Corporate Tax

Deducting Your Trip To India – Detailed Business Expense Guide

Suppose that you have just arrived from a two week trip to Europe, where you were able to close some deals while visiting some old friends. You’re so happy not only because you were able to snag more business, but you were able to bring home some souvenirs for your family and friends. And of course, you were able to squeeze in some time for relaxation and got to see top sights like the Big Ben and the Eiffel Tower.

But did you know that you can even reduce your next tax bill by declaring your recent trip abroad? Indeed, jet setting can save you a significant amount of money, but only if expenses satisfy certain conditions.

Business Related Travel Expenses are Tax Deductible

According to the Internal Revenue Service (IRS), you can deduct ordinary and necessary expenses for travel away from home or business as long as these are connected with your business or job. This applies to both domestic and international travel.

What are ‘ordinary’ expenses? The IRS defines this as a common or accepted expense in your trade or business. For instance, you can consider the costs associated with distributing promotional literature like newsletters and holiday cards as ordinary expenses.

On the other hand, a necessary expense is defined as something helpful and appropriate for your business or work.  Your business trip, which allowed you to close new deals, can be considered as one.

The IRS says that for travel to be considered deductible, it should be ‘away from home.’ This stipulation is almost always  satisfied for international travel. The IRS will consider  you to be away from home if you are on travel outside your tax home (where you live or work)  for a time longer than a typical day’s work.

Keep in mind, though, that eligible deductions for business travel are only for temporary work on the road. If you spent more than a year on the road for a business travel, then it is considered an indefinite assignment and thus doesn’t qualify you for a tax liability. Even short assignments to the same place during a fiscal year may be considered by the tax authorities as an indefinite assignment.

Eligible Business Travel Tax Deductibles

Now you may ask—what are the travel related costs that you can normally deduct on your tax bill?

Among the travel related costs that you can deduct on your next tax bill are:

  1. It doesn’t matter whether you travel by plain or car; you can normally reduce the expenses related to getting to and from a business destination as long as it is not close to your tax home.

For example, you took a cab to get from the airport to the hotel where you met your client. You can deduct the cab fare as a work-related transportation cost. You can also declare car rentals, and even costs incurred when you took your own car (gasoline expenses, parking and toll fees, for example.) You can even claim the expenses of operating and maintaining a vehicle such as repairs, washing, oil change,  and tire replacement as tax deductibles.

What if your client provided you with a free ticket? Or a friend in London gave you a ride? Obviously, you can’t declare these as deductibles.

But what if you took an ocean liner on your way to London? Can you also deduce the costs on your next tax bill?

The IRS has special rules when it comes to luxury water travel. There is a daily limit on the amount that you can deduct. The amount varies depending on the time of the year. It is typically 200% of the highest federal per diem rate allowable during the time of your travel.

For instance, the highest federal per diem for the period January 1 to March 31 is $428. The daily limit on luxury water travel is double that amount, which is $856.

So let’s say that your total bill for a five-day cruise to London from New York for a business travel conducted in February is $5,000. You can only claim $4,280 as your deductible because you exceeded the daily limit of $856 per day.

  1. Shipping and Baggage. You can also deduct expenses that you incurred for shipping almost anything you need for your business or job while on travel. For instance, the $100 bill that you incurred for sending props or other materials required for a presentation.
  1. You can also deduct the full cost of the hotel room or other accommodations if your trip is overnight. Thus, you can reduce a $7000 per night stay at The Savoy on your next tax bill.
  1. You can deduce up to half of the cost of your meals if you are traveling for business. However, the meals should not be lavish or extravagant. There’s no clear-cut definition for a lavish or extravagant meal, but you can expect to get audited if you claimed a meal consisting of lobster and champagne as a deductible.
  1. You can also deduct any communication-related expenses like phone calls and faxes while you are traveling for business. This also includes international calls.
  1. Cleaning – this includes expenses for washing and ironing your clothes during the trip. Because you have to be presentable during your meetings with clients, right?
  2. Tips— you can also deduct the tips that you handed out to waiters, bellboys, and other workers.

Travel Considered Entirely for Business

The IRS maintains that only foreign travel which is spent solely for business is fully deductible. This means that if you spent your entire stay abroad on business-related activities, then you can claim all your travel expenses as tax deductible.

Since you did go spend time visiting friends and sightseeing during your trip, then you’ll have to allocate between tax deductible business expenses and the non-deductible personal ones.

But let’s face it–you do want to deduct the entire cost of transportation during your entire trip abroad, right?  You can deduce your travel expenses even if you didn’t spend the entire trip on business-related activities if you meet any of these conditions:

  1. You don’t have substantial control. According to the IRS, you don’t have substantial control over your trip if you are not a managing executive, or you are not related to your employer. The IRS defines a managing executive as an employee who has the authority and responsibility to decide on the necessity for business travel.

You also don’t have substantial control if you are merely an employee who was ordered by your boss to go to say, Paris, for a business trip.

But if you’re self-employed, then you might not satisfy this condition at all.  The IRS maintains that self-employed individuals and business owners have substantial control over arranging their business trips.

  1. You were outside the US for less than a week. The IRS will consider your travel entirely for business if you were out of the country for a week or less. However, you will have to count the day you return to the US, and not the day that you left.

This can get a bit confusing if you were traveling to different parts of the US before you left for London. For instance, say your home is in Denver. You left for New York on Tuesday, stayed there for a few days for a series of meeting, before flying to London on Saturday morning.

You had several business meetings in London on Sunday and Monday, then spent the next two days sightseeing. You went back to the US on Thursday before going back to Denver on a Saturday.

Although you were away from your home for more than a week, you were out of the US for less than a week. Remember that the IRS won’t count the day you left your home.

So, you may be able to claim the costs of your stay in London from Saturday and Sunday, but you won’t be able to do so for Tuesday and Wednesday.

  1. You spent less than a quarter of your travel on personal activities. But what if you spent more than a week outside the US? Does this mean that you can’t claim that as business related, and thus make you unqualified for tax deductibles?

You can, as long as you spent less than a quarter of your trip on personal activities.

So let’s say that you spent 14 days in London, and only got to see the sights and visit your friends in 1 to 2 days. You deduct the cost of the round trip plane fare, cost of meals, lodging, and other related expenses as mentioned earlier.

  1. Vacation was not a major consideration in arranging the trip. You can claim deductions on your tax bill if you can prove that a vacation was not a major consideration in arranging the trip.

Tips in Filing Business Travel Expenses

Now that you have an idea which business-related travel expenses you can claim as a tax deductible, here are some tips that you should remember so that you will be able to maximize your savings the next time you file your tax returns:

  1. Keep track of all your receipts and records. You can save a lot of time in looking for receipts when you keep every slip that you get during the course of your travel. You should also write on the back of each slip the location and date, the name of the person that you met, as well as the reason of the expense. This way, you won’t have to scavenge for slips when it is time to file your tax returns.
  1. Document everything. If you’re taking a client to a fancy dinner, you can claim that as a deductible. But you should be able to justify to the IRS that the nature of the meeting warranted such a fancy dinner. Thus it is recommended that you document the business you discussed so that you can justify the claim or pass an audit.

If you attended conferences or meetings while on travel, it would be a good idea to keep the programs or brochures you received. You can also keep the emails sent to you by people whom you met during the business meetings as proof to back up your claim.

Make it a habit to write down the names and business relationship of all the people you met during your travel. Write down their names as well as the business discussed.

You should also know that the IRS does not require receipts for travel expenses less than $75. So if you checked in a hotel for an overnight stay at a discounted price of $70, you’re not obligated to show the actual receipt.

  1. Try apps. If you have too many documents to keep track of, you might want to download and use apps for travel expenses. There are apps such as Tax Tracker that can help you in documenting business and travel expenses.

Mobile apps can monitor your travel expenses, time spent on the road, and miles traveled so you can file taxes and claim deductions quick, easy, and accurately.

