September 1 – 2024 Fall and 2025 Tax Planning
Tax Planning Contact this office to schedule a consultation appointment.
September 10 – Report Tips to Employer
If you are an employee who works for tips and received more than $20 in tips during August, you are required to report them to your employer on IRS Form 4070 no later than September 10. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 8 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.
September 16 – Estimated Tax Payment Due
The third installment of 2024 individual estimated taxes is due. Our tax system is a “pay-as-you-earn” system. To facilitate that concept, the government has provided several means of assisting taxpayers in meeting the “pay-as-you-earn” requirement. These include:
- Payroll withholding for employees;
- Pension withholding for retirees; and
- Estimated tax payments for self-employed individuals and those with other sources of income not covered by withholding.
When a taxpayer fails to prepay a safe harbor (minimum) amount, they can be subject to the underpayment penalty. This penalty is equal to the federal short-term rate plus 3 percentage points, and the penalty is computed on a quarter-by-quarter basis.
Federal tax law does provide ways to avoid the underpayment penalty. If the underpayment is less than $1,000 (the de minimis amount), no penalty is assessed. In addition, the law provides “safe harbor” prepayments. There are two safe harbors:
- The first safe harbor is based on the tax owed in the current year. If your payments equal or exceed 90% of what is owed in the current year, you can escape a penalty.
- The second safe harbor is based on the tax owed in the immediately preceding tax year. This safe harbor is generally 100% of the prior year’s tax liability. However, for taxpayers whose AGI exceeds $150,000 ($75,000 for married taxpayers filing separately), the prior year’s safe harbor is 110%.
Example: Suppose your tax for the year is $10,000 and your prepayments total $5,600. The result is that you owe an additional $4,400 on your tax return. To find out if you owe a penalty, see if you meet the first safe harbor exception. Since 90% of $10,000 is $9,000, your prepayments fell short of the mark. You can’t avoid the penalty under this exception.
However, in the above example, the safe harbor may still apply. Assume your prior year’s tax was $5,000. Since you prepaid $5,600, which is greater than 110% of the prior year’s tax (110% = $5,500), you qualify for this safe harbor and can escape the penalty.
This example underscores the importance of making sure your prepayments are adequate, especially if you have a large increase in income. This is common when there is a large gain from the sale of stocks, sale of property, when large bonuses are paid, when a taxpayer retires, etc. Timely payment of each required estimated tax installment is also a requirement to meet the safe harbor exception to the penalty. If you have questions regarding your safe harbor estimates, please call this office as soon as possible.
CAUTION: Some state de minimis amounts and safe harbor estimate rules are different than those for the Federal estimates. Please call this office for particular state safe harbor rules.
Weekends & Holidays:
If a due date falls on a Saturday, Sunday or legal holiday, the due date is automatically extended until the next business day that is not itself a legal holiday.
Disaster Area Extensions:
Please note that when a geographical area is designated as a disaster area, due dates will be extended. For more information whether an area has been designated a disaster area and the filing extension dates visit the following websites:
FEMA: https://www.fema.gov/disaster/declarations
IRS: https://www.irs.gov/newsroom/tax-relief-in-disaster-situations
September 2024 Business Due Dates
September 16 – S Corporations
File a 2023 calendar year income tax return (Form 1120-S) and pay any tax due. This due date applies only if you requested an automatic 6-month extension. Provide each shareholder with a copy of their Schedule K-1 (Form 1120-S) or a substitute Schedule K-1 and, if applicable, Schedule K-3 (Form 1120-S) or substitute Schedule K-3 (Form 1120-S).
September 16 – Corporations
Deposit the third installment of estimated income tax for 2023 calendar year
September 16 – Social Security, Medicare and withheld income tax
If the monthly deposit rule applies, deposit the tax for payments in August.
September 16 – Nonpayroll Withholding
If the monthly deposit rule applies, deposit the tax for payments in August.
September 16 – Partnerships
File a 2023 calendar year return (Form 1065). This due date applies only if you were given an additional 5-month extension. Provide each partner with a copy of K-1 (Form 1065) or a substitute Schedule K-1.
September 30 – Fiduciaries of Estates and Trusts
File a 2023 calendar year return (Form 1041). This due date applies only if you were given an extension of 5 1/2 months. If applicable, provide each beneficiary with a copy of K-1 (Form 1041) or a substitute Schedule K-1.
Weekends & Holidays:
If a due date falls on a Saturday, Sunday or legal holiday, the due date is automatically extended until the next business day that is not itself a legal holiday.
Disaster Area Extensions:
Please note that when a geographical area is designated as a disaster area, due dates will be extended. For more information whether an area has been designated a disaster area and the filing extension dates visit the following websites:
FEMA: https://www.fema.gov/disaster/declarations
IRS: https://www.irs.gov/newsroom/tax-relief-in-disaster-situations
Article Highlights:
- Understanding the Threats
- Common Scams Targeting Seniors
- Awareness and Protection Strategies
- Tips for Caregivers
- Key Points to Remember
- IRS Advice and Resources
- Key IRS Recommendations
- What to Do if Scammed
- Long-Term Steps
As our population ages, seniors increasingly become targets for a variety of scams. These fraudulent schemes can have devastating financial and emotional impacts on older adults, who may be more vulnerable due to factors such as isolation, cognitive decline, or simply a trusting nature. The Internal Revenue Service (IRS) has been proactive in issuing warnings and providing guidance to help protect seniors from these threats. This article will delve into the nature of scams targeting seniors, what to be on guard for, awareness and protection strategies, IRS advice, and steps to take if one falls victim to a scam.
Understanding the Threats – Scammers employ a range of tactics to deceive seniors, often posing as representatives from government agencies, familiar businesses, or charities. The IRS, in its news release IR-2024-164, highlights the rising threat of impersonation scams targeting older adults. These fraudsters use fear and deceit to exploit their victims, often pressuring them into making immediate payments through unconventional methods such as gift cards or wire transfers.
Common Scams Targeting Seniors
Impersonation of Known Entities: Fraudsters often pose as representatives from government agencies like the IRS, Social Security Administration, or Medicare. By spoofing caller IDs, they can deceive victims into believing they are receiving legitimate communications. These scammers may claim that the victim owes money, is due a refund, or needs to verify personal information.
Claims of Problems or Prizes: Scammers frequently fabricate urgent scenarios, such as outstanding debts or promises of significant prize winnings. Victims may be falsely informed that they owe the IRS money, are owed a tax refund, need to verify accounts, or must pay fees to claim non-existent lottery winnings.
Pressure for Immediate Action: These deceitful actors create a sense of urgency, demanding that victims take immediate action without allowing time for reflection. Common tactics include threats of arrest, deportation, license suspension, or computer viruses to coerce quick compliance.
Specified Payment Methods: To complicate traceability, scammers insist on unconventional payment methods, including cryptocurrency, wire transfers, payment apps, or gift cards. They often require victims to provide sensitive information like gift card numbers.
Awareness and Protection Strategies
Awareness is the first line of defense against scams. Seniors and their caregivers should be educated about the common tactics used by scammers and the red flags to watch for. Tips for Seniors:
Verify the Source: Always verify the identity of the person or organization contacting you. If you receive a call, email, or text message claiming to be from the IRS or another government agency, do not provide any personal information. Instead, contact the agency directly using a verified phone number or website.
Be Skeptical of Unsolicited Communications: Be cautious of unsolicited communications, especially those that request personal information or immediate payment. Legitimate organizations will not ask for sensitive information through unsecured channels.
Do Not Rush: Scammers often create a sense of urgency to pressure victims into making hasty decisions. Take your time to verify the legitimacy of the request and consult with a trusted family member or friend before taking any action.
Use Secure Payment Methods: Avoid making payments through unconventional methods like gift cards, wire transfers, or cryptocurrency. Legitimate organizations will not request payment using these procedures.
Monitor Financial Accounts: Regularly monitor your bank and credit card statements for any unauthorized transactions. Report any suspicious activity to your financial institution immediately.
Tips for Caregivers
Educate and Communicate: Regularly discuss potential scams with the seniors in your care. Ensure they understand the common tactics used by scammers and encourage them to reach out to you if they receive any suspicious communications.
