Qualified Business Income Deduction – An Overview

Qualified Business Income Deduction – An Overview

by | Apr 1, 2020 | Business Tax, Individual Tax

There’s a new deduction on the block, if you haven’t heard of it already. Another new item from the Tax Cuts & Jobs Act of 2017, the Qualified Business Income (QBI) Deduction allows certain businesses to claim a deduction of up to 20% of qualified business income. That deduction operates similarly to itemized deductions by reducing the income that will be used to calculate what you owe in taxes. As you may expect, there’s a lot to unpack in the calculation of that 20% QBI deduction.

Qualify for QBI

The QBI deduction is available to sole proprietorships, partners in a partnerhsip, or the shareholders in S corporations. Certain trusts and estates, such as Real Estate Investment Trusts (REITs), may also claim QBI. Corporations cannot claim QBI. Generally, QBI is geared towards individual taxpayers with small businesses formed as “pass-through” entities such as the aforementioned examples.

Specified service, trade or businesses (SSTBs) may be unable to claim QBI as well. See Form 8995 Instructions for a full list. Some businesses to note that do not qualify:

  • Health
  • Law
  • Accounting
  • Consulting
  • Investing & investment management

However, if an SSTB is below certain income thresholds, they may qualify for QBI. More on those thresholds later.

Adding up for QBI

QBI is the net amount of qualified income, gains, deductions, and losses connected to the operations of a trade or business in the United States. To figure your QBI, you should consider all related expenses and income to your qualified business. However, certain items cannot be included in your QBI calculation such as:

  • Interest income not related to the business.
  • Non- Effectively Connected Income (ECI) with the USA.
  • Amounts received as guaranteed payments (such as partners in a partnership)
  • Capital gains or losses
  • Dividends and dividend equivalents

QBI is a new tax frontier to grasp, so this is a good place to pause. Join us here at MiklosCPA for part 2 as we drill down further into the how QBI is calculated and where to report it.

MiklosCPA is a California based CPA firm that works with emerging businesses in various industries with their accounting and tax needs. Check out our social media pages for additional tax tidbits. Or if you’d like to learn more how we can help YOUR business, drop us a line.

Stay a Few Steps Ahead of Scammers – Taxpayer Info Security

Stay a Few Steps Ahead of Scammers – Taxpayer Info Security

by | Feb 19, 2020 | Individual Tax

Picture this scenario. It’s a week until the April 15 filing deadline. You’ve put off doing your income taxes until the last minute. As you scramble to get your papers together, you suddenly get a call on your cell phone from an unfamiliar 1-800 number. The caller gruffly states they are from the IRS and if you don’t pay what you owe today, your social security number will be invalidated. In order to pay, the surly caller asks you to provide your bank account number and verify your social security number.  Wait a minute, you think. Why are they asking for my SSN if they’re saying they’ll invalidate it? This sounds suspicious. You tell them to pound sand and hang up.

 The above scenario of “invalidating an SSN” is actually one of the latest scams criminals have concocted to scare confused taxpayers into yielding private information that can lead to drained bank accounts and property theft. Being aware of such scams and other thieving tactics will help save you and your loved ones from lost funds and financial hardships.

Your Security is Showing

Keeping your computers and mobile devices secure should be a given, especially if you utilize banking or payment applications on the internet. Consider these tips:

  • Create strong passwords with case sensitive letters and symbols.
  • Install security software & add an extra protection layer.
  • Back up your files on an external hard drive or a cloud service.

Phishing scams and malware

The internet has become the main form of communication. Naturally, scammers find ways to leverage it to trick taxpayers. Here are some scams to look out for:

  • Emails posing as trusted sources like a bank or a tax preparer. They may provide links with URLs that look odd. Don’t click them immediately. Hover over them with your cursor to see if the URL directs to the purported website.
  • Avoid immediately downloading any software in those suspicious emails.
  • Verify the site you’re using is secure and the correct site. Look out for typos in the web address bar and make sure it is encrypted as “https.” Scammers may set up fake sites to look like login pages where you can accidentally give your login information to thieves.

 The IRS does not call taxpayers with threats of jail or invalidating SSNs nor do they send unsolicited emails or request sensitive information online. If you encounter such events, report scam emails to the IRS at phishing@irs.gov and scam calls at www.tigta.gov. 

As a CPA firm beholden to our clients and the public at large, MiklosCPA believes in sharing useful information, like taxpayer security, with our readers. Check out our social media for periodically posted useful taxpayer tidbits. Based in California, MiklsoCPA supports business clients of emerging firms with their accounting and tax needs. If you wish to learn more of how our services can help YOUR business, please contact us.

Gambling Losses, Decedent Estate Taxes, and the Other Itemized Deductions

Gambling Losses, Decedent Estate Taxes, and the Other Itemized Deductions

by | Jan 31, 2020 | Individual Tax

If you’ve been following us for a bit, you may have noticed that we’ve highlighted the most well-known deductions that can be itemized for your tax return: medical expenses, the SALT deduction, home mortgage deduction, charitable deduction, and casualty losses. There’s one more section left on that Schedule A form, “Other itemized deductions.”

