QUESTION: I have a small consulting business with a new solo 401(k). Where on the 1040/Schedule C do I report the employee and employer portions?  —Charles Judice

ANSWER: The answer depends on whether you offer to match your employees' retirement contributions. If you don’t offer an employee match, you need to report your contributions to the solo 401(k) on the 1040, not the Schedule C, says Bill Fleming, a managing director of private-company services at PricewaterhouseCoopers in Hartford, Conn. Report any amounts you put into the 401(k) on line 28 where it says “Self-employed SEP, SIMPLE, and qualified plans.” If you do offer your employees a 401(k) matching contribution, then report that information on the Schedule C, under the pension line 19, he says.

---

QUESTION: I am the sole proprietor of a small LLC business with income that can vary significantly. As a result, income averaging (which is no longer allowed) could be quite beneficial to me. Do you know if I can incur next year's expenses this year and prepay things like business trips (airline tickets, hotel rooms, car rentals, trade show expenses), contractor expenses and health-care expenses (monthly premiums over one year), etc.? If I could do this, I would in essence be doing my own form of income averaging.  —John Rovani

ANSWER: You can prepay for anything you like, but you won't be able to take the deduction for this year — no matter which accounting method you choose. The Internal Revenue Service does not allow you to deduct expenses that are paid in advance, says Brendan J. O'Keefe, an accountant and financial advisor in Orleans, Mass. (See page 20 of Publication 535.) Even under the cash-basis accounting method, which generally requires business owners to recognize expenses at the time cash is paid out, the actual use of an airline ticket or car rental has to occur before the payment goes through in order to deduct the expense.

Here's an example: Say you purchase an airline ticket in December this year, but don't fly out until January 2009. You can only take the deduction in 2009, says O'Keefe. Moreover, even if you used the ticket and didn't pay until 2009, under the cash-basis method of accounting you'd still only be allowed to take the deduction in 2009. The same thing goes with other types of expenses. Say a business owner signs onto a three-year insurance policy and pays for it all upfront. As the IRS explains, that business owner will still need to deduct the cost of each year’s premium during the year in which that expense was allocated.

---

QUESTION: Do I still need an EIN, or Federal Tax ID number, if I'm running a husband/wife business as a limited liability company in Texas and we have no employees?  —Guy Drobny

ANSWER: The employer identification number, or EIN (also known as the Federal Tax Identification Number), is a unique number assigned by the IRS that identifies the company as a business. It's fair to say that a vast majority of businesses require an EIN (this is how the government tracks and regulates businesses). However, in community property states such as Texas and California, husband and wife limited liability companies, or LLCs, with no employees are considered single member entities. As such, they don’t need an EIN, says Jay R. Brennan, an accountant and financial planner in Princeton, N.J. By contrast, in the 41 non-community property states, such as Virginia and New York, LLCs with more than one member — regardless of their marital status — who don't have employees need an EIN. Those LLCs must file their federal tax return as either a corporation (Form 1120) or partnership (Form 1065).

Once employees enter the picture, however, every company or business entity (sole proprietorship, LLC, corporation or partnership) needs an EIN – no matter if they’re in a community property state or not. (For more information on EINs, click here.)

---

QUESTION: Do Section 179 limits apply independently when you have two S corporations which are under common control, or is the $800,000 maximum for purchases the total between the two companies?  —Mary

ANSWER: Technically speaking, you can buy up to $800,000 worth of qualifying assets and deduct up to $250,000 of those expenses for each S corporation during 2008. However, since you own both firms, they are considered “pass-through entities” — meaning that all of their information gets reported on your taxpayer filing — and therefore you can't take the two $250,000 deductions.

Here's why: Under the so-called Section 179 deduction, which was expanded in February per the passing of the economic stimulus package, a single taxpayer is limited to the $250,000 deduction, says Brennan, the accountant and financial planner in Princeton. So even if you wanted to take two $250,000 deductions, you can't because whatever transpires under each S corporation gets passed through and reported on your single return. (Read our story on the enhanced Section 179 deduction for more information).

Other Asked & Answered columns:

• Asked & Answered: Small Businesses and the Credit Crisis
• Asked & Answered: FSAs vs. HSAs