Monthly ArchiveMarch 2018

Taking Proper Business Deductions From Day One

Deducting Startup of Business

For individuals who started a business and have incurred expenses before they officially opened their doors, they are entitled to deduct certain organizational and startup costs on the tax return. The IRS also has strict guidelines that must be followed in claiming there. Here are the rules:

The Allowable Deductions

According to the IRS, three categories of startup costs are eligible for tax deduction. This can be deducted once the business is opened. The startup costs are connected to:

  • Creating a business or trade or also investigating the acquisition and creation of the active business or trade. Some of these costs may also include surveying the markets, analyzing the labor supply and products and also visiting the potential business locations. Just like any other costs that are associated with investigating or creating existing and new businesses, this is not any different.
  • Preparing the opening date of the business. Any costs that the owner has incurred before the doors of the business have even been opened and begin generating income are also included in the category, along with the exception of the equipment. This will be depreciated. The eligible expenses can also include wages and training along with travel costs so that distributors, suppliers can be located. Other additional expenses include the advertising and consultancy fees for accountants and attorneys.
  • Organizational costs. If the business has been legally set up but the owner as a corporation or partnership before the end of their first year in the business, then it is possible to deduct those costs. The expenses that are associated with connecting legal fees, salaries for temporary directors, state organization fees and organizational meetings. The expenses are asked to set up the partnership agreement also include the filing and accounting fees as well as the legal expenses.

How to Take the Deductions

 The IRS lets the individual reduce $5,000 in the startup costs for businesses, $5,000 in the costs of the organization but the total startup costs can only be $50,000 or less. If the startup costs for these exceed $50,000, then the amount of the deduction allowed will be reduced to that dollar amount. If the startup costs are over $55,000, then the deduction is eliminated completely. For example, if the startup costs total to $53,000, then the taxpayer loses $3,000 of the deduction and could also be allowed to deduct $2,000 from this. If the startup costs amount to $55,000 or over this, then the owner does not qualify for this deduction at all.

The costs that remain after the deduction must be amortized annually and in equal portions for the next 15 years.

Individuals can also claim the deduction for the tax year once the business has officially opened. If the individual fails to claim the deduction, it is still possible to file the amended return within half a year of the due date on the return. This also excludes extensions. When this is done, then the IRS also suggests that the individual writes “Filed pursuant to section 301.9100-2” on the return that has been amended and then send this to the similar address to which the taxpayer has sent the original return.

Timing is Important

Sometimes, the deduction in the first year of the business does not always make sense financially. For example, it is likely that the individual will experience losses during the first few years while it is in business. If so, then it might be better if deduction is amortized during the few years of the business so that it balances out the profits that would come in the picture eventually. If this is what the owner chooses to do, then it is very important to file IRS Form 4562along with the tax return during the first year. The owner can also amortize the organizational and startup costs as long as these are qualified. They do not have to be done on the same period of amortization. Keep in mind though that once this is done then periods for every deduction must be chosen and the taxpayer cannot change them. Important decisions on this matter must be discussed with tax advisers.

How to Deduct the Start Up Costs for Businesses

 Individuals who wish to start a business, there is good news and there is also bad news. The bad news is it may cost a lot for him to pay every cost for the business startup. However, the good news is it is possible for him to deduct a majority of these startup costs on his income tax return.

There are lots of misinformation that floats on the internet regarding business startup costs and what must be deducted. There are startup costs that may be deducted during the first year of the business and there are other costs that can be spread out through the years. It may be complicated, especially for the beginner, but it is possible to have everything straightened out.

What are Business Startup Costs?

New businesses deduct costs for starting businesses, however there are restrictions and limitations on these said costs. IRS claims that the start-up costs are the total amount that has been paid and also incurred for:

  • Creating a business or trade that is active
  • Investigating the acquisition as well as the creation of active business or trade

The costs of starting businesses can be separated into two:

  • start-up costs
  • the costs for investigation

Business start-up costs are also called capital expenditures because these are for the long run and not just for the first year. This is part of the investment in business assets as well as investment costs that have been amortized during the course of several years.

These Are Not Startup Costs

Some expenses that may be incurred during startup phase of the businesses are not deductible and regarded as startup costs. This includes:

  • costs of buying business assets such as vehicles, equipment, and building. These costs are separate when it comes to tax purposes.
  • costs to qualify to get into this kind of business. For example, getting a license for real estate

 When Do Businesses Open?

 By determining the date when the business owner actually opens his business depends primarily on various factors. However, it is important to determine the startup date simply for the purpose of reducing the startup costs.

Take this for example. If the individual is looking into purchasing a business, then he must know how far back these costs are. Typically, it is possible to go back from the very first year of the startup date.

How Much Can Be Deducted, How Is the Deduction Made and When Can It Be Done?

If the individual is buying the business, then the costs that are generated in the course of the search or the preliminary investigation of the trade is considered capital costs. These cannot be spread or amortized for 15 years. There are other costs that can be deducted instantly.

Should You Deduct or Amortize the Start-Up Costs?

It is possible to deduct $5,000 in start-up costs in the very first year of the business. This deduction is also restricted if the owner has over $50,000 in the start-up costs. If there are additional start-up costs that go beyond the $5,000, then this can be amortized in the 15 years. If the owner is not going to be profitable in the first year, then he may prefer to consider the option to minimize the taxes in the years where profit has been made.

Instead of deducting this $5,000 from the very first year of the business, then it is possible for the owner to amortize the start-up costs in the course of 15 years. It is also possible to take the similar deduction every year. Take this situation for example. If the startup costs are around $45,000, then it is possible to remove $3,000 every year for 15 years.

Owners can also wait to recover the start-up costs until it is time to close or sell the business. However, a number of business owners do not want to wait for that long period of time to just get the tax benefit from the start-up costs.

Bonus Deduction for Organizational Expenses

The IRS generally separates the general business organizational and start-up costs. Organizational costs are the ones involved in forming the partnership, corporation, or limited liability company. Take note that it is not a sole proprietorship. These costs can also be incurred in the end of the first year that the company has been in business.

Aside from the $5,000 start-up deduction, it is possible to take up around $5,000 along with the deduction for the organizational expenses of the small business which can also amount to $50,000. The deduction can also be applied to the legal fees and the other expenses that form the business structure.

Can A Startup Business Still Deduct Expenses Even When It Did Not Open?

If the deal does not work, then the individual can deduct personal expenses on Schedule A of the Form 1040 then this is a miscellaneous expense. If the business is searching for something in mind and did not buy the business, then these businesses cannot be deducted. These are not related to any existing trade or business.

Startup Business Tax Tips

Starting any business is the American Dream. Anyone can be their own boss and also earn a living by doing what they love. The benefits are also to die for. However, the high costs that are associated with going out on their own and can also prove to be an obstacle. The good news is that the IRS and Internal Revenue Service can also cut the business owners and give them a bit of break regarding taxes.

Startup tax deductions are capital costs

Startup costs can be deducted. These can be anything from analysis and market research to scout out the locations for the business. This can also include the costs of legal fees, training staff and establishing suppliers and vendors.

Advertising in anticipation of the opening is also a legitimate startup expense along with the organizational costs. If the taxpayer decides to organize this as some kind of partnership or corporation, then the expenses are incurred before they can actually go into business. If the owner is not sure which of these costs qualify, then sites like TurboTax can walk the taxpayer through the business expenses that are deductible.

Most of the startup expenses can be regarded as capital costs for the purposes of tax return. The IRS looks at this as long-term assets that are invested in the future of the business. As assets, you must depreciate them generally and rather deduct this cost in the year that this has been purchased. This means that it is possible to recover the expense once it has been stretched out through many years. The exact number of the years that can take a depreciation deduction which also depends on the nature of the asset.

You can elect to amortize other costs

There are some startup expenses that are organizational costs and it can also be amortized, or it can be deduced at the full cost on the very year that the business opened. If you choose the amortization and the certain rules also apply:

  • Costs are then incurred before you open the business
  • Associated costs can also be incurred if the business operated for years

Amortization is similar to capitalization in and it also involves allowing the deductions to stretch out for as long as it can be stretched out. It is possible for the business owner to choose the exact amortization period but once this is done, he is stuck with it.

The IRS also won’t allow the taxpayer to change this later. If he decides to amortize the costs rather than deduct this straightforward, then it can benefit him in the coming future tax years. Another option if the business is not bringing in the boatloads of income as well as the startup year but also expect to make the nice profit in the coming years, in order for the tax break that can be beneficial.

Some costs also do not qualify as startup expenses

There is some equipment that can be purchased when treated as regular business expenses. For example, if the taxpayer is thinking of opening a landscaping business and one of the cost is buying a truck, then it capitalizes and also depreciates the costs. There are expenses that are treated in the similar way that it could be, had it been operational for the business.

What is an Aadhaar Card?

