM PIT-1 are due April 15th. Estimated tax payments (see below) are due quarterly on April 15, June 15, Sept.15, and January 15. |
|
S-Corporation |
Form 1120S and NM PTE are due the 15th day of the 3rd month after the end of the tax year (March 15 for most S-corporations). |
|
EXTENSIONS |
The business owner may request an extension of time to file the tax returns. However, these extensions do not extend the time for paying the tax, if any. |
Estimates
In addition to the regular tax forms, the law requires that, if an estimate of the tax is not properly prepaid on a quarterly basis, a non-deductible underpayment penalty may be levied. Since an estimate is based on forecasting the future, and subject to human error, the tax laws provide two safe-harbors to avoid the penalty for underpayment. If your payments (including amounts withheld) are made timely for each quarter and they equal the lesser of 100% of the prior year's tax or 90% of the current year's tax, then the penalty can be avoided. There are exceptions to this rule if your income exceeds certain levels. Estimates are filed as follows:
C-Corporation: Electronic deposit (EFT) will generally be required.
Individual: Mailed with federal Form 1040ES and New Mexico Form PIT-ES. Checks for the IRS are made payable to United States Treasury. For New Mexico, they are payable to N.M. Taxation & Revenue Dept.
The addresses may be different from those to which tax returns are mailed.
First Corporate Return
The first tax return a corporation files is very important. As part of that return, elections are made which will dictate the way the corporation is taxed for many years to come. Some of the more significant elections that may need consideration are outlined below:
Election to capitalize and amortize costs incurred to organize the business. These can be legal, accounting or similar fees paid to commence operations. Such costs are not normally considered expenses of the corporation and are not deductible unless this election is made.
Election to accrue vacation pay earned but not taken by employees at the end of the tax year. Without this election, vacation pay is not deductible until the year it is taken.
The elections discussed above are only a few of those that may need to be considered in an initial return. A qualified Certified Public Accountant can help plan how best to utilize elections to take advantage of various provisions of the federal and New Mexico tax laws including, for example:
a. Net Operating Loss carryovers
b. Research and development tax credits
c. Business energy tax credits
Tax Planning
Proper tax planning is essential in order to make the most of the income tax laws. You will probably need to develop a relationship with a Certified Public Accountant who has experience with the taxation of your type of business. Tax planning is not a one-time shot right before the return is due. Tax planning is a year-round endeavor requiring communication on both sides - you and your CPA. Proper planning ensures that there are no surprises when the return is filed.
It is not unusual for a start-up business to incur losses while it is becoming a well-established enterprise. The business owner may be able to use those losses to offset taxable income from other sources or to carry over the losses to offset income in another year. Therefore, it is important not to overlook any legitimate expense even if the owner expects not to make a profit in the current year.
State Taxes
Income Taxes
New Mexico imposes income taxes on Individuals and Corporations. The state income tax liability is based on the corresponding federal tax return, a method sometimes called "piggy-backing." The federal income tax return must be completed before preparing the state return. Beginning with the federal Adjusted Gross Income, the state return applies various adjustments to arrive at the state Net Taxable Income. There are also a number of special tax credits under New Mexico law.
New Mexico requires a Form CIT-1 for C corporations which are subject to their own income tax. A Form PTE is required for "pass-through" entities including S corporations, Partnerships and Limited Liability Companies. There is a $50 annual franchise fee payable by S corporations, but no such fee is payable by other "pass-through" entities. Income tax for these entities is generally passed through to their owners using a Schedule K-1 (see page 6-14).
State income tax rates for individuals follow a pattern somewhat similar to the federal tax brackets for the various filing statuses. The state tax rate for the lowest bracket is currently 1.7% of taxable income. It increases in several stages to 8.2% for the highest brackets. The state includes a tax table in the Personal Income Tax (PIT) Form Packet for taxable incomes up to $95,000. For higher incomes, the 2001 tax schedule is as follows:
| of taxable income |
|||
|
Filing status |
Tax is... | Plus | in excess of: |
|
For taxable income over $95,000 but not over $100,000: |
|||
| Single | $6,517.50 | 8.2% | $95,000 |
| Married Filing Jointly | 5,881.00 | 7.9% | 95,000 |
| Married - Separately | 6,828.00 | 8.2% | 95,000 |
| Head of Household | 6,179.00 | 8.2% | 95,000 |
|
For taxable income over $100,000: | |||
| Single | 6,927.50 | 8.2% | 100,000 |
| Married Filing Jointly | 6,276.00 | 8.2% | 100,000 |
| Married - Separately | 7,238.00 | 8.2% | 100,000 |
| Head of Household | 6,589.00 | 8.2% | 100,000 |
|
The corporation income tax rates are listed at the end of this chapter. | |||
"The gross receipts tax is imposed on persons engaging in business in New Mexico. Such persons are solely liable for payment of the tax; they are not ‘collectors’ on behalf of the state."
There is no requirement that the seller collect the tax from the customer. Whether the seller recovers the cost of the tax is at the discretion of the seller. The seller will be responsible for the tax whether it is a recovered cost or not.
Simply stated, there are three categories of gross receipts or income. They are: exempt, deductible and taxable. Only the receipts that fall under the exempt category are exempt from reporting. A few examples of exempt gross receipts are payroll wages received, or interest or dividend income, or oil and gas mineral interests. In the ordinary course of business, whether in the course of selling goods or services, most all receipts are going to be either subject to Gross Receipts Tax liability or deductible from the gross receipts on the tax report as not subject to gross receipts tax.
