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Attributes of different entities - Choosing a Business Entity

Attributes of different entities - Choosing a Business Entity

When launching a new venture, one of the first decisions you will make is determining which structure, or "entity," your business will assume. Depending on which entity you choose, the decision may affect your own and your business's tax situation, the level of protection your personal assets (including your home) receive, and the amount of control you have over the business.

Following is a brief primer to help guide you in your choice. You may want to consult a qualified attorney or financial professional before making your final decision.

Formalities of existence Some types of entities are simple and inexpensive to form and maintain, while others must meet specific requirements. If you want to keep the overall management of your business as simple as possible, you might choose an entity with few formalities.

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SECURE Act provisions affecting individuals

SECURE Act provisions affecting individuals

Congress recently passed, and the President signed into law, the Setting Every Community Up for Retirement Enhancement Act (SECURE Act), landmark legislation that may affect how you plan for your retirement. Many of the provisions go into effect in 2020, which means now is the time to consider how these new rules may affect your tax and retirement-planning situation.

Here is a look at some of the more important elements of the SECURE Act that have an impact on individuals. The changes in the law might provide you and your family with tax-savings opportunities. However, not all of the changes are favorable, and there may be steps you could take to minimize their impact. Please give us a call if you would like to discuss these matters.

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Thoughts on 2019 Year-End Planning for Individuals

As we move into the fourth quarter, now is an excellent time to review your current tax planning strategies to ensure they’re still meeting your needs and develop plans for 2020. It’s also a good time to take advantage of last-minute planning opportunities that could save you money now and in the coming year.

With all that in mind, please contact us at your earliest convenience to discuss your tax situation so we can develop a customized plan. In the meantime, here’s a look at some of the issues we’re recommending clients consider as they begin their end-of-year review.

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Taxation of Investments
Tax Planning, Individual Tax Ben Schultz Tax Planning, Individual Tax Ben Schultz

Taxation of Investments

It's nice to own stocks, bonds, and other investments. Nice, that is, until it's time to fill out your federal income tax return. At that point, you may be left scratching your head. Just how do you report your investments and how are they taxed?

Is it ordinary income or a capital gain?

To determine how an investment vehicle is taxed in a given year, first ask yourself what went on with the investment that year. Did it generate interest income? If so, the income is probably considered ordinary. Did you sell the investment? If so, a capital gain or loss is probably involved. (Certain investments can generate both ordinary income and capital gain income, but we won't get into that here.)

If you receive dividend income, it may be taxed either at ordinary income tax rates or at the rates that apply to long-term capital gain income. Dividends paid to an individual shareholder from a domestic corporation or qualified foreign corporation are generally taxed at the same rates that apply to long-term capital gains. Long-term capital gains and qualified dividends are generally taxed at special capital gains tax rates of 0 percent, 15 percent, and 20 percent depending on your taxable income. (Some types of capital gains may be taxed as high as 25 percent or 28 percent.) The actual process of calculating tax on long-term capital gains and qualified dividends is extremely complicated and depends on the amount of your net capital gains and qualified dividends and your taxable income. But special rules and exclusions apply, and some dividends (such as those from money market mutual funds) continue to be treated as ordinary income.

The distinction between ordinary income and capital gain income is important because different tax rates may apply and different reporting procedures may be involved. Here are some of the things you need to know.

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Tax Cuts and Jobs Act: Impact on Businesses
Tax, Tax Planning, Business Tax Ben Schultz Tax, Tax Planning, Business Tax Ben Schultz

Tax Cuts and Jobs Act: Impact on Businesses

The Tax Cuts and Jobs Act, a $1.5 trillion tax cut package, was signed into law on December 22, 2017. The centerpiece of the legislation is a permanent reduction of the corporate income tax rate. The corporate rate change and some of the other major provisions that affect businesses and business income are summarized below. Provisions take effect in tax year 2018 unless otherwise stated.

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Virtual Currency Generates Tax Liability in the Real World

Virtual Currency Generates Tax Liability in the Real World

Cryptocurrencies can be used entirely within a virtual economy or can be used instead of a government-issued currency to purchase goods and services in the real economy (GAO Report: Virtual Economies and Currencies —Additional IRS Guidance Could Reduce Tax Compliance Risks (GAO-13-516), (June 18, 2013)). Cryptocurrency, also known as virtual currency, is a digital representation of value that functions as a medium of exchange, a unit of account, or a store of value, but is not backed by a government-issued legal tender. A few examples of popular cryptocurrencies are Bitcoin, Ethereum, and Litecoin.

Since virtual currencies don’t have the status of legal tender, the Internal Revenue Service has said it will treat virtual currency as property rather than currency, since it is not regulated by any central banking system (IRS Notice 2014-21).  This means that the sale or exchange of a virtual currency that has gained value since they were acquired could trigger a tax liability.

Through certain exchanges, virtual currencies can be digitally traded between users and purchased or exchanged for U.S. dollars, other foreign currencies, or other crypto-currencies. Accordingly, taxpayers can have gain or loss on the exchange of virtual property. The tax treatment of that gain or loss, well, depends on a number of factors.  Many of these factors have not been completely defined, as the AICPA points out in its comment letter to the IRS (AICPA Comments on Notice 2014­21, June 10, 2016). 

