Individual Tax

Surviving small business ordeals with a friend!

Wow never had you imagined that there will come a time when surviving that business venture with your friend has become so difficult. It has strangely put your friendship at jeopardy too. This was indeed uncalled for.

While starting that business together there were high hopes running on both ends but then tightening of funds, lack of trust and other minor quarrels started to get the better of the two of you ad finally the business. It may be vice versa also. But whatever the case outcome is for the detriment of both. So why not take care of it and nip it right at the bud?

Don’t know how? Well here’s what you should do.

Important Ways To Keep That Venture Rocking!

Talking is rocking for all business – it is extremely important that both the friendly partners engage in honest conversations. It’s absolutely crucial that they talk out their differences and share the solutions to the problems bothering them.

• Have written proof/ agreements – the agreement of your business should be in writing. These come in handy at times of disputes and can effectively put things in order. So this is another aspect to keep the business partnership going.

•Separate attorneys must be made to review the documents separately – in order to gain full knowledge about how the agreement affects you, you must get a separate attorney for yourself ad so does your partner. Whatever may be the case, there should be an attorney’s involvement towards the understanding of the signed document.

•Draw the line between friendly and business communication – Be vocal about any important issues at the work place. Any issue, major or minor must be approached immediately to stop them from going out of proportion. No matter what leave the business in office.

•Bond outside office – discuss issues other than business when not in office – This goes a long way towards saving both the business and the friendship. Mutual respect is enhanced, and tensions avoided.

What ever may be the case it is important to note that the two important aspects of life, that is, work and friendship must not be let go of easily.

Top 3 Deductions for Self Employed | Infographics

Self employed individuals can also take advantage of many tax breaks.  Here are the three most popular tax breaks that can help you reduce your tax bill.  Do you have health insurance ?  You can deduct the cost of your health insurance and of your family.  Do you have an office ?  You can deduct your office expense. Yes, it also includes your home office expenses.  If you are in business for yourself than you must be spending money on supplies.  Most supplies are also tax deductible.  However, there are many tax deductions that can also get you in trouble.  You must watch out for those kinds of tax deductions.
self employed tax deductions

Will Mitt Romney (Republican) File for OVDI 2012 ?

The easiest way to evade tax and pile personal savings is to tuck away money in offshore / overseas accounts. Mitt Romney, the republican presidential candidate is currently enjoying attention for having put away his ‘vast wealth’ into overseas establishments. However it is not Romney alone, who stocks money in Swiss bank accounts, provides fund to third world countries (money laundering) and clever as he is he has allocated all asset listings to a certain omnipresent ‘Uncle Sam’.

But can Romney rest in peace? Can the ‘Uncle Sam alibi’ silence his political foes and also the common mass?  This is infact a warning for the others to take due notice of summons for Tax Justice Network. TJN conceptualized by British Houses of Parliament is a research centre that analyzes and reports on ‘how tax evasion on part of high net worthy investors affects national economy’. In its latest report ‘The Price of Offshore revisited’ it presents a detailed study on financial assets invested in foreign fiscal centres and secrecy structures. It traced $21 trillion (a total of US and Japanese economy combined) as reserved with overseas banks.  This amount is exclusive of non-financial assets like real estate holdings, yachts & bonds and equities etc. if these non-cash assets are added to $21 trillion, the amount increases to $32 Trillion, TJN reports.

The IRS is trying hard to convince high net worthy investors to reveal detailed property holdings in order to clear tax with the US government. Infact the IRS has designed two amnesties to encourage the investors bring back national currency from their foreign bank accounts.  Offshore voluntary disclosure programs this year has brought in more than $5 million as taxes, interests and penalties. Almost 33,000 taxpayers revealed their financial holdings in order to dodge criminal charges for evading taxes.

The offshore voluntary disclosure endeavour is an on going process. Penalty charges for those that have avoided paying taxes for overseas assets has gone up by 27.5 % from 25% in last year’s program. However the amnesty is far better for high net worthy investors for it charges only a penalty fee. On the other hand if the IRS discovers foreign assets after the amnesty period is over then they might as well confiscate all fiscal assets or might even send the investor to federal jail.

