Taxes Archives - Material Handling Wholesaler

Section 1202: Small Business Stock Capital Gains Exclusion

Thu, 05 Jan 2023 17:55:06 +0000

Selling your business? What if I told you that you could exclude up to $10 Million from the sale of your business if you meet certain parameters? It is important business owners take note of the requirements as they are very important in order to qualify for the exclusion. Section 1202 of the Internal Revenue Code is a very beneficial tool and the exclusion and easily be applied to your sale. Section 1202 is known as the Small Business Stock Capital Gains Exclusion. This section can only be applied to qualified small business stock acquired after September 27, 2010, that is held for more than five years. Within the Protecting Americans from Tax Hikes (PATH) Act in 2015, one tax benefit, made permanent by the Obama administration, was the Small Business Stock Capital Gains Exclusion found in Section 1202. The intention of this section in the Internal Revenue Code was to provide an incentive for non-corporate taxpayers to invest in small businesses in the United States. Before February 18, 2009, Section 1202 allowed up to 50% of capital gains to be excluded from gross income. The American Recovery and Reinvestment Act then increased the exclusion rate from 50% to 75% for stock purchased between February 18, 2009, and September 27, 2010. This was done in order to stimulate the small business sector. The latest revision to Section 1202, where we are today, provides for 100% exclusion of any capital gain if the small business stock was acquired after September 27, 2010. The capital gains exempt from tax are also exempt from the net investment income (NII) tax applied to most investment income at a rate of 3.8%. The limit upon the amount of gain a shareholder can exclude is limited to either $10 Million or 10 times the adjusted basis of the stock. Any taxable portion of the gain from selling small business stock has an assessment at the maximum tax rate of 28%. Keep in mind, not all small business stocks qualify for this tax break. Some very stringent requirements must be followed regarding small business stock. These requirements are: It was issued by a domestic C-corporation other than a hotel, restaurant, financial institution, real estate company, farm, a mining company, or business relating to law, engineering, or architecture. Can also be applied to an LLC taxed as a C-Corporation. It was originally issued after Aug. 10, 1993, in exchange for money, property not including stocks, or as compensation for a service rendered. On the date of the stock issue and immediately after, the issuing corporation had $50 million or less in assets. The use of at least 80% of the corporation’s assets is for the active conduct of one or more qualified businesses. The issuing corporation does not purchase any of the stock from the taxpayer for four years beginning two years before the issue date. The issuing corporation does not significantly redeem its stock within two years beginning one year before the issue date. A significant stock redemption is redeeming an aggregate value of stocks that exceed 5% of the total value of the company’s stock. If you own a business that satisfies these requirements, then start celebrating. Whenever you go to sell your business, you should be able to exclude all or almost all your federal capital gains tax. Keep in mind that state taxes differ from federal taxes. If your state taxes conform to federal taxes, you could also exclude capital gains from your state taxes. Since all states do not correlate directly, taxpayers should seek guidance on how their states will treat the gain from the sale of qualified small business stock. Looking at an example, consider a single taxpayer with normal taxable earnings of $600,000. Due to their income, they are subject to the highest tax rate. When they sell the eligible small company shares, they bought on September 30, 2010, they get $60,000 in realized profit. Since the person may deduct all their capital gains, no federal tax is owed on the profits. Assume the Investor bought the stock on February 9, 2009, and traded it for a gain of $60,000 after five years. The amount of federal tax owed on capital gains is 28% × 50% x 60,000, or $8,400. About the Author: Business owners must check immediately with their business broker, accountant, or legal counsel regarding their business structure. This is especially true for those who plan to sell within the next couple of years. If you are looking into selling your business and have any questions about the Small Business Stock Capital Gains Exclusion, reach out to the professionals at The Center for Financial, Legal, and Tax Planning, Inc at our website, www.taxplanning.com or by phone at (618) 997-3436.

