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Articles Posted in Tax Laws

Everyone, from small business owners to independent contractors, knows there some extremely specific advantages to incorporating. Not only do you receive some protection in case of liability, since the business is held liable, instead of you – the individual owner – (although this depends largely on the circumstances, of course), but incorporating also sets you up to be eligible for plenty of tax breaks.

Since different types of corporations are taxed at varying rates, they are also eligible for many tax breaks that individuals are not. Without a doubt, sifting through the incorporation paperwork may help you quite a bit when filing your yearly federal and state tax returns. But overall, there are five main ways that you can save money on your taxes, simply by incorporating your business. So, you need to be aware of the following advantages when making any big decisions:

1) You Won’t Have to Pay Self-Employment Tax

While it’s common for individuals and businesses to owe money to the IRS, many of them have the means to pay their tax debts when they file every year. However, not everyone can do this, leaving debts owed to the Federal Government outstanding. If you fall into this category, there are some important things that you need to know, including the following:

1) You Still Need to File Your Current Tax Return

Even if you owe the IRS money from a previous year or two, you still need to file your current tax return on time. Not filing can lead to a number of penalties, and it may void any ongoing payment agreements that you have with the IRS. It’s always a good idea to make sure that you send in that return on time, even if that return results in you owing money to the IRS.

Winning money at a casino, sportsbook, or via the lottery is a rollercoaster ride with its inevitable up and downs. Yes, it is undeniably exciting to win and stash a little extra cash in your pocket. But the downside that many forget in the heat of the moment, is that you owe taxes on those winnings, and if those taxes are not disclosed on your annual tax return or paid in full, you could end up with plenty of problems with the IRS. They will not hesitate to collect what is owed to them and more, should you profit from gambling winnings.

What Constitutes Gambling Winnings?

The IRS only requires people to pay taxes on a certain amount of the money that they win through gambling. These amounts vary, based on how the money is won. Here is a general breakdown to keep in mind when at the casino or racetrack:

Divorcing your spouse can be a complex undertaking and involves more than simply splitting up jointly owned bank accounts and properties. It also means ensuring that your taxes are completed and filed properly. A number of issues can pop up while completing taxes in the middle of a divorce, some of which may require you to file tax return(s) with your soon to be ex-spouse. In other cases, a change of marital status can result in having to file taxes quite differently than you are used to, leading to the high probability of making a mistake.

Filing Tax Returns Jointly

According to current IRS regulations, two spouses who are in the middle of a divorce, yet not officially divorced at the end of the tax year can file a joint tax return. Even if both individuals are no longer residing in the same location, as long as they are still legally married and no official divorce decree has been approved by the courts, that joint return is valid.

Business expenses are tax-deductible, or at least they usually are. The Internal Revenue Code (IRC) does not allow the deduction of some business-related expenditures. The Uniform Capitalization (UNICAP) rules, for example, require businesses to capitalize certain expenses, or include them in inventory costs. This can present disadvantages in terms of tax liability. The IRC makes an exception for farm businesses, although this may come with additional rules regarding depreciation that may have their own disadvantages. The Tax Cuts and Jobs Act (TCJA) of 2017 amended the IRC to allow other businesses to opt out of the UNICAP rules, but without being subject to the special depreciation rules. In early 2020, the IRS released guidance on how farming businesses can use the new exemption provided by the TCJA.

What Are the Uniform Capitalization Rules?

Under § 263A of the IRC, certain expenses must be capitalized or treated as inventory costs. The UNICAP rules apply to direct and indirect costs associated with real or personal property that is “produced by the taxpayer,” or that is acquired as a capital asset for the purpose of resale. These rules are significant in capital-intensive businesses like real estate. Direct costs include materials and labor directly involved in development or construction. Indirect costs arise from similar activities that benefit a property.

How Do the UNICAP Rules Apply to Farmers?

Section 263A(d)(1) exempts farmers from the UNICAP rules altogether for livestock and plants with “a preproductive period of 2 years or less.” The IRS periodically publishes a list of plants that fit this description. The most recent list, published in 2013, includes apples, coffee beans, grapes, lemons, olives, oranges, and walnuts.