Generally, convertible virtual currency (e.g., Bitcoin), which has an equivalent value in or acts as a substitute for real currency, is treated as property for federal tax purposes. Transactions using convertible virtual currency are subject to the general tax principles that apply to property transactions. A taxpayer who receives convertible virtual currency as payment for goods or services must include in gross income the currency's fair market value, measured in U.S. dollars, as of the date it was received. If a taxpayer successfully "mines" convertible virtual currency (e.g., uses computer resources to validate Bitcoin transactions and maintain the public Bitcoin transaction ledger), the currency's fair market value is includible in gross income as of the date of receipt (IRS Notice 2014-21) (U.S. Master Tax Guide® (2018), 785, Taxation of Miscellaneous or Other Income).

Selling or Exchanging Virtual Currency

Generally, stocks and virtual currencies are taxed the same when held as capital assets by the taxpayer, according to the IRS Notice.  The character of gain or loss from an exchange of virtual currency for property depends on whether the virtual currency is a capital asset in the taxpayer’s hands. Thus, if virtual currency is a capital asset in the taxpayer’s hands, the taxpayer realizes capital gain or loss from the exchange of virtual currency for property. If the virtual currency is not a capital asset in the taxpayer’s hands, the taxpayer realizes ordinary gain or loss.

Taxpayers who exchange virtual currency for other property will have gain or loss on the transaction. Like other exchanges of property, the amount of gain or loss is based on the difference between the fair market value of the property received and the adjusted basis of the property given up. Thus, a taxpayer has taxable gain if the fair market value of the property received in exchange for the virtual currency exceeds the taxpayer’s adjusted basis for the virtual currency. A taxpayer has a loss if the fair market value of the property received in exchange for the virtual currency is less than the taxpayer’s adjusted basis for the virtual currency.

Like-kind exchange

Taxpayers who engage in a like-kind exchange of property held for investment or for productive use in a trade or business may defer gain on the transaction. However, like-kind exchanges cannot be used for certain types of property including stocks, bonds, and foreign currencies. It is not clear if cryptocurrency can be disposed of in a like-kind exchange; and, if it can be, what would qualify as like-kind property.  The AICPA has requested that the IRS clarify "if there are particular factors that distinguish one virtual currency as like­kind to another virtual currency for section 1031 purposes" (AICPA Comments on Notice 2014­21, June 10, 2016).

Receiving Virtual Currency for Earned Income

Taxpayers have gross income if they receive virtual currency as payment for providing goods or services.

Employers and employees. Individuals who receive virtual currency, such as bitcoin, from their employer as payment for services must include the fair market value of the virtual currency in income. Employers that pay their employees’ wages in virtual currency must withhold tax on the wages. The fair market value of the virtual currency paid is subject to federal income tax withholding, Federal Insurance Contributions Act (FICA) tax and Federal Unemployment Tax Act (FUTA) tax. Employers must report such amounts on Form W-2, Wage and Tax Statement.

Independent contractors. An individual who receives virtual currency for performing services as an independent contractor has self-employment income equal to the fair market value of the virtual currency measured in U.S. dollars on the date of receipt.

Miners of virtual currency. Individuals will have gross income if they receive virtual currency for successfully mining virtual currency. An example of mining is using computer resources to validate bitcoin transactions and maintain the public bitcoin transaction ledger. When a “miner” successfully mines virtual currency, the miner has gross income equal to the fair market value of the virtual currency on the date of receipt of the currency.

An individual who mines virtual currency as a trade or business and not as an employee is subject to self- employment tax on the income derived from the mining activities. Self-employment tax is applied to the individual’s net earnings from self-employment from the mining activity, which is the gross income derived from the trade or business of mining less allowable deductions.

Gifts or Inheritance

The current IRS guidance on virtual currency transactions does not address the tax treatment of gifts and inheritances involving virtual currency. Since the IRS’s stated taxing principle is to treat virtual currency as property, gifts or inheritances of virtual currency should be treated as gifts or inheritances of other kinds of property.

Regarding Fair Market Value

Fair market value of virtual currency. In order to calculate gross income, gain or loss, or basis for virtual currency transactions, taxpayers must determine the fair market value of the virtual currency. Since virtual currency transactions are reported in U.S. dollars for tax purposes, taxpayers must determine the fair market value of virtual currency in U.S. dollars as of the date of payment or receipt of the virtual currency.

The fair market value for popular virtual currencies, such as bitcoin, ethereum or litecoin, can easily be determined. If a virtual currency is listed on an exchange and the exchange rate is established by market supply and demand, the fair market value is determined by converting the virtual currency into U.S. dollars at the exchange rate in a reasonable manner that is consistently applied. If the virtual currency is converted into a different real currency, then that amount must be converted into U.S dollars. Virtual currency converters are widely available on the internet.

Although the fair market value of virtual currency can easily be determined if it is listed on an exchange, the IRS has not provided any guidance on determining the fair market value of the hundreds of virtual currencies that are not listed on an exchange.

