Tax & Accounting Q & A – Who gets the dependent?

Tax & Accounting Q & A – Who gets the dependent?

by | Dec 13, 2023 | Individual Tax

An old work friend of mine reached out to me recently with a tax question regarding her family situation. The short end of it: she, a single mother, was living with her child, her mother, and grandmother at her grandmother’s home. We’ll call my friend Ann for anonymity’s sake. Ann’s mother is recently retired and living on social security while Ann works a full-time office job while caring for her child. Ann’s grandmother has been long-retired and owns her house free and clear. Ann wanted to know who should claim her grandmother as a dependent for income taxes. As much as I wanted to hit that It Depends button and be done with it, I offered to learn a little more of her situation and give a more thought-out answer. 

Dependents, briefly 

First, let’s take a refresher on claiming dependents. The IRS has specific tests for taxpayers looking to claim dependents that need to be met. Essentially, taxpayers may claim a dependent as a “qualified child” or a “qualified relative.”  

A qualified child generally must be a lineal descendent of the taxpayer, be less than 19 years old (or 24 if a full time student), live with the taxpayer more than half of the year and does not provide more than half of their own support. 

Not meeting these criteria will give the taxpayer the option to claim the dependent as a “qualifying relative”. A qualified relative has similar requirements such as the dependent not providing more than half of their own support and living with the taxpayer for at least more than half of the year. Taxpayers often claim dependent parents and extended family they provide care for as “qualifying relatives” on their income tax returns. However, only one person may claim that qualified dependent. Adult siblings cannot both claim their widowed mother as a dependent on their own income tax returns, for example. Check out our article on dependents for more info. 

Notably, the qualified dependent must not have a gross income that exceeds a certain number each tax year, for 2023 it is $4,700. 

Depending on Dependents 

Going back to my friend Ann and her situation, who should claim the dependent? Reiterating the info above, Ann’s mother is retired and mainly lives on social security. Ann works a full-time office job and her mother and grandmother watch her child while she is at work. Ann and her mother provide support to Grandma and live at Grandma’s home. Ann did not indicate that Grandma supported herself or had any significant source of income that could possibly disqualify her as a qualified dependent. Based on the info I gleaned from my friend, Grandma may be claimed on Ann or Ann’s mother respective income tax returns. But, who would benefit more from claiming Grandma as a dependent? Taking as much as I could into consideration, it seemed Ann would benefit more. Ann would be able to claim two dependents (Grandma and her child) and qualify for a larger deduction, or even claim Head of Household status if she qualified. She may even be able to claim more for tax credits such as the Earned Income Tax Credit. Ann’s mother lives on social security and that is only partially taxed depending on her total income, assuming she had no other income sources. 

Income taxes require personalized advice. Each person may have unique circumstances surrounding their tax situation that requires further analysis and discussion, whether it be for a person who shares a multi-generational home or for a newly-minted business venture. As an accounting & tax firm, MiklosCPA regularly communicates with clients on their anticipated tax and accounting needs so our clients can succeed in their business dreams and ambitions. Learn how we can help you and your business needs by chatting with us. Also, be sure to check us out on our social media pages as we regularly post and share “good-to-know” accounting and tax articles. 

Deduction for Start-up & Organization Expenditures

Deduction for Start-up & Organization Expenditures

by | Nov 3, 2023 | Business Tax, Individual Tax

Starting a business always comes with a flourish of optimism and ambition. Startups have access to assorted tax credits and incentives that may not be available to larger businesses. One notable incentive is a deduction for start-up and organization expenditures that owners can utilize as they set the foundations for their business dreams.

Starting Deduction

Taxpayers are able to deduct up to $5,000 of accumulated start-up expenditures in the tax year that the business begins. To qualify, the expenditures must meet two requirements:

  • A cost that the business could deduct if they paid or incurred it to operate as an active trade or business, in the same field that the business entered into.
  • A cost that a business pays or incurs before the day their business begins.

Startup expenses such as incorporation expenses, advertisements for the opening of the business, and travel necessary to secure distributors, suppliers, or customers, are all qualified to be included in this startup deduction, up to the $5,000 limit. Phase out rules apply of course. The $5,000 limit begins to phase out at $50k of total startup expenses and is entirely phased out once total expenditures exceed $55,000.

Any other startup expenditures not deductible in the year the business started may be evenly amortized over a 180 month (12 year) period beginning from the start date of the business. Additionally, taxpayers may elect to capitalize all startup expenditures and not claim the $5,000 deduction.

