The Estate Tax – A Wealthy Farewell Gift to Uncle Sam

The Estate Tax – A Wealthy Farewell Gift to Uncle Sam

by | Nov 1, 2019 | Business Tax, Individual Tax

Dying is expensive. Funeral costs, the plot of land your body will occupy, and other expenses to cap off a good life. However, that’s not all. Depending on how vast are the assets you leave behind, wealthy individuals may be liable for the Estate Tax.

 

Estate Tax?

 

The estate tax, or more derisively referred to in public discussions as the “death tax”, is an inheritance tax that behaves similarly to the gift tax. Except in this case, the transferor is deceased and no longer among the living. So who gets the tax? The estate of the deceased person, of course. After tallying up the entirety of that person’s estate (the Gross Estate), the estate tax is calculated and the government takes its cut before it gets transferred to the inheritor of the deceased’s estate. Just like the gift tax though, it does not apply to most taxpayers due to its very high exemption amount, currently set at $11,400,000.

Exclusions & Deductions

 

Just like the gift tax, deductions are available to use to limit the bite of the estate tax by deducting the amount of the gross estate to be taxed. Some deductions include charitable contributions, marital transfers, casualty losses, and admin/funeral expenses.

4 credits are also available to use towards the estate tax. The Applicable credit amount (ACA), a tax credit for death-related taxes paid to foreign governments, a credit for gift tax paid that is part of the gross estate, and any prior transfers for taxes paid by the deceased within 10 years before or 2 years after the decedent’s death.

A Last Toll

 

Form 706 is used to file the estate tax. A fully prepared Estate Tax return is due 9 months after the death of the taxpayer. Of course, a 6 month extension is also available. The estate tax affects a very small number of taxpayers, but learning about the intricacies and unique pieces of our tax code helps readers gains some useful knowledge on taxes as a whole. As a CPA firm, we firmly believe in sharing relevant and interesting knowledge. Many of our clients would agree and feel more confident in their decision-making knowing they’re properly informed and their accounting and tax needs are kept in proper order by us. If you would like to learn more of our services, contact us!  Also, please follow our social media pages for future articles like this that cover the unique tidbits of our tax system.

A Hidden Price Tag on That Lavish Gift – The Gift Tax

A Hidden Price Tag on That Lavish Gift – The Gift Tax

by | Oct 11, 2019 | Business Tax, Individual Tax

Did you know a special tax exist on the transfer of high-value gifts like luxury vehicles? The Gift Tax applies to these large transactions. While most people may not likely have to encounter them for their personal tax filings, it is worth gaining some insight on what triggers a gift tax and how it operates.

Gift Tax

The Gift Tax applies to transfers of property as a gift unless it is:

  • Valued below the annual exclusion limit of $15,000.
  • A deduction for a qualified charitable gift.
  • A qualified transfer to the donor’s spouse, otherwise known as the marital exclusion.

For example, Tim, a wealthy business owner, gives his nephew a pristine-condition vintage 80s sports car currently valued at $20,000. Surpassing the exclusion limit, Tim will have to file Form 709 and report the transfer of that car and pay the gift tax associated with it.

Exclusions & Deductions

Certain items qualify as exclusions and deductions towards the calculation of the gift tax. In addition to the annual exclusion, any gift amounts paid directly to a medical provider or education organization are excludable. So for example, a rich aunt that pays a university for her niece’s first year of college tuition would be an excludable gift amount. However, any amounts paid for boarding are not excludable. The marital deduction allows spouses to transfer property to each other an unlimited amount. Charitable deductions are calculated based on the FMV of the donation minus the annual exclusion.

Gift Tax Formula

In short, the gift tax is calculated as:

 

Value of gift amount

     – Exclusions (such as the $15,000 exclusion)

    – Deductions (such as charitable deductions)

= Taxable gift for the current year

     + prior year taxable gift amounts

 = Taxable gift amount to date

      x Tax rate

= Tentative gift tax

     – (prior year gifts x current tax rates) – (unified credit)

 = Gift Tax Liability

 

Ok, so maybe it’s not that short. But this formula takes into account any previous taxable gift amounts and liabilities.