Aadhaar is a 12-digit identity number that is issued to Indian residents. This is based on their demographic and biometric data. The data is collected by the UIDAI or the Unique Identification Authority of India. It is a statutory authority that is established in January 2009 by the Indian government. This is also under the jurisdiction of the Ministry of Electronics and Information Technology. It follows the provisions that have been set by the Aadhaar Act of 2016. This is the Targeted Delivery of Financial and other Subsidies.

Aadhaar is the world’s largest biometric ID system. It has over 1.19 billion individuals enrolled and represents 99% Indians. It has been described as the most sophisticated ID program in the whole world. Aadhaar is not proof for residence or citizenship. In fact, it does not even grant the rights to domicile in the country. It has been clarified by the Home Ministry in June 2017 that the Aadhaar is not legal identification document for Indians to use when travelling to Bhutan and Nepal.

Overview of the Aadhaar

The UIDAI or the Unique Identification Authority of India is required to assign the UID number to all the residents of India. Implementing this UID scheme requires the generation the assigned UIDs so that they can define the mechanisms and processes for linking UIDs with partner databases. This makes operation and management of any stage of the life cycle of the UID easier. Policies and procedures are also framed to update the mechanism and then define the applicability and usage of UIDs for delivering various services, among others. The number that is linked to the basic demographic and biometric information like fingerprints, photograph and two iris scans. This are then stored in the central database.

The UIDAI was initially set up by the Indian Government under the aegis of the Planning Commission. Therefore, they have been given the responsibility to come up with the policies and plans that will be implemented to the UID scheme. It also owns and operates the UID database and is made responsible for updating and maintaining this on an ongoing basis.

The data center of the UIDAI is located at the IMT or the Industrial Model Township in Manesar. It started issuing UIDs in September 2012. ITs aim was to issue Aadhaar numbers to every resident so that it can eliminate fake and duplicate identities. This number can also be used to verify and authenticate information in a cost-effective and easy way that can be done online or anywhere at anytime. The Government of India also indicated that it recognizes a letter from the UIDAI containing information such as name, address and Aadhaar number and regard this a valid and official document. It is important to note that Aadhaar is not there to replace identity cards. It also does not constitute proof for citizenship or residency. Aadhaar does not confer guarantee rights, entitlements or benefits. It is simply a number that is random and does not start with a 0 or 1. It is also not loaded for intelligence or profiling because this would make it prone to theft or fraud. Therefore, there is a measure of privacy with this information. The unique ID qualifies as valid ID when citizens are making use of government services such as a subsidized ration, benefits under NSAP, e-sign, a digital locker, pension schemes, kerosene from the PDS or LPG connection.

UAN or Universal Account Number under EPFO and other services such as opening a bank account or acquiring a SIM card can be done with the Aadhaar number as well.

According to the official website of the UIDAI, any individual who has an Aadhaar can verify how unique his or her number is through the Aadhaar Verification Service or AVS that is quite user friendly and is already on the website. A resident that is enrolled under the National Population Register does not need to be enrolled again.

Direct Benefit Transfer

The Aadhaar project is linked to public subsidy and unemployment benefit schemes like MGNREGA and LPG scheme. These Direct Benefit Transfer schemes has the subsidy money directly transferred and carried out by the NEFT or the National Electronics Fund Transfer system. This does not depend on the Aadhaar.

Aadhaar-enable biometric system

In July 2014, Aadhaar enabled the biometric attendance system by introducing this in the office. Ut was then checked by government employees. The public could see the attendance of the employees from the website. However, three months later, in October 2014, the website was closed to the public. It was then made active again and opened to public access in March 2016. Employees use the last four digits of the Aadhaar number as well as their fingerprints for authentication. There are technological glitches on the system so it was still a work in progress.

Aadhaar as a Digital Identity

A number of features that the Aadhaar card allows it to serve as a digital identity and one that facilitates digital identity. This is because the document of the card is electronic when set in PDF format. There is a QR code that provides the digital XML representation of the core details of the card. The number and some of the limited details that are validated online along with the notable exclusion of the name allows the details to be updated online. It can also be done via the user’s mobile because the phone number and/or email serves as the second factor of authentication. The system can also collect a photo, eye scan and 10 finger scans.

Impediments and other concerns

Feasibility concerns

The Aadhaar project was being implemented without any cost benefit or the feasibility studies so that it can ensure whether the project can still meet the goals that it has stipulated. It has also been pointed out that the government was somehow obscuring the security aspects of Aadhaar and it focuses on the social benefit schemes.

The debate on its feasibility and ability to sustain the project of this size is settled one 1.19 billion Indians have been enrolled in the program. This pretty much represents 99% of the total population. The quality of the data that has been collected is the most advanced in the world. This compliments the other initiatives that have been taken by the government which benefits people and gives them easy access to public services.

Lack of Legislation and Concerns on Privacy

On February 2, 2015, the Supreme Court asked the new government to clarify to the public where they stand on the project. This was in relation to the criticism that it has been ignoring the previous orders and pushes ahead with the project as well as the project that they find unconstitutional because it allows the profiling of the citizens. On July 16, 2015, the Indian government requested that the Supreme Court revoke the order. They suggested that the Aadhaar be just used for various services. In fact, some states insisted that the Aadhaar be used for benefits.

On August 11, 2015, the Supreme Court directed the government to actually publicized this in electronic and print media that Aadhaar was not required for any welfare scheme. The Court also referred that the petitions that are claiming for Aadhaar be unconstitutional.

On July 19, 2017, the Supreme Court started hearing the arguments that have been presented and figured out whether this was in fact fundamental to provide privacy. The nine judges unanimously upheld right for privacy and regarded this as the fundamental right under the Constitution.

This constitutional bench of the Supreme Court is also hearing various cases that are related to how valid the Aadhaar is on the various grounds that include surveillance, exclusion and privacy solely for the benefit of welfare.

The Legality of Sharing Aadhaar Data with Those Who Enforce the Law

In 2013, there was the case of the CBI attempting to solve the rape of a schoolgirl. They managed to acquire fingerprints from the crime scene that was a match with the UIDAI database. The court then asked the UIDAI to hand the data to the people in GOA and submit this to the CBI.

The UIDAI appealed in the Bombay High Court and accepted that the request could actually set the needed precedent for future requests. However, the High Court rejected the argument by placing an interim order that was directed to the CFSL or the Central Forensic Science Laboratory. This was the study of the technological capability of the database to also see if it was possible to solve the crime. The UIDAI eventually appealed to the Supreme Court. It argued that the chance for 600 million people recorded on the database would eventually result to hundreds of thousands of false results because of the high false positive rate of 0.057%.

On March 24, 2014, the Supreme Court has restrained the central government from sharing UIDAI data with the third party or agency, whether these be private or government, without the Aadhaar-holder’s content in writing. Therefore, there was another interim order that was dated on March 16, 2015. The Supreme Court of India directed that the States and Union of India as well as all their functionaries adhere to the said order. It pretty much observed some of the government agencies that were also still treating Aadhaar as a requirement. They asked every agency to issue the notifications to clarify that it was not.

Security Concerns

Aadhaar was originally intended to flush out the illegal immigrants but these social security benefits were eventually added so that privacy concerns can be avoided. It also expressed objections for Aadhaar numbers to be issued to illegal immigrants. The Committee said that these projects were implemented in a manner that is so unplanned that it bypassed the Parliament.

In May 2013, there have been some errors that were admitted in the registration process. There were people who received their Aadhaar cards but complained because these had wrong fingerprints or photographs. According to some officials that work at the Intelligence Bureau, the UIDAI project is criticized because the Aadhaar number was not considered as a proof of residence that is credible enough. As how it was stated in the liberal pilot phase, a person could claim to live and accept the address.

Overlaps with the National Population Register

The Aadhaar along with projects from the National Population Register have been reported to be conflicting, it was also reported that the UIDAI share data with the NPR. NPR eventually collected its own data. However, the government insisted that the Aadhaar was not some kind of identity card, but a number and the NPR was not really a requirement for national security purposes. The order of the Supreme Court in 2013 did not affect the project that was spearheaded by the NPR because it was not actually linked to the subsidy.

In July 2014, a meeting that was held in relation to discussing the possibility of merging both projects, NPR and Aadhaar, concluded that these were complementary. The meeting was attended by people in Law and Justice and Telecom industries. Later in that month, there was no more plan to merge the two projects.


In order for Aadhaar to be accessible and undocumented poor citizens, setting an Aadhaar card does not really require specific documentation. There are multiple options that are made available. This is when the use of biometric facilities are reduced so that it can eliminate duplication. In theory, it is also possible to obtain the card under a fake name. It is less likely that the individual could maintain another Aadhaar card under another name.

The Aadhaar card is not a secure document according to the agency that has not been treated as some kind of identity card because it was often treated as such. However, because there was no practical way to validate the card, there were lots of questions to utilize this as an ID card. There were also five main components in the Aadhaar app transaction – the vendor, the back-end validation software, the customer, the app and the Aadhaar system itself. There were also two main external concerns. This was to secure the data that was often at rest on the phone and the kind of data in transit that is secure. At each seven points, the data of the customer is vulnerable to any kind of attack. This is because the validation software and the app are quire insecure. The Aadhaar system can be found insecure as well as the network infrastructure. The laws are inadequate and therefore does not work in that sense.