  1. Be honest. The best way to avoid a date with the IRS is to be honest about declaring your tax returns. Deduct only the expenses that you are entitled to. Keep all supporting documents just in case you are called for audit. Remember, you not only end up losing deduction but also pay additional tax, interest, and penalties if the tax authorities find out that you make unsubstantiated claims.

Worse, the IRS may subject your tax return to further scrutiny. And you don’t want them to start digging.

The bottom-line is that you can make a lot of exemptions when you travel abroad for business purposes. Now that you know which travel expenses you can deduct, start saving those receipts and recording every expense. You’ll be surprised at the amount that you can save during the tax season.

Hire Your Children To Save Taxes

Child labor is a subject that has a negative connotation in our society. For most people, it means depriving children of their childhood. It means forcing them to work when they should be at home watching TV, or playing in the fields.

But it is a different matter altogether if the child is employed by his or her parent’s company.

If you have a small business and you have children aged below 18 years old, it is highly recommended that you hire them as employees. It can be a very fulfilling experience to them. It can hasten their growth, develop a sense of pride and self-worth, and teach them to be more responsible.

Moreover, it can save your company thousands of dollars in taxes. It’s like hitting two birds with one stone—your children can be productive during their spare time and you andyour company can get to save a lot of money.

Hiring teen and young adults in a family owned business benefits both parents and the young ones. Parents get to save more as their businesses have lesser tax burden. Children, on the other hand, can be productive and get some extra money for their extracurricular and summertime activities.

Tax Benefits

There are several ways for your company to benefit from hiring your children as workers:

  1. The child’s salary is free from taxes.

You might know that the first $6,300 of income in a fiscal year is free from federal taxes. This is called the Standard Deduction. So if you hire a child as an employee of your firm, you’re basically keeping that amount in the family. Hire someone else and that $6,300 is taken out of you.

That money coming from your own pocket can be used by your son or daughter to buy a car, or go on a vacation. Even better, he can use it to support himself or his college education.

  1. The child’s salary will be tax deductible.

Let’s say that you are hiring your child with an annual pay of $6,300.  You can declare that amount as tax deductible from your business income.  The first $6,300 earned by a child working in his/her parent’s firm is not subject to tax. Yes, this means that your child’s earning will not only be subject to federal income tax tax but also state tax, FICA, or Medicare.

You, as the business owner, meanwhile, can declare that amount as fully deductible. This means that you will get a tax relief based on your child’s salary as an employee of your business.

For instance, your business is in the 35 percent tax bracket. You hire your 14-year old son to work in your office and help you with the filing of documents, or working  with the spreadsheets. For the year, he earns $6,300 in wages. He must also has no other sources of income.

You, as the business owner, stand to save $2,205 since the full amount of his wages will be deductible as compensation.

  1. No FICA taxes.

As mentioned earlier, your child’s salary isn’t subject to FICA tax. This means your firm won’t have to pay FICA taxes on your child’s wages.

However, there are certain requirements for your child’s salary to be exempt from this kind of tax:

  1. Your business is a sole proprietorship
  2. It is a husband-wife partnership
  3. It is a husband-wife LLC considered as husband-wife partnership for tax purposes
  4. It is a single member LLC treated as sole proprietorship for tax purposes

It should be noted that your child’s salary is not exempt from FICA taxes if your business is a corporation. FICA tax exemption is also not applied if the business is a partnership, or one or more partners are not parents of the child.

  1. Setting up retirement savings plan.

What most people don’t realize is that children under 18 can contribute to their own individual retirement account (IRA). This can be a great way for them to get a head start as far as saving and investing money is concerned.

Your child can contribute up to $5,500 to a traditional IRA. He can subtract the amount from their income for tax purposes. However, your child can’t make more contribution to what he earned in a year. So if he earned $5,000 in a year, the maximum IRA contribution he can make is $5,000.

  1. Shifting a parent’s higher taxed income to a child.

Since your child can save by a) having his income exempt from taxes and b) having the option to set up IRA on the income, you can then shift your higher taxed income to him.

Going back to our examples, your son makes $6,300 and then adds $5500 as a contribution to an IRA. Thus he has $11,800 shielded from taxes, and your business can write off that amount as a legit business expense that can reduce your gross income.

That’s the maximum amount that your child can make in a year sans tax. If you give him a higher pay than $6,300 in a year, the next $9,275 will only be taxed at a rate of 10%.

Thus, your son stands to have a tax of just $927.50 for the year on aggregate earnings of $21,075.

You’ll be wise enough to include that amount in your own income as you can incur a tax liability of $10,600. You can save up to $9,672 in taxes by doing so.

Guidelines

There are several things that you should know if you are to hire your kids as employees. Knowing these guidelines should keep the IRS from disallowing your company from claiming said tax exemptions:

  1. He/she must be a real employee.

Your children should be hired as bona fide employees. This means that they have work that is helpful and appropriate for your business. Typical jobs for children include routine office work such as typing jobs, stuffing envelopes, cleaning the office, answering phones, or making deliveries.  Tech-savvy teenagers can help in marketing a company through social media. Or they can help in maintaining the spreadsheets of the firm.

They can’t be hired for jobs that have no connection with your business, like mowing your lawn at home. Suffice to say, children shouldn’t be asked to do household chores and get compensated for it.

Since your child is considered as a real employee, he or she should fill out their timesheets. It is also recommended that they sign a written employment agreement that specifies the duties and work hours of the employee.

  1. The work must be age-appropriate.

The work assigned to your child should be age-appropriate. There’s a chance that a 8 or 9 -year old child can help in some tasks in the office like stuffing envelopes or even making deliveries. But it will be difficult for the IRS to believe that a child aged below that age can perform any useful work for your firm. Employing a 6 or 7 year old for photocopying work or filing can put you in trouble with the IRS.

It’s also a no-no for children aged 16 years and below to work in a dangerous industry. Hence if your business is heavy equipment contracting, you can’t assign your 15-year old son to the field.

  1. Child should comply with legal requirements.

Since the child is considered a real employee, he or she should comply with the same legal requirements as you would when you hire a stranger. Thus, he will have to apply for a Social Security Number and fill out IRS Form W-4. He or she should also complete Form I-9 of the U.S. Citizenship and Immigration Services.

  1. Compensation must be reasonable.

Simply put, your child’s salary should be consistent with market rates.

Many shrewd business owners would try to give their children a big compensation because it can give them more tax savings in the long run. It would enable them to shift much of their income to their kids who are likely to be in a much lower income tax bracket. But you shouldn’t attempt to do this as the IRS would eventually find out about this if they do an audit.

In paying your children, you should give them a reasonable compensation. The total compensation must include the salary plus all the fringe benefits such as health insurance and medical expense reimbursements.

To get an idea on how much you are to pay your child, you can call an employment agency to see the typical compensation for the type of work that your youngster will do in your business.

  1. Pay in cash.

It’s up to you to decide how much you would pay your son for the services he renders to your business. Just make sure that you pay him in cash if you don’t want to get in trouble with the IRS. Compensation in the form of foods and other things won’t cut it.

There was this case of a tax preparer in Washington who also owned an employment agency. She employed her three children aged 8, 11, and 15. The kids earned a combined $15,000 in two fiscal years for doing tasks like filing and stuffing envelopes. Their mom deducted their salary as business expenses. The IRS disallowed it.

Why?  It’s because the children’s wages was used by their mom to pay for their food, often pizza.  Also, she used the money to pay for their tutor’s fees.

While the mother argued that it was her children who asked her to spend their earnings that way, the Tax Court ruled in favor of the IRS. It noted that it is her parental obligation to provide food and support her children’s education, and the wages of the kids should not be used for these purposes.

  1. Be diligent about documentation and book keeping.

One way to ensure that this arrangement won’t backfire on you is to be diligent about the documentation and book keeping. Doing so would convince federal or state auditor that you reasonably employed your children for your business, and that your tax claims are legit.

Aside from getting all the state permits necessary to employ children, your company’s recordkeeping and payroll tax accounting must also be fool-proof. The payroll for your kids must be done in the same way that an employer would do the payroll for another employee. Paying a fair market rate, as mentioned earlier, would also satisfy the auditors.