 

Taxpayer Assistance

Taxpayer’s are responsible for maintaining adequate records and documentation to substantiate the accuracy and completeness of their tax return.  Also, it’s possible that each virtual currency transaction is reportable in some form on a taxpayer’s tax return.   Support of a tax professional who is familiar with the virtual currency environment is recommended to assist with reporting requirements.   We are excepting a limited number of new clients this tax season. Contact our office today to schedule a consultation.

 

No portion of this website and related content should be construed as legal, tax, accounting, or financial advice.  See this website’s terms of use.

 

 

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Deduction Planning
Tax Planning Ben Schultz Tax Planning Ben Schultz

Deduction Planning

Taxes, like death, are inevitable. But why pay more than you have to? The trick to minimizing your federal income tax liability is to understand the rules and make the most of your tax planning opportunities. Personal deduction planning is one aspect of tax planning. Here, your goals are to use your deductions in the most efficient manner and take all deductions to which you're entitled.

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Year-end Tax Planning
Tax Planning Ben Schultz Tax Planning Ben Schultz

Year-end Tax Planning

As the end of the year approaches, it's time to consider strategies that could help you reduce your tax bill. But most tax tips, suggestions, and strategies are of little practical help without a good understanding of your current tax situation. This is particularly true for year-end planning. You can't know where to go next if you don't know where you are now.

So take a break from the usual fall chores and pull out last year's tax return, along with your current pay stubs and account statements. Doing a few quick projections will help you estimate your present tax situation and identify any glaring issues you'll need to address while there's still time.

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Tax Issues for Household Employers
Financial Management, Tax Planning Ben Schultz Financial Management, Tax Planning Ben Schultz

Tax Issues for Household Employers

If you pay for household help, you may be liable for the "nanny tax," even if your employee is not a nanny, per se. The nanny tax refers to three federal employment taxes that household employers may have to pay for their domestic workers — Social Security, Medicare, and unemployment taxes. If you hire someone to work in or around your home, you'll need to know what federal income tax issues (if any) apply, and what forms may be required. Although you may have to withhold and pay federal employment taxes in certain cases, you won't have to withhold federal income tax from your household employees' wages (unless you choose to do so).

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Introduction to the S Corporation - Distributions
Business Tax, Tax, Tax Compliance, Tax Planning Ben Schultz Business Tax, Tax, Tax Compliance, Tax Planning Ben Schultz

Introduction to the S Corporation - Distributions

What are S corporation distributions?

Distributions from an S corporation occur when a corporation makes a payment of cash or property to its shareholders based on their stock ownership. Because S corporations serve as conduit (pass-through) entities, distributions from S corporations more closely resemble partnership distributions than C corporation distributions. C corporation distributions, of course, usually take the form of taxable dividends.

To determine the tax consequences of distributions from an S corporation, it is important to know first whether or not the S corporation has accumulated earnings and profit (AE&P). AE&P is important because a distribution from AE&P will result in a taxable dividend to a shareholder. An S corporation does not generate earnings and profit as such and will not have AE&P unless the company existed originally as a C corporation or acquired a C corporation. To simplify matters, this discussion will presume that there is no AE&P. If there is a possibility that your C corporation will make an S election, contact an accountant or tax attorney to learn more about AE&P.

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Introduction to the S Corporation - General Rules
Business Tax, Tax, Tax Compliance, Tax Planning Ben Schultz Business Tax, Tax, Tax Compliance, Tax Planning Ben Schultz

Introduction to the S Corporation - General Rules

What is an S corporation and how is it taxed?

In effect, an S corporation conducts business as a regular corporation but is essentially taxed as a partnership. Unlike a C corporation, the S corporation generally does not pay a corporate tax on income. Rather, the S corporation passes income, losses, deductions, and credits through to its shareholders, who report the items and calculate the tax on their individual returns.

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Introduction to the S Corporation - Income or Loss
Tax Planning Ben Schultz Tax Planning Ben Schultz

Introduction to the S Corporation - Income or Loss

What is an S corporation?

An S corporation is a small business entity that is treated as a regular corporation for all purposes other than its treatment under tax law. To make a "subchapter S election," a corporation must satisfy a number of requirements:

  • All shareholders must consent to the S corporation status
  • The number of shareholders is limited to 100 (25 for tax years beginning prior to 2004)
  • The corporation can issue only one class of stock
  • The S corporation must be a domestic corporation, and its shareholders must be citizens or residents of the United States
  • Only individuals, estates, S corporations, and certain trusts can be shareholders of the S corporation
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WHEN DO YOU HAVE TO PAY A GIFT TAX?

People are sometimes surprised to learn that the IRS regulates gifts over a certain size. 

As a donor, you are responsible for reporting the gift if it exceeds $14,000 and paying the gift tax if you have given more than $5.45 million in cash or property (over a lifetime). Regardless of the amount, you cannot deduct a gift as you could with a charitable donation.
As a recipient, you do not need to include the gift as part of your taxable income. However, if you receive property other than cash, you will need to determine the cost basis at the time of the transfer to have the proper value in case you dispose of it later.

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