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Year-End Tax Planning Tips for small businesses

Wed, 27 Oct 2021 13:39:24 +0000

You still have time to significantly reduce this year’s business federal income tax bill even with all the uncertainty about proposed tax law changes. Here are five possible moves to consider — but stay tuned for developments. Congress is currently considering some major tax changes. If approved, it’s unclear when they will all take effect. Claim 100% First-Year Bonus Depreciation for Last-Minute Asset Additions Thanks to the Tax Cuts and Jobs Act (TCJA), 100% first-year bonus depreciation is available for qualified new and used property that’s acquired and placed in service in the calendar year 2021. That means your business might be able to write off the entire cost of some or all of your 2021 asset additions on this year’s federal income tax return and maybe on your state return, too. Consider making additional acquisitions between now and December 31. Contact your tax pro for details on the 100% bonus depreciation break and exactly what types of assets qualify. However, if significant tax-rate increases are enacted for 2022 and beyond, you could be better off forgoing 100% first-year bonus depreciation and, instead, depreciating newly acquired assets over a number of years. If tax rates go up, those future depreciation write-offs could be worth more than a current-year 100% write-off. Fortunately, you have until the deadline for filing your current-year federal income tax return — including any extension — to decide which course to take. If your business uses the calendar year for tax purposes, the extended filing deadline will be October 17, 2022, for sole proprietorships and C corporations. The extended deadline will be September 15, 2022, for partnerships, limited liability companies (LLCs), and S corporations. Extending your return may give you more flexibility to react to future tax developments. Write Off New or Used Heavy SUV, Pickup, or Van The 100% bonus depreciation deal can have a major tax-saving impact on first-year depreciation deductions for new or used heavy vehicles used over 50% for business. That’s because heavy SUVs, pickups, and vans are treated for federal income tax purposes as transportation equipment. In turn, that means they qualify for 100% bonus depreciation. Specifically, 100% bonus depreciation is available when the SUV, pickup, or van has a manufacturer’s gross vehicle weight rating (GVWR) above 6,000 pounds. You can verify a vehicle’s GVWR by looking at the manufacturer’s label, which is usually found on the inside edge of the driver’s side door where the door hinges meet the frame. If you’re considering buying an eligible vehicle, placing one in service before year-end could deliver a significant write-off on this year’s return. However, if significant tax-rate increases are enacted for 2022 and beyond, you could be better off forgoing 100% first-year bonus depreciation and, instead, depreciating newly acquired assets over a number of years. You have until the deadline for filing your current-year federal income tax return, including any extension, to decide whether claiming 100% first-year bonus depreciation is a good idea. Manage Current-Year Business Income and Deductions If your business operates as a pass-through entity — such as a sole proprietorship, S corporation, partnership, or LLC taxed as a partnership — your shares of various tax items are accounted for on your personal return and net income is taxed at your personal federal income tax rates. As the year-end approaches, if you expect to be in the same or lower federal income tax bracket in 2022 than you are in 2021, the traditional strategy of deferring taxable income into next year while accelerating deductible expenditures into this year makes sense. Deferring income and accelerating deductions will, at a minimum, postpone part of your tax bill from 2021 until 2022. On the other hand, if you expect to be in a higher tax bracket in 2022 than you are in 2021, accelerate income into this year (if possible) and postpone deductible expenditures until 2022. That way, more income will be taxed at this year’s lower rate instead of next year’s higher rate. Maximize the Deduction for Pass-Through Business Income The deduction based on an individual’s qualified business income (QBI) from pass-through entities is a key element of the TCJA. The deduction can be up to 20% of a pass-through entity owner’s QBI, subject to restrictions that can apply at higher income levels and another restriction based on the owner’s taxable income. For QBI deduction purposes, pass-through entities include: Sole proprietorships, Single-member LLCs that are treated as sole proprietorships for tax purposes, Partnerships, LLCs that are treated as partnerships for tax purposes, and S corporations. You can also claim the QBI deduction for up to 20% of qualified REIT dividends and up to 20% of qualified income from publicly traded partnerships. Because of the limitations on the QBI deduction, year-end tax planning moves (or lack thereof) can increase or decrease your allowable QBI deduction. For instance, year-end moves that reduce this year’s taxable income can have the unanticipated negative side effect of reducing this year’s QBI deduction. Work with your tax pro to optimize your results. Establish a Tax-Favored Retirement Plan If your business doesn’t already have a retirement plan, now might be the time to take the plunge. Current retirement plan rules allow for significant deductible contributions. For example, if you’re self-employed and set up a SEP-IRA, you can contribute up to 20% of your self-employment earnings, with a maximum contribution of $58,000 for 2021. If you’re employed by your own corporation, up to 25% of your salary can be contributed to your account, with a maximum contribution of $58,000. If you’re in the 32% federal income tax bracket, making a maximum contribution could cut what you owe Uncle Sam for 2021 by a whopping $18,560 (32% times $58,000). Other small business retirement plan options include: 401(k) plans, which can even be set up for just one person (also called solo 401(k)s), Defined benefit pension plans, and SIMPLE-IRAs. Depending on your circumstances, these other types of plans may allow bigger deductible contributions. Thanks to a change made by the 2019 SECURE Act, tax-favored qualified

