Corporate Tax

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.

Have a question Estimated Taxes

Please feel free to ask your estimated tax question on facebook page.

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.

    Benefits of Sanjiv CPA’s Payroll Services

    When you use Sanjiv Gupta CPA Payroll Services, you can avoid the complexity of calculating your payroll and tax withholdings. This will let you spend time focusing on your business’ success.

    If you are like most businesses, you are constantly struggling to keep up with complex employee-related issues and ever-changing tax legislation. It is time to consider outsourcing your payroll to Sanjiv Gupta. This will help you mitigate your risk and remain focused on your business.

    You can rely on Sanjiv Gupra CPA Payroll Service’s tax expertise and comprehensive payroll services to manage your business’ payroll. At Sanjiv CPA, you can choose a standalone payroll tax solution or you can bundle the payroll tax services with a complete payroll solution.

    Benefits Of Sanjiv CPA’s Payroll Services

    • Convenience: Submit payroll easily by phone, fax or online.
    • Eliminate Time Consuming Manual Processes: Our payroll service provides automated tax services with payroll integration.
    • Reduce Potential IRS Penalties: Approximately 40% of small businesses get hit with IRS penalties on their payroll tax filings because they filed inaccurate or late returns or they were found in non-compliance. When you outsource your payroll to Sanjiv CPA, you can eliminate the risk of IRS penalties.
    • Peace of Mind: Outsourcing your payroll to Sanjiv CPA provides peace of mind. Your payroll taxes will be filled accurately and on-time by certified public accountants you can trust.
    • Customize Your Business’ Tax Strategy: Sanjiv Certified Public Accountants can help you customize your business’ tax strategy with a wide variety of related tax services and add-ons.
    • Personal Service: Sanjiv Gupta CPA Payroll Services are always only a phone call away. If you have any questions about your payroll account, you can talk to a live payroll advisor and receive immediate attention.
    • Health Care Reform Compliance: We will ensure that you are in compliance with the Health Care Reform so you can prevent issues and penalties.
    • Expertise: When you outsource your payroll to Sanjiv Gupta CPA, you can rest assured that you are putting one of the most important accounting processes in the hands of experts. We have expertise in payroll tax filing, employment-related tax and all other business-related tax issues.
    • Reduced Payroll Administration Costs: When we handle your payroll tax filings and payroll services, you will find a huge reduction in administration costs. Your staff can spend their time and efforts on business functions that will increase your overall revenue.

    Sanjiv Gupta CPA provides innovative payroll features and reliable expertise that you can trust. Your staff will be able to stay focused on your core business. We will handle your payroll, tax filings, 1099s, workers comp and withholdings.

    We guarantee our cost effective and timely payroll tax filing services. You can rest easy because you will no longer be stressed over filing deadlines and tax calculations. You will not have any more IRS penalties or interest charges because you accidently filed late. Sanjiv Gupta CPA Payroll Service advisors are experts in government regulations. We can help you reduce hidden payroll costs, reduce potential risk and start focusing on your bottom line.

     

    How The IRS Tells The Difference Between Negligence And Tax Fraud

    Cheating on your taxes is a crime. However, only .0022% of taxpayers are actually convicted of a tax crime. This percentage is surprisingly small especially when you take into consideration that the Internal Revenue Service estimates approximately 17% of taxpayers do not comply with tax laws in one way or another. Over the past ten years, the number of tax crime convictions has decreased.

    The IRS reports that individual, middle income earning taxpayers account for 75% of the cheaters. Corporations account for the majority of the rest. The worst tax cheaters are usually workers from the service industry and other cash intensive businesses from handyman to professional doctors. For example, the IRS makes the claim that waitresses and waiters, on average, underreport their tips in cash by 84%.

    How Taxpayers Cheat

    Many of the people who cheat on their taxes deliberately underreport income. A study performed by the government found that the bulk of people that underreported income were clothing store owners, self-employed restaurateurs and car dealers. Salespeople and telemarketers were next followed by doctors, attorneys, accountants and hairdressers.