The $5,000 deduction is claimed in the “other deductions” line of the taxpayer’s Form 1040 Income tax return. Amortization of the startup expenditures in excess of the $5,000 is claimed on part IV of Form 4562. A requirement to claim the deduction is that the business must be actively in business and not “merely an investment”.

 

A deduction for start-up expenses is just one of many incentives small and emerging business can utilize as they take the steps forward to see their ambitions and business goals come to fruition. Owners focus entirely on doing all that is necessary to get their businesses running in these early stages. Having some additional support, such as a trusted accounting affiliate, during the early stages of the business can help integrate good practices, such as accurate recordkeeping, that can benefit the business as it grows down the road. MiklosCPA has been a trusted accounting affiliate for many small and emerging businesses over the years. Set up a chat with us and learn how we can help your startup or small business. Also, like, follow, and subscribe to our social media pages. We periodically post assorted accounting and other “good-to-know” articles for individuals and businesses.

Some California Sales Tax Exemptions

Some California Sales Tax Exemptions

by | Jul 13, 2023 | Business Tax, Individual Tax

Recently we broadly went over sales & use tax in California and that it applies to categories of tangible personal property that cover almost anything that residents and businesses will encounter in their daily life. There also happen to be several categories of tangible property exempt from sales & use tax, which means those types of goods are nontaxable for sales & use tax, depending on the circumstances.

Tangibly Exempt

California regulations will explicitly define categories of tangible property exempt from sales tax. Often it applies to broad categories of tangible goods but sometimes it can depend on circumstances of those goods such as the temperature (food for purchase) or who the seller or customer may be. Let’s take a look at some notable categories exempt from sales tax:

  • Grocery food items
    Very broad category of food items available at groceries are exempt from sales tax upon purchase. This would include things like bread, fruits, vegetables, frozen food items, candies, and bottled water. However, items you would also typically find at groceries like soda, alcohol, over-the-counter medicine, and hot prepared food to-go are still subject to sales tax.
  • Cold food to go
    On that note, all cold food items sold “to go” are exempt from sales tax. Examples would include deli food items that are not toasted and ice cream sold “to go”. It is why ice cream and deli places typically ask you if you want your cold food “for here” or “to go”. Sales tax applies to food eaten in a restaurant with seating provided, regardless of temperature.
  • Prescription medication
    Next time you pick up prescription medication, check your receipt if sales tax applies. In California, sales tax does not apply to medication prescribed by a doctor’s note. Over-the-counter medicine still has sales tax though.
  • Labor
    Labor costs such as the labor charges to install tires or fix a toilet are exempt from sales tax. However, these labor charges should be separately stated on an invoice, otherwise it may be considered taxable if it is lumped together with taxable goods into a single charge.
  • Sales for resale
    A business purchasing tangible inventory from a vendor for the intention of resale is exempt from sales tax. The business needs a resale certificate for their business records to show proof of intent to resell.

 

  • Sales made to customers outside the state
    A business in California making a sale of tangible property to a customer outside the state is exempt from sales tax. For example, a home based business selling skateboards online sells a skateboard to a customer in Wyoming. California sales tax does not apply because the customer is outside the state.

Businesses based and operating in California should be mindful of the taxability of their sales transactions. Owners know their plates are already full in running their business. Small and emerging business owners have come to rely on us here at MiklosCPA over the years to help with the accounting and tax needs that businesses in all industries may face. With our help, owners can then focus on what is most important, growing their business! Learn more how we can help your business by chatting with us. Also, like, share, and subscribe to our social media pages for more useful tax tidbits and other good-to-know articles.

Special Exemptions & Deductions for Trusts & Estates

Special Exemptions & Deductions for Trusts & Estates

by | Jun 16, 2023 | Business Tax, Individual Tax

As we recently explored, trusts & estates are fiduciary entities that have income tax requirements somewhat similar to corporations, partnerships, and other organized entities. Just like other income tax filers, deductions are available to trusts & estates that fiduciaries can utilize when filing the necessary Form 1041 for their trust or estate.

Exemptions & Deductions

The Tax Cuts & Jobs Act of 2017 upended many long-standing rules in federal income tax, notably the personal exemption. However, the exemption “sort-of” lives on in the context of trusts & estates. Estates are allowed a $600 exemption. Simple trusts are allowed a $300 exemption and all other trusts are allowed a $100 exemption.

Some common deductions available to trusts & estates as well are depreciation, interest expense, casualty losses, and even certain taxes paid. However, some deductions unique to trusts & estates and deductions need to be handled differently.