  1. Your child should also help your business.

Finally, business owners should not only be concerned with the tax savings they’ll get when they hire their children. They must also be sure that their children can do the tasks assigned to them. The children should be able to help the business, and not just for the tax savings that the firm gets because of them.

Sure, they’ll reduce taxes by employing a child. But if the child doesn’t do a good job at work, then it would probably best to hire another individual to do the job for the firm.

Let’s say that a father hires his 15-year old son to help typing documents in his office. He’s able to save $3,000 in taxes for doing so. But if his son just lounges around the office and doing nothing, then the father didn’t really get the best out of this arrangement. It would have been better for him to hire another person who can actually help his company.

With the tax savings that small business owners can get, it really makes a lot of sense for them to hire their children during summer or even on weekends. The business owner not only stands to save on taxes, but also instils in his/her children values like hard work and responsibility.

If you decide to do this, you should ensure that you do things right. Get your children the necessary permits. Do your accounting cleanly. And give them real wages—not slices of pizza. If you do things correctly, you can save thousands of dollars in taxes while training your children who could be your successor one day.

How to shield business using accrual accounting ?

How Accrual Accounting Can Shield Businesses from Tax Payments

 Business owners like you should not only be hard working and motivated. They must also be clever. From sourcing the cheapest materials to finding the cheapest labor without compromising the quality of their items; entrepreneurs have many ways of displaying their shrewdness. Being shrewd can give them the edge over their competitors.

Managing the company’s finances is one area where business owners should be very clever at. In particular, being familiar with the principal methods of keeping track of income and expenses—cash and accrual—would enable business owners to know which method of account is best for their business.

And it’s simply not for complying with tax rules and regulations. Sometimes, being familiar with accounting nitty-gritty can save a business owner thousands of dollars for a fiscal year.

Take for instance, delaying taxes on a portion of their income for a year. There’s a very generous accounting rule that allows an entrepreneur or a company to delay paying taxes on a fiscal year.

So say that you are a business owner, and the IRS would let you take a year to pay taxes on an income amounting to $11,000.  You’ll have 12 months to produce $2,750 assuming that you have a tax rate of 25%. You could instead defer paying that tax, and use the money to invest in advertising. Or maybe upgrade your equipment so that your business becomes more productive and profitable.

Cash vs. Accrual Method

To better illustrate how the accrual method of accounting can benefit business owners by letting them defer payment of a portion of their income tax, let’s look at the two methods of recording accounting transactions.

In cash method, the income is counted when your company receives money or check. Expense is counted when your firm pays for a service or product.

Let’s cite an example so you can better understand. If you sell merchandise amounting to $500 to a customer on January and receive payment for it on March 1, you can record the income on March 1. This is because it was only on March 1 that you received the payment.

This method is preferred and practiced by more small business owners. For one, it is easier to maintain. Business owners or their bookkeepers only record when the firm receives cash, or pays cash out. It is straightforward and simple. It requires little record keeping other than checkbook register and bank statements.

But one disadvantage of this method is that it can distort the picture of your firm’s income and expenses. It won’t account well for situations wherein you have used credit to buy supplies, or extend credit to your customers.

It can also lead you to falsely believe that your business is experiencing highs and lows.  For instance, if your company receives many payments on a month, you may think that the business is booming. But the reality could be that those payments came from sales that took place many months earlier.

In the accrual basis, transactions are only counted when they happen. It doesn’t take into account of the date the money is actually received or paid. There’s no need for you to wait until you see the customer’s money being transferred into your account, or you actually pay out of your checking account if we talk about expense.

In accrual method of accounting, the job completion date is the one that matters. You can’t put the income down in your books until your business finishes a service or delivers all the products as specified in the contract. So if a job takes another 30 days for the finishing touches, it doesn’t have to go on the books until the 30 day period has lapsed.

For example, your business is a leather repair shop. It has been commissioned to repair an antique leather couch, with the job completed on December 10, 2015.  Your business bills the customer for $1,000, which you receive on January 10, 2016. In the accrual method of accounting, your business will have to record that income in December 2016 even though your firm has yet to receive payment from the client.

The foundation for accrual accounting is the “matching principle.”  This is the idea that expenses must be recorded whenever an obligation is incurred. When a firm makes a sale, the expenses needed to produce the item or provide the service must also be record in the same period—regardless of when the cash is paid.

The strength of the accrual method is that it can tell you the health of your business. You would know if the company is booming or slowing down, depending on the number of orders or deliveries that it is posting for a certain period.

But it won’t tell you what cash your business has on hand. This in turn, could lead you to add debt that you can’t afford. Moreover, the accrual basis is very complicated for most small business owners. Shifting tax burdens using this method is also difficult for most entrepreneurs.

Some small businesses try to get the best of both worlds, so to speak, by using a hybrid method. They use the cash method for income and expenses, and accrual basis for inventory as required by the IRS.

Certain types of businesses are also allowed to use special accounting methods, like builders, contractors, farmers, and business owners who receive payments under long-term contracts.

Saving on Taxes Using Accrual Method

While the accrual method can be complex for most business owners, it can be very useful for those who want to save on taxes. As mentioned earlier, large businesses use this type of accounting. Even small businesses with sales under $5 million a year can use accrual accounting. With accrual method of accounting, business owners can reduce their tax burden or liability.

In the accrual method, businesses can delay recognition of an income to a future tax year in order to reduce their tax liability for the current year. This explains what we mentioned earlier—that if a business has an income amounting to $11,000 for year 1, it can elect to defer payment of $2,750 in taxes for the said income to the next succeeding year.

To better illustrate how accrual accounting can work to the advantage of small businesses in deferring tax payment, let’s cite a few examples.

Usually, businesses include advance payments for the services in the tax year that they receive them. But they can also choose to declare that payment until the next year until the product or service has been completed.

For example, a contracting firm uses the accrual method of accounting.  It receives a $100,000 advance payment in December 2016 from a client for the construction of a house to be completed by the end of 2017. The firm has the option not to include the amount in its income for tax purposes for 2016, but instead declare it for 2017.

The game goes for advance payments for goods and properties. Businesses can postpone reporting income from the advance payments they receive from properties they sell, lease, build, or install.

For example, a magazine receives a 12-month subscription for its monthly publication. In November 2016, it received payment the payment of $120 from a subscriber who agrees to pay the entire cost upfront. The said firm can postpone reporting the income until the completion of the contract, or when it has completed delivering the magazines to the subscriber.

In these scenarios, the companies can opt to use the payments they received to grow their businesses, like investing or buying new equipment.

Limitations

However, companies who opt for accrual accounting have to follow certain rules if they want to defer recognizing income during a certain year.

Generally, businesses are not allowed to defer inclusion of an advance payment in income for services that they are to perform after the end of the tax year following the year that they received the payment.

To further illustrate this, a dance studio gets a two year contract for 96 one-hour dance lessons. It received an advance payment for the contract in October 2016. The contract would stretch up to 2018. The company is thus obligated to recognize the payment in its 2016 income because part of the services won’t be performed until 2018 (or the year after the year it received the payment).

Deferring reporting income is also not allowed if the company receives it under a guarantee or warranty contract. The same goes for income from prepaid rent.

Other Benefits of Accrual Accounting

Aside from the flexibility that accrual accounting can afford to small business owners, there are other advantages or benefits that this accounting method can give to entrepreneurs.

One is that it gives a better picture of a company’s financial performance. Accrual accounting allows the business owner to easily see how the company is doing as far as finances are concerned. He or she will be able to see where the profits are coming from, and where the expenses are going.

Another benefit of accrual accounting is that a business owner would be able to track historical trends. Since accrual accounting can track revenue and expenses, it allows for a better way of tracking the business activities. Business owners will be able to identify trends that are related to occurrences in the market place.

Accrual accounting can also benefit the company by making access to credit easier. Since companies will be able to keep track of their financial performance with accrual accounting, they stand a better chance of getting access to credit from financial institutions. This is particularly important for small businesses which need credit to expand, and at times, to survive.

