Tax, Accounting and Business Consulting

  How is Tax Calculated on Installment Sale An installment sale is a sale of property where you receive at least one payment after the tax year in which the sale occurs. When you receive payment in installment for sale of asset, you're required to report gain on an installment sale under the installment method unless you elect out from it on filing the return or before the due date for filing your tax return (including extensions) for the year of the sale. You can recognize full gain in the year of sale even if it is an installment sale on Form 4797, Sales of Business Property, or on Schedule D (Form 1040), Capital Gains and Losses and Form 8949, Sales and Other Dispositions of Capital Assets. It is worthwhile to remember that installment sale method is not available for property sold on loss. Likewise, you cannot use the installment method to report gain from the sale of inventory or stocks and securities traded on an established securities market . Even it is installment sa...

Injured and Innocent Spouse Relief   Injured Spouse Injured spouse is one whose share of federal tax refund was reduced to pay his/her spouse’s debt. Refund may be applied to the following overdue debts like; ü   Past-due child support ü   Debts to federal agencies ü   Federal or State income tax obligations ü   State unemployment compensation debts ü   Student Loan If you are not legally responsible for these debts, you may get the part of your refund by filing Form 8379. Most of the debts should be taken before the marriage. You have to file form 8379 within 3 years of the original tax return filed or within 2 years of taxes paid whichever is later. If you have not filed the taxes, then you must file within 2 years from the date taxes were paid. If IRS reduces your refund they will send you a notice of offset from them showing the following: ü   The original refund amount ü   The amount applied to your spouse's debt ü...

Seven Days and Thirty Days Rental Rules  Seven days rental rule allows real estate owners to claim the loss from the rental activates to offset the loss against other earned income. In simply put, If a property is rented for an average of 7 days or less then owners will be eligible for tax-deductible losses.  For example if the property was rented for 132 days during the year and it was rented for 22 times. The average rental period will be 6 days. You are eligible to deduct the rental loss from your income. (Treas. Reg. Sec. 1.469-1T(e)(3)(ii)(A)). Likewise if it is rented for average period of 30 days or less and services are provided to the renters, rental income is active income. The rule says if it is rented for 7 days or less and in case of 30 days or less with substantial service, the activity is not a rental activity.  It is worthwhile take note that it is a favorable provision of tax law for owner of vacation rentals. Generally the owner does not participat...

  Residential Real Estate Tax Planning Real estate investment is a very good investment and produce regular stream of income if managed properly as well creates equity for the future. If it is planned properly real estate investment can save a big deal of taxes if planned properly. Other investment has very little options when it comes to saving taxes, but real estate provides great deal of opportunities. In most cases real estate rentals are passive income. However, there are certain tricks and tools that can help you save taxes not only for current year but also for future years.  How is rental income taxed   Rental income is a passive income in most cases, and it is taxes at the ordinary income tax rate. If there is loss, the loss can only be off set against passive income. If there is no passive income or passive income is not enough to offset rental income, the loss will be carried forward to future years until you have passive income. The passive income need...

 Capital Gain on Sale of Primary Residence What is a primary residence? Primary residence is your home you bought at least two years ago and lived /used it for at least for 2 years out of preceding five years. Sale of primary resident is taxable however, Section 121 allow you to exclude certain portion of your gain if you meet both ownership and use test. That mean you are taxed to certain gain but not all, if you fulfill the requirement under the section. Let me simply it. In case of filing married joint you can you can exclude gain up to $500,000 and $250,000 in case of other filing status. Ownership test: To take the exclusion you must have owned and used your home as your main home for a period aggregating at least two years out of the five years prior to its date of sale. Use test: You must have used you home as primary resident for 24 months out of last 5 years. However, the ownership and the use can be different time period with in the last 5 years. It is w...

  Qualified Opportunity Zone (QOZ)   ü   Established by The Tax Cuts and Jobs Act 20174 to provide a tax incentive for private, long-term investment in economically distressed communities ü   Capital Gain Tax deferral or reduction: Investors in these programs have opportunities to defer and potentially reduce tax on recognized capital gains. ü   Tax savings: Tax payer can avail saving in taxes when they retain the investment in the Qualified Opportunity Fund for the time frame stipulated. Meaning, if you are hot by a huge tax bill due to capital gains, investing in a Qualified Opportunity Fund may worth considering, provided you invest within a prescribed time frame. What is Qualified Opportunity Zone? IRS says: A QOZ is an economically distressed community where new investments, under certain conditions, may be eligible for preferential tax treatment. Localities qualify as QOZs if they were nominated for that designation by a state, the District of ...