Most taxpayers will not have to worry about the gift tax, but business owners who may consider transferring gratuitous amounts of property to families and loved ones should take heed of potentially incurring that gift tax. Having a knowledgeable tax and accounting team to provide guidance on such matters for business owners can prevent a lot of future complications. Just like us here at MiklosCPA. We are a California-based accounting firm that helps many small and emerging businesses with their tax and accounting needs. Schedule a chat with us to learn more about our services, and please subscribe to our social media channels for future useful pieces of accounting and tax knowledge!

Is Your Budding Business Considered A Hobby or A Business? – An Overview

Is Your Budding Business Considered A Hobby or A Business? – An Overview

by | Sep 25, 2019 | Business Tax, Individual Tax

Do you have a hobby you’re so passionate about that you’ve started to build a business around it, such as making arts & crafts and selling it at street fairs? Unless you devote much effort into it and consistently turn a profit, the IRS may determine your venture as a hobby and not a business.

Hobby or Business?

When determining hobby or business operations, the IRS primarily looks at if the business is actively engaged in making a profit. They generally look to see if the business made profit in consecutive years otherwise it may fall under the category of a hobby. Here are some additional factors to consider when determining if your business is a hobby:

  • Is the business carried out in a business-like manner with complete and accurate books & records?
  • How much time and effort is put into the business to make it profitable?
  • Does your livelihood depend on income from this business activity?
  • Is this business activity profitable in some years?

Hobby Deductions

While being considered a hobby activity disallows access to several small business expense deductions you would see on the Schedule C, there are some allowable hobby deductions. For example, Ordinary and necessary expenses related to your hobby venture are still available. However, those deductions are all limited up to the income of your hobby venture. Deductible losses beyond that cannot be claimed. For example:

Deb runs her artisan artichoke dip business on the side. She runs it only on weekends due to her regular job during the week. It doesn’t do too well in its first few years and she decides to close it. It barely earns $1500 in income, but cost her $2500 in expenses to start up and operate. Deb can only claim up to $1500 in allowable hobby deduction losses.

 

Claiming Hobby Losses

Hobby losses are claimed on Schedule A, just like other itemized deductions that you would claim for your individual tax filing. By having enough itemized deductions such as hobby losses, you can potentially lower your taxable income.

While starting up a hobby-based business is often a passion project, elevating it into a full-blown business operation can take time and a proper support team. Good accounting is necessary for any growing business. Look no further for that. MiklosCPA is a California-based CPA firm that supports many small and emerging businesses with their tax and accounting needs. Consider giving us a call, and follow us on our social media for more upcoming “good-to-know” pieces.

 

Take that L, and Carry It Forward – Net Operating Losses

Take that L, and Carry It Forward – Net Operating Losses

by | Jul 1, 2019 | Business Tax, Individual Tax

Owning and running a business comes with unlimited potential for growth and lofty dreams. It also comes with the risk of failure and defeat. Losses are just as much a part of life as success, and luckily the law give us the opportunity to leverage some of those losses towards potentially paying less taxes.

Net Operating Losses (NOL)

Let’s say that you are preparing your small business taxes on your Schedule C. You notice that your deductions are more than your income. Your business may have a net operating loss (NOL). Don’t fret. NOL can be used as a deduction for your individual taxes to reduce your taxable income and ultimately lower what you owe in taxes. However, there are some limits. Spending money on a bad date unfortunately won’t count as NOL.

For the most part, NOL comes from running a business. Expenses associated with starting and maintaining a business often qualify for business deductions. Sometimes your profits won’t match what you’ve spent to keep the business going and you’ll have a qualifying NOL. Only in narrowly defined circumstances, such as qualified casualty losses, can personal losses qualify. There are also limits to NOL for individuals, such as the NOL cannot exceed 80% of the individual’s taxable income. Capital losses, such as stocks losing value, cannot exceed capital gains.

Carry on, my wayward NOL

Once you’ve correctly calculated your NOL, you can use it as a deduction for your taxes. Of course, there are rules to it though. The Tax Cuts and Jobs act made it so NOL after 2018 cannot be “carried back” to previous tax years, with some specific exceptions in industries like farming. If your NOL hits the “80% of your taxable income” limit, the excess NOL will be carried over to the next tax year and onward until that NOL is depleted.