Finally, accrual accounting would enable firms with annual sales of $5 million or annual inventory sales of $1 million to meet generally accepted accounting principles or GAAP.  The latter is considered the industry standard for financial statement preparation. Meeting GAAP enables investors and financial institutions to easily determine a company’s financial health or standing.

How to Change from Cash to Accrual Accounting

Now that we have established that accrual accounting can enable a small business to defer paying of taxes under certain conditions, the next question you may have in mind is how to change from cash to accrual accounting.

Changing accounting method should be approved by the IRS first. To do this, you should file Form 3115 or Application for Change in Accounting Method. You’ll have to pay a user fee for this.

You can also contact a business or commercial law attorney, or inform your accountant, about your desire to shift from cash to accrual accounting. These pros can help your business change to the accounting method that can increase your business’s profitability and shield it from taxes during certain tax years.

The accrual method of accounting may be something you aren’t familiar with as a business owner.  You may have been accustomed to the cash-basis that you can’t imagine shifting your accounting methodology anytime soon.

But as you have realized upon reading this article, the accrual method of accounting can give you a lot of benefits. It can enable you to defer payment of taxes for a particular year.  The money that could have been spent for tax payment can then be used by the business for initiatives like buying equipment and even investments.

As a business owner, it only makes sense for you to study the nitty gritty and even shift to the accrual method of accounting from a cash-basis method. While it is complicated and time consuming, it can be very advantageous to your business. Aside from the tax savings you can get, accrual accounting can enable your business to grow. You would be able to study better the financial health of your business, and get access to loans from financial institutions.

Understanding the Complexities of Capital Gains Tax in India

A few years ago, Aarav inherited a parcel of land from his parents.  Since he lives in the city and has no plans of going back to his hometown, he decides to sell the land. He then uses the money to buy an apartment right in the heart of the city.  It took almost three years for Aarav to buy the apartment after selling his inherited property. He falsely assumes that there is no tax liability in his reinvestment. After some time, he finds out from a tax consultant or worse, from the tax authorities, that he will have to pay tax on the capital gained from the sale of his inherited property.

It may have occurred to Aarav that the property he received is not subject to tax. This is true. In India, any asset that is received as an inheritance is fully exempt from gift tax. So he’s not obligated to pay any tax upon receipt of the parcel of land from his folks.

But the sale of the asset is not exempted from tax. This is taxable under capital gains.

In India, it is not uncommon for taxpaying individuals like Aarav to inherit properties such as land or house from their families.  And just like what Aarav did, these individuals would sell the property and invest in another property at some point in time.

However, it is also common for many people in India to be unaware of tax laws regarding inherited properties like land and house, as well as the tax stemming from the sale of those properties. They would only know of the tax liabilities they have when notified by the tax authorities, or as in the case of Aarav, when informed by his tax consultant or a chartered accountant.

It is thus very important for individual taxpayers in India to know of these laws especially if they are to inherit a property from their families.

What is Capital Gains?

In the case of Aarav, he failed to realize that he had to pay the capital gains tax from the sale of the parcel of land that he disposed of.  By definition, capital gains is the profit that Aarav got when he sold the capital asset (in his case, the parcel of land) for a price higher that the purchase price.

Capital assets are property held in any kind by the taxpayer. It may be a parcel of land, a building, a house, or a vehicle. Leasehold rights, trademarks, patents and even jewellery may be considered as capital assets as well.  In certain cases, capital assets may include rights of management to any Indian company.

Thus, capital gains tax not only applies to the sale of an inherited house or parcel of land. It can also apply to the sale of a vehicle, patent, and jewellery.

Capital assets are classified into two – short-term capital asset and long term capital asset.

In Aarav’s case, the sale of the inherited land took him 35 months after the date of the transfer into his name. As such, it is considered short-term capital asset.

If he had disposed the property a month or so longer, it would have been treated as long-term capital asset.

Under the Indian tax laws, the following aren’t considered capital assets:

  • Stock in trade
  • Consumable stores or raw materials
  • Personal effects
  • 5 percent gold bonds
  • Gold deposit bonds
  • Special Bearer Bonds 1991
  • Agricultural land in a rural area. As of AY 2014-15, rural area is defined as any area outside the jurisdiction of a municipality having a population of 10,000 or more.

Calculating Capital Gains

Short-term capital gains and long-term capital gains are computed differently.

Long term capital gain is computed as the full value of consideration fewer expenditures incurred wholly in connection with the transfer of the capital asset. This includes brokerage, commission, and advertisement expenses, among others.  Indexed cost of acquisition and indexed cost of the improvement, if any, may also be deducted.

Full value consideration pertains to the amount that the seller agrees to get in exchange for his or her capital assets. It should be noted that capital gains is chargeable to tax in the year of the transfer.

t of acquisition pertains to the amount for which the capital asset was acquired by the seller. Cost of improvement, on the other hand, pertains to the expenses incurred to make improvements to the capital asset. However, all, improvements made before April 1, 1981 won’t be taken into consideration.

 

On the other hand,  short term capital gains is computed as the sales value of the asset less expenses incurred related to the transfer of the capital asset.  Cost of acquisition, or the purchase price of the capital asset, as well as cost of improvement, may also be deducted from the sales value of the asset.

 

Cost of acquisition pertains to the amount that any of the previous owners has paid to acquire for the property. Going back to Aarav’s case, let’s say that his grandfather was the original owner of the parcel of land. He had purchased it for Rs 20,000. This will be the cost of acquisition that Aarav can deduct to arrive at the short-term capital gains tax.

 

It can be said that calculation of long term and short term capital gains is basically the same. The only difference is that in calculating long-term capital gains, the cost of acquisition and improvement is indexed, or adjusted for inflation.

Short term capital gains on the sale of a property are taxable per slabs rates as applicable to the individual taxpayer. This means that the capital gains tax is payable at the same rate as the income tax of the tax payer.   In Aarav’s case, the capital gains would have been taxed at a rate of 25 per cent if he falls under the 25 per cent bracket.

On the other hand, long-term capital gains are taxable at a uniform rate of 20% plus surcharge and education cess.

Exemptions Under Income Tax Act

However there are exemptions on capital gains that can be applied as specified under certain sections of the Income Tax Act of 1961.

Going back to Aarav’s case, if he had used the proceeds arising from the sale of his inherited property, then he could have been exempt from paying capital gains tax.

Section 54, for instance, exempts sale of house property on the purchase of another house property. In this case, the capital gains arising from the sale of a house property is used in buying another house property.

The new property should have been purchased a year before the sale of the inherited property or two years after the sale of the property.

Going back to Aarav’s case, if he had bought the property he now has in the city within two years after he sold his inherited land, then he would have been able to apply for this exemption. Or, if he had bought the house a year before he was able to dispose of the parcel of land he inherited from his family.

Also, he could have been exempt from capital gains if he used the gains in the construction of the property that was completed within three years from the date of the sale of the inherited property.

It should be noted that under this section, only one house property can be bought or constructed using the capital gains to claim the exemption. The exemption can be nullified if the new property is sold within three years of its purchase or construction.

Investing in Bonds

Under Section 54EC, exemption is available when the capital gains from the sale of the first property are reinvested into specific bonds. These bonds are issued by the Rural Electrification Corporation and the National Highway Authority of India. Investment in these bonds should be up to Rs.50 lakhs.

The money that Aarav invested in bonds should be redeemed after three years. However it cannot be sold before the lapse of three years from the date of sale. Aarav should have invested the money he gained from the sale of his inherited land within six months after the sale of the property to have been able to claim this exemption.

The tax exemption is equal to the capital gain or to the investment, whichever is lower.  Transferring the bonds or taking a loan against them within three years is forbidden, though. It can result to the capital gain becoming taxable.

Investing in these bonds would yield a return of 5.5 per cent interest in a year.