  Gift Tax Do you need to pay taxes when you receive a gift or gift is not taxable? It is interesting to note that gift tax is imposed on the giver unlike any other provisions of the income tax. We are knew very well that taxes are paid by the person who receives the money. However incase gifts, it is opposite. The person who receives gift has no obligation even to report.  However, the person who gives gift is required to report or file return and pay gift tax in case gift cross a certain threshold.  The gift that you received is not an income to you, and you may enjoy it in full with out any tax burden. But the giver might required to pay tax in some situations. Gifts of small amount is not taxed or should be reported. How small? Gift up to $17,000 to a an individual in 2023 if you are single and gift up to $34,000 if you split it between you and your spouse, and there is no obligation to report or pay taxes.  If you give small gifts, reporting and gift tax can be ...

  Tax on Gain/loss on Sale of an S-Corp S-Corp has no federal taxes on its own, the ordinary income/gains flows through to the shareholders. Same way the profit or loss from sale of a business also flows through to the shareholders. The gain or loss on sale of a business is generally capital gain or loss. The gain or loss is computed by stock-basis of the shareholders from the price you paid for the business. Loss from sale is capital loss and only offset against capital gains and only $3000 can be deducted from other income on personal tax form 1040. “ More the stock basis less the gain, less the stock basis more the gain ” Buyer has no tax liabilities on purchase of a business. There are two ways you can structure your sale of a business       1.       Sell your company     2.       Sell company’s assets only When you sell your company, you calculate income by the money you received for your ...

  Social Security Points You must earn 40 Social Security Credit to qualify Social Security benefits. Credit is earned when you earn and pay social security taxes. You can either earn this as an employee or as a self employed individuals. Employer must match your deduction and that will go towards your social security account. However there is limit to the deduction. The income is limited to certain threshold. You social security is not deducted once you hit the ceiling.  This annual limit is called the contribution and benefit base. For the year 2023, the limit is $160,200. For 2022 it was $147,000. In simple word social security is deducted for maximum of $9,932.40 for the year 2023. The limit is decided based on national average wage index. How do you earn social security points? You earn social security points when you earn certain amount of wages each year. You can earn only up to 4 point in a year. To reach your 40 points, you need to put in social security taxes...

  Employee Retention Tax Credit (ERTC) What is Employee Retention Tax Credit Employee Retention Credit is a fully refundable tax credit provided under CARES Act to encourage businesses to keep employees on their payroll. Most of the small and medium business entities are eligible to this credit if they have employees on payroll and they were impacted by pandemic. The impact may be partial or full shut down of the business or substantial decrease on their revenue. For 2020 The credit is equal to 50% of wages of the employee. The maximum amount of qualifying wages per employee is $10,000. In simple words, an employer can get refund up to $5,000 per employee or 50% of the wages paid whichever is lower. The business should have been shutdown or partially shut down or there is reduction of revenue by 50% during the same quarter compared to 2019 quarters. For 2021 The credit for 2021 is 70% of wages per employee per quarter till September 30, 2021 (before October 1, 2021). The maximum el...

Individual Tax Saving Strategies Good amount of tax saving can be done following some basic rules. Tax saving put more money in your pocket and also provide financial freedom in future if you choose good investment and retirement plan while planning your taxes. Tax  planning is a continues process throughout the year than just visiting a CPA at the year end and give her all your tax info and expect her to make best out of it. Consult a good tax practitioner and spending some time with her/him to discuss your tax situation and your financial goals. Tax planning does not have a specified format; it depends on the financial goals and need of an individual. Tax planning is tailor-made rather than readymade strategies. However there are certain measures you might take which saves you some taxes and helps you acquire financial freedom in long run. Here are few things you can do to save your taxes: Contribute to employer sponsored retirement account – 401K, 403(b), etc. Contribute to the ...

  Stock Trader Tax Status (TTS) and Mark-to-Market (MTM) Election Let’s first discuss type of individual who buys and sells securities wearing different hats. Investors: Investors buy and sell security with an intension to income from dividend, interest and capital appreciation. They hold security for longer period. They are investors and are not in trading business. Investors hold their security for a substantial period of time. Sometimes, even forever. When the security is sold the gain or loss will generally be capital gains shown on Schedule D of form 1040 and on form 8949.Investment income is not subject to self employment taxes neither the investment expenses are deductible on the individual tax return. Investor are also limited to capital loss limitation. However, capital losses can be set off against capital gains. Dealers: Dealers can be individual or a business entity. Dealers purchase and buy stocks on behalf or for their customers regularly. Sometimes dealer mai...