Other Itemized Deductions

What constitutes other itemized deductions? Before the Tax Cuts & Jobs Act (TCJA) of 2017, a long list of deductible expenses, mostly associated with business-related expenses, were allowable. The TCJA overhaul reshaped deductible expenses as we know it. Therefore, the list of allowable “other itemized deductions” shrank down to a significantly smaller list:

  • Gambling losses up to the extent of gambling winnings
  • Casualty & theft losses from income producing property
  • Federal estate tax on income in respect to a decedent
  • Deduction for amortizable bond premium
  • Ordinary loss attributable to a contingent payment debt instrument
  • Deduction for repayment of amounts under a claim of right if over $3,000 (see pub 525)
  • Certain unrecovered investment in a pension
  • Impairment-related work expenses of a disabled person

If you’re curious, check out Publication 529 starting on page 3 for an exhaustive list of what is no longer deductible.

Schedule A Deduction Plan

Combining these other itemized deductions with the other Schedule A deductions will help you to claim itemized deductions as opposed to only claiming a standard deduction. Itemized deductions lower your taxable income and can potentially save you in taxes if you itemize properly. With some planning, taxpayers can rightfully claim itemized deductions. Here at MiklosCPA, we feel that sharing knowledge, such as available itemized deductions, empowers our clients to make effective decisions for their emerging businesses. Get a vision of how we can help your emerging business by giving us a call! Also, follow our social media pages for more “good-to-know” articles like this one and share that knowledge with your friends and associates!

A Tax-Free Gain – The Home Sale Gain Exclusion

A Tax-Free Gain – The Home Sale Gain Exclusion

by | Jan 17, 2020 | Individual Tax

Selling your home while the market looks good? You’ll likely make a nifty profit, but the profit may be subject to the capital gains tax. Did you know some or maybe ALL of that capital gain on your home sale may be excluded? By excluding that capital gain on the sale of a home, you potentially pay less in your income tax! To be eligible for this exclusion, there are some criteria to meet.

Qualifying for the Exclusion

In order to be able to exclude the gain on the sale of a home, tests of ownership & use must be met:

  • The home must have been the principal residence of the taxpayer. For example, rental properties sold off will not qualify.
  • The taxpayer must have occupied the home for 2 of the past 5 years. The 2 years do not need to be consecutive but the total amount of days occupied in the span of that 5 years should be 2 years.
  • The taxpayers should not have claimed the home sale gain exclusion within 2 years of the sale of another home (the “once-every-two-years limit”).

Claim the Gain

The gain can be claimed when the Form 1099-S is received after the home is sold. Currently, up to $250,000 for a single filer can be claimed, and up to $500,000 for a married, filing jointly couple. Recently widowed taxpayers may also claim the full exclusion. Even if your home sale may not meet all the criteria to claim the full exclusion, a partial exclusion may also be available to taxpayers depending on the circumstances of the move such as for work, a health-related relocation, or unforeseen events like the home being destroyed in a disaster.

The rules surrounding income tax can get complex, but knowledgeable persons take advantage of the unique pieces that exist in it, such as the home sale exclusion. With the right knowledge and planning, individuals and small business owners can make the most of their annual tax filing. MiklosCPA provides that right knowledge and accounting support for many individuals and emerging businesses. We have helped business owners in assorted fields with their accounting and taxation needs, freeing them up to focus on their most important goal, growth. Learn more how our knowledge can empower your business goals through our services by giving us a call.

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Check those Gains – An Overview on the Capital Gains Tax

Check those Gains – An Overview on the Capital Gains Tax

by | Dec 26, 2019 | Individual Tax

The “Capital Gains Tax” is something you may have heard in passing in the news or in financial magazines. The general gist of it is a tax applied to the gain, a.k.a. the profit, someone makes selling a capital asset like stocks.

Capital Assets?

Real estate, stocks, and rare collectibles like artwork or vintage baseball cards are all capital assets. Basically, non-inventory assets qualify as capital assets, and therefore when sold for a gain have a capital gains tax applied to it.

Hold on to your Asset

The amount of time you hold on to your capital asset prior to selling it will determine what capital gains tax rate will be applied. Assets sold for a gain but were held less than a year, otherwise known as short-term assets, are taxed at the ordinary income level of the taxpayer. This can mean for taxpayers in higher brackets as much as 37% of that gain being taxed! Holding onto an asset for more than a year qualifies it for a lower rate when sold and therefore some savings.  For example:

Bob purchased 200 shares of ZZZ Company at $20 each. He intends to sell them at $30 each. Assume he is in the income tax bracket of 24%

Short-Term Long-Term
Bob sold his shares a month later and had a capital gain of $2,000 ($30 x 200 shares – $20 x 200 shares). Bob sold his shares a year later and had a capital gain of $2,000 ($30 x 200 shares – $20 x 200 shares).
Bob’s capital gain is taxed at his ordinary income tax rate of 24% Bob’s capital gain is taxed at the long-term cap gains rate of 15%
$2,000 x 24%= Cap gains tax of $480.00 $2,000 x 15%= Cap gains tax of $300.00

 

That’s almost a 10% drop in the tax rate if it’s a long-term asset! It literally pays to be patient in this case. The current cap gains tax rates are 0%, 15%, and 25% depending on your total taxable income.

Owners of emerging business should keep the capital gains tax in mind. Holding onto assets for more than a year before selling may potentially save you in taxes. Emerging businesses benefit from accounting teams cognizant of bookkeeping but the tax rules as well, like us here at MiklosCPA. MiklosCPA has helped many businesses in assorted industries with their tax and accounting needs through the latest in “virtual office” services. Let us show you how we can benefit your business! Give us a call to learn more how we can help you. Make a new social media friend and follow our media pages too. We regularly post interesting tax tidbits and other “good-to-know” news for our readers.

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