Capital Gains Account

Aarav could have also invested the money that he had gained from the sale of his inherited property in a Capital Gains Account. This is specified under the Capital Gains Account Scheme. Aarav could have deposited the money in any public sector bank. The deposit can then be claimed by Aarav as exempted from capital gains. Moreover, he won’t have to pay any tax on it.

However, Aarav should have done this before the deadline for filing tax returns which usually is on July 1. The money deposited in the account should only be used in buying or constructing a residential house within the prescribed period.

There are two kinds of capital gains deposits in the market. One is a savings type account while the other is terms deposit. Any individual taxpayer can transfer money from one account to another by paying fixed penalties or charges in a bid to exempt his or her capital gains against tax.

In the savings deposit type of capital gains deposit, the money can be withdrawn as long as there is a declaration that the money will be for the construction or purchase of a house. The money will have to be used for the declared purposes within 60 days. Any unutilized amount will have to be re-deposited into the capital gains account as well.

As far as interest rates are concerned, capital gains deposit will have the same rates as those on regular savings and term deposits. There’s also tax for the interest earned. Proof of deposit has to be attached with the taxpayer’s income tax return.

In the event that the deposited amount is not fully used to buy and construct a new house at the end of the three-year period from the sale of the asset, the money in the account will be treated as capital gains.

Opting to open a capital gains account should be considered only as a stop-gap measure.  The individual taxpayer will eventually have to use the money to buy or build a house within a specified period.

Other Exemptions

There’s also an exemption specified under Section 54B of the 1961 Act. This specifies that short term or long term capital gains are tax exempt when the proceeds are used to purchase new agricultural land. The purchase should have been consummated within two years after the sale of the inherited property. Also, the agricultural land should not be sold within 3 years from the date of its acquisition.

Under Section 54G, exemption is also allowed if the gain is reinvested in acquiring a building or machinery in a rural area. There’s also exemption allowed if the gain is used in acquiring land, building, or machine in a Special Economic Zone as specified under Section 54GA.

Conclusion

The truth is that computing capital gains tax on the sale of a property, whether it is inherited or not, can be very tricky.  It is thus highly recommended that tax payers who acquire a property and then sell it later on consult a tax expert or chartered accountant.

As shown in the case of Aarav, he would not have been caught surprised and unaware of his tax obligations had he consulted a tax expert or accountant before he sold his property and bought a new house. This only underscores the need to get professional advice especially when dealing with real estate.

Understanding and Avoiding California State Taxes

There was a time when everybody seemed to dream of moving to California. It was, after all, the “Golden State.”  It had endless sunshine and an incredible weather – which proved to be enough motivation for Americans who have had enough of the cold.  It also had a booming economy, pristine beaches, and yes, Hollywood.

But now, many people in California would gladly trade places with Americans living in other states. There are lots of reasons behind this, from the horrible traffic in major cities, to rising criminality, and the fact that Californians are being taxed to death.

According to non-partisan, non-profit research group Tax Foundation, California has one of the highest state taxes in the country. The Washington, D.C.-based group says that California has the highest state-level sales tax rate at 7.5 percent, albeit this would drop to 7.3 by the end of the year. The rate can hit as high as 10 percent in some California cities, though, when combined with local sales taxes.

Here’s a breakdown of how California taxes will affect you should you work, buy a home, or just shop in the Golden State.

Property Tax

Property in the state is assessed at 100 percent of its fair market value.

However, Californians could qualify for a property tax break under certain conditions. For instance, homeowners are qualified for a reduction of $7,000 in the taxable value of their properties if they live in their homes as their principal residences. Senior citizens and the disabled (including the blind) are also eligible for deferring their property taxes for their principal places of residence under a new tax postponement program that started last September 1, 2016.

State Income Tax

The personal income tax rates in California range from 1 to a high of 12.3 percent. These are levied not only in the income of residents, but also in the income earned by non-residents who are working in the state.

The highest rate is levied at income levels of at least $526,444. An extra 1-percent surcharge is also levied onto incomes of more than $1 million. Those earning $7,850 or less in taxable income are charged the lowest rate of 1 percent.

It’s not surprising that a lot of Californians are moving elsewhere because of the high taxes that they have to deal with in their home state.  According to the IRS, more than 250,000 Californians have moved out from the state in 2013-2014.  This is the highest level in more than a decade.

Basic Rules

If you are one of the many Californians wishing to avoid California income tax, there are two basic rules that you have to keep in mind. The first is that a resident pays California tax on their worldwide income.

For instance, you are a resident of California and you own part of a LLC outside of the state. You will have to pay California tax on your distributive share of the company’s LLC income, despite the LLC having earned all of its income outside of California (say another state like Nevada).

The second rule is that California will tax income generated in the state, regardless of where you live. So if you own California real estate but live in New York, you still have to pay California tax on the real estate income of your property.

Defining California Residents

The state has an expansive definition of California residency. A person is considered a resident if he or she is in California other than temporary or transitory purpose.  An individual is also considered a California resident if he or she maintains a domicile in the state despite being outside of the Golden State for a temporary or transitory purpose.

What is temporary or transitory? Generally speaking, this purpose applies to a person who visits the state for an extended vacation of 3 months and doesn’t engage in any type of commercial activity in the state.

Of course, there are several exceptions to this rule. Let’s say that a millionaire couple, Mr. & Mrs. Smith, rents an apartment in California for 3 months. They travel around the world for the rest of the year, and spend parts of it living in Las Vegas where they have a mansion. It may seem like the couple are ‘safe’ from California tax laws because they only spend three months in California.

But tax authorities may be able to find proof that Mr. & Mrs. Smith are residents of California. For example, they may have a closer connection to California than in Nevada, where they have a home. One factor may be their historical ties— Mr. & Mrs. Smith had long lived in California. They may also have children and grandchildren in California, which represent the closest connection to the taxpayers. The tax authorities can argue that even though the Smiths owned a hoe in Nevada, California is still their home because this is where their family and social contacts are.

An individual who has been in the state for more than 9 months is presumed to be a resident.

Corbett Factors

There are 29 residency factors that the state looks in determining that a person is  a resident of California. These include birth, marriage, and raising family; preparation of tax returns; ownership and occupancy of custom built home; ownership of family corporation; ownership of cemetery lots; service as an officer and employee of a business corporation; and church attendance and donations, among others. These are the so-called Corbett factors, coming from the California Supreme Court case Corbett vs. Franchise Tax board which listed the 29 residency factors.

These 29 residency factors are most of the time used by California residents who want to escape tax from their home state. For example, a taxpayer wanting to escape California tax would argue that he has his tax returns prepared in Nevada and has a driver’s license there. He would also show that he has a condo in Las Vegas, and is a member of a country club in Nevada.

Those arguments may be true, but the California Franchise Tax Board could counter the taxpayer’s arguments by showing that the individual spends more time in California than in Nevada. This can be done by showing the person’s Internet searches and reviewing charge card receipts, for example. The person’s Internet searches could reveal that the taxpayer buys things in LA malls and shops at the Spectrum. His charge card receipts, meanwhile, could show that he frequently dines in at posh restaurants near his Laguna Beach property.

Sale of a Major Business

It is also common for California residents to change residency to avoid being tax for the sale of a substantial business. For instance, a company based in Arizona but with assets and operations in California is to be sold for $10-million. The owner tries to escape California tax by changing his residency.

The business owner may be able to avoid California taxes if the sale of the company is consummated after he/she changes personal residency.

However, in most circumstances, there will still be taxes levied on the sale of the company since its assets are in California. So even if the taxpayer has changed his residency, he will have to pay for the taxes on the California source income from the sale of the business.

The key here is to planning the business sale correctly from the beginning. The business owner/tax payer should leave and stay out of California for the sale year and several years after because the state can still argue that the individual only did so to avoid tax from the major sale.

In fact, many taxation experts suggest that business owners who sold their companies with assets and business operations in California should out of the state for at least four years. The reason for this is that the return may be selected for an audit 2-3 years after the tax return is filed for the year of the sale. Franchise tax board audits in California take longer than IRS audits. These audits are also more thoroughly documented particularly in cases of residency determinations.