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Getting the most out of the Home Office Deduction

Wed, 10 Mar 2021 18:42:44 +0000

Over the past few months, nature has forced many working Americans and small business owners to work from home. Whether it be due to COVID-19, natural disasters, or the recent snowstorm that impacted almost all of the lower 48 United States, more Americans are working from home than ever before. A small consolation to working from home is that taxpayers can count part of that heating bill as a home office expense on their tax return. A taxpayer can do the same if they qualify for the home office deduction. Basically, the taxpayer gets to count a portion of home-related expenses that typically aren’t deductible. This includes certain residential maintenance and operational costs, such as utilities. Before cranking up their heat/air conditioning, a taxpayer needs to note a particular portion of the previous sentence: count a portion of home-related expenses. For example, a taxpayer’s house is 2,500 square feet. A taxpayer’s home office is a 250-square-foot room. A taxpayer can then claim 10 percent of a taxpayer’s annual heating, air conditioning, and water bills, as well as other common housing expenses, that make it possible for a taxpayer to do their work from there. People can only deduct the number of their residence expenses that apply to their home office. A home office is usually either a separate room or a portion of a room that meets the Internal Revenue Service qualifications. Notably, a taxpayer uses the area/room exclusively and regularly to conduct their business. Most of all, it should be noted that the home office deduction is not available to W2 employees. A taxpayer can usually deduct the business percentage of their utility payments and other services that pertain to the entire house. In addition to the heat, cooling, and running water, this may also include trash collection, security services, pest control costs, and even cleaning services. Keep in mind however that if a taxpayer is a DIY type of person, a taxpayer can only deduct the cost of the material and not the cost of their labor. If a taxpayer pays for a service that is not related to the business in any way, it is not deductible (i.e., painting their bedroom). However, so long as the service is related to the business (i.e., painting their office) then the direct expense is allowable. The type of home expense that a taxpayer claim is particularly important. The IRS breaks the type of home expenses down into three categories: (1) Direct expenses are expenses only for the business part of a taxpayer’s home (i.e. painting their office) and they are fully deductible; (2) Indirect expenses are expenses for keeping up a taxpayer’s entire home (i.e. insurance, utilities, and general repairs) and they are deductible based on the percentage of a taxpayer’s home used for business: and (3) unrelated expenses are expenses for only the parts of a taxpayer’s home not used for business (i.e. lawn care) and these expenses are not deductible. A taxpayer’s monthly mortgage or rent payment is probably a taxpayer’s largest home-related expense that can be counted toward the home-office deduction. Many homeowners already itemize and claim their home’s mortgage interest payments, as well as property taxes on Schedule A. If a taxpayer has a home office, a taxpayer can apportion part of these payments, again using the square footage percentage, toward their home office. A taxpayer’s Schedule A deduction amount then will be reduced. For most homeowners who work from home, it is more advantageous to claim at least part of the cost as a business expense. Homeowners know that home maintenance and repairs are treated differently for tax purposes. This is also true with regards to claiming the home office deduction. If a taxpayer can claim the home office deduction, then a taxpayer can deduct a portion of the taxpayer’s repairs. These are actions that keep a taxpayer’s home in ordinary and efficient operating condition. And, per the earlier discussion and IRS expense type table, just how much is deductible again depends on whether it is a direct or indirect expense. Generally, repairs include things like fixing interior walls and floors or exterior components like roofs and gutters; painting the whole house; and repairing a furnace or air conditioner that was worn out, for example, by extreme weather events. Again, the home office deduction amount uses the percentage of space calculation. Capital improvements, however, are added to the basis of the property. These are things that add to the value of a taxpayer’s home or considerably prolong its useful life. They also help home sellers realize a smaller profit and possibly escape tax on the proceeds. But when it comes to a taxpayer’s home office, a taxpayer can claim depreciation on the portion of a taxpayer’s home that serves as a taxpayer’s home office. This allows a taxpayer to account for costs over the years of such things as a taxpayer’s payments toward their mortgage principal. There is no denying that during these uncertain times, it is crucial for small business owners and self-employed individuals to receive every dollar that may be owed to them come tax time. If a taxpayer owns a small business or is a self-employed individual with questions about the proper deductions to take, including the home office deduction, please reach out to the professionals at The Center for Financial, Legal and Tax Planning, Inc.