Set Up Protections: Help seniors set up protections such as fraud alerts on their credit reports and two-factor authentication on their online accounts.
Monitor Communications: If possible, monitor the mail, phone calls, and emails that the senior receives. This can help identify potential scams before any damage is done.
Encourage Reporting: Encourage seniors to report any suspicious activity to the appropriate authorities. Reporting scams can help prevent others from falling victim to the same schemes.
IRS Advice and Resources – The IRS has been actively engaged in efforts to protect taxpayers, including seniors, from scams and identity theft. The Security Summit partnership between the IRS, state tax agencies, and the nation’s tax professional community has been working since 2015 to combat these threats. Remember that:
The IRS will never demand immediate payment via prepaid debit cards, gift cards or wire transfers. Typically, if taxes are owed, the IRS will send a bill by mail first.
The IRS will never threaten to involve local police or other law enforcement agencies.
The IRS will never demand payment without allowing opportunities to dispute or appeal.
The IRS will never request credit, debit or gift card numbers over the phone.
Key IRS Recommendations
Know the IRS Communication Methods: The IRS will never initiate contact with taxpayers by email, text message, or social media to request personal or financial information. Initial contact is typically made through a mailed letter.
Questions or Concerns About Your Taxes: Contact your tax professional.
Report Scams: If you receive a suspicious communication claiming to be from the IRS, report it to the IRS at [email protected]. You can also report scams to the Federal Trade Commission (FTC) at www.ftc.gov/complaint.
Protect Personal Information: Be cautious about sharing personal information. The IRS advises taxpayers to use strong passwords, secure their devices, and be wary of phishing attempts.
Seek Professional Help: If you believe your identity has been compromised, contact this office immediately. The IRS has special provisions for victims of identity theft to protect their tax filings.
What to Do if Scammed – Despite all precautions, scams can still happen. If you or a loved one falls victim to a scam, it’s important to act quickly to minimize the damage.Immediate steps to take:
Stop Communication: Cease all communication with the scammer immediately. Do not provide any further personal information or make any additional payments.
Report the Scam: Report the scam to the appropriate authorities. This includes the IRS, the FTC, and your local law enforcement. Reporting the scam can help authorities track down the perpetrators and prevent others from being victimized.
Contact Financial Institutions: Notify your bank, credit card companies, and any other financial institutions involved. They can help you monitor your accounts for fraudulent activity and take steps to protect your assets.
Place Fraud Alerts: Place a fraud alert on your credit reports with the major credit bureaus (Equifax, Experian, and TransUnion). This can help prevent further identity theft.
Review Credit Reports: Obtain and review your credit reports for any unauthorized accounts or activities. You are entitled to a free credit report from each of the major credit bureaus once a year through www.annualcreditreport.com. You may even want to put a freeze on your credit, which will help prevent fraudsters from opening credit accounts in your name or accessing your credit reports. To do so you’ll need to contact the three major consumer credit bureaus. The drawback to doing so is the inconvenience of contacting the credit bureaus again if you need to lift the freeze on your credit card(s).
Secure Personal Information: Change passwords and security questions on your online accounts. Consider using a password manager to create and store strong, unique passwords.
Long-Term Steps
Monitor Accounts: Continue to monitor your financial accounts and credit reports regularly for any signs of fraudulent activity.
Educate Yourself: Stay informed about the latest scams and fraud prevention strategies. The IRS and other organizations regularly update their websites with new information and resources.
Seek Support: Falling victim to a scam can be emotionally distressing. Seek support from family, friends, or professional counselors if needed.
Legal Assistance: In some cases, it may be necessary to seek legal assistance to resolve issues related to identity theft or financial fraud.
Scams targeting seniors are a growing concern, but with awareness and proactive measures, older adults can be protected from these threats. By staying informed, verifying communications, and taking swift action, when necessary, seniors and their caregivers can safeguard against fraud and ensure financial security.
Remember, if you or a loved one is ever in doubt about a communication or request, it’s always better to be safe than sorry. Reach out to trusted family members, friends, or professionals for advice and support. Together, we can create a safer environment for our seniors and help them enjoy their golden years without the fear of falling victim to scams.
Self-Employment Tax: Who Really Needs to Pay and Why You Can’t Afford to Ignore It
Article Highlights:
Understanding Self-Employment Tax
Who is Required to Pay Self-Employment Tax
Who is Exempt from Paying Self-Employment Tax
Special Situations
In the realm of taxes, understanding who is required to pay self-employment tax and who is exempt is crucial for individuals navigating their financial responsibilities. Whereas employees have Social Security and Medicare taxes withheld from wages–often referred to as FICA taxes– individuals who work for themselves are subject to self-employment (SE) tax, which they pay in lieu of the Social Security and Medicare taxes employees pay via payroll withholding. Employees and employers share the employee’s liability, while self-employed individuals pay both the employer and employee liability.
Understanding Self-Employment Tax – Before diving into the specifics of who must pay self-employment tax, it’s essential to understand what it entails. Self-employment tax is governed by the Self-Employment Contributions Act (SECA), under which individuals who earn income directly from their business activities, rather than as employees, are required to contribute to Social Security and Medicare. This tax is calculated as a percentage of net earnings from self-employment.
For 2024, the self-employment tax rate is 15.3%, comprised of 12.4% for Social Security contributions on the first $168,600 of net earnings and 2.9% for Medicare contributions on all net earnings. Unlike employees, who share these tax responsibilities with their employers, self-employed individuals bear the full burden. An additional Medicare tax of 0.9% of net self-employment income applies for those with SE income above the following thresholds: $250,000 married joint, $125,000 married separate and $200,000 all others
Who is Required to Pay Self-Employment Tax? – Generally the following are subject toself-employment tax:
Sole Proprietors and Independent Contractors – Individuals operating their businesses or offering services as sole proprietors or independent contractors are required to pay self-employment tax on their net earnings if they exceed $400 in a tax year.
Partners in a Partnership – Members of a partnership that conducts a trade or business are subject to self-employment tax on their share of the partnership’s income.
Members of a Limited Liability Company (LLC) – Depending on the election made by the LLC, members may be treated as sole proprietors or partners for tax purposes and thus be required to pay self-employment tax on their share of the LLC’s profits.
Clerics – A cleric is required to pay self-employment tax on income from services as a minister unless the individual has taken a vow of poverty. The following are examples of common situations related to the self-employment income of clerics:
W-2 Income – from the Church is subject to income tax, and self-employment tax. It’s important to note that the church does not withhold FICA taxes for this income.
Self-employment Income – Clerics who do not work for a specific church or who receive income for presiding over weddings, funerals, etc., have non-employee income that is taxable and subject to self-employment tax, based on the net profit from the self-employment activity.
Schedule C – This is the IRS form on which clerics report their SE income, which can be offset by associated expenses, resulting in the net profit that’s subject to SE taxes.
Most clerics receive a Housing (Parsonage) Allowance from the church they work for. To the extent allowed by law, this income is not subject to income tax but is subject to self-employment tax.
Who is Exempt from Paying Self-Employment Tax? – While the scope of self-employment tax is broad, there are specific exemptions and special cases:
Employees: Individuals who work as employees and receive a W-2 form are not subject to self-employment tax on their wages, as their employers withhold Social Security and Medicare taxes throughout the year that the employer pays over to the government.
Rental Income: Generally, income derived from renting out property is not subject to self-employment tax unless the individual is engaged in a rental business that provides services for the convenience of tenants. This generally includes rents paid in crop shares.
Limited Partners: Limited partners in a partnership may be exempt from self-employment tax on certain income distributions, as their involvement in the business is typically passive, i.e., more in the nature of an investment.
Certain Business Owners: Owners of corporations, including S corporations, may not be subject to self-employment tax on their share of the corporation’s profits, though they must pay themselves reasonable compensation subject to the FICA employment taxes.
Commissions Allowed by the Probate Court – Commissions (fees) allowed to nonprofessional fiduciaries (such as an estate executor or trustee) by a probate court under local law generally aren’t considered self-employment earnings. However, if the fees relate to active participation in the operation of the estate’s business, or the management of an estate that required extensive management activities over a long period of time, the fees would be SE income to the extent they represents a special payment for operating the business.