Four years may not even be safe for taxpayers wanting to avoid taxes in California. In some cases (especially if the stakes are high enough, meaning there’s a substantial money involved in the sale), then it is advisable for taxpayers to stay out of California in 5-6 years.

And staying out of California not only means physically returning to the Golden State and re-establishing a home there years after the sale of a major business. It also means that the taxpayer should not give the tax authorities in California any hint of going back there years after completing a major business sale.

For example, the FTB can access social media accounts of taxpayers in California. If a taxpayer who sold his company in California for $20 million dollars in 2014 posted on Facebook about how he can’t wait to go back to LA as  a resident, then he just gave the tax authorities some great evidence to pursue a case against him.

The same goes for Twitter activity. If the taxpayer makes any tweets indicating that he has plans of going back to California and re-establishing domicile there, then the tax authorities could build a case against him.

In some cases, even the state where the taxpayer established residency in can be a factor in the tax authorities pursuing a case against him. Obviously, the FTB is very wary of Californians who have moved to nearby states like Nevada. Because of the close proximity of Nevada to California, the FTB is very skeptical of claims of Nevada residency than residency in Florida or Massachusetts.

It even becomes ‘safer’ for Californians if they move elsewhere shortly before a substantial sale of their business. This can shield the entire gain from the business sale against California taxes. The state may be skeptical of the timing of the change of residence;  but if a taxpayer can prove that the sale occurred months after he had completely moved out of the state then he has a good chance of being exempted against California tax on the business sale.

Retaining a Home in California

One common question is—can a taxpayer who had left California keep a family home in the state without being considered by the state as a California domiciliary?

While it may appear that California tax authorities will consider a taxpayer to be a California domiciliary because of  his home in California, there are other factors that can come in to play. For instance, the taxpayer may argue that the home wasn’t really used by the family during the past year.  Tax authorities may also look into the size and value of the home in California as compared to out of state home.

But retaining a family home in California can be considered by tax authorities as one good indication that the taxpayer how had left California still has plans of going back to the state.

This can be compounded by the FTB conducting interviews with neighbors who would tell them that the taxpayer had told them that he intends to be back in a few years. In such case, then the tax board will have a strong case against the taxpayer who had left California after a major business sale.

Still, people who are planning to leave California for good and terminate their residency can control the facts. They can leave the state several months before completing a major business sale. They can also sell the family home to show tax authorities that their domicile has shifted. Granted that these aren’t easy decisions to make (selling the family home is certainly difficult by any standards), but the taxpayer still has the advantage of knowing what needs to be done before selling a property or a business. With that advantage, he will know what to do even before the tax authorities in California smell something fishy with the transaction he is involved in.

Understanding Hillary Clinton’s Tax Plans

Democratic presidential candidate Hillary Clinton has vowed that she will make sure the wealthy and the largest firms will be paying their fair share while providing tax relief to working families. According to her, the economy should work for everyone and not just at the top of the food chain. She has committed to restoring fairness in the US tax code, vowing to create more jobs in the US and make the economy more competitive in the long haul.

Clinton has pledged to do the following:

  • Restore fairness to the US tax code by implementing a ‘fair share surcharge’ on multi-millionaires and billionaires. He will also champion for measures such as the Buffett Rule in a bid to ensure that the richest citizens in the country won’t be paying a lower tax than middle-class families.
  • She has also assured that her administration will close loopholes in the current tax code so that multi-million dollar estates will be paying their fair share of taxes.
  • Put a stop to corporate and Wall Street tax loopholes such as inversions that reward firms for shifting profits and bringing in jobs overseas. She has stated her desire to charge companies that leave the US, levying an exit tax on those firms that get away with untaxed foreign earnings.
  • She also said that she will be closing tax loopholes that allow Wall Street money managers to pay lower taxes than some middle-class households. And under the Clinton administration, businesses that bring in much-needed jobs in the US will be given lower taxes.
  • Simplify taxation for small firms to encourage the growth of the micro, small, and medium enterprises. In turn, these firms can grow and hire more people. In particular, she is setting sights on freeing small businesses with 1-5 employees that spend more than a thousand dollars on federal tax compliance. According to her, that is more than 20 times higher than the average for bigger companies.
  • Provide tax relief to working families and shield them from the rising costs of day-to-day living. She has particularly offered tax relief for Americans who are facing excessive out-of-pocket health care expenses as well as those who are taking care of an elderly or ill family member.

A Closer Look at Clinton’s Tax Plans

Here are the major points of Clinton’s tax plans:

  • Charging a 4% surtax on adjusted gross income or income earned in excess of $5 million. This proposal would affect the so-called high-income tax payers or roughly one in every 5000 tax payers. In the long run, it is expected to raise around $150 billion in tax revenue for the federal government.

However, the income tax rates for individuals, married tax payers, and heads of households earning less than $5 million a year will not be affected or changed at all.

  • Imposition of the so-called Buffett Rule that would call for a 30 percent minimum tax on taxpayers who have an adjusted gross income of more than $1 million.

To the uninitiated, the Buffett rule was coined by outgoing US president Barrack Obama who had noted of billionaire Warren Buffett’s criticism of current tax policies.  In 2011, Buffett wrote that he had paid lower tax rates than his secretary.

According to Clinton, the imposition of the Buffett Rule would be one that would             help the nation achieve greater fairness in its tax system.

  • Raising capital gain taxes on high income investors. High income fliers, or those who are earning more than $400,000 make a lot of money from capital gains. In the current tax code, these high income investors pay a 20 percent tax on realized gains from investments that were held more than a year. Clinton is amenable to preserving the rate but only for investments that were for a minimum of six years. She bats for investments that were held less than six years to be taxed on a sliding scale. This would encourage investors to think long term as they have a tax incentive to hold onto an investment.
  • Raise tax rates on big estates. If Clinton gets elected, expect money and assets left to heirs to be tax heavily if these come from a big estate. She also wants to tax estates worth more than $3.5 million, and $7 million for married couples. These are far lower than today’s estate tax exemption level of $5.45 million for individuals and $10.9 million for couples.
  • She also wants to estate tax rate to be slashed to 40 percent from 45 percent.

For business taxes, Clinton wants the following:

  • Standard deduction for small businesses
  • Raise the limit for foreign ownership in inversion transactions to 50 percent of combined company shares from the current 20 percent
  • Impose a corporate exit tax on unrepatriated corporate earnings
  • Tax high frequency trading although the rate is still to be determined
  • Provide tax credits for investments in community development and infrastructure
  • Reform performance-based tax deductions for top earning executives of public firms
  • Eliminate tax incentives for fossil fuels

Impact of Higher Tax on High Income Earners

The nopartisan Tax Policy Center estimates that taxpayers in the upper echelon would have to deal with an average tax increase of $4,527, representing a 1.7 percent reduction in after-tax income. Those who have incomes in the $295,000 and $732,000 range would have to pay $2,700 more in taxes. Those in the 0.1 percent with income greater than $3.8 million will also have their taxes increase to about $520,000.

The four percent surcharge that Clinton is proposing stems from a report by the IRS that in 2013, the 400 top income payers paid an effective tax rate of 23 percent brought about by lower rates on capital gains and other tax loopholes.

Not surprisingly, the bottom 95 percent of the taxpayers will not see any changes to their taxes. The Tax Policy Center says that if Clinton’s tax proposals are enacted, this would translate to an increase in revenue by about $1.1 trillion over the next decade.

The Tax Policy Center also notes that almost 80 percent of tax increases in a Clinton administration would affect only 1 percent of the population in the first decade. One in the 1 percent would owe as much as $120,000 more while the poorest citizens would owe $6 more.

But the Tax Foundation, a top independent tax policy research organization, sees Clinton’s plans as having a detrimental impact on the economy. In the long run, it could reduce the economy’s size by 1 percent according to the foundation’s Taxes and Growth Model.  It is also projected to lead to nearly 1 percent lower wages and 311,000 fewer jobs as well as 2.8 percent smaller capital stock.  The foundation states that these are a result of higher marginal tax rates on labor income and capital.