Scams in Property Taxes: Please Take a Note

Everyone wants their property taxes reduced. In an attempt to reduce taxes many people fall prey to tax scammers. To be safe from these scammers the taxpayers need to be careful about the following things:

  • Many times you may receive letters that look like they are from government offices but in reality they are usually from the private companies trying to fool you into giving them money.
  • Homeowners should also stay clear from any company that offers to file an assessment challenge in return of an upfront fee.
  • Homeowners should also avoid any kind of services that requires a copy of the property deed or the social security number.

Many of you must have received letters that claim to get your property assessment done for a fee that can be as nominal as a few dollars to a couple of hundred dollars. But in reality these companies just take your money and fill out property assessment form which you can do yourself without any charge. And in some cases these companies just take the money and do nothing at all.

While the government agencies send out their forms sometime in June these scammers send their form much early. In some of the states if the value of the house has gone down from the previously assessed value then the property taxes are automatically reduced. So the scammers usually target those homeowners who are hoping for a reduction in taxes. These companies send their forms or letters earlier than the government agencies and claim that they will reduce the taxes. Many homeowners pay a considerable amount to them and in June their taxes are reduced. What the homeowners fail to realise is that their taxes were naturally supposed to go down and the company has not actually done anything.

But if you are actually looking for one such company to handle your property taxes then it is better that you avoid any company that proposes to do your work for an upfront fee or your property deed or social security number. It is also better to keep away from companies that claim that they are affiliated with government agencies.

All You Wanted to Know About Medicare Tax

Medicare tax is quite popular in theUS. Like land tax and service tax, Medicare tax is imposed on earning/ wage / salary of an employee or a self employed individual. As per 2013 budget the US government has announced an increase in Medicare tax rate; from 2.9% to 3.8%.

Medicare hospital insurance amount is divided amongst the employees and the employer; both are subjected to pay half the amount of the total taxable money. Those that are self employed have to pay the total amount as they themselves are employee and employer, rolled into one. However such individuals can file for half the amount paid as Medicare tax when filing for tax return.

Medicare tax rate will be increased to bring under its fold higher income individuals and investment income. This as a part of health care reform laws is called ‘unearned income Medicare contribution tax and it is calculated as follows:

Multiply 3.8% tax rate by the lower of either of net investment income or the gross income over a certain amount

While the net investment amount covers interests, annuities, rents, dividends, capital gains etc the gross adjusted income includes overseas income/ income from properties abroad etc.

Employers are required to deduct an additional 0.9% from their employee’s salary which is calculated on the threshold amount. This deductible amount is the difference between 3.8% unearned Medicare tax and the 2.9% Medicare contribution tax. Because employers may not have knowledge whether an employee is subjected to additional Medicare tax or not the tax amount is decided upon the individual’s income tax return. All extra tax amounts are to be cleared by the individual who is filing for tax return. On the other hand if employers do not calculate on this basis then they can be subjected to penalties and fines.

If you fall within the higher income group then you might want to calculate the amount that you have to pay as additional Medicare tax at the rate of 3.8%.

  • Tax-deferred plans such as IRAs and 401(k) accounts should be the place where you would need to shift income-producing investments .
  • Avoid taxable bonds in favour of tax-exempt bonds.
  • To ensure net capital gains to be as low as possible you need to pair capital gains with capital losses..
  • When the additional Medicare tax would not apply you would need to postpone selling investments with a capital gain by about a year.
  • Children or other family members who aren’t subject to the additional Medicare tax should be bestowed with income producing investments.
  • Increase payroll withholding or estimated taxes to cover the additional Medicare tax.

By all these methods you would be able to ensure that you plan your medicare axes well and gain greater savings.

2013 Tax Brackets – What Do You Think?

So you think Obama is going to win the elections and get elected for the 2nd term. What does that mean for taxes?  Are they going to go up or down and then there is whole another topic about deductions and tax credits?

President Obama wants to keep the 10% to 28% tax rates with no change.  He also wants to bump the top two rates to 36% and 39.65.  At the same time, Republicans want to keep all the Bush Tax rates as is.