Termination Payments of Former Insurance Salespeople – The law provides that net earnings from self-employment don’t include any amounts received from an insurance company for services performed by an individual as an insurance salesperson for the company if certain conditions are met.
Religious Exemptions – Ministers, Christian Science practitioners, and members of religious orders who have taken a vow of poverty may get an exemption from self-employment tax on their earnings if certain requirements are met. To get the exemption, Form 4361 must be filed with the IRS.
Retired clergy receiving parsonage or rental allowances are not subject to self-employment tax.
Notary Public – The fees for the services of a notary public are exempt from the self-employment tax.
Nonresident Aliens – Nonresident aliens engaged in a trade or business within the United States may be subject to self-employment tax, with specific exemptions based on tax treaties.
Miscellaneous Income from an Occasional Act or Transaction – Income from anoccasional act or transaction, absent proof of efforts to continue those acts or transactions on a regular basis, isn’t income from self-employment subject to the SE tax. An example is a nonprofessional fiduciary who manages the estate of a relative or friend. However, professional fiduciaries are subject to self-employment tax
Special Situations
Self-employment Tax Deduction – Self-employed individuals can deduct half of their self-employment tax when calculating their adjusted gross income, providing some relief. The purpose of this deduction is to make up for the self-employed person having to pay both sides of the Social Security and Medicare taxes. However, this is not a deduction on the individual’s business form, such as Schedule C. It is deductible whether the individual itemizes their deductions or claims the standard deduction.
Optional Methods – There are two methods – one for farmers and another for nonfarmers – that can be used when net self-employment earnings are less than $400 and paying SE tax isn’t required. Use of these methods allows a taxpayer to continue accruing credit toward their Social Security coverage in years when profits are small (or even when there is a loss). Using the optional method may also allow the individual to qualify for the earned income credit and certain other credits, or to receive a larger credit. These individuals are subject to special rules for self-employment tax, with different thresholds and rates applying to their net earnings.
Understanding the intricacies of self-employment tax is vital for anyone earning income outside of traditional employment. While the responsibility to pay rests on many self-employed individuals, exemptions and special cases exist.
Contact this office with questions regarding self-employment tax and how it may apply in your specific circumstances.
Should Tips Be Tax-Free? How Recent Proposals Could Change the Way You Tip
In recent years, tipping culture has seen significant changes, particularly with the rise of digital payment kiosks and self-checkout lanes. A CBS News article recently questioned, “Are tip requests getting out of hand?,” pointing out the shift from traditional tipping practices to new scenarios like tipping on to-go coffees and takeout orders.
While the pandemic initially led to an increase in tipping to support service workers, many Americans now face financial constraints due to ongoing inflation. According to a recent PYMNTS and LendingClub report, nearly two-thirds of Americans are living paycheck to paycheck.
This raises an important question: How much should you tip, and what are the tax implications
Understanding Tipping Standards
Dr. Jaime Peters, assistant dean and professor of finance at Maryville University, suggests, “It helps to understand how people are paid.” For example, waitstaff at restaurants often receive lower base wages, with tips expected to bring their earnings to or above the minimum wage. This contrasts with other roles, like grocery store cashiers, where tipping is less common and hourly wages are higher.
As tipping expectations expand to include new scenarios, such as at digital kiosks, the question of whether or not to tip—and how much—becomes more complex. Vincent Birardi, CFP and wealth advisor at Halbert Hargrove, advises, “One situation in which you should not be compelled to tip relates back to the automated kiosk. There shouldn’t be this pressure on customers.”
He recommends that if you receive exceptional service, a modest tip of $1 or $2 is appropriate, rather than the standard 20%.
Who Deserves a Gratuity?
Traditional tipped roles include waitstaff, taxi drivers, and salon workers. Dr. Peters told CNBC. “Tipped employees may also include front-of-house restaurant staff, bellhops, parking attendants, airport service workers, and food delivery workers,” she said. These workers often rely on tips as a significant part of their income, and tipping remains customary in these contexts.
For services where tipping is optional, such as routine car maintenance or handyman visits, Birardi recommends a 10% to 20% tip if the service is exceptional. Alternatively, providing a meal or snack for service workers can be a budget-friendly way to show appreciation for services rendered.
The Tax Implications of Tipping
Recent proposals from former President Donald Trump – the Republican Presidential nominee – and Vice President Kamala Harris – who received the Democratic nod after President Joe Biden bowed out of the race – suggest making tip income tax-exempt. The Senate bill, “No Tax on Tips Act,” introduced by Sen. Ted Cruz, proposes a 100% above-the-line deduction for cash tips, while other bills, like the “Tax-Free Tips Act of 2024,” aim to exempt tips from both income and payroll taxes.
These proposals reflect ongoing debates about how best to support tipped workers while managing tax policy. Trump and Harris’s proposals are part of a broader conversation about tax relief and economic support. However, these proposals have potential drawbacks.
The Tax Foundation notes:
By making one type of income (tips) exempt from income tax, while other types of income (most importantly, wages) remain taxable, the proposal would make more employees and businesses interested in moving from full wages to a tip-based payment approach. That would mean more service industries adopting the restaurant industry approach of a list price up front and an expected voluntary tip at the end of the transaction.
Political Implications and the Debate
As election season approaches, discussions about tax policy often bring tipping practices into the spotlight. Both Donald Trump and Kamala Harris have proposed changes that could significantly impact how tips are taxed. These proposals aim to alleviate the tax burden on service workers and potentially simplify the tax code. However, they also raise questions about fairness and effectiveness.
Trump’s Proposal: Former President Trump’s tax reform proposal includes provisions to make tips tax-free. This move aims to provide immediate financial relief to service workers but could lead to unintended consequences, such as increased tax evasion and wage manipulation by employers.
Harris’s Proposal: Vice President Kamala Harris supports a similar approach, arguing that exempting tips from taxes would provide much-needed support to workers in the service industry. However, critics argue that this could disproportionately benefit higher earners and complicate the tax system further.
A concern not addressed by either candidate are the potential issues of Social Security and Medicare. Will their proposals also include tips being exempt from Social Security and Medicare taxes? If so, this could impact workers’ retirement and Medicare benefits when they retire. Seems some of the bills introduced in Congress have considered that issue and do not exempt tips from payroll taxes while others do. We will have to wait and see.
Is There a Better Approach?
Raising the standard deduction could potentially be a more effective way to provide tax relief to low- and middle-income earners. For instance, increasing the standard deduction by $6,000 would benefit both wage earners and tipped workers, unlike the no-tax-on-tips proposal, which might disproportionately benefit higher earners and complicate the tax system.
As Dr. Peters concluded her remarks, “You can always decide to tip a little more or less based on your financial situation and your appreciation for the service provided. The thought still counts the most.”
When It’s Okay Not to Tip
While tipping is generally expected, there are specific situations where it may be acceptable to forego a tip. Here are four scenarios:
Poor Service: If the service doesn’t meet expectations, it might be reasonable to withhold a tip. From a tax perspective, this doesn’t affect the overall tax treatment of the service.
Prepaid Services: For services that are prepaid, such as at an all-inclusive resort, additional tipping is typically not expected.
Gratuity Included: Some establishments include a gratuity in the bill, especially for large parties. In such cases, additional tipping is generally not required.
Administrative Fees: Services that include an administrative fee in their charges, like online booking platforms, often replace the need for a tip. These fees are considered taxable income by the IRS.
The rise of tipping at digital payment kiosks and the proposed tax changes reflect ongoing shifts in how we view and manage tipping. While 20% remains the general rule of thumb for tipped services, it’s important to tip according to your financial situation and the service received.
And, while the debate over tax-exempt tips continues, focusing on straightforward ways to support service workers and manage your finances effectively remains priority number one.
IRS Offers Second Chance to Resolve Employee Retention Credit Claims with New Voluntary Disclosure Program!