Using New Tax Laws To Reduce Your Taxes In 2018

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Plan your taxes now take advantage of new laws.

Join Sanjiv Gupta  CPA on May 19th, 2018 for 2 hours and learn about various new laws that might help you reduce your 2018 taxable income.

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  • Standard Deductions
  • Child Tax Credit
  • Rental Property vs Mortgage Deduction
  • State and Local Taxes
  • Retirement Contributions
  • IRA and Roth Contributions
  • S Corp
  • 1099 to S Corp Conversion

and many more.


Tips to Reduce Self-Employment Taxes

Tips to Reduce Self-Employment Taxes

Self-employed individuals must know that aside from income tax, they must pay self-employment taxes which support Social Security and Medicare programs. There are ways that can reduce the amount that they owe.

More and more individuals opt for self-employment as opposed to being employed because they can set their own hours and are not pressured to punch in a fixed schedule each morning. However, when the day ends, they still have similar tax obligations as full-time employees. Aside from the income tax that they have to pay, they must secure payment for self-employment taxes such as Medicare and Social Security. The fact that they have their own businesses definitely increases the exertion of record-keeping that must be done for tax purposes. Whenever the self-employed digs through countless boxes of business receipts, they envy those who are just required to enter their over-all income from their W2 form.

Self-employment is synonymous to freedom. It is also synonymous to responsibility and therefore, lots of expenses. There are self-employed individuals who choose this path because they prefer the first two, but they cringe every time it is tax time. This is because they are not completely aware of some of the tax-write offs that they are actually entitled to.

It may seem daunting at first but there are various ways that allow the self-employed individual to reduce the amount owed.

Educational Expenses

When it is time to file income tax returns, self-employed individuals must not hesitate to take claim of their benefits simply because they are their own boss. For example, an expense that they can get paid for is “educational expense.” This is a deduction that is often overlooked. If the self-employed is taking courses or even buying material that is needed for research, then this is considered a deductible because it makes one’s work more effective.

Individual Retirement Plans (IRAs)

The best tax write-off for those who are self-employed is their retirement plan. This is because they have no employees that they are required to set individual 401k plans for. However, for those who are self-employed and have employees, it is recommended that they opt for SIMPLE or what is also known as the Savings Incentive Match Plan for Employees IRA. This is an IRA based plan that provides small employers a method that is simplified and easy to understand so that they can also contribute to the retirement of their employees.

Therefore, retirement plans are the best kind of tax deduction. To top this off, the government even assists in funding this.

Self-employment taxes 101

Self-employment taxes are up and about so that the programs from Social Security as well as Medicare are funded. Employees must pay similar taxes by going through what is known as employer withholding. Employers make additional tax contributions and they do this for their full-time employees. Self-employed individuals must pay all these taxes on their own.

Tax Deduction for SE

The IRS or the Internal Revenue Service requires those who make $400 or above this amount in being self-employed to file a tax return. The return must have a Schedule SE. This is used to calculate how much taxes that the self-employed individual owes. However, when 1040s are being filled out, the IRS lets the self-employed deduct a percentage of their tax payments and also adjust to their income. They can also deduct around 50 to 57% of the self-employed tax payments. The exact amount depends primarily on how much the self-employed can earn.

S Corp Savings

 If the self-employed create a business as a corporation or an LLC (Limited Liability Company), then making the S Corp election with IRS can present opportunities that also reduce their self-employment tax liability. With S-Corp,  individuals pay a reasonable salary from their earnings. They can also distribute the profits that remain to themselves as well as the other shareholders and even the partners and leave the remaining in the business. There are situations that the money is in excess to the salary that is calculated for the income tax but is not exempted for the employment taxes.

For example, if the self-employed operates the business and lists this as a sole-proprietorship then they earn $100,000 for that given year. Self-employment taxes are then due on that amount. However, there are also appropriate circumstances along with the S Corp that the amount may also exceed the salary that is reasonable for the self-employed to not be subject to self-employment taxes.

Reducing Net Profit

The Schedule C-EZ or popularly known as the Schedule C calculates the net profit of the self-employed individual. They must then include and list this as an income on their 1040. They can use this on Schedule SE so that self-employment taxes can be calculated. The net profit is also equal to the gross recipients that the individual earned after business expenses have been deducted. This lowers the net profit number. The lower the amount is, then the lower the employment tax bill is.

In order to reduce self-employment taxes, the individual must also be extremely accurate and thorough when filing and preparing the Schedule C. This ensures that the deductions are possible. The business expenses must be necessary in order to operate the business as a deductible. This cannot be filed as personal in nature. There are various types of deductible business expenses. These are cost of acquiring as well as maintaining a business vehicle, office rent, calls made and office equipment and supplies.

Using the home or dwelling for business

Most self-employed individuals start their businesses as home-based businesses. Therefore, they must determine which business costs are deductible. They should always keep track of the expenses that are related to their housing costs because their houses are the locations for their business.

If the taxpayer’s gross income from the business exceeds the total expenses, then they can deduct all the expenses that are related to their business use in their home. If the gross income is less than the total expenses, then the deduction is also limited to the difference of the gross income and the sum of every business expense that the individual would pay if the business is not conducted in the home. These expenses also include the Internet, phone lines and other costs that the business accumulates.

The individual must have a home office that is exclusively used for the business. This is because the Internal Revenue Service requires self-employed individuals to document this.

Deducting Automobile Expenses

If the individual travels for the business, even if it is short distances in the city, this must be deducted and documented as business miles traveled on the tax return. The taxpayer can also file the over-all actual expenses that has been incurred and use the standard mileage rate that is prescribed by the IRS. The IRS also has a mileage rate that is allowed and should be checked each year that they can change.

If the taxpayer decides to use the actual and over-all car expenses, they have to include depreciation, insurance, registration, payments, licenses, maintenance, repairs, garage rent, fees for parking and too. If taxpayers decide to use the standard mileage rate, it would be best that they keep a log. Document daily, weekly and monthly usage of miles and also distinguish the business use from the personal use.

Depreciation of equipment

There are some people who are self-employed and can purchase the equipment and property for the business. If they expect that the property will last longer than a year, it could also be depreciated on the tax return. According to the IRS, claims regarding property must meet these criteria: the taxpayer must own the property and it must be held and used to generate income. The property must have a useful life, meaning the individual can guess how long the owner can generate income from it. It may not be considered a useful life if it is just a year or less and it can also not be disposed and purchased in the very year.

There are certain repairs on the property that has been used for the business that can also be deducted. Another advantage is that it facilitates the system that lets the individual track the changes conducted every year.

Other areas to explore

There are deductions that can be missed especially in advertising as well as promotional expenses, air, bus and train fare and banking fees. Restaurant meals along with other entertainment costs are also easily written off as long as these are necessary and important business expenses.

In addition, self-employed individuals are suggested to consider health insurance premiums which represent a credit and not a tax deduction. This is because the credit directly goes against the taxes and not a reduction of the income.

No matter which expenses that the taxpayer discovers can be written off, the important thing to remember is that records must be accurate throughout the year. Save the receipts, as well as email receipts and log and file these so that it is easy to retrieve them during tax time.

Long-term tax saving strategies

Individuals are encouraged to not look at the last-minute write-offs especially when considering the tax deductions from being self-employed. They should think about laying long-term strategies connected to saving money especially in an annual context. This is highly suggested if the taxpayer earns a lot.

Accountants are trained to tell their clients what they have to pay. They are not working to come up with strategies for payment reduction.

To reduce the gross taxable income, taxpayers are also asked to consider setting up a benefit pension plan that is well defined. The basis of this plan are age and income. The older the individual is and the higher his earnings, the more they are allowed to contribute. Another alternative plan is an age-weighed profit-sharing plan. This is similar and beneficial to entrepreneurs that hire several employees.

Another strategy for business owners who earn higher than average have their own building through LLCs or limited liability companies. A similar business structure is required to pay rent. This rent is then used to pay the mortgage. However, this is also regarded as a business expense strictly for tax purposes.

Self-employed professionals are required to have liability insurance and they should consider setting up their very own insurance company. A captive insurance company insures the risks that any businesses can accumulate. The premiums are also tax-deductible.

However, they are warned that if the money has been accumulated along with claims that are minimal, then the money is taken out and filed as taxable under capital gains. This is actually not a retirement strategy, but it saves them money and lets them pay this by themselves instead of getting an insurance company to deduct this as premiums. With these long-term strategies that end up complicated, financial planners and business attorneys must be consulted in order to ensure that the best plan possible is made for the business to thrive.

Being self-employed also means taking on costs and risks that are not encountered when they are employed by someone else. They are responsible for obtaining customers and generating income. They also have to constantly prove the value of the service and the product. They also have to pay the internet bills and phone bills that are incurred to get and also retain these customers. Other costs include travel expenses for meetings and above all, liability insurance just in case they are sued.