It is quite obvious that rate rates will change and it is hard to predict the change with so much uncertainly.  But here is our best guess.

2013 Tax Rate Guesses

 

These rates in the table below are for a married couple filing jointly.

Taxable Income 2012 Tax Rates 2013 tax rates if Bush tax cuts aren’t extended Obama’s proposed 2013 tax rates
up to $17,400 10% 15% 10%
$17,401 to $70,700 15% 15% 15%
$70,701 to $142,700 25% 28% 25%
$142,701 to 217,450 28% 31% 28%
$217,451 to $250,000 33% 36% 35%
$250,001 to $388,350 33% 36% 39.6%
$388,351 or more 35% 39.6%

Obama's Health Care Plan and Tax Deductions

As many of you may know that starting 2014 Obama’s healthcare plan will kick in that may allow low income families to enroll in qualified health care plan and claim the insurance premium as tax credit.  However, some of us are still wondering what if qualified health plan offered by the Obma’s health care plan is cheaper than the one offered by our employer.    Can we switch to different plan?  If we make the switch, can we still deduct premium?

Answers to these questions are equally important to the employers.   Employers would like to predict their exposure to the employer responsibility excise imposed should if they offer the healthcare that does not provide minimum value (What is the minimum value?), or is unaffordable.   After all, employers want to know if they should continue with their health plans or not?

“Have IRS not finalized the rules?” you may ask.  You can read T.D. 9590 published by the IRS and Treasury Department.  You will find many rules to determine eligibility for and calculation of the tax Code section 36B refundable health insurance premium tax credit added by the Patient Protection and Affordable Care Act, as amended.   These rules address many matter e.g treatment of required waiting periods, or relief from erroneous automatic enrollment in an employer-sponsored plan.  But at the same time they leave many issues for future guidance and public interpretation.

For example, Employers can find out when employer plan coverage is affordable for the employee by using a simply formula (i.e., the employee’s contribution is no more than 9.5% of household income) but do not address whether coverage is affordable for related individuals who can enroll in the employer plan.

Many groups are working closely with IRS and Obama’s administration to finalize the rules and calculation methods to determine how much premium should be deductable.  Tax payers are also being invited by the IRS to comment on these matters.

Would like to share your thoughts on this matter?

IRS and YouTube Partnership To Educate You

Internal Revenue Service has partnered up with online video site, YouTube, to deliver its message to general public.  You can find hundreds of useful tax related videos on YouTube.   You can estimate the popularity of this combination by looking at viewership of IRS channel.  Over 1.7 million views makes the IRS YouTube Channel  the fifth most viewed online channel out of more than one hundred and twenty-five YouTube Channels.

IRS conducts online webcast on various topics and post those webcast as video’s on YouTube.  You can participate in online webcast to ask your questions live to an IRS agent or simply view the video’s to enhance your knowledge.  During tax time you find videos about last minute tax tips or how to arrange payment schedule with the IRS.   However, you will also find wealth of knowledge even after the tax time.

Just last month, IRS conducted a webinar called “Small Business Advantage: Put our knowledge to work for you.”  Webinar was over one hour long and included multiple resources to help small businesses thrive.

You can easily find IRS YouTube channel by simply typing IRS in the search box on YouTube.

Sanjiv Gupta CPA advises all his clients to learn from online videos but don’t depend upon those advises entirely.  Often time interpretation of online video can cause quite a bit of confusion and usually end up costing penalties and late payment charges to tax payers.  ‘You should watch the video to understand the basic concept but always consult with tax professional to understand how you can apply the concept in your business” explains bay area’s popular certified public accountant Sanjiv Gupta.

Tax Strategy For Facebook Stock Holders / Employees

Are you one of the lucky Facebook employee who received millions in Facebook stocks ?  Are you giving away half of your stocks just to pay for taxes ? Are you looking for a strategy that can save thousands of dollars in taxes ?  Than you need to make an appointment with your CPA as soon as possible.   Time can play a big factor in how much tax you will end up paying.

You may also be aware of Facebook selling some of your shares to cover the tax withholdings.   How much tax should be withhold ?  Each situation is unique and Facebook may not be aware of each individual tax status and therefore can not accurately determine how much tax to withhold.  However, this won’t stop them from selling your stocks.