Article Highlights:
Announcement 2024-30
Second Employee Retention Credit Voluntary Disclosure Program
Background and Purpose
Eligibility Criteria
Program Terms
Application Process
Closing Agreement
The Internal Revenue Service (IRS) has introduced a second Employee Retention Credit (ERC) Voluntary Disclosure Program as outlined in Announcement 2024-30. This initiative is designed to address erroneous claims for the ERC, a refundable tax credit aimed at supporting businesses and tax-exempt organizations that continued to pay employees during the COVID-19 pandemic under specific conditions.
Background and Purpose – The ERC was established to provide financial relief to businesses that were either fully or partially suspended due to government orders, experienced a significant decline in gross receipts, or were classified as recovery startup businesses during the pandemic. However, the IRS has identified concerns regarding fraudulent claims and misleading advertisements that have led to improper ERC claims.
The first ERC Voluntary Disclosure Program, which concluded on March 22, 2024, saw over 2,600 participants. It allowed employers to resolve their improper claims by retaining 20% of the claimed ERC amount while settling their employment tax obligations. The second program continues this effort, albeit with a reduced retention rate of 15% for participants.
Eligibility Criteria – To participate in the second ERC Voluntary Disclosure Program, applicants must meet several criteria:
Only Available for 2021 Claims: The program is limited to ERC claims filed for the 2021 tax periods and for which the employer received a credit or refund prior to August 15, 2024.
Non-Criminal Status: Participants must not be under criminal investigation or have been notified of such intentions by the IRS.
Third-Party Information: The IRS should not have received third-party information indicating noncompliance.
Examination Status: Participants should not be under an employment tax examination for the relevant periods.
Recapture and Repayment Notices: Participants must not have been notified of ERC recapture or received a demand for repayment.
Program Terms – The second ERC Voluntary Disclosure Program offers several key terms:
Employment Tax Adjustments: Participants are not entitled to any ERC for the periods in question and must remit 85% of the claimed amount back to the Treasury.
Interest and Penalties: Participants will not be required to repay overpayment interest, and no underpayment interest will apply if full payment is made before executing the closing agreement. The IRS will not impose civil penalties related to the underpayment of employment tax attributable to the claimed ERC.
Income Tax Effects: Participants are not required to amend their income tax returns to adjust wage expenses related to the ERC.
Preparer/Advisor Information: Participants must disclose information about any preparers or advisors involved in the ERC claim.
Application Process – Participants must submit Form 15434, the Application for Employee Retention Credit Voluntary Disclosure Program, by November 22, 2024. This form must be completed under penalties of perjury and include detailed information about the taxpayer and the claimed ERC.
Payments should be made through the Electronic Federal Tax Payment System (EFTPS), with separate payments for each tax period. Participants unable to make full payments may request alternative arrangements, such as installment agreements.
Closing Agreement – Upon submission of the required information, the IRS will prepare a closing agreement, which participants must sign and return within 10 days. This agreement finalizes the terms of the settlement and ensures compliance with the program’s requirements.
The second ERC Voluntary Disclosure Program represents a critical opportunity for businesses to rectify erroneous ERC claims without facing severe penalties or litigation. By participating, businesses can resolve their tax liabilities while retaining a portion of the claimed credit.
If you have questions or need assistance, please contact this office.
Cash In on Global Wealth: How Working Abroad Can Slash Your Tax Bill and Expand Your Horizons
Article Highlights:
Qualifications
Tax Home in a Foreign Country
Foreign Earned Income
Bona Fide Residence Test
Physical Presence Test
Foreign Housing Exclusion and Deduction
Married Couples
Self-Employed Individuals
Earned Income Tax Credit
Foreign Tax Credit
Combat Zone Workers
Flight Attendants
State Tax
The Foreign Earned Income Exclusion (FEIE) under Section 911 of the U.S. Internal Revenue Code allows U.S. citizens and resident aliens living abroad to exclude a portion of their foreign earned income from U.S. taxation. For the tax year 2024, this exclusion amount is up to $126,500 (inflation adjusted annually) per individual. This provision aims to mitigate the double tax burden that might otherwise occur from income taxed by both the United States and the foreign country where the income is earned. To qualify for the FEIE, an individual must meet three primary criteria.
Qualifications – To qualify for the foreign earned income exclusion, a U.S. citizen or resident alien must:
Have foreign earned income (income received for working in a foreign country, including payroll disbursements from a U.S. employer and self-employment income),
Have a tax home in a foreign country, and
Meet either the bona fide residence test or the physical presence test.
Tax Home in a Foreign Country: The individual’s tax home must be in a foreign country. A tax home is defined as the general area of an individual’s primary place of business or employment, regardless of the family home location. This criterion ensures that the individual is genuinely working and earning income abroad.
Foreign Earned Income: The income must be earned for services performed outside the U.S. This includes wages, salaries, professional fees, and other compensation for personal services rendered.
Bona Fide Residence or Physical Presence Test: The individual must either be a bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year or meet the physical presence test by being physically present in a foreign country for at least 330 full days during a 12-month period.
Bona Fide Residence Test – The bona fide residence test requires an individual to demonstrate that they have established a genuine residence in a foreign country for an uninterrupted period that includes an entire tax year. Factors considered include the individual’s intention, purpose of the trip, and nature and length of the stay abroad. Temporary absences from the foreign country for vacations or brief trips to the United States for business or personal reasons do not necessarily disqualify an individual from being considered a bona fide resident.
Physical Presence Test – The physical presence test is more straightforward, requiring the individual to be physically present in a foreign country or countries for at least 330 full days within a consecutive 12-month period. These days do not need to be consecutive, but they must fall within a single 12-month window. This test allows for greater flexibility, as it does not consider the individual’s intentions or reasons for being in the foreign country. When the period for which the individual qualifies for the FEIE includes only part of the year, the exclusion limit must be adjusted based on the number of qualifying days in the year.
Foreign Housing Exclusion and Deduction – In addition to the FEIE, U.S. citizens and resident aliens working abroad may also qualify for the foreign housing exclusion or deduction. This provision allows for the exclusion or deduction of certain amounts paid or incurred for household expenses that occur because of living abroad. Qualifying expenses include rent, utilities (excluding telephone charges), real and personal property insurance, residential parking, and certain occupancy taxes. The amount of the foreign housing exclusion or deduction is subject to limitations based on geographic location and is calculated based on housing expenses that exceed a base amount.
The housing exclusion is limited to 30% of the taxpayer’s earned income exclusion for the year less the base amount. Thus, for 2024, the maximum housing allowance exclusion is $17,710 (($126,500 x .30) – $126,500 x .16)).
Higher Caps for High-Cost Locations – The Code allows the 30% cap amount to be replaced by higher amounts based on geographic differences in housing costs relative to housing costs in the U.S. The IRS annually identifies locations within countries with high housing costs and provides an adjusted limitation on housing expenses to be used for these localities for the tax year.
Special Situations
Foreign Earned Income – Does Not Include:
Pay received as a military or civilian employee of the U.S. Government or any of its agencies.
Pay for services conducted in international waters (considered not to be a foreign country).
Pay in specific combat zones, as designated by a Presidential Executive Order, that is excludable from income.
Payments received after the end of the tax year when the services were performed to earn the income.
The value of meals and lodging that are excluded from income because they were furnished for the employer’s convenience.
Pension or annuity payments, including Social Security benefits.
Married Couples – Both spouses may claim the FEIE up the maximum amount for the year provided they each individually meet the qualifications. Thus, for example, a married couple both with foreign earned income can exclude up to $126,500 each, which if they both qualify for the annual maximum, means they could exclude up to $253,000 for 2024. However, if one spouse’s foreign earned income exclusion is less than the maximum amount, the excess cannot be transferred to the other spouse.
Married Couples Living Apart – Special rules apply if taxpayer and spouse live apart and maintain separate households. Both may be able to claim the foreign housing exclusion or the foreign housing deduction. This can be done if the spouses have different tax homes that are not within reasonable commuting distance of each other. Otherwise, one spouse only can exclude or deduct a housing amount.
Self-Employed Individuals – A qualifying individual may also claim the foreign earned income exclusion on foreign-earned self-employment income. The excluded amount will reduce the individual’s regular income tax but will not reduce his or her self-employment tax. Also, the foreign housing deduction—instead of a foreign housing exclusion—may be claimed.