By using NOL effectively, you can mitigate the costs associated with starting up a business. Learning the ins and outs of NOL while starting up that business may be too time consuming and costly. Having a back-room team manage those details can help your start-up get on the right foot. Our firm, MiklosCPA, has supported many small business clients with their tax and accounting concerns so they can focus on their ambitions to grow their business. Get in touch with us to learn more about how we can help your business, and follow us on our social media pages for future “good-to-know” articles and other interesting tax tips.

The Small Business Filing – Schedule C

The Small Business Filing – Schedule C

by | Jun 17, 2019 | Business Tax, Individual Tax

Are you the sole proprietor of your small business? When it comes time to file your taxes, where do you put those expenses to claim the plethora of deductions available to small businesses? The answer, you see, is the Schedule C.

Schedule C is used to report income or losses for a business, operated as a sole proprietorship. To qualify as a business to use Schedule C, the individual must be regularly and continually involved in the operations of that business with a main focus on income or profits. It cannot be something mostly passive such as selling cookies for the annual church bake sale. Corporations and partnerships have different forms to report income or losses. For now, we’re focusing on the Schedule C that gets attached to an individual’s Form 1040.

The Schedule C – Simplified

The form itself can be outlined as:

  • Biographic info, such as name, address, accounting method, etc.
  • Income – gross sales, returns and allowances.
  • Expenses – such as actual expenses, depreciation, commissions, contract labor, premiums on business insurance, contributions, and business use of home.
  • Cost of Goods Sold (COGS), if applicable.
  • Vehicle Information, to claim deductible expenses for business use of a vehicle.
  • Other Expenses, not already listed above such as amortization, bad debt expenses, and business start-up costs.

Once this is all added up, a small business owner can determine if they had a profit or a net operating loss. Profits are always good, but even a net operating loss can be useful for deductible expenses or carrying the losses over to the next year.

Taking advantage of small business-related expense deductions on Schedule C like the business use of home, vehicle expense, and others require a bit of planning and know-how to use properly. Sometimes up-and-coming businesses and their owners may not have the time to plot these things out. Imagine having a knowledgeable support team take care of those needs, while you can focus on what counts most, growing your business! That’s us here at MiklosCPA. We are a California-based accounting firm that supports small and mid-sized business clients with their accounting and tax needs. Contact us to learn more about our services, and follow us on our social media pages for future good-to-know articles like this one!

Cancelled Debts? They May Still be Taxable.

Cancelled Debts? They May Still be Taxable.

by | May 1, 2019 | Business Tax, Individual Tax

Debt has become inevitable in many lives in the modern age. In fortuitous circumstances and probably after jumping through many legal hoops, debts may be cancelled and loans forgiven by a lender. However, even though you may be freed from those debts by a lender, that cancelled debt may still be taxable. Most people don’t know, but they may still end up having to pay taxes related to those cancelled debts since the balance of those cancelled debts are treated like income for tax purposes.

 

Cancelled debts

Say for example, a lender compromises with you regarding an outstanding personal loan of $8,000. They agree with you that if you pay off $4,000 of that debt, they’ll accept it in satisfaction of the loan. The remaining $4,000 of that loan now gets treated as part of your gross income for annual tax filing.

 

Bankruptcy, Gifts, and Other Exceptions

Of course, there are exceptions to keep in mind. Generally, debts cancelled in relation to a bankruptcy are excluded and not taxable on a person’s income. Debts canceled as a gift or inheritance are also not taxable. Cancelled qualified debts in real property and farming may also be excluded from being taxable.

 

1099-C

If you have any canceled debts, you should receive a 1099-C form from an applicable entity, such as a bank or a government entity like FDIC. Besides the usual identifying information, the form has an “Identifiable Event Code” section where a letter denoting what kind of event the canceled debt is related to. For example, “A” would be for Bankruptcy, “F” would be for By Agreement. You’ll need this document with your individual filing.

 

The taxability of cancelled debts may not be something commonly known. Having a knowledgeable accounting support team can help you and your business swerve around these potential financial potholes. MiklosCPA is a California-based accounting firm that helps many clients with their accounting and tax needs. Learn more of how our services can your business reach its growth potential! Contact us, and also follow our social media for more future “good-to-know” posts.

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