The National Center for Policy Analysis’ Tax Analysis Center supports those claims of the Tax Foundation. In backing up the claims of the Tax Foundation, the NCPA says that the tax plan of Clinton will also hurt other taxpayers and not just the rich contrary to what her drumbeaters are saying.

A study conducted by NCPA senior fellow Dr. David Tuerck shows that while federal tax revenues would increase if Clinton’s tax plans are implemented it can also affect the income of the general population.

In the said study, the top 10 percent of income earners would lose almost 2 percent of their broadly measured income in 2017. Moreover, the poorest 10 percent of the population will lost around 0.7 percent of their broadly measured income which is the largest loss among the bottom 90 percent of the population.

The study points out that taxing high-income earners can slow down economic growth, which can hurt even the lowest income earners.

Taxes on Small Businesses

Clinton says she is proposing a scheme called “checkbook accounting” that will make filing taxes for small firms as simple and easy as keeping a checkbook or printing out a bank statement.

The standard deduction for small businesses is designed to allow small businessmen to take a standard deduction instead of tracking expenses like rent, phone bills, and office supplies. There’s still no specific amount of percentage discussed, as this would be up to Mrs. Clinton’s treasury department to refine the idea.

Many observers think that the idea will help businesses, because it would be much simpler for them to file taxes. It is also seen to provide a net benefit to small firms as they can still choose to list of all their deductions, and as such any firm will be able to choose the option most favorable to them.

However, others point out that the benefits of this tax proposal aren’t that big for small firms. Most firms today rely on technology such as apps to track their expenses. They also use those files for filing of their taxes.

Capital Gains Taxes Impact on investors

Clinton’s tax proposals will also have an effect on investors in the country. As mentioned earlier, Clinton is batting for six capital gains taxes, with longer holding periods getting the lowest levy.

Clinton believes that by encouraging shareholders to hold on to their assets for the long haul, companies will be able to engage in moves that create long-term value like investing more in employees and raising wages instead of buying back shares.

The Tax Policy Center estimates that Clinton’s plan to increase capital gain taxes on investments held for shorter than six years would raise around $84 billion over a decade. This is assuming there will be little changes in investing patterns.

But the Tax Foundation says those plans will reduce tax revenues as it would push investors to hold on to their holding a lot longer.  The organization says that this proposal would likely result to a loss of around $375 billion on a static basis, as it can reduce number of capital gains realizations.

The mutual fund industry is expected to be hit by Clinton’s capital gains tax proposal. If Mrs. Clinton’s plan pushes through, the belief is that investing in ETFs will become more popular than actively managed funds which have a 2-3 year time horizon.

Impact of Exit Tax on Companies

Another pillar of Clinton’s tax program is charging expatriating US firms an ext tax based on their offshore earnings. Clinton’s explanation is simple – “if they (companies) want to go, they have to pay to go.”

Clinton wants firms that have their tax residency moving to a non-U.S. jurisdiction to immediately pay its corporate income tax on overseas income that it has deferred.  The concept is basically asking for corporate exiters to pay before they escape.

This proposal is seen to counter the move of many US firms to shift their tax jurisdiction out of the US, which has the highest corporate tax rate at 35 percent. If this proposal comes into being, firms will face penal provisions for shifting tax residency abroad to leverage tax advantages.

Interestingly, this is an issue that is seen to protect the interests of US workers which Clinton’s rival Donald Trump has also championed by blasting trade deals like the North American Free Trade Agreement.

Conclusion

While Clinton’s tax plans appear to cater to the majority of US taxpayers, the consensus of many experts is that it would be detrimental to the economy in the long run. Although most of her policies except for the capital gains policy would likely raise tax revenue, organizations like the Tax Foundation believe that her plans will impose higher marginal tax rates on capital and labor income. This can then result to a slowdown in the US economy in the long run. This detrimental effect on the US economy will overshadow the revenue that Clinton’s tax policies could collect.

Indeed, Clinton’s tax plans appeal to a larger part of the population but a closer examination of her tax program reveals that there is still a lot to be improved on.

2016 tax rates

2016 Tax Rates – Plan Ahead To Save

Many of you are getting your paperwork ready to file your 2015 tax returns but you may also want to review the latest tax brackets and standard deductions amounts for the upcoming 2016 tax year.  This can give you a head start for 2016 tax planning.

 

2016 TAX BRACKETS

INDIVIDUALS:

Over But Not Over Tax Rate
$0 $9,275 10%
$9,276 $37,650 15%
$37,651 $91,150 25%
$91,151 $190,150 28%
$190,151 $413,350 33%
$413,351 $415,050 35%
$415,051 And over 39.6%

 HEAD OF HOUSEHOLD

Over But Not Over Tax Rate
$0 $13,250 10%
$13,251 $50,400 15%
$50,401 $130,150 25%
$130,151 $210,800 28%
$210,801 $413,350 33%
$413,351 $441,000 35%
$441,001 And over 39.6%

 MARRIED FILING JOINTLY

Over But Not Over Tax Rate
$0 $18,550 10%
$18,551 $75,300 15%
$75,301 $151,900 25%
$151,901 $231,450 28%
$231,451 $413,350 33%
$413,351 $466,950 35%
$466,951 And over 39.6%

 MARRIED FILING SEPARATELY

Over But Not Over Tax Rate
$0 $9,275 10%
$9,276 $37,650 15%
$37,651 $75,950 25%
$75,951 $115,725 28%
$115,726 $206,675 33%
$206,676 $233,475 35%
$233,476 And over 39.6%

The IRS has also released its standard deductions chart for 2015. Everyone who pays taxes will get a small increase in their standard deduction amount.

 STANDARD DEDUCTIONS

Filing Status Standard Deduction Amount
Single $6,300
Married Filing Jointly $12,600
Married Filing Separately $6,300
Head of Household $9,300
Surviving Spouse $12,600

There are some important changes in 2016 tax code!

  • New Limit For Earned Income Credit =  $6,269 for those who have 3 or more qualifying children in 2016 (Married Filing Jointly)
  • Had a Foreign Income = The foreign earned income exclusion is $101,300 for 2016.
  • Personal Exemption =  $4,050 for this year.  Alternative Minimum Tax  (AMT) exemption amount is $83,300 (Married Filing Jointly) and $53,900 for singles.

Estimated Taxes

Estimated Tax Deadline Is September 15th for the 3rd Quarter

Uber driver or involved in some kind of consulting work?  Whether you’re working as a 1099 contractor or enjoying making money from renting your spare room, don’t forget you may need to pay estimated taxes. Tthe upcoming 3nd quarter estimated tax deadline is Tuesday, September 15th.

Are ready to make the estimated tax payment? If not, let me give you few suggestions.

Do I Need To Pay Estimated Taxes?

We are required to pay our taxes as we earn our income.  Our federal and state government expects tax payments throughout the year.  This is primary reason why taxes are regularly withheld from the employees pay checks.

If you are Uber Driver, Renting Your Home on AirBnB, Self-Employed as a freelancer, contractor or home based entrepreneur you mostly likely don’t have your taxes withheld from your pay (we strongly recommend that you check with your tax professional and file timely payroll) throughout the year.  That is why you are subject to estimated tax payments.  If you think you will owe more than $1000 in taxes this year or 10% more than your last year taxes than you should pay the estimated tax.

Due Dates for the Estimated Tax Payments

Here’s the schedule:

  • 1st Quarter (January 1 – March 31): April 15
  • 2nd Quarter (April 1 – May 31): June 15
  • 3rd Quarter (June 1- August 31): September 15
  • 4th Quarter (September 1 – December 31): January 15

As always, If the 15th falls on a weekend or a holiday, then the due date is the next weekday.

How Can I Pay Estimated Tax Payments?

Here are couple ways to make the tax payments.