Earned Income Tax Credit – Once the foreign earned income exclusion is claimed, the earned income credit cannot be claimed for that year.
Foreign Tax Credit – Where an individual is required to pay taxes to the foreign country where they are working, they have the option of claiming a foreign tax credit or claiming the FEIE for the same income. If the FEIE is chosen, a foreign tax credit can still be claimed for income more than the excluded amount and other income subject to foreign taxes.
Combat Zone Workers -Certain U.S. citizens or resident aliens, specifically contractors or employees of contractors supporting the U.S. Armed Forces in designated combat zones, may qualify for the foreign earned income exclusion even if their “abode” is in the United States.
Flight Attendants – International flight attendants can qualify for the foreign earned income exclusion, but there are limitations. According to a tax court case involving an international flight attendant based out of Hong Kong International Airport, the Tax Court ruled that wages she earned while working in international airspace did not qualify as foreign earned income eligible for exclusion. Additionally, the flight attendant was required to include pre-flight and post-flight service time and allocate sick, and vacation leave between excludible and non-excludible portions of her flight attendant’s income.
Ship Crew Members – The IRS specifies that for the FEIE, a foreign country is any territory under the sovereignty of a government other than that of the United States. Time spent in international waters does not count towards the Physical Presence Test, and by extension, work performed in international waters does not directly contribute to foreign earned income. However, income earned while the ship is docked in foreign ports may qualify.
State Tax – If the U.S. state of residence when departing the U.S. is one with state income tax, there may be a requirement to report all the foreign income on the state tax return, unless there is an exception.
If you are considering foreign employment or traveling abroad while working, before you make your final decision, please contact our office to learn more about the foreign earned income and housing allowance exclusions, or about how to meet the bona fide residence or physical presence tests.
Best Practices for Hiring: Red Flags to Watch Out For
Hiring the right talent is crucial for the success and growth of any organization, especially for small and medium-sized businesses (SMBs). The hiring process is not just about filling a position; it’s about finding the right fit for your company’s culture and goals. Making the wrong hire can be costly and time-consuming, impacting your business in several ways.
Why Hiring Right is So Important
Cost Implications: The financial cost of a bad hire can be substantial. According to various industry studies, the cost of replacing an employee can range from 30% to 150% of their annual salary. This includes direct costs like recruitment fees, training, and onboarding, as well as indirect costs such as lost productivity and the impact on team morale.
Time Investment: The time required to hire and train a new employee is significant. From the initial job posting to screening resumes, conducting interviews, and finally onboarding, the process can take several weeks to months. A bad hire means repeating this entire process, diverting valuable time and resources away from other critical business activities.
Impact on Team Dynamics: A wrong hire can disrupt team cohesion and productivity. Employees who lack integrity or are hard to be around can create a toxic work environment. This not only affects the immediate team but can also have a ripple effect throughout the organization, leading to decreased employee engagement and higher turnover rates.
Client Relationships: For SMBs and accounting professionals, maintaining strong client relationships is paramount. Employees who do not align with your company’s values or who lack the necessary interpersonal skills can negatively impact client interactions. If an employee is difficult to be around, chances are clients won’t enjoy their presence either. This can lead to lost business opportunities and damage to your company’s reputation.
Long-term Growth: Hiring the right talent is essential for long-term growth and innovation. Employees who embody the company’s values and mission are more likely to be engaged, motivated, and committed to the organization’s success. Finding employees who are humble, hungry, and smart—traits that drive collective success—contributes to a positive work culture.
By being vigilant about red flags during the hiring process, you can better assess candidates’ suitability for your organization. This approach not only saves time and money but also ensures that you build a cohesive and productive team dedicated to achieving your business goals.
How Job Candidates Present Themselves
Rambling: Candidates who ramble endlessly or constantly change the subject when asked a question may lack focus and the ability to communicate effectively. This can be a sign that they are not well-prepared or are trying to cover up a lack of knowledge.
Contradicting Themselves: If a candidate frequently contradicts themselves, it can indicate dishonesty or a lack of clarity in their thoughts. Consistency in responses is key to assessing their reliability and truthfulness.
Bragging: While it’s important for candidates to be proud of their accomplishments, excessive bragging can suggest a lack of humility and a tendency to take all the credit. This behavior can be detrimental to team dynamics and collaboration.
Lack of Eye Contact: Avoiding eye contact can suggest a lack of confidence or honesty. However, it’s important to consider that some individuals, especially those who are non-neurotypical, may struggle with eye contact. Focus on other communication cues like coherence and enthusiasm.
Unkempt Appearance: A candidate who appears unkempt may not care about how they present themselves or represent your company. While everyone has off days, a consistent lack of grooming can be a red flag.
Constant Rescheduling: Life happens, and rescheduling an interview occasionally is understandable. However, candidates who constantly reschedule may lack time management skills and respect for your organization’s time.
Tardiness: Being extremely late without a valid reason is a red flag. Punctuality is crucial, especially in the first interview, as it reflects the candidate’s respect for the opportunity and their organizational skills.
Inappropriate Humor: While humor can break the ice, inappropriate jokes during an interview can be a major red flag and a potential HR issue. Assess how their sense of humor might impact team dynamics.
Use of Slang: Overly casual language or slang during the interview can indicate a lack of professionalism. While workplace cultures vary, it’s important to gauge if the candidate can adapt to your company’s communication standards.
Swearing: Swearing during an interview is almost always inappropriate and shows a lack of professionalism and respect. Even in relaxed company cultures, this is a significant red flag.
How the Candidate Acts in the Interview
Lack of Enthusiasm: A candidate who lacks enthusiasm may not bring the required energy and motivation to the job. Enthusiasm is crucial for maintaining a positive and productive work environment.
Doesn’t Ask Questions: Candidates who don’t ask any questions about the role or company may not be genuinely interested or prepared. This can indicate a lack of engagement and curiosity, which are important traits for any role.
Unfamiliarity with Your Company: Candidates who haven’t researched your company or the job description may not be fully prepared or interested. This lack of preparation can be a red flag for their commitment and diligence.
Asking Inappropriate Questions: Questions that are personal or unrelated to the job can suggest a lack of professionalism and focus. It’s important to assess whether the candidate’s questions are relevant and insightful.
Hire Right!
Hiring the right talent is essential for the success of SMBs and accounting professionals. By being vigilant about these red flags, you can better assess candidates’ suitability for your organization. Remember, the goal is to find individuals who not only have the necessary skills but also align with your company’s values and culture. This approach will help you build a cohesive and productive team dedicated to achieving your business goals.
limited Deductions: How Landlords Can Navigate Beyond the $25,000 Loss Limitation
Article Highlights:
$25,000 Rental Passive Loss Limitation
Unlimited Losses When Qualifying as a Real Estate Professional
What is Material Participation?
Navigating the Rules
Examples
The intricacies of tax law, particularly around rental real estate, can be both a boon and a bane for investors. Among these complexities, the $25,000 rental passive loss limitation stands out as a critical rule for taxpayers who own rental properties. This provision, coupled with the concept of unlimited losses when qualified as a real estate professional, forms a cornerstone of tax planning for real estate investors. This article delves into these topics, offering insights into how investors can navigate these rules to optimize their tax outcomes.
The $25,000 Rental Passive Loss Limitation
At its core, the $25,000 rental passive loss limitation is a tax provision that allows real estate investors to deduct up to $25,000 of losses from passive rental activities against their nonpassive income. Generally, passive losses are only allowed to offset passive gains. This rule is relevant for individuals who own rental properties and actively participate in the activity. “Active participation” is a less stringent standard than material participation (discussed below). For example, you may be treated as actively participating if you make management decisions, such as approving new tenants, deciding on rental terms, approving expenditures and similar decisions, in a significant and bona fide sense. Passive activities are defined as business activities in which the taxpayer does not materially participate.
You aren’t treated as actively participating in a rental real estate activity unless your interest in the activity (including your spouse’s interest) was at least 10% (by value) of all interests in the activity throughout the year.