    A far distant second were taxpayers that are self-employed who over deduct their business expenses including car expenses. The Internal Revenue Service has surprisingly concluded that a mere 6.8% of tax deductions are actually overstated or false.

    When you are caught cheating on your taxes by an IRS auditor, you can just have to pay penalties and civil fines or your case can be referred to the division of criminal investigation.

    Negligence or Fraud?

    IRS auditors have been trained to find tax fraud, an act done willfully with the intent to defraud the Internal Revenue Service. That is beyond making an honest mistake. Examples of fraud include keeping 2 sets of books, using a fake social security number or claiming dependents when you have none. Even though auditors have been trained to look for tax fraud, they do not start off suspecting it. They have an understanding about how complicated the tax law is and expect all tax returns to have a few errors. Normally, they’ll give you the benefit of the doubt and they will not come after you if they believe you made an honest mistake.

    If you made a careless mistake, you could receive a 20% penalty on your tax bill. While this is not great, it is better than a 75% penalty for fraud. Even to the courts and the IRS, the line between fraud and negligence is not clear. Auditors are able to spot common problems on tax returns that constitutes fraud such as fake receipts, altered checks and businesses without records.

    The chance of being convicted of a tax crime is extremely low but it does occur. If you are being accused of fraud, you need to hire the best legal counsel specializing in tax crimes.

    Could you get audited in 2014 ?

    The IRS is on the prowl this year and they could be coming after you. The Internal Revenue Service is able to more easily identify possible red flags that will trigger audits thanks to computerized checks and an improved detection system.

    Audits are normally triggered when a tax return is filed containing something unusual such as a deduction that is above average. The taxpayer has nothing to worry about as long as they are able to properly defend the filings with documentation and logic. Unfortunately, if this happens, you will still have to deal with the added stress and the response time.

    Below are 9 signs that you might get audited this year.

    You Forgot To File One Of The Tax FormsAll tax forms sent out to taxpayers are also sent to the IRS. If you forget to file one of the forms you received with your taxes, the IRS might flag your tax return to be reviewed.

    You Are Self-employedAlthough it does not seem fair, when a taxpayer is self-employed it can raise red flags. The best advice, if you are self-employed, is to keep track of all of your expenses and all documentation so you are able to defend all credits and deductions that you claim.

    You Made A Lot More Money In 2013Major changes in this year’s income is a red flag for the IRS. It can mean that the taxpayer has under reported earnings in the prior year.

    You Claimed Losses From One Of Your HobbiesIt is not legal to write hobbies off as business expenses. For example, if you make jewelry as a hobby, you cannot deduct material costs and tools. Now if you were selling the jewelry you made, it would be considered a business and you would be able to deduct those costs. Remember, a business is an endeavor you enter into and conduct with a reasonable expectation of making money.

    You Were Exceedingly Charitable This YearThe IRS looks for taxpayers that have inflated donations to charitable organizations. They pay particular attention to people who have donated close to $500 because that is the limit that can be deducted without filing Form 8283.

    You Have A Bank Account OverseasThis year, the IRS has additional requirements for taxpayers with banks accounts overseas. If you fail to report one of the requirements, it could be an audit trigger.

    The Numbers On Your Forms Do Not Match – If you make a mistake with the numbers on your forms or the amounts do not add up, chances are the IRS will notice and will review your return carefully for any other discrepancies. Make sure you review your return carefully before filing.

    Your Deductions Include Expensive Entertainment And Meal CostsThe IRS usually checks high business deductions to ensure the business expense is legitimate.

    You Deducted High Home Office Expenses (Not The New Home Office Standard Deduction)When you itemize your home office expenses, the IRS will often review the tax return to make sure the expenses are really for business purposes. There is a new standard deduction for home office expenses that will not raise any red flags.

    You should not worry as long as you know that you filled out your tax return properly. Just make sure that you keep good records of all the deductions and credits you take so you will be prepared if the IRS has any questions.