Gross Receipts Tax is due only at the point at which the sale of goods or services ends with a final consumer. In the terminology of the New Mexico Taxation and Revenue Department, this is when the product or service leaves the "stream of commerce." For example, Gross Receipts Tax would not be an issue should a general contractor buy materials or services from a lumberyard or subcontractor to build a house for a new homeowner. In this example, the final consumer is the new homeowner. When the homeowner pays the general contractor for the materials and services provided to complete the home, the transaction is then subject to gross receipt tax. The goods and services leave the stream of commerce when the new homeowner buys the home. Here again, the additional cost of the tax can be passed on to the homeowner, but the legal liability for gross receipts tax is imposed on the seller, in this case, the general contractor.
In the above example, the general contractor would be required to present to the lumberyard or subcontractor a NTTC (Non-Taxable Transaction Certificate). This provides certification to the seller of the goods or services that the general contractor is not the final consumer. There are several types of NTTCs. The forms can be applied for and obtained from the New Mexico Taxation and Revenue Department. It is important to have the correct type of NTTC on file for any transaction for which a deduction is taken. Gross receipts, whether deductible or taxable, are reported on Form CRS-1. The form is filed either monthly or semi-annually, depending on the volume of receipts. The forms are provided by the state in a packet when the business applies for a state identification number (see page 2-8).
Should your business sell goods or services to someone who does not live in New Mexico, the rules can be confusing. Generally, Gross Receipts Tax on out of state sales depends upon where the title and risk of loss changes hands. Title means ownership or right to ownership. If title and risk of loss changes hands in New Mexico, the transaction is subject to Gross Receipts Tax. Conversely, should title and risk of loss change hands outside of New Mexico, the transaction is not subject to Gross Receipts Tax. Though not subject to the Gross Receipts Tax, the receipts should be reported, and deducted on the CRS-1 report.
If your company will be doing business in more than one state, it is essential that you familiarize yourself with the tax laws and filing requirements of those states. Each state has its own rules and regulations; if you are in non-compliance, you may be barred from doing business in that state.
It is important to find a reliable source of whom you can ask questions, preferably a senior level official at the New Mexico Taxation and Revenue Department or a certified public accountant who is well versed in the system. Periodically the New Mexico Taxation and Revenue Department holds seminars for the public on various aspects of the Gross Receipts Tax. Call the Department for further information and schedules of upcoming seminars.
The NM Taxation and Revenue Department has an impressive and informational web site at http://www.state.nm.us.gov
Some important phone numbers at the NM Taxation and Revenue Department are:
Audit and Compliance Division (505) 827-0900
Protest Office (505) 827-0916
Tax Information & Policy (505) 827-0939
Personal Income Tax Information (505) 827-0827
Gross Receipts Tax (Form CRS-1) (505) 827-0832
The average business owner is very likely to receive communications or notices from taxing authorities from time to time. As most taxpayers are well aware, neither the Internal Revenue Service nor the New Mexico Taxation & Revenue Department is infallible. These notices should never be ignored, even if they appear to be incorrect. On the other hand, the business owner or taxpayer should not feel intimidated and, as a result, pay an assessment without first establishing its validity. Your certified public accountant is familiar with various types of notices, the regulations involved, the appropriate methods of verifying or disproving their validity, and how to deal with them efficiently within allowable time limits. Unless the owner or taxpayer is virtually certain that the assessment (including interest and penalties) is correct, a prompt request for assistance or intervention from your CPA may save money as well as unnecessary anxiety.
|
CORPORATION FEDERAL INCOME TAX RATES FOR 2001 |
|
|||||
| Taxable Income (Form 1120 line 30) |
of the | |||||
| But Not | % on | amount | ||||
| Over | Over | Pay | + | Excess | over: |
|
| $ 0 | - | $ 50,000 | $ 0 | 15% | $ 0 |
|
| 50,000 | - | 75,000 | 7,500 | 25 | 50,000 |
|
| 75,000 | - | 100,000 | 13,750 | 34 | 75,000 |
|
| 100,000 | - | 335,000 | 22,250 | 39 | 100,000 |
|
| 335,000 | - | 10,000,000 | 113,900 | 34 | 335,000 |
|
| 10,000,000 | - | 15,000,000 | 3,400,000 | 35 | 10,000,000 |
|
| 15,000,000 | - | 18,333,333 | 5,150,000 | 38 | 15,000,000 |
|
| 18,333,333 | - | ............... | 6,416,667 | 35 | 18,333,333 |
Taxable income of certain personal service corporations is taxed at a flat 35% rate. |
|
| CORPORATION NEW MEXICO STATE INCOME TAX RATES FOR 2001 |
|
|||||
| Taxable Income | % on | of the amount |
||||
| Over | But not over | Pay | + | Excess | over: |
|
| $ 0 | - | $ 500,000 | $ 0 | 4.8% | $ 0 |
|
| 500,000 | - | 1,000,000 | 24,000 | 6.4 | 500,000 |
|
| 1,000,000 | - | -- | 56,000 | 7.6 | 1,000,000 |
|
Exhibit 6A - Form 112
Exhibit 6B - Form 1065
Payroll Taxes | Selecting A Year-End | Income & Gross Receipts Tax
Cash Planning & Forecasting | Obtaining Credit & Financing | Insurance
Selecting Professional Advisors | Other Helpful Information | Exhibits
Online Advisor | Contact Us | Links to Other Tax & Business Sites | Home | Top