For single individuals and married couples filing jointly, the maximum special allowance is $25,000. This allowance is halved for a married individual filing separately, provided they lived apart from their spouse throughout the tax year. A married taxpayer filing separately who lived with their spouse at any time during the year is not eligible for any amount of the special allowance. The allowance is also available to qualifying estates, albeit with certain adjustments.
However, this beneficial allowance comes with limitations. The full $25,000 deduction is only available to taxpayers whose modified adjusted gross income (MAGI) is $100,000 or less. For those with MAGI between $100,000 and $150,000, the allowance is gradually phased out, reducing by 50% of the amount by which the taxpayer’s MAGI exceeds the $100,000 threshold. Taxpayers with a MAGI of $150,000 or more are ineligible for this allowance.
Unlimited Losses When Qualifying as a Real Estate Professional
Generally, rental activities are passive activities even if you materially participated in them. However, for any tax year in which you qualify as a real estate professional, the rule treating all rental activities as passive activities doesn’t apply to your rental real estate activity. Instead, that activity is not a passive activity if you materially participated. For this purpose, the default rule is that each interest you have in a rental real estate activity is a separate activity. But you can choose to treat all interests in rental real estate activities as one activity.
You are considered a real estate professional (qualifying taxpayer) for a particular tax year if BOTH qualifications below are met:
More than half of the personal services you perform during that year are performed in real property trades or businesses in which you materially participate, and
You perform more than 750 hours of services during that year in real property trades or businesses in which you materially participate (1).
If you own at least one interest in rental real estate and meet the above tests the IRS considers you a real estate professional.
(1) The IRS outlines several tests to determine material participation, including working on the activity for more than 500 hours during the tax year, providing substantially all the participation, or spending more than 100 hours and nobody else spends more time.
Material participation offers a significant advantage for qualified real estate professionals who are also real estate investors who materially participate in the management their properties. By meeting the material participation criteria, these real estate professionals can offset their nonpassive income without the $25,000 limitation, potentially leading to substantial tax savings.
Navigating the Rules
Understanding and navigating these rules require a strategic approach. For passive investors, actively participating in rental property management can be a game-changer. This level of involvement can qualify investors for the $25,000 passive loss allowance (within the MAGI limitations noted above), providing a valuable tax deduction.
For those real estate professionals aiming to deduct unlimited losses, achieving the required hours of involvement and material participation is key. This may involve restructuring activities to meet the IRS criteria for material participation or increasing involvement in the property’s management. Eligible real estate professionals can benefit from this approach, as their entire rental losses can be deductible against their other income.
Examples
Consider the case of Mike, a single taxpayer with a salary of $42,300, dividends of $300, interest of $1,400, and a rental loss of $4,000 from a property he actively managed. Despite the rental activity being passive, Mike’s active participation allows him to use the entire $4,000 loss to offset his other income, thanks to the special allowance.
In another scenario, Stacey, a single taxpayer with a MAGI under $100,000, actively participates in her rental real estate activities that result in a loss of $27,000. Her involvement allows her to utilize the special $25,000 allowance to offset up to $25,000 of her nonpassive income, demonstrating the tax-saving potential of active participation. The $2,000 that she can’t deduct will carry over to the next year.
If Stacey was a qualified real estate professional, she would be able to deduct the entire $27,000 loss against her non-passive income in the year the loss occurred.
Please contact this office if you have questions or would like to see if you can benefit from meeting the active participation criteria or qualify as a real estate professional.
Unraveling the Mysteries of Crowdfunding: Navigate Taxes, Regulations, and Surprising Pitfalls with Ease
Article Highlights:
Understanding Crowdfunding
The Three Main Types of Crowdfunding:
Equity-Based
Donation-Based
Rewards-Based
Tax Implications of Crowdfunding
Business Fundraising
Individual Gifts
Charitable Gifts
SEC Requirements if Offering Investment Equity
IRS Information Reporting
In the digital age, crowdfunding has emerged as a revolutionary way for individuals and businesses to raise funds for a wide array of projects, from innovative products and artistic endeavors to personal causes and community projects. However, as with any financial activity, crowdfunding comes with its own set of tax implications and regulatory requirements, particularly when it involves raising money to fund a business. Understanding these implications and the involvement of the Securities and Exchange Commission (SEC) is crucial for anyone looking to embark on a crowdfunding campaign.
Understanding Crowdfunding – Crowdfunding is a method of raising capital through the collective effort of friends, family, customers, even strangers and individual investors. This approach taps into the collective efforts of a large pool of individuals—primarily online via social media and crowdfunding platforms—and leverages their networks for greater reach and exposure.
There Are Three Main Types of Crowdfunding:
Equity-Based Crowdfunding: Investors receive a stake in the company, typically in the form of shares.
Donation-Based Crowdfunding: Contributions are made with no expectation of return; often used for charitable and humanitarian causes.
Rewards-Based Crowdfunding: Backers receive a tangible item or service in return for their funds.
Tax Implications of Crowdfunding – The tax implications of crowdfunding can vary significantly based on the type of crowdfunding campaign and the nature of the funds raised. Generally, funds raised through crowdfunding can be considered taxable income by the Internal Revenue Service (IRS) if they are not classified as loans that need to be repaid, capital contributed in exchange for an equity interest, or gifts made out of detached generosity without any quid pro quo.
For Equity-Based and Rewards-Based Crowdfunding – If the campaign provides backers with equity or rewards, the funds raised are generally considered taxable income to the fundraiser. However, if the funds are spent on deductible business expenses, the net taxable income could be reduced to zero.
For Donation-Based Crowdfunding – Funds raised may not be taxable if they are considered gifts, but this depends on the specific circumstances and whether there is any expectation of return or benefit to the donor.
The IRS treats certain crowdfunding contributions as gifts, which means they are not taxable to the recipient. This treatment aligns with the principle that gifts are transfers made out of detached generosity. However, donors need to be aware of the gift tax rules. For instance, if an individual contributes more than the annual exclusion amount ($18,000 for 2024, but periodically adjusted for inflation) to a single recipient through a crowdfunding campaign, they may need to file a gift tax return.
A less understood but critical aspect of crowdfunding is the “gift tax trap.” This situation arises when someone sets up a crowdfunding campaign to benefit another individual but initially receives all the funds themselves. The IRS views these funds as a gift to the campaign organizer, who then gifts them to the intended beneficiary. If the total amount exceeds the annual gift tax exclusion, the organizer could be liable for gift tax and may need to file a gift tax return, reducing their lifetime gift and estate tax exemption.
Some crowdfunding platforms have addressed this issue by allowing organizers to designate beneficiaries who can directly access the funds, thereby avoiding the gift tax trap. However, not all platforms offer this feature, and organizers must be diligent in how they set up and manage their campaigns.
It’s important to distinguish between crowdfunding campaigns for charitable causes and those for personal benefit. Contributions to qualified charities through crowdfunding can be tax-deductible for the donor, provided all IRS documentation requirements are met. However, funds raised for individual needs, such as medical expenses or personal emergencies, are considered personal gifts and are not tax-deductible for donors. This distinction underscores the need for both donors and recipients to fully understand the tax implications of their crowdfunding activities.
SEC Requirements When Raising Money – When a crowdfunding campaign involves offering equity in a business activity, it falls under the purview of the SEC, which has established regulations to protect investors and maintain fair, orderly, and efficient markets. The SEC’s involvement is particularly pronounced in equity-based crowdfunding, where businesses offer shares to investors.
Under the Securities Act of 1933, any offer to sell securities must either be registered with the SEC or meet certain qualifications to be exempt from registration. The Jumpstart Our Business Startups (JOBS) Act of 2012 introduced an exemption for crowdfunding, allowing companies to raise funds without the need for a traditional securities registration, provided they adhere to certain conditions:
Fundraising limit: Businesses can raise up to $5 million in a 12-month period through crowdfunding platforms.
Investor limitations: There are limits on the amount individuals can invest in crowdfunding projects, based on their income and net worth. The amount an individual can invest through crowdfunding in any 12-month period is limited.