Numerous tax codes have been written in order to soften the blow of covering tax costs. Everyone must claim the business tax deduction that they qualify for. The profitability of the business depends on minimizing the costs as well as maximizing the resources. There are small business tax deductions that are regarded as more complicated. Remember that any time that the cost is an expense that is legitimate, then the IRS will eventually examine this and see if it can be audited.

Rehabilitation Tax Credit

Rehabilitation Tax Credit

The purpose of federal and state preservation tax incentives is to encourage the private sector investment in the filed of rehabilitating and re-using historic buildings in order to promote the investment in the local enemies.

If an individual owns a historic property, then he has the chance to earn state income tax credit as long as the property is qualified for rehabilitation expenditures. Whether the tax payer is planning to rehabilitate the primary and secondary residence in the commercial property, then there are state incentives that can help.

The rehabilitation credit are the costs incurred by the individual for rehabilitation. It can also be the reconstruction of buildings. Rehabilitation means restoration, renovation and finally, reconstruction. It does not cover the enlargement or new construction of a venue.

The percentage of the costs that can be credited is:

  • 10% for the buildings that have been in service prior to 1936
  • 20% for historic structures that are certified

Definition of Rehabilitation Tax Credit

A federal tax incentive encourages the real estate developers to renovate, reconstruct and restore old buildings. This is placed in service before 1936 and are also eligible for the 10% credit as well as the certified historic structures that qualify for the 20% credit. This credit also applies to the rehabilitation costs of the building and not the cost of purchasing for the building as well as repairing sidewalks, landscaping and parking lots. The credit and total amount eventually increases slightly if the building is tehn located in a disaster area.

Things to Remember When Claiming the Rehabilitation Tax Credit

Investment Credit or Form 3468 is also used to claim various investment credits which also includes section 47 of the rehabilitation credit. For 3468 must be attached to the income tax return for every year that the individual is qualified for the rehabilitation tax credits. However, the form is not required when it is carried forward or there is back net operating losses all from the tax credit due to rehabilitation costs claimed in that tax year.

Breaking Down Rehabilitation Tax Credit

It is common knowledge that taxpayers must meet the requirements concerning the rehabilitation project as well as the timeframe and also completes it on the date when to claim the credit. The reconstruction and enlargement projects are also not eligible for the tax credit along with the tax-exempt properties that are qualified. Only the title holder of this property can claim this specific credit. States can also offer the rehabilitation tax credits that are used to encourage the development.

There are still limitations on using the low-income housing credits and its rehabilitation. The guidelines must also apply with the IRS especially when it comes to auditing the credit projects. The limitations that are included are the ones at risk and are of passive loss. Finally, when planning opportunities, taxpayers are encouraged to use the low-income housing credits as well as its rehabilitation especially the use of the credits in tandem.

Who Must File

Taxpayers that claim the rehabilitation tax credit are required to file the Form 3468. This also includes the partner, shareholder and beneficiary that claims the credit through the partnership, S corporation or the trust.

In addition to this, if the estate or the trust, partnership or the S corporation is the very owner of that historic structure, then the taxpayer must file the Form 3468. The lessor also provides that the project number from the National Park Service to the lessee.

Property or Source of Credit

If the credit was claimed simply for the rehabilitation of a historic structure and was done by the owner of the property, then the National Park Service (NPS) project number must also show the owner return. Remember to not use the state or internal identification numbers for this purpose.

If the lessee is the owner of the property, then the lessee must fill up the Part 1 of Form 3468 and also provide the project number from the National Park Service.

If the expenditures for the rehabilitation has been passed through to the S corporation, estate, partnership or trust, then the EIN or the employer identification number of the pass-through can also be shown.

Date of Certification of the Completed Work

Form 3468 also requires the date when the NPS Reviewer has signed the Form 10-168 for NPS. It is important to not use the dates listed for Part 1 or 2 as well as the application date listed on Part 3 for the NPS Form 10-168.

If the final certification has not been received around the time that the tax return has been filed for the year the credit has been claimed, then the copy of the first page of Form 10-168 of the NPS Form Historic Preservation Certification Application, which is the Part 2 of the Description of Rehabilitation. It has an indication that this was received by the Department of the Interior as well as the State Historic Preservation Officer and with that is the proof that the building is definitely a certified historic structure. Taxpayers who electronically file and submit this information along with the Form 8453. Certification information is also required to be received in that very year.

Carryforward or Carryback

Taxpayers are not encouraged to file the Form 3468 if the credit is a carryforward or carryback from previous years. What must be done instead is to report the credit on Form 3800. If required, this can also be filed on Form 8582-CR.

Tax Exempt Use Property

The rehabilitation tax credit cannot be allowed for expenditures with the property that is regarded as tax exempt. As written in the tax-exempt entity, it leases the rules listed on 168(h) and the threshold determines if this is a disqualified lease that exits and has been increased to beyond 50%.

Alternative Minimum Tax

The qualified rehabilitation credits also determined in the Internal Revenue Code listed in Section 47 is attributed to the qualified rehabilitation expense property. It also takes into account the alternative tax rules that are not applicable. Therefore, a taxpayer must use the rehabilitation tax credit as the way to offset the regular tax liability.

Place of Filing Notice

If the taxpayer has claimed the rehabilitation tax credit then the entire project cannot be completed in 30 months after the credit has been claimed and the individual has not yet received the final certification straight from the Department of Interior. If this is the case, then they must also provide a written notice to the IRS or the Internal Revenue Service. The notice that this is provided before the last day of the 30 month deadline. It is then required by the Regulation Section 1.48-12 that this be emailed to the address of the individual and must also have the consent to extend the limitations of the statute.

Qualifications for the Rehabilitation of the Historic Properties Credit

An individual is entitled to a refundable credit if the business:

  • is allowed to have a federal credit listed under the IRS and in Section 47. This is for the qualified rehabilitation expenses that are related to the rehabilitation of certified historic structures.
  • part or all of the rehabilitation project can be located within the census tract and is identified as below 10% of the state median family income and also calculated on every first day of every year by using the recent five-year estimate that came from the American Community Survey and is published by US Census Bureau.

Any new credit that has been earned for the property and is placed in the service on or even after January 1, 201 5 and is not utilized in the current tax year and treated as the overpayment or refund of the credited tax to the following year’s tax revenue. This change is also applicable to the tax years that start on or after January 1, 2015. The carry forward or credit from previous years cannot be applied toward the tax for the ongoing tax year. It has also been carried over to following years indefinitely.

 What is the total credit?

  • For the tax years between January 1, 2010 and January 1, 2020, the credit amounts to 100% of the total federal credit amount that is allowed on the historic structure.
  • The total amount of the credit cannot go beyond $5 million for every structure.

Requirements for Recordkeeping

Taxpayers have to prove that they are entitled to the tax credits. In the course of the audit, they are required to also provide documentation so that the entitlement is substantiated and based on specific facts that are claimed by the tax credit.

Eligibility Requirements for Tax Rehabilitation Credit

 There are 4 factors that help decide whether the rehabilitation project meets the basic requirements for the suggested tax credit of 20%.

  1. The historic building is listed in National Register of Historic Places or certified in contributing to the significance of what is called the “registered historic district.”

Buildings are listed individually in National Register of Historic Places or even part of the historic district. Taxpayers must also contact the local historic district commission, SHPO or the State Historic Preservation Office, or municipal planning office to find out whether the building is listed or not.

If the property is located in a certified state and local district or a National Register district, then it must be designation as a structure that also retains the historical integrity by the National Park Services. It must also contribute to the historical character of the district and qualify as what is called the “certified historic structure.” Note that not every building in the mentioned district has contributed to this. When the historic districts have been designated, then this is usually associated with particular time period or significant periods, like “mid-1800s to 1935.” In this district, the 1950 office building cannot contribute and also not qualified for the 20% rehabilitation tax credit.

The owner of the building can also request from the National Park Service in designating the building and also listing it as “certified historic structure” and also complete and submit this as part of the Historic Preservation Certification Application.

  1. The project must also meet the “substantial rehabilitation test.”

In a nutshell, this pertains that the rehabilitation cost must be more than the building’s pre-rehabilitation cost. This is also the test that must be required within the two years or within five years of the project as soon as it is completed in multiple phases.

The over-all cost of the project also goes beyond $5,000 or the building has been adjusted on a regular basis. The formula listed below is how a project can be determined as substantial and qualified for the credit.

A – B – C + D = adjusted basis

A = this is the purchase price of the land and/or the building
B = the cost of the property when it has been purchased
C = the depreciation that is taken for the income-producing property
D = the cost of the capital improvements that were made since the purchase

Some of these expenses may not be associated with the project that is qualified for the tax credit, like the new rear addition, landscaping and new kitchen appliances.