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Having help around the house can be an enormous benefit for families that are overwhelmed with work, parenting, and other obligations. Hiring a household employee, however, can affect your taxes, so it is important to know what you are getting yourself into.

What Is a “Household Employee”?

The IRS uses a two-part definition of “household employee”: the job must involve domestic services, and the person must be an employee rather than an independent contractor.

Domestic Services

The term “domestic services” includes any work typically done in or around the home, including:
– House cleaning;
– Cooking;
– Child care;
– Gardening or groundskeeping; and
– In-home nursing care.

One might be tempted to think of a large, exceedingly-wealthy household like the one depicted in the television show Downton Abbey. Many households in the U.S. employ one or two household employees, such as a housekeeper and a nanny.

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Federal tax law provides favorable tax treatment for various “qualified” retirement plans by deferring income tax on contributions made by workers. The Internal Revenue Code (IRC) limits the annual amount that workers can contribute to qualified plans. Executives at large corporations have another option for retirement savings that allows them to make far greater contributions thanks to loopholes in the IRC. A bill introduced in the U.S. Senate earlier this year, the CEO and Worker Pension Fairness Act (CWPFA), would close these loopholes, resulting in higher taxes for executives.

What Is an Executive Retirement Plan?

The term “executive retirement plan” refers to certain deferred compensation plans that are not “qualified” under the IRC. They are not eligible for deferred taxation in the same way as qualified plans like individual retirement accounts (IRAs) or 401(k) plans, but large corporations have found ways to take advantage of tax deferrals.

Workers with qualified retirement accounts have an annual limit on contributions. Tax deferrals on contributions to 401(k) plans, for example, are limited to $19,500 per year. Some executive retirement plans, however, may allow unlimited contributions. A report by the Government Accountability Office (GAO), entitled Private Pensions: IRS and DOL Should Strengthen Oversight of Executive Retirement Plans, found that 2,300 corporate executives maintain around $13 billion in this type of account. Many of them contribute to these accounts after they reach their annual limit on qualified plan contributions.

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If you are employed, your boss probably pays many of your taxes for you. Your pay stubs will show withholding for federal income tax, Medicare, and FICA. At the end of the year, you will receive a W-2 showing your total earnings from your job and the total amount of taxes withheld. Self-employed people must also pay these taxes, and they have to handle all of the details themselves. To understand whether you have to pay the self-employment tax, you need to determine whether you are “self-employed” for federal tax purposes, and whether you make enough from self-employment to need to pay the tax. Our Los Angeles tax advisors can help you assess these factors.

What Is the Self-Employment Tax?

It might be easiest to define the self-employment tax by comparing it to the taxes paid by employed persons. A typical employee has two types of tax withheld from their paychecks. The first is their individual federal income tax withholding. The amount that their employer withholds from each paycheck is based on the information they provided on Form W-4.

The other type of tax, commonly known as “payroll tax,” goes towards Social Security and Medicare. The Social Security portion is often known as the FICA tax, after the Federal Insurance Contributions Act. The employer withholds the following percentages of the employee’s gross wages:
– 6.2% for Social Security; and
– 1.45% for Medicare
The employer must match these amounts. While the employee pays 7.65 percent of their paycheck, the total amount received by the government equals 15.3 percent.

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The world has had to learn a new vocabulary in recent weeks. In an effort to slow the spread of the coronavirus and the disease it causes, COVID-19, public health officials across the globe have urged people to practice “social distancing.” Non-essential businesses are closed, and thousands if not millions of people have quickly learned how to work remotely. In the midst of all of this, the federal government has offered some relief by delaying Tax Day for three months. Instead of income tax returns and payments being due on April 15, they will now be due on July 15.

Why April 15?

April 15 has been the due date for federal income taxes for a little less than seventy years. Income taxes themselves have only been an inevitable part of life nationwide for a bit more than a century.

The Sixteenth Amendment to the U.S. Constitution first authorized the federal government to levy an income tax in 1913. Eight years earlier, the Supreme Court had ruled that an income tax contained in a tariff bill was unconstitutional. Amending the Constitution overruled the court.
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