  • Our post offices are still operating (who knows till in current financial condition) so you can still mail in your payment. The IRS has specific mailing addresses based on the state where you live. Make sure that your payments are postmarked by the due date to avoid penalties.

Important Note about estimated taxes: Keep a record of all your estimated tax payments.  Your CPA will ask for this at the end of the year to enter the estimated taxes paid when you filing your taxes.

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llc tax benefits

LLC Tax Benefits

LLC Tax Benefits Basics

Forming a LLC or limited liability company is a superb way of protecting personal assets from company liabilities. Incorporation protects personal property in case a judgement gets rendered against the registered business. Forming a LLC also affords the business owner a great advantage in terms of reporting taxes to the government.  Take couple minutes to review this article and learn about various LLC tax benefits that are available to you.

Profits and losses associated with the business get reported on personal tax return of the owner. The process functions in a manner similar to sole proprietorships or general partnerships, known as “pass-through” taxes. These make it unnecessary to file a corporate return for a LLC owner.

No Residency Requirements

After forming a LLC, a business owner is not under obligation to live within the state of its formation. It is not even necessary for such an individual to obtain permanent US residency or be a US citizen. Business enterprises owned by immigrants are for this reason usually constituted as LLCs.

In essence, LLCs afford your company greater credibility with prospective partners, suppliers and lenders and often get favoured by other businesses. These types of entities employ a flexible management structure. A LLC can establish any form of organizational structure as agreed upon by its owners. These owners who are the members or alternatively the managers can manage it. This practice differs from corporations that require constituting a board of directors to oversee all major decisions of business pertaining to the company. In this case, these directors manage day-to-day aspects of the business.

LLCs in general have to deal with fewer annual requirements and ongoing formalities as imposed by states compared with corporations. As well, fewer restrictions are imposed on ownership of LLCs, which is contrary to the rules applicable to S Corporations. Anyone considering incorporating a business as C-Corp or S-Corp can benefit greatly by registering it as LLC.

S-Corporation

The S Corp is quite similar to a LLC since its federal tax status equally allows pass-through of losses or taxable income to owners or investors. Your firm does not get double-taxed like in the case of a C corporation.

S Corp status provides pass through taxation, opportunities for investment, limited liability and eliminates double taxation of business income. As well, an S Corp can continue functioning after the demise of its owner.

C-Corporation

Individuals who prefer incorporation to LLCs can benefit greatly by choosing a C-Corp. Forming a C-Corp enables one to create a separate structure for shielding personal assets from judgement leveled against the registered company. The structure of a C-Corp includes shareholders, officers as well as directors.

 Pick a good CPA to avail all the tax benefits of incorporation

The process involved in preparing to file taxes and clearance can be very cumbersome. This is among the reasons why many owners of businesses choose to outsource most of the work to tax preparation services. Diverse service providers are available to perform this task at present. No longer are conventional methods being utilized for preparing tax, as there are less time-consuming techniques in use today. Sophisticated software and easier calculation methods are now available and these have expedited the completion of taxation procedures.

In earlier time, such work was done in-house by most businesses. However, taxation is getting outsourced by most businesses nowadays. The firms handling this task are in charge of preparing documentation as well as verifying figures for rebates and tax payments on behalf of their clients.

Business owners always seek to maximize their business profits and maintain efficiency in their mode of operation. Outsourcing is one of the strategies that helps them in attaining these goals. Costs of operation can be minimized through this undertaking. A good number of big companies make use of software specifically designed for tax preparation. The software gives the advantage of providing accurate calculations and in a quick and efficient manner.

The methods employed by specialized taxation assistance firms are ultramodern and exclude any miscalculations. You can be certain of handing in your taxes within the scheduled deadlines since these companies are highly reliable and prompt in service. Furthermore, you can benefit from such assistance all around the clock and they are open to scrutiny by clients all through this process. The experience that the firms have accumulated from working in this niche for a long time enables them to virtually respond quickly and effectively in any situation that you may find yourself in.

A reputable taxation firm seeks to provide concrete feedback along with reporting erroneous entries. This gives clients the opportunity of making the developments and changes necessary for organizational progress in future.

A number of organizations are keen to carry out on-job-training for staff to handle taxes, but the task of sustaining a dedicated department could take up a lot of time. Employees already present might be unable to handle the complexities involved with such jobs. Hiring taxation services therefore ends up saving time. The personnel who handle tax documents in taxation assistance firms are skilled and competent in performing annual and other kinds of tax audits for different individual and corporate clients. Although the service may be slightly costlier than handling the taxes on your own, you can expect to receive exceptional delivery of documented taxes from them. Get online and check out a suitable company for preparation of taxes.

Review Your Franchising Business Contract

About ¾ of the world’s population deals in the field of business rather than seeking employment in the form of jobs. Businesses generate the type of income that holds the ability to elevate a person’s social status within a fortnight or render the person towards no option but bankruptcy if dealt in a careless way. The manner of a person and his or her attitude in dealing with a business strategy is very essential for the success or failure of a business.

For example, an organized, well-mannered individual with a set of principles and wisdom would excel more and benefit from his abilities in the field of business rather than a person with a casual attitude. A casual attitude means that the person has no respect for the law, no knowledge regarding anything in the field of business, has no prior experience working on his own, does not realize the value of time and behaves selfishly whilst setting up a business. This type of behavior provides no benefits. Business is a field which requires sharp instincts at all stages, otherwise one can look at a life of bankruptcy after making a single wrong move.

Since the field of business is generally preferred, several countries especially countries in the west have designed laws which control the different aspects of business. This includes dealings in all forms of business contracts be it franchising or any form of setting up a brand name from scratch. There are fundamental rules that need to be followed. These rules are set by the respective governments of the countries. These laws have been designed to prevent any form of fraudulent behavior from any party involved in the commencement of a business deal.

It has been announced repeatedly that people attempting to set up a business and especially, individuals involved in doing franchising businesses, should investigate the brand name, background information and financial history of the franchiser.   This unveils any problems related to the brand name or the franchiser. Many franchisers attempt to sweeten a business deal by sugarcoating the sales pitch but the contract that is drafted is very different from what they present.  This sort of fraud ends up harming the franchisee, which is why it is important to conduct a thorough background check before finalizing a business deal.

There are a number of laws that have been devised to prevent this fraudulent behavior from bankrupting innocent people. The federal governments of different countries have made it compulsory for the franchiser to provide the franchisee with all the details and legal documents for the franchise business proposal before the franchisee is required to make a statement of agreement or decline. During the sales proposal, the franchiser is required to provide the franchisee with a ‘Detailed Disclosure Document’, which includes all the necessary financial and legal history of the brand that is up for the franchising business. The franchisee owns the right to ask the franchiser any questions that he or she may harbor during the pre-sale proposal presentation.

The ‘Detailed Disclosure Document’ contains the following vital pieces of information from the franchiser:

  • Financial statements which relate the accurate audited statements of the company
  • A complete profile portfolio, which contains the executive details of the company
  • Criteria of the required franchisee responsibilities
  • The information of minimum ten purchasers of the product in the area of the franchisee
  • Accurate financial protocols for maintaining the franchise chain as well as the franchise business’s startup cost

  • Validate the earning packages stated in the ‘Detailed Disclosure Document’. A franchisee can accomplish this task by acquiring information from other franchisers who provide proposals in the area.
  • Complete the ten days’ period before validating an answer to the respective franchiser. A franchisee should utilize this period to the best of his or her advantage without worrying about withdrawal.
  • The appointment of an attorney and accountant can potentially help a franchisee investigate the legal and financial counterparts of the franchising business in question. This is the potential act which can provide verification for the business proposal to be authentic in all its claims or not.
  • Ask the franchiser for a detailed account in writing of all the successful purchasers of the franchising protocols.
  • Compare the benefits of the offer with other franchise owners in the area as well as investigate what other potential brands have to offer.
  • Read the contract once it has been drawn and sign the contract, which holds the criteria of your interest in writing, which were promised to you in the pre-sales pitch.

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    These few basic rules of investigations hold the key to running a successful franchising business.