Are you thinking about renouncing your citizenship like  Severin to avoid paying millions in taxes or do you have any other tax strategy in place. Well, if you don’t than you should think about it.   Your CPA should be able to help you come up with one.   In most cases, it is very late to renounce your citizenship but you may have some other options to avoid paying huge taxes.  Moreover,  “There is a  law known as the Reed Amendment which explains that if the Attorney General determines that a U.S. citizen renounced citizenship for the purpose of avoiding tax, the former citizen may be barred from returning to the U.S.” explains Sanjiv Gupta CPA.   You can look at your capital losses to help offset the gains from Facebook stocks., he added.

“I am not going to sell any of my stocks than why do I owe taxes ?,” ask Facebook employee aka 21st century millionaire.

As Facebook employee, you received restricted stock units, or RSUs, that don’t turn into actual stock until there is what is defined as a liquidity event.  Liquidity event is taxable event and  Facebook IPO is one such event.  In other words, you now owe taxes.  Sanjiv Gupta explains that IRS considers income from stocks as regular compensations and should be taxed as any other regular income you may earn.

In other words -Income from RSU turned stocks is not taxed as long-term capital gain tax. Instead they will be taxed as your regular income based upon your tax bracket.   You will be taxed both California Tax and Federal tax.

Just in California State Tax you will pay about 9.3% plus 1% surcharge if your net taxable income is over 1 million dollars.  Now add yourFederal income tax bracket on top of this and you may be close to 50% in taxes alone.

That is lot’s of taxes.   Grab your phone and set up an appointment with your CPA to discuss your situation.  You can also consult with Sanjiv Gupta by calling 510-825-7563.

 

 

Tax Deductions for Independent Contractor or 1099

Starting out a consulting business can be very lucrative. However, it can also result in heavy tax bill you do not organize your income and expense properly.   So, how do you organize your income and expenses?

You can start by opening a different bank account.  Do not mix your business bank account with your personal bank account. All business related income should come to this account and all expenses should be paid from this account.   Your client will send you form 1099-misc at the end of the year.  IRS will also reactive a copy of this 1099.  That being said your total business income should be greater or equal to the amount listed in 1099.  You may get an automated customer generated audit if you report total income less than the amount listed on your 1099.  Keeping a separate bank account will help in calculating total business income and you act as proof in case of audit.

Now you need to deal with your business expenses.   Easiest way to do this is to categories your business expenses.   We recommend you use same or similar categories listed on schedule C.  This will help during tax time.  Now, every time you pay a bill, you simply need to enter that transaction in the correct category.  You can use a simple spread sheet, financial software or you can use shoe-box.  Most CPA firms also provide bookkeeping services. For example, you can simply send us your bank statement at the end of the month and we can do the complete bookkeeping. We will assign each expense into an appropriate categories based upon its tax implication.

What are some of the most popular business expense categories ?

  • Advertising – All expenses paid for online marketing or print marketing including business cards or flyers.
  • Consultation Fees – Fee paid to professionals like attorney, CPA, or marketing professionals.
  • Insurance Cost –  Business Insurance Expenses including life, property & casualty, or business insurance
  • Interest Cost – Interest cost of your business loans. You can include fees and other related cost.
  • Office expense – Any supply or equipment you purchase for your business operation.
  • Rent or lease other business property – Cost of operating your business office.
  • Repairs and maintenance – Include all cost related to your business only.
  • Travel – the cost of traveling to a business related event like convention, meeting, or business trip
  • Meals and entertainment – You can include meals and entertainment expenses related to your business.
  • Utilities –electricity, gas, telephone, internet
  • Other expenses – such as Dues & Subscriptions, Web development, and Business telephone expenses.

 

Health Insurance expenses:  Premiums paid for your health insurance are tax deductible.   You can deduct the full cost of health insurance premiums on form 1040 but you must have an Income from you business.   You can deduct the health insurance cost event if you run into losses but it has to be reported different.  Consult with your CPA to ensure you are reporting the deduction properly.

Still have a question about your business expense?  Leave us a comment or call our office at 510-825-7563