If the individual’s annual income or net worth is less than $124,000, their equity investment through crowdfunding is limited to the greater of either $2,500 or 5% of the greater of the investor’s annual income or net worth.
If the individual’s annual income and net worth are at least $124,000, their investment via crowdfunding can be up to 10% of their annual income or net worth, whichever is greater, but not to exceed $124,000.
The forgoing limits are based on the SEC Updated Investor Bulletin posted on October 14, 2022. These limits change from time to time. The bulletin also includes examples of how the limits, included above, are computed as well as instructions for determining net worth. The site also includes higher investment limits for Accredited Investors. Basically, Accredited Investors have higher incomes and net worth as described on the SEC website.
IRS Information Reporting and Crowdfunding – One of the key reporting requirements for crowdfunding campaigns comes in the form of IRS Form 1099-K, “Payment Card and Third Party Network Transactions.” This form is used to report payment transactions processed through payment card transactions or settlement entities. If a crowdfunding campaign processes over $5,000 (2024) in payments, the payment processor will issue a Form 1099-K to the IRS and the fundraiser. Congress has mandated the reporting threshold be reduced to $600 and the IRS is phasing in that lower threshold.
The issuance of Form 1099-K has significant implications for fundraisers:
Income Reporting – Receipt of a Form 1099-K essentially notifies the IRS that the individual or business has received payments that may be taxable.
Tax Liability – The fundraiser must report the income on their tax return, potentially increasing their tax liability. However, legitimate business expenses funded by the campaign can be deducted. Where the fundraising was not related to a business, such as with charity-based crowdfunding, and a 1099-K was issued, the 1099-K amount may need to be reported on the fundraiser’s income tax return, and then offset by a like amount, resulting in no taxable income. An explanation why the income is not taxable should be included. This procedure will prevent future inquiry from the IRS as to why the income was not reported.
Crowdfunding offers a unique and powerful means of raising funds, but it comes with complex tax implications and regulatory requirements. For businesses, understanding the nuances of equity-based crowdfunding and complying with SEC regulations are critical steps in leveraging this fundraising method effectively. Additionally, recognizing when funds raised may be taxable and how to report them correctly to the IRS is crucial for all types of crowdfunding campaigns.
If you have questions before launching a crowdfunding campaign, you may wish consult with this office to understand the specific implications for your project. Proper planning and advice can help ensure that your crowdfunding efforts are both successful and compliant with all financial and regulatory requirements.
The Ultimate Guide to Starting Your Own Business: A Step-by-Step Blueprint for Young Entrepreneurs
Starting your own business is an exciting journey filled with opportunities and challenges. As a young entrepreneur, you have the energy, creativity, and drive to turn your ideas into reality. This comprehensive guide will walk you through the essential steps to launch your business successfully. By following this blueprint, you’ll be well-prepared to navigate the complexities of entrepreneurship and set your business up for long-term success. And remember, before you get started, reach out to us for personalized advice and support tailored to your unique needs.
1. Find the Right Opportunity
The first step in starting a business is identifying the right opportunity. Consider your expertise, interests, and the amount of time and money you can invest. Some businesses can be launched from home with minimal overhead, especially in the e-commerce and remote work sectors. Evaluate your ideas to ensure they are viable and have the potential to generate revenue. If you’re unsure where to start, explore various business ideas and trends to get inspired.
2. Write a Business Plan
A solid business plan is crucial for your success. This document outlines your business goals, strategies, target market, and financial projections. It serves as a roadmap for your business and is essential when seeking funding from investors or lenders. Your business plan should include:
Executive Summary: A brief overview of your business and its objectives.
Business Description: Detailed information about your products or services.
Market Analysis: Insights into your target market and competition.
Organization and Management: Your business structure and team.
Marketing and Sales Strategy: How you plan to attract and retain customers.
Financial Projections: Budgets, cash flow projections, and funding requirements.
3. Choose a Business Structure
Selecting the right legal structure for your business is vital as it affects your taxes, liability, and regulatory requirements. Common structures include:
Sole Proprietorship: Simple and easy to set up, but offers no personal liability protection.
Partnership: Ideal for businesses with multiple owners, but personal liability is shared.
Limited Liability Company (LLC): Provides personal asset protection and flexible tax options.
Corporation: Offers the most protection but is more complex and costly to set up.
S-Corporation: S-corporations are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes.
Consult with our office to determine the best structure for your business.
4. Get a Federal Tax ID
An Employer Identification Number (EIN) is necessary for most businesses to file taxes, open bank accounts, and hire employees. Applying for an EIN is free and can be done online in just a few minutes.
5. Apply for Licenses and Permits
Depending on your industry and location, you may need various licenses and permits to operate legally. Research the specific requirements for your business and ensure you comply with all regulations. This may include health inspections, zoning permits, and professional licenses.
6. Open a Business Bank Account
Separating your personal and business finances is crucial for effective financial management. A business bank account helps you track expenses, manage cash flow, and simplify tax preparation. Setting up an account is straightforward and provides a professional image for your business.
7. Understand Your Startup Financing Options
Most businesses require some initial capital to get started. While traditional business loans may not be available to new businesses, there are alternative financing options to consider:
Personal Savings: Many entrepreneurs use their own savings to fund their startups.
Crowdfunding: Platforms like Kickstarter and Indiegogo allow you to raise funds from the public.
Personal Loans: Borrowing from friends, family, or financial institutions.
Business Grants: Explore grants available for small businesses and startups.
Equity Financing: High-growth startups may attract investors in exchange for equity.
8. Get a Business Credit Card
A business credit card can provide short-term financing and help manage cash flow. It also helps separate personal and business expenses and can offer rewards such as cashback or travel points. Ensure you use the card responsibly and pay off the balance each month to avoid debt.
9. Choose the Right Accounting Software
Accurate financial records are essential for tracking your business performance and preparing for taxes. Invest in accounting software that suits your needs and budget. As your business grows, consider hiring a bookkeeper to maintain accurate records and provide financial insights.
10. Prepare to Pay Your Taxes
As a business owner, you’ll have new tax responsibilities, including potentially paying taxes throughout the year. Develop a relationship with a tax professional to ensure compliance and take advantage of any tax breaks available to your business.
11. Protect Yourself with Business Insurance
Business insurance protects your personal and business assets from potential risks. General liability insurance is recommended for all businesses, and you may need additional coverage depending on your industry and contracts.
12. Establish Your Online Presence
An online presence is crucial for reaching potential customers and building your brand. Create a professional website and set up social media profiles to engage with your audience. Invest in search engine optimization (SEO) to improve your visibility and attract organic traffic.
13. Set Up a Payments System
If you plan to accept credit and debit card payments, you’ll need a payment processor and point-of-sale (POS) system. Consider the costs of hardware, software, and processing fees when choosing a provider. Ensure your system is secure and user-friendly to provide a seamless customer experience.
14. Hire Employees
If your business requires additional help, you’ll need to hire employees. This involves setting up payroll, obtaining workers’ compensation insurance, and complying with labor laws. Create a clear job description and hiring process to attract the right talent.
15. Get Financing to Grow Your Business
Once your business is established, you may need additional financing to expand. Explore options such as business loans, lines of credit, and equity financing to support your growth. Ensure you understand the terms and conditions of any financing you pursue.
Are You Ready?
Starting a business is a rewarding journey that requires careful planning and execution. By following this step-by-step guide, you’ll be well-equipped to launch and grow your business successfully. Remember, we’re here to help you every step of the way. Contact us before you get started for personalized advice and support tailored to your unique needs. Let’s turn your entrepreneurial dreams into reality!
Unlock Cash Flow and Profits: The Power of Installment Sales when Selling Your Rental
Article Highlights:
Automatic Application of the Installment Method
Electing Out of the Installment Method
Depreciation Recapture
Determining the Contract Price and Profit Percentage
Pros and Cons of an Installment Sale
Buyer Assumes Existing Mortgage
Disposition of an Installment Note Before It’s Paid Off
Transfer Because of Death
Business Installment Sales
The installment sales method is a significant tool for taxpayers selling a rental property at a gain, offering a way to spread tax liability over the period in which the sale proceeds are received. This method, while beneficial in many scenarios, comes with its complexities and considerations, especially when dealing with rental properties. This article delves into the nuances of the installment sales method, covering its automatic application, the option to elect out, depreciation recapture, and various other aspects critical to understanding and optimizing the use of this method for rental property sales.