  1. Rehabilitation work must be done as suggested by the Standards for Rehabilitation of the Secretary of the Interior.

There are ten principles that ensure the historic character of any building that has been preserved during rehabilitation. These should be followed. Standards are also applied to various projects in reasonable manners as long as these take into consideration the technical and economic feasibility.

  1. After rehabilitation, this historic building is also used for income-producing purposes all for five years. The owner-occupied residential properties are not qualified for federal rehabilitation tax credit.

 The 20% credit is only available to the properties that are rehabilitated for the income that produces purposes like industrial, rental residential, commercial, agricultural and apartment use. The credit cannot be used when rehabilitating the private residence.

However, if the portion of the personal residence is not conducted for business, for example a rental apartment or office, then there are instances that this amounts to the over-all rehabilitation costs that are spent on the portion of the residence that makes it eligible for the credit.

How To Save Taxes By Setting Up S-Corp

How to Save Taxes as an S-Corporation

If the individual is self-employed, it is possible to help avoid high Medicare and Social Security taxes to organize the business as some kind of S-corporation. This is because individuals who are not hired by any corporation must pay higher Medicare and Social Security. By organizing the business as some kind of S-corporation, then having higher taxes can be avoided.

The IRS or the Internal Revenue Service can also take a close look at the taxes if this route is chosen as it could also lower the overall tax liability and then generating the similar net income.

Self-Employment Taxes

Whether the individual is an employee or self-employed, they still have to pay Medicare and Social Security taxes to the government. When working for someone else, the individual is only responsible for his share of the taxes and the employer can make the difference by paying the balance off. However, for those who are self-employed, they are expected to pay both the portions of the tax. The combined employer and employee portions of this tax usually amounts to a total of 15.3 percent.

S-Corp Distributions

If the business is organized as some kind of S-corporation, then it is possible to classify some of the incurred income as a salary and some of these as a distribution.  The individual is still liable for the self-employment taxes on the salary portion of the income, but they just have to pay the average income tax on the distribution portion. It also depends on how the income is divided. In doing so, it can save a substantial amount of the self-employment taxes by merely converting this into the S-corporation.

The Risks of Filing the Business as an S-Corporation

The Internal Revenue System or the IRS looks closely at the S-corporation returns because it has more potential to be taken advantage of. Take this situation for example. An entrepreneur who generates an annual income of $500,000 abut only records $20,000 will trigger an inquiry from the IRS because he is obviously avoiding much self-employed taxes. The guiding principle is that the taxpayer must designate an amount that is reasonable to his income. However, this is quite a gray area and if the envelope is pushed too far, then there is more risk for the IRS to do an audit and also start of potential penalties on the interest of the back taxes that the IRS have already addressed.

Additional costs for S-Corporations

The S-Corporation saves the individual from self-employment taxes. It also costs the individual more than he can save. With larger corporations, the S-corporation is some start-up that has accounting and legal costs. There are some states that are expected to pay more taxes and fees. Take for example the S-corporation in California must pay 1.5% on the income and a minimum annual amount of $800. This is not a requirement for sole proprietors.

Difference Between S Corp and LLC

Both the S-corp and the LLC provide the entrepreneur the similar kind of protection. However, the LLC is much simpler than the S-corp. Filing it as LLC can also save the taxpayer a couple of thousand dollars especially on the cost of administration. However, studies show that there is more money saved when incorporating. This Is because of the differential in the Medicare tax.

It is important to note that the profits from the LLC are taxed completely for FICA, which is Medicare and Social Security combined. This means 15.3% of the FICA taxes along with the additional $2.9 Medicare taxes on the profits that are above the wage base.

This is where the difference between the S-profits come in. An S-Corporation is not taxed for FICA. This is the differential in Medicare. Under normal circumstances, full time physicians usually earn more than what they get from the wage base of the Social Security. The tax savings are also generated from the Medicare differential between the non-taxed profits of the S-corps and the fully taxed profits of the LLC.

The catch is when the entrepreneur incorporates then he is both the owner and employee of the corporation. As the corporate owner, the taxpayer hires himself, who is also the employee. The upside is that the LLC is some kind of venue where the taxpayer is both the worker bee and the business owner. Therefore, the business results of the LLC when reported and filed on Schedule C that also includes the individual’s 1040, there is no separate income. This then saves him money.

Receiving Remuneration from S-Corp in Two Ways:

  • As an employee, the taxpayer receives a “fair salary” by the corporation because he is productive.
  • As the owner, the tax payer pays himself a “distribution” of the said profits that remain after every other expenses (including the salary of the tax payer). These profits are also taxable because it is income and not because it is considered as Medicare taxes.

For S-Corp to make sense financially, the individual must have profits that are significant and long lasting even after the salary of the employees have been paid fair and square. How is a fair salary calculated? Here are two ways:

  • The IRS typically does not challenge the “fairness” of the salary if it is not equal to the remaining profits even after paying one’s self.
  • The entrepreneur must also pay a reasonable amount depending on one’s production, location and profession.

The salary being reasonable is constantly scrutinized by the Internal Revenue System. This is because of the owners of S-corp are tempted to earn their remaining profits from the Medicare taxes because all year round, they were only getting miniscule paycheck.

Business owners and self-made entrepreneurs must understand that S corporations can save owners tax when registered as a small business. There is a big benefit for the entrepreneur if they list the business down as an S corporation. The S corporation minimizes the employment taxes.

However, it must be clarified that the S corporation is not really a corporation. Instead, an S corporation is actually a limited liability company that is strictly made for the Subchapter S election.

People including tax accountants regard this as “S corporation.” However, the more proper way of calling it is Subchapter S corporations especially when the entity that is making the election is a “Subchapter S LLC.” It only comes to show that the entity that makes the election is really an LLC.

Here is a more elaborate explanation on how the Subchapter S allows the business owners to save more money:

Avoiding Some Taxes

The S corporation election lets the business owner avoid Medicare, self-employment taxes and Social Security on the portion of the business profits. That is the deal as well as the trick. The tax avoidance gambit also works quite simply despite it being regularly debated by the Congress and also reaffirm the works.

With an S corporation, the entrepreneur splits the business profits into two: “distributive share” and “shareholder wages.” The shareholder wages are subjected to 15.3% tax and the leftover distributive share cannot be subject to 15.3%.

Tax accountants really do not explain this and can be quite sheepish on this particular subject matter. However, for entrepreneurs who wish to avoid Medicare and Social Security taxes along with the self-employment taxes, it is definitely beneficial for them to be listed as an S corporation.

Note that the S corporation also lets the active shareholders to not pay the surtax of 3.8% for Medicare on business profits.

The Deductible Losses for Smaller S Corporations

As mentioned in the previous paragraphs, the saving tax loophole on taxes that is associated with the S corporation passes by S corporations that let the shareholder as well as the employee avoid the employment taxes. This is where entrepreneurs and self-employed individuals must focus on if they wish to make a Subchapter S election for their LLC or their corporation.

However, there are also two smaller general tax benefits that are associated with the S corporation. The first benefit is that the S corporation tends to lose money and that loss eventually becomes a tax deduction on the individual tax return of the shareholder.

There are some rules that the entrepreneur must follow in order to deduct these losses. In summation, the money that is lost must be the money of the beneficiary. They must also be working in the S corporation. This is a good benefit for businesses that experience losses whenever they ramp up.

Another benefit is that the minor tax savings can also flow from the Subchapter S status. An S corporation has a safer tax return that can put deductions. This results to entrepreneurs claiming deductions that are legitimate.

No Corporate Income Tax

Another tax saving benefit that must be delivered by S corporations is a special case and is only applicable to businesses that are operated in the form of regular corporations. These are also regarded as C corporations.

In most situations, S corporation does not pay corporate income tax. This means that when compared side by side with the C corporation, the S corporation can pretty much save the entrepreneur a corporate income tax.

With the examples presented above, it only makes sense that it is definitely fair for the entrepreneur to tax these small business corporations at a 63% tax rate. It is also self-evident that a corporation should be elected and treated as an S corporation. This is because as S corporation, there is no income tax that can be levied. Whenever the income is allocated to the individual shareholders, there is a maximum rate of 44%. This means that it would be around $440,000 in the form of income taxes and then it would be around $600,000 left over right after the tax profit.

Year End Tax Planning for S Corporations

 Businessmen and entrepreneurs work hard on preparing and planning for the upcoming tax season. An area that must be paid significant attention is how to properly plan for the S-Corporation clients. This is because the S-corporation is a designation within the IRS tax code which also changes how corporations are taxed. If the corporation is created within the state law and it is applicable, then it is granted the S Corporation status from the IRS. The business is no longer taxed as a corporation and this is good news for the owner because they receive lower tax rates. In the long run, it transforms into a “flow through” entity and its earnings accumulated from the corporation are eventually taxed at the level of shareholder and listed as is on the 1040 tax return. There are also other entities that is requested and treated as the S Corporation for the taxes whereas the remaining amount is simply for the LLC and its legality.