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Major update regarding the new Tax Law

Fri, 08 Mar 2019 21:49:59 +0000

IRS Releases Final Regulations Under Section 199A (20% Deduction) It’s been over a year since the Tax Cuts and Jobs Act has been passed, and the IRS is providing the final pieces of clarity of the infamous section 199A deduction which allows you to not pay tax on 20% of the Qualified Business Income. In previous articles and publications we have taken each individual proposed regulation or finalized regulation and defined it in order to give you, the reader, the best possible understanding of how to apply the complicated deduction. So to continue the trend, today we have one more section 199A piece to discuss, this time involving rental real estate enterprises. The IRS in Notice 2019-7 provided that a rental real estate enterprise will be treated as a trade or business solely for purposes of section 199A. Some people might ask, what is a rental real estate enterprise and how do I qualify? In short, a rental real estate enterprise is a primary form of income based on rental properties. The courts have often found there is a simple test whether a taxpayer’s activity qualifies to meet the level that constitutes a trade or business, the test being: (1) regular and continuous conduct of the activity, which depends on the extent of the taxpayer’s activities; and (2) a primary purpose to earn profit, which depends on the taxpayer’s state of mind and good faith intention to make a profit from the activity. By meeting these requirements with your rental property, you should be in line for the 20% qualified business deduction. Additionally, it will be imperative that the taxpayer meet the IRS’s definition of rental real estate enterprise in order to qualify for the safe harbor. Per the IRS, the definition is, “an interest in real property held for the production of rents and may consist of an interest in multiple properties.” For consistency sake, the IRS has decided that taxpayers must either treat each individual rental property as a separate enterprise, or in the alternative treat all of them as a single enterprise. However, commercial and residential real estate may not be part of the same enterprise. Finally, taxpayers may not pick and choose enterprise variations year by year unless there is a drastic change in facts surrounding the properties. Furthermore, for the sole purpose of section 199A, a rental real estate enterprise will qualify for the 20% qualified business deduction if the following requirements are met (within that taxable year): Separate books and records are maintained to reflect income and expenses for each rental real estate enterprise; For taxable years beginning prior to January 1, 2023, 250 or more hours of rental services are performed (as described in the revenue procedure) per year with respect to the rental enterprise. For taxable years beginning after December 31, 2022, in any three of the five consecutive taxable years that end with the taxable year (or in each year for an enterprise held for less than five years), 250 or more hours of rental services are performed (as described in the revenue procedure) per year with respect to the rental real estate enterprise; and The taxpayer maintains contemporaneous records, including time reports, logs, or similar documents, regarding the following: (i) hours of all services performed; (ii) description of all services performed; (iii) dates on which such services were performed; and (iv) who performed the services. Such records are to be made available for inspection at the request of the IRS. The contemporaneous records requirement will not apply to taxable years beginning prior to January 1, 2019. Moreover, if you have questions about what qualifies as a rental service the list below is a list of services the IRS has deemed as rental services: Advertising to rent or lease the real estate Negotiation and executing leases Verifying information contained in prospective tenant applications Collection of rent Daily operation, maintenance, and repair of the property Management of the real estate Purchase of materials Supervision of employees and independent contractors There are some exclusions that owners should be aware of. First and foremost, real estate used by the taxpayer (including owner or beneficiary) as a residence is not eligible for the 199A deduction. Another exclusion is any real estate rented or leased under a triple net lease. The IRS states a triple net lease includes a lease agreement requiring the tenant or lessee to be responsible for the taxes, fees, insurance, and maintenance activities, in addition to rent and utilities, on the property. All in all, the 199A deduction was a key part of the Tax Cuts and Jobs Act, which continues to be fleshed out. Now that the final regulations are coming to fruition, we can look toward the future of using the deductions soundly. If you have further questions about the 199A deduction or other tax questions, contact us at the Center for Financial, Legal & Tax Planning, Inc., at (618) 997-3436.

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