Automatic Application of the Installment Method – The installment sales method automatically applies to the sale of a rental property sold at a gain when at least one payment is received after the year of sale. This method allows the seller to defer recognition of gains over the period payments are received, rather than recognizing the entire gain in the year of sale. The gain on the sale is reported proportionally as payments are received, aligning the tax liability with the cash flow from the sale. The installment method doesn’t apply if the sale results in a loss.
Electing Out of the Installment Method – While the installment method applies automatically when all sale proceeds aren’t received in the sale year, sellers have the option to elect out. This election must be made by the due date of the tax return for the year of the sale and is irrevocable without IRS consent. Electing out means recognizing the entire gain in the year of sale, regardless of when the payments are received. This might be advantageous in a year when the seller has lower income or expects tax rates to rise in the future.
Depreciation Recapture – One of the critical considerations in the sale of a rental property is the recapture of depreciation. The portion of the gain attributable to depreciation deductions taken during the period the property was rented must be recaptured as ordinary income in the year of sale, regardless of the installment method. This recapture can significantly impact the tax liability in the year of sale, as it is not eligible for deferral under the installment method.
Determining the Contract Price and Profit Percentage – The contract price in an installment sale is the total consideration received by the seller, less any mortgage assumed by the buyer. The gross profit percentage is then calculated as the gross profit (selling price minus adjusted basis) divided by the contract price. This percentage is crucial as it determines the portion of each payment considered taxable gain.
Pros of an Installment Sale:
Tax Deferral – The primary advantage is the deferral of taxes, allowing the seller to spread the tax liability over several years.
Possibility of a Lower Tax Rate – Capital gains rates are based on a taxpayer’s adjusted gross income, so the tax rate could be less for some years during the installment collection period than in the sale year.
Cash Flow Management – It provides a steady stream of income over time, which can be particularly beneficial for retirement planning or other long-term financial strategies.
Potential Interest Income – Sellers can potentially earn interest on the deferred payments, increasing the overall return on the sale.
Cons of an Installment Sale:
Interest Rate Risk – If the seller finances the sale at a fixed interest rate, there’s a risk that interest rates will rise, and the seller will be locked into a lower rate.
Possibility of a Higher Tax Rate – Capital gains rates vary based on a taxpayer’s adjusted gross income, so the tax rate could be more during the installment collection period than in the sale year. In addition, Congress could increase the rates and/or lower the income point at which the capital gains rate applies.
Buyer Default Risk – There’s always a risk that the buyer may default on the installment payments, leaving the seller to deal with foreclosure or renegotiation.
Depreciation Recapture – The requirement to recapture depreciation in the year of sale can result in a significant upfront tax liability.
Taxation of the Down Payment – The down payment received in the year of sale is part of the total payments and is subject to the same gross profit percentage calculation as other payments. This means a portion of the down payment will be recognized as gain in the year of sale.
Buyer Assumes Existing Mortgage – If the buyer assumes the existing mortgage on the rental property, the amount of the mortgage assumed is subtracted from the selling price to determine the contract price. This can reduce the seller’s immediate tax liability but also decreases the overall contract price, affecting the gross profit percentage.
Disposition of an Installment Note Before It’s Paid Off – Selling or otherwise disposing of the installment note before it’s fully paid off triggers immediate recognition of all remaining gain, potentially resulting in a significant tax liability in the year of disposition. This requires careful planning to manage the tax impact.
Transfer Because of Death – Whoever receives the installment obligation as a result of the seller’s death is taxed on the installment payments the same as the seller would have been had the seller lived to receive the payments. An installment note does not receive a step up in value based upon the seller’s death.
If, however, an installment obligation is canceled, becomes unenforceable, or is transferred to the buyer because of the death of the holder of the obligation, it is considered a disposition. In this situation the estate must figure its gain or loss on the disposition. If the holder and the buyer are related, the fair market value of the installment obligation is considered to be no less than its full face value.
Business Installment Sales – Installment sales can also be used when a business is sold. Essentially, the same rules apply, but complexity arises when the sales price is composed of different assets, for example business equipment, real property, and goodwill.
The installment sales method offers a flexible and tax-efficient strategy for selling rental properties, allowing sellers to spread their tax liability over the period payments are received. However, it requires careful consideration of various factors, including depreciation recapture, the calculation of the contract price and gross profit percentage, and the potential risks and benefits. Proper planning can help maximize the advantages of the installment sales method while minimizing its drawbacks.
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Stop Chasing Payments: QuickBooks’ Reminders Can Help You Get Paid Faster
In 2021, QuickBooks introduced a set of reminder options designed to tackle one of the most pressing challenges for many businesses: getting customers to pay on time. If you haven’t fully utilized these features yet, it’s time to revisit them and streamline your collections process.
Here’s an updated guide on how to use QuickBooks’ payment reminder tools to ensure timely payments, while better managing your customer relationships.
Setting Up Customer Groups
To start leveraging QuickBooks’ payment reminder feature, you must first create customer groups. Here’s how to set them up:
Access the Customer Groups Feature
Access the Customer Groups Feature
Go to the Customers menu.
Select Payment Reminders and then Manage Customer Groups.
Create a New Customer Group
Click on Create Customer Group to open a wizard that will guide you through the setup process.
Enter a name for your group (e.g., “California High Balance”) and add a description if needed. Click Next.
Define Group Filters
In the Select Fields window, set the filters for your group:
Field: Select State.
Operator: Choose Equals.
Value: Select CA (or any other relevant states).
Add additional filters as needed (e.g., Open Balance greater than $500). Click Add for each filter.
Review and Finalize
The View/Select Customers window will display your filtered list. You can choose to automatically add or remove customers based on their balance status or manage it manually.
Click Finish and then OK to save your new customer group.
Your customer groups will now appear in the Manage Groups window, where you can edit, delete, or email the group as needed.
Sending Effective Payment Reminders
With your customer groups in place, you can now set up and send payment reminders to ensure timely collections:
Access Payment Reminders
Go to the Customers menu.
Click on Payment Reminders and then Schedule Payment Reminders.
Create a New Reminder Schedule
Click on Let’s get started.
Choose whether to send reminders via invoices or statements. For example, to remind customers 15 days past due, click New Schedule next to Invoice and name your schedule (e.g., “15 Days Past Due”).
Define the Reminder Criteria
Under Send reminder to, select your previously created group (e.g., “All customers”).
Click Next, then Next again to review your customer list.
Click Finish, then OK.
Customize Your Reminder Message
Back on the Schedule Payment Reminders screen, click + Add Reminder.
Enter the number of days (e.g., 15) after which the reminder will be sent.
Customize the reminder email using the sample text provided. You can insert fields for personalized data by clicking Insert Field.
Finalize and Save
Review your email, check spelling, and click OK.
Save the reminder or add additional reminders as needed.
Managing and Sending Reminders
QuickBooks will notify you when payment reminders are due. To manage and dispatch these reminders:
Review and Send Reminders
Open the Customers menu.
Select Payment Reminders and then Review & Send Payment Reminders.
Check the reminders you wish to send and click Send Now.
Track and Monitor
You can monitor the status of sent reminders in your customers’ invoice histories and sent mail folder.
Best Practices for Using Payment Reminders
While QuickBooks’ payment reminders can be a powerful tool, it is important to use them with care – the last thing you want to do is alienate loyal clients. Follow these tips to maintain the utmost professionalism:
Avoid Overuse: Excessive reminders can annoy customers. Ensure reminders are timely and warranted.
Etiquette Matters: Customize reminders to be polite and professional to maintain positive customer relations.
Monitor Effectiveness: Track the effectiveness of your reminders and adjust schedules or messages as needed.
By integrating these tools into your QuickBooks routine, you can reduce instances of non-payment and improve your cash flow. Should you need further assistance or have questions about using QuickBooks to its fullest potential, feel free to reach out. Our team is here to help you streamline your business operations.