There are also several aspects that are connected to S corporations and must be specially planned toward the end of the year. When the Congress enacted the statutes of the S-Corporation, there have been lots of quirks and this was created and it primarily affected the S-Corporations. It eventually seemed inconsistent along with the other areas from the tax code. Nonetheless, it requires that this may be properly accounted for.

Salary of the Owner

The profits of partnerships, LLCs and sole proprietorships are subjected to two taxes: self-employment taxes and income taxes. When one of these two is treated as some kind of S-corporation. The residual profits are not subjected to taxes for the self-employed. This can definitely decrease taxes. This is somehow true to a certain degree. Offsetting the tax savings is the very reason why an owner of any S-corporation must pay himself or herself a salary that is within the means to commensurate services that have been provided to corporations. The salary is then subjected to employment taxes. In effect, the portion of the residual profits of corporations are not allocated to salaries subjected to self-employment taxes.

Here’s How Taxes Work for Citizens and Residents Living Abroad

Here’s How Taxes Work for Citizens and Residents Living Abroad

For Americans or legal residents living on tropical islands or traveling, they must consider the possibility of being locked up just in case fate does not favor them. That is why it is very important to pay taxes even when one is overseas so that when something happens, the government can still protect these individuals. Contrary to popular belief, moving out of the States does not relieve the individual of tax obligations. The IRS has the knack of tracking anyone anywhere in the world.

Here are some tips on how citizens and legal residents can manage their taxes and tax liabilities while they are outside in the country and remain within good graces of the government of the United States.

  1. Understand the Foreign Earned Income Exclusion

Resident aliens as well as US citizens are subject to federal income tax when set on the worldwide income. The FEIE or the Foreign Earned Income Exclusion lets the qualified taxpayers exclude the taxable income and reach it to around $101,300 of the earned income that is subject to only two requirements. It is also very important to note that the income the individual receives must be earned because he is working. It may be as an independent contractor or an employee and also not apply to the passive income like dividends, pensions, income and rental income. Independent contractors also receive what they call a 1099-MISC and still be subjected to self-employment tax (Medicare and Social Security) on their net income. Another thing to note is that this can also be optimized simply by opening the S corp and the other potential offshore structures which depend on the individual tax situation of the person.

  1. Understand the requirements of the FEIE

There are two requirements that can be done. First, the individual must establish a “tax home” if they are in a foreign country or in other several countries. Another is that they have to satisfy the “Bonafide Resident Test.”

  1. Have a Fire Sale

The easiest way for an individual to meet the “Tax Home” requirement is to also cut the ties with the United States. This means that the individual has to give up the apartment. To be more elaborate, when the individual has to give up their apartment, cancel their lease or sell their car, all with the documentation that they will leave.

  1. Get Out

The IRS site describes that the hardest process when fulfilling the requirements is the Bona Fide Residence Test, which has already previously been mentioned. This can be done when the individual is a resident of a foreign country for a period that has not been interrupted and includes an entire tax year. This means is that the individual must plant their flag in other countries for a majority of the year. It may not necessarily be advisable to stay in just one country, for example, being confined in a jail cell, but these individuals must prove that they are there in the long run. It is not black and white and some examples that prove residency are:

  • Establishing a temporary home in foreign countries for periods that are no definite. An example is having a lease for the long run and also owning a home there.
  • Physical presence in a foreign country. This means that they have to be residing in the mentioned country.
  • The assumption as well as economic burdens including paying the local taxes
  • Actively participating in communities on a cultural and social level. Citizens and residents must acquire their library cards and gym memberships to prove that they are living there.
  • Marital status and family status – if the residents have spouses or family members in the country they are in, it is easier to file this.
  • Other documentation like local bank account info, driver’s license and health insurance
  1. Physical Presence Test

 For new generation of expats, the physical presence test is more applicable. This includes the digital nomads who usually jump from one country and then to another. According to the IRS website, these individuals must be physically present in a country for 330 days in the course of 12 months. The 330 days do not have to be consecutive. The Physical Presence Test does not really depend on the residence that the individual has established, neither is it about proving the return the United States or the reason and purpose of staying abroad. The Physical Presence test only needs the time that the individual is in that country. The intention, regarding the purpose and nature of the stay abroad are also relevant when determining whether the requirement mentioned in Step 3, “Tax Home”, is met.

The very point of this discussion is that anyone can pick up and also leave any day for that year. They can also travel anywhere in the world and physically work in the countries just on their laptop and then return to the United States after one year. As long as this individual was in the United States for 35 days or even less, as long as this is within the period, they still qualify for what they call the FEIE. They do not have to pay taxes on the very first $101,300 in the total of earned income. This case, the split is also divided on a prorated calculation. Approximately this would amount to $50,000 in 2017 and also $50,000 in 2018 for the year period that has been split between the two calendar tax years.

It is very important to understand the tax implications of a country that the citizens or residents are traveling through or possibly be living in. In general, if they are spending more than 183 days or around half a year in another country, they must file as a fiscal resident of that year. For a person who is perpetually traveling or what they call a digital nomad who is qualified under the Physical Presence Test, then this is not any problem. If the individual plans on taking a bona fide residency somewhere and then it gets tricky.

Countries such as Hong Kong, the Seychelles, Taiwan, Singapore, Panama and Costa Rica have what you call a “territorial tax system.” Only the tax income is generated within the country’s borders. There are also a number of countries that have no income taxation such as Bahamas, Bermuda, Monaco, United Arab Emirates, Cayman Island and Andorra.

The choice becomes whether the individual has to choose a country that is for tax purposes and then just pay the required tax in that country at a low income tax rate. Examples of these countries are Bulgaria, Malta and Portugal or also choose to set the residency up in the country. The resident and citizen can be a permanent resident in various countries, but it still depends on the rules of the locality. There are also some people who split the time between the places such as Colombia and Panama and also claim the residency in Panama because of the more favorable tax treatment. In any event, it is also important to be mindful of thresholds when one becomes a tax resident. The aforementioned 183 days is usually the general rule of thumb and this does not apply to various countries. In these complicated cases, it is quite prudent to also receive the counsel of a CPA or a qualified tax attorney.

  1. Staying Out

If the resident or citizen craves for Jimmy John’s and Costo and actually decides to return for these reasons, it may cost him thousands of dollars. Just like qualifying for the status of a hotel chain or an airline, the rules that comply with the Physical Presence Test are quite strict. To begin with individuals, they must be in other countries for around 330 to 365 days. This does not have to be counted within the calendar year. As long as the individual is in another country for around 330 out of the 365 days, then it can be prorated.

However, there is a different requirement if the individual is in international waters or flying over US airspace. If he or she is visiting the United States and have to give an extra hour because the flight is delayed and if it has been missed, then this will also be counted towards allotting the days. Another scenario is if they leave the West Coast around 11:00 pm that is bound for Europe and also charged additional days because this is still in the jurisdiction of the United States. It is very important that there are buffer days remaining so that the mistake would not be as costly as it would.

How to Pay Zero Taxes to the US with the Foreign Earned Income Exclusion

The IRS has built a time bomb to the FEIE. If residents or citizens fail to submit and file their US returns, then they are audited by the IRS. They won’t be able to take the FEIE as well. Even if they are working abroad and would eventually owe the United States government nothing, it would still result to the individual paying the United States 100% of their income.

The same can be said to those who filed their US returns but are not truthful about their foreign salary because they omit this. The downside to that is the minute the individual is audited, they can lose the FEIE and also pay taxes that is 100% of their salary. The way to go around this is that they have to claim the FEIE or they would lose this entirely.

The most common reason why this happens is that the individual though they only need to report their US income to the United States and the foreign source income to the foreign country that they rare residing. Not reporting your foreign salary to the IRS is a big error that can cost them big time.

The very take-away from this is that the United States require every citizen and resident alien, whether they are in the United States or not, to pay their taxes.

Consequences of not filing US tax returns

Living abroad for a number of Americans and legal residents may seem like an adventure of a lifetime. They are exposed to various experiences and their senses are constantly invigorated by events that are delightful, interesting and unexpected. For most, it is the stuff of dreams. There are also unfortunate individuals. Unfortunately, these dreams can also turn dark quickly especially when they discover that they did not comply with the Internal Revenue Service because they did not file their US income tax.

Every year the United States spends 5 billion dollars simply for enforcement activities. This includes auditing, collections, discovery and prosecutions which pretty much yields around that amount all in additional tax revenue. It is clear that their financial best interest is about to get easier for the US government. They can also assess and prosecute the Americans living abroad and who are behind the filing of the US income taxes.

Just like any US resident, if you are an American residing in any country abroad and fail to file the US or the state taxes, then they will receive penalties for not filing their taxes, even if they do not owe the taxes to the state government or the IRS. The failure to file the penalty can also be thousands of dollars and can also take part in the advantages, benefits and special reductions that are offered to the US expats that can help reduce the US tax obligation. There are also news that have been enacted and provided the United States a crystal clear picture of who among the Americans are living abroad and are also not filing, what they are worth and where they are living. The days of living beyond the grid is waning and a new era of what is focused and enforced. The United States have entered this data by sharing the agreements at a level that is most sovereign and between the five of the largest countries within a swarm of the additional countries that are asked to join into data sharing.

Solar Tax Credit

Solar Energy Tax Credits

Federal Tax Credits of Solar Energy

Tapping the sun to acquire power feels very good. Solar power does not pollute but it reduces the use of fossil fuels and other coal and also reduce the individual carbon footprint. It is also up to five times expensive as electricity that is from natural gas and the other sources.

In order to encourage the Americans to use the solar power, the Department of Energy along with the Environmental Protection Agency run the Energy Star Program which among the other projects also offer the tax credits simply for the solar-powered systems.

Credits for approved solar installations

Installing the alternative energy equipment in one’s home can also qualify them for a credit that can amount to 30% of the total cost. The credit is made available until the end of 2019. The percentage usually steps down every year and then ultimate does so at the end of 2021.

The qualifying equipment also includes the solar-powered units that can generate the heat water or electricity. The credit can be made available for improvements especially when it is to make a residence for the individual. This can also apply to a second residence.

As credit, it is possible to take the amount directly off the tax payment and not make this a deduction from the taxable income. Aside from the cost of the system, there is also no limit to the total dollar amount of the credit.

How to Claim Solar Credits for Rental Property

It is not possible to claim credit simply for installing solar power at the rental properties that the individuals own. The exception is when the taxpayer lives in the house for just some time of the year and also use it as a rental while one is away. When one is needed to reduce the credit for the vacation home, rental and otherwise, also reflect the time that this was not there. If the individual lives there for around three months per year, for example, then the individual can claim 25% from the credit. The system usually costs around $10,000 which is the 30% credit from the $3,000 and can also claim a quarter from that, which is around $750.

Filing Requirements for Solar Credits

When claiming the credit, it is necessary that the individual must file the Form 5695 as well as part of the tax return. This can be calculated on the credit of the form. This is then entered as a result on the 1040.

If the individual ends up with bigger credit than the income tax due, then they cannot use the credit in order to get the money back from Internal Revenue Services. Generally, what they can do is carry the credit over to the following year. Unfortunately, it is not yet clear whether they can carry these unused credits to the years after the solar credit expires.

Residential Renewable Energy Tax Credit

The Consolidated Appropriations Act was signed in December 2015. It also has an expiration date for solar thermal technologies and PV and introduced the gradual step down in the value of the credit for the technologies. The credit that is delegated to the other technologies also expired toward the end of 2016.

Taxpayer can claim the credit of 30% that is considered qualified expenditures for the system that has served as a dwelling unit which is located in the United States. As long as this owned and used as a residence for a taxpayer, then this is what counts. The expenditures in relation to the equipment can also be treated and made the minute the installation of these solar panels are completed and finished. When the installation is set at the new home, then the date that is placed in the service of the occupancy from the homeowner. The expenditures also include the labor costs for every on-site preparation that is in the assembly of the installation of an original system. Preparing and wiring of an interconnected system to a home can also receive deductions from the federal tax.

Solar-Electric Property

  • 30% of the systems have been placed by December 31, 2019
  • 22% of the systems have been placed in service by December 31, 2021 and before January 1, 2022
  • Systems can also be placed in service between January 1, 2006 and December 31, 2021
  • The home that is served by the system does not have to be the principal residence of the taxpayer
  • 26% for the systems that have been placed in the service between December 31, 2019 and Janaury 1, 2021
  • There is also a maximum credit for the systems that is placed in service after 2008

Solar-Water Heating Property

  • 30% for systems have been placed in service by December 31, 2019
  • 22% for the systems have been placed in the service between December 31, 2020 and January 1, 2022
  • Systems are also placed in service between January 1, 2006 and December 31, 2021
  • Half the energy that has been used to heat the dwelling’s water ideally must come from solar and the solar water-heating property expenditures to make it eligible
  • The home is served by the system and it does not have to be the principal residence of the taxpayer
  • The tax credit does not also apply to the solar water heating property for hot tubs or swimming pool
  • Equipment must be certified for performance and pass the SRCC or the Solar Rating Certification Corporation or any comparable entity that has been endorsed by the government of the corresponding state where this property has been installed
  • There is no maximum credit for the systems that have been placed in service after the year 2008.
  • 26% for systems are placed in service that are between December 31, 2019 and January 1, 2021

 Fuel cell property

 The maximum credit is $500 for every half kilowatt

  • The fuel cell can also have a nameplate capacity at least 0.5 kW of electricity that uses an electrochemical process and the electricity-only generation efficiency is more than 30%.
  • The home served by the system must also be the principal residence of the taxpayer
  • If ever it is a joint occupancy, the most maximizing costs that can be taken into account by every occupant is $1,667 for every 0.5 kW. This does not necessarily apply to the married individuals who filed as joint. The credit can also be claimed for every individual that is proportional to the over-all costs that have been paid.
  • Systems must be put in service between January 1, 2006 and December 31, 2016
  • For the systems that have been installed in 2017, these are all considered not eligible

 Small wind-energy property

  • For the systems that have been installed in 2017, these are not eligible
  • Systems can also be placed in service between January 1, 2009 and December 31, 2016
  • There is no maximum credit that is placed for the systems after the year 2008
  • The home served by the system also does not necessarily have to be the principal residence of the taxpayer

Geothermal heat pumps

  • For systems that have been installed in 2017, these are not eligible.
  • Systems must also be placed in service between January 1 2008 and December 31, 2016
  • The home that is served by the system does not necessarily have to be the principal residence of the taxpayer
  • The geothermal heat pump can also meet the Federal Energy Star criteria
  • There is also no maximum credit for the systems that have been placed in service after the year 2008

Significantly, the American Recovery and Reinvestment Act of 2009 also repealed the previous limitation on using the credit for eligible projects that are supported by the “subsidized energy financing.” For projects that have been placed in service after December 31, 2008, then the limitation no longer applies.

Established by the Energy Policy Act of 2005, the FTC or federal tax credit for the reoprty ‘s residential energy initially started to work with solar-electric systems, fuel cells and solar water heating systems. The Energy Improvement and Extension Act of 2008 also extended the tax credit of the small wind-energy systems along with the geothermal heat pumps. This was made effective January 1, 2008. Other key revisions include the eight-year extension of credit until December 31, 2016. The ability to take advantage of the credit and set this alongside the alternative minimum tax. This also includes the removal of the $2,000 credit limit that is targeted solely for the solar-electric systems that started in 2009. The credit has also been further enhanced in February 2009 as conducted by the American Recovery and Reinvestment Act of 2009. This removed the maximum credit amount all on eligible technologies with the exception of fuel cells that have been placed pretty much in service after 2008.

Guide on How to Receive the 30% Credit from Solar Energy

The Solar Tax Credit is the Law that has been extended by legislature in December 2015 and it lets the taxpayer take the 30% credit, as long as it is a qualified expenditure for the solar system. This is considered qualified if it serves as a dwelling unit that is located in the US and is owned and also used as a home by the active taxpayer.

The expenditures in relation to the equipment are made when the installation has been completed. The eligible expenditure also covers the labor costs for preparation made on site, piping and wiring the interconnection of the system to the home and the installation of the original system. In a nutshell, this means that the entire value of the quote from this solar company can install the solar panels that are eligible for the tax credit.

To claim the 30% tax credit from solar energy, individuals must complete the Form 5695 and then add the results to the main tax return.

Here are steps on how to complete the Form 5695:

Form 5695 calculates the tax credits for various qualified residential energy improvements. You just need to worry about Line 1 for solar electricity. Also insert the total cost for the solar panel systems that include the installation listed into Line 1.

Assuming that the taxpayer is not receiving the tax credit for the fuel cells that have been installed on the property, then they do not carry forward the credits that have been accumulated form last year. If this is the case, the value from Line 6 is then put on Line 13.

The next step is to calculate if the taxpayer has enough tax liability to acquire the whole 30% credit that can be received for the year.

The worksheet on Page 4 of Form 5695 must then be calculated to come up with the limit on the tax credits that can be claimed. If they are claiming tax credits for interest on mortgage, buying a plug-in hybrid or electric vehicle, buying the home for the first time or adoption expenses, then there should be more information at hand.

  1. Enter the amount on Line 47 from Form 1040 or Line 45 from Form 1040.
    2. Enter the overall amount, if there are, of the credits from Lines 48 until 51 on Form 1040 and Line 22 on Schedule 4 or Lines 46 to 48 from Form 1040NR.
    3. Enter the amount om Line 40 from Form 5694.
    4. Enter the amount on Line 11 or Line 12 if the individual is claiming child tax credit.
    5. Enter the amount on Line 9 from Form 8396.
    6. Enter the amount on Line 16 from Form 8396.
    7. Enter the amount on Line 3 from Form 8859.
    8. Enter the amount on Line 15 from Form 8910.
    9. Enter the amount on Line 23 from Form 8936.
    10. Add the lines 2 to 9.
    11. Subtract Line 10 from Line 1. Enter the amount on Line 14 from Form 5695 as well. If it is zero or less, then just enter 0 on Lines 14 and 15 of Form 5695.
    12. Enter the result on Line 14 from Form 5695 and then review Lines 13 and 14 and put the smaller one among the two on Line 15.
    13. Add the Lines 6, 11 an 12.

This is hwo you come up with the Federal Tax Credit for Solar Energy.

Deduct These Start Business Expenses

Whenever individual start a brand new business that requires money, it can be difficult for them to shell out their cash. Luckily, it is possible for the entrepreneur to receive cost deductions in order to limit tax bills. Here are ways on how these entrepreneurs can decrease the taxes that they have to pay.

What Entrepreneurs Can Write Off

Once the business opens and starts making money, the costs of items can be deducted and filed as business expenses. These business start-up costs are considered capital expenses. These are the costs that the individual can incur and regard as an asset of the business which will also benefit him or her for more than a year.

Typically, it is not possible to deduct the expenses until the entrepreneur sells or disposes the business in the long run. There is a special tax rule that lets the owners deduct $5,000 in the start-up as long as the expenses that have been incurred in the first year of the business. It is possible to then deduct the rest if there are any. Other equal amounts over the course of the next 15 years can also be deducted.

Some Startup Costs That Can Be Written Off

The business deductions for the next company can also include the costs of:

  • Licenses, permits and other fees
  • Advertising costs, which also include advertising the business opening and also creating websites for the business
  • Rental of the business equipment like office supplies and customers
  • Expenses connected to obtaining suppliers, financing, distributors and customers
  • Accounting and legal fees
  • Investigating costs and what it takes to create a business that is successful which also includes the research on potential products and markets
  • Office rent and utilities that have been paid before the business starts operation
  • Costs for training employees before the business opens

 Can a Small Business Deduct the Cost of the Computer?

 If the individual buys the computer for the business and this is exclusively used for it, then it is possible to list this as a deductible. If the computer is used for business more than 50% of the time, it is definitely a qualified deductible.

However, personal time still has to be accounted. Take this situation for example. If the $1,000 computer is used for 60% of the time, then $600 can be deducted.

Are There Up Exceptions to Start Up the Cost Deduction

Some costs that are related to opening the business that is not considered as a start-up expense. Many of these costs can still be deductible and different restrictions and rules can be applied.


The largest expense that a number of home business can incur is that the business starts the inventory. Buying the goods or materials to make the goods to sell to the customers are also considered expenses.

Long Term Assets

These are items that can be bought for the business and will also last for more than a year. This definitely includes office equipment, computers, cars and machinery. The long term assets that the tax owner can buy before the business officially opens are not considered qualified for the startup costs.

Instead, what can be done is to treat these items that have been purchased as some kind of long-term assets that can be bought after the business begins. It must either depreciate the item in a span of several years or deduct the cost in just one year as it is listed under Section 179. It is not possible to take the depreciation of the Section 179 that is deducted until after the business has begun.

Research and Development Costs

The tax law can also include the special category for development and research expenses. There are also costs of the business that has been incurred in order to discover something new in the experimental sense. This could be a new formula, process, prototype, invention.

These costs also include the computer and laboratory supplies, rent, overhead expenses, equipment rental and utilities. It does not cost the purchasing of the long-term assets. These R&D costs are then deductible as listed in the Section 174 of the Internal Revenue Code. This can also be applied if the business owner incurs the costs even before the business opens.

Organizational Costs

Costs that are incurred to form the limited liability company, partnership or corporation can then technically be part of the startup costs. The rule for deducting the costs can be the same for any startup expense. However, if you form an LLC with one-member then there is no business deductions for the start-up that can even exceed over $5,000.

When Can Business Startup Costs Be Deducted?

Expenses that were listed as startup expenses before the business can also become deductible as soon as the business starts operation. For example, the supplies that have been purchased after the business can start and currently be deducted in operating the expenses. The supplies that you bought before the business starts as additional expense.

When Does A New Business Begin For Tax Purposes

According to the court, a new business begins paying the tax when it starts to function as a pressing concern. IT can also start performing the activities for which it was organized. Also according to the IRS, the venture is a concern once it has acquired the assets that are necessary to perform the intended functions. It can also put the assets to work. The business begins when this business is started, whether they are actually earning money.

For example, if the business has provided a service to clients or customers, it also includes consulting, law services, accounting, financial planning. The business can also begin when the taxpayer offers the services to the public.

For knowledge workers, the business starts once assets are accumulated and the products are sold. These kinds of workers can also include artists, computer programmers and writers.

These products do not have to be completed nor do the sales must be solicited. An investor’s business can also begin when the inventor starts working on an invention. It also does not matter when it is sold, patented or even completed. The writer’s business can also begin when the writer starts coming up with a writing project.

What happened to expenses incurred early on?

Expenses incurred before the business opened can be deducted in the period of 180 months as opposed to doing this all at once because the business would be operating. Typical costs also include the investigation of whether the business should be opened, supplies must be ordered and employees are trained.

When a new business is investigated, it can be quite an expensive proposition. However, these expenses cannot be deducted under the general rules that are made for the business deductions. This is because these expenses simply exist for business or trade and can only be deducted as such. By definition, this can also be incurred for the startup expenses prior to the time that the business has begun.

How fortunate it is that there are ways to go around this dilemma. If the expenditures can result to the up and running business, then they can deduct the part of the costs in the first year and also amortize the remaining costs that can be deducted in the equal installment through the period of 180 months. It begins in the first month that the business has officially opened.

How much can be deducted during the first year of the business. One if then able to deduct this for $5,000 if the qualifying start-up costs can also be the reason to deduct on the phase when the expenses are reached. If the start-up efforts can also end in the creation of the active business or trade. The tax return for the year of the business commences, then the total amount of expenses can also be deducted, as long as one is less than the other.

What Costs Don’t Qualify

The investigation also expenses that these are qualified in relating both the business condition that are general and also relate to specific businesses. The market and product research can also be determined in making it feasible and also starting a specific kind of business. The costs of checking these various factors are involved in the selection that can be amortized and investigated. Aside from that, the costs of creating the business can also include wages, salaries, advertising, consultant and professional fees.

What Costs Don’t Qualify

The following costs do not really qualify for the deduction of the first year. The incorporation expenses cannot also be deducted as the startup costs. However, they can also be deducted in incorporation expenses. The start up expenditures of the real estate taxes, interest, experimental costs and research are also allowed as some kind of tax deduction. This may also be incurred.

The costs are also attributable to acquisition of the specific property that can be subject to the cost recovery and depreciation that do not qualify for the amortization. Instead the property cannot be depreciated under specific rules.

What if the business does not open?

If the entrepreneur chooses to not push through with the business, then he can opt to not pay the portion of the costs. It pays to generally investigate various possibilities of going through the business and to also purchase the non-specific business that still exists. It also considers what are regarded the deductible and personal costs. However the total costs can also pay in attempt to purchase or start specific kind that could also be considered in the capital expense and then claim this as capital loss. This is also subject to the rules that are applied to the non-business capital losses.

If they purchased the business assets in the process of the corporation opening, then the entrepreneur can also claim a loss once this is sold or disposed.

Start Up Costs for Partnerships

If the business decides to conduct it as some kind of partnership, then any of the partners can deduct the expenses that are paid to start and open the business. However, the partnership can also elect to amortize and deduct the over-all start up costs. Under the same rules, this is a sole proprietorship, except the election cannot be done with a partnership and then eventually reported to one of the partners.

If you also decide that the partnership cannot be considered for this election, then the organizational cost can be added to the tax basis of the interest of the partnership. If that is the case, the partnership interest is eventually sold and dissolved so that the capital expenses are then reduced to the amount of the capital loss and gain.

Calculating the Start Up Expense Deduction

This is done by calculating the first year deduction. Once this is determined, the amount of that qualifies the expenses. There is also the need to determine how much of these expenses are deducted in the year.

Work Smart

 It is usually the best way to claim the 60 month amortization that can be deducted as early as possible. The IRS also determines that the business can also begin in the year before the election that lets the amortization of the startup costs. The right to deduct the costs in the earlier year can also be lost.

This is the calculation for the first year:

The initial year deduction amount must be determined. If there is more than $50,000 in the expenses, then it must be reduced to maximum amount of $5,000. For every $1 is $1 if there is $50,000 in total expenses. With that being said, if the total is $55,000, then all the expenses must be amortized in a period of 180 months.

It is also important to determine the monthly amortization amount. This can be done by subtracting the initial year deduction amount and get this from the total expenses. This is the amortizable amount and it is also divided from the amount so that monthly deduction can be calculated.

Determine the months of amortization is claimed on the tax return and also the business has been operated. The amortization period can also start the month that it has operated the business. The amount can also amortize the return on the number of months that the business can be operated on a monthly basis.