Exclusive Deductions

Trusts & Estates have a few unique deductions available to them. Utilizing them along with the other common deductions available to businesses and individuals can help potentially lower income taxes that he fiduciary entity may owe.

  • Deduction for administrative expenses – Costs paid or incurred in connection with the administration of a trust or estate that would not have been incurred if the property were not held in the trust or estate.
  • Distributions of taxable income to beneficiaries – The trust or estate receives a deduction for distributions made to beneficiaries. Limited to the distributable net income (DNI) of the trust or estate.
  • Deduction for expenses allocated to tax-exempt income – tax-exempt income, such as certain death benefits or interest on state or municipal bonds, that may be subject to taxes or other business expenses are deductible to the trust or estate on the Form 1041.
  • Schedule K-1 Depreciation – Depreciation from pass-through entities are a separately stated item included on the Form 1041 Schedule K-1. Fiduciaries must provide separate statements detailing the depreciation.
  • Charitable contributions
    • Treatment of charitable contributions from a trust or estate is a little different than if it were from an individual or corporation. Individuals have limits set on the deduction while trusts & estates generally do not have one. Additionally, estates are allowed a deduction for any gross income paid or set aside for charitable purposes while trusts can deduct up to the amount paid. Charitable recipients are not considered beneficiaries.

 

Trusts and Estates are unique legal entities with tax issues that are not commonly encountered. Grantors, beneficiaries, and administrators may need additional information or help in understanding and meeting their tax obligations. Fortunately, MiklosCPA has your back. We are a California-based accounting firm that has helped emerging businesses and specialized clients such as trusts and estates with their accounting and tax needs. Learn how we may help your organization by reaching out. Also, follow us on our social media pages for more tax tidbits and other “good to know” pieces for your business.

Estimated Taxes & Periodic Payments

Estimated Taxes & Periodic Payments

by | May 3, 2023 | Business Tax, Individual Tax

Businesses and individuals with income not subject to withholdings generally must make estimated income tax payments throughout the year. For example, self-employed individuals and winners of large prizes. Additionally, estates and trusts are usually subject to paying estimated taxes.

No Holding Back

Assuming no withholdings are made, individuals expecting to owe more than $1,000 in income tax for the year when filing their return are expected to make estimated tax payments. Similarly, corporations generally must make estimated tax payments if they are expecting to owe more than $500 in a year when filing their return. Estimated taxes are calculated on the current regulations governing federal income tax using Form 1040-ES.

Period Payments

Estimated tax payments are divided into 4 periodic payments throughout the year. Payments are due 15 days following the end of each period.

Period Payment due date
Jan 1 – March 31 April 15
April 1 – May 31 June 15
June 1 – Aug 31 Sept 15
Sept 1 – Dec 31 Jan 15 (of the following year)

 

If the due date falls on a weekend or holiday, payments will be considered timely if it is made by the following business day that isn’t a weekend or holiday, e.g. April 18th for 2023. These estimated payments may be done either through mail or electronically, such as through the Electronic Federal Tax Payment System (EFTPS).

Penalty Pinching

Missing any of the timely payments will incur penalties. Additionally, underpayment of estimated taxes at any point in the tax year will incur an additional penalty cost on top of the already-due estimated tax.

However, these penalties may be avoided if you owe less than $1,000 in tax minus withholdings and credits OR if you paid at least 90% of the current year tax or 100% of the prior year’s tax, whichever is smaller.

Managing timely estimated payments can be cumbersome for businesses and owners focused simply on growing their budding business. Having the support of proper “back-office” staff can help with those day-to-day accounting and tax concerns. MiklosCPA helps many small and emerging firms with their accounting and tax needs, such as making their timely estimated tax payments. Curious how we can help you and your business? Let’s chat. Also, like, share ,and subscribe to our social media pages for more useful tax tidbits like this and other interesting articles for small business owners.

Used, Stored, & Consumed – California Use Tax

Used, Stored, & Consumed – California Use Tax

by | Nov 24, 2022 | Business Tax, Individual Tax

Use tax, put simply, is a transaction tax that acts complimentary to sales tax in most states and municipalities. In the state of California, just as the sales tax applies to the sale of taxable goods, the use tax applies to the use, storage, or consumption of those taxable goods in cases when the sales tax did not apply, such as inventory taken out for personal use. Originally enacted to protect in-state businesses from out-of-state competitors, businesses should remember to look out for use tax in their business transactions. Use tax may be an uncommon tax issue, but it arises significantly in the event of an audit.

Sales tax is usually passed on to the customers on their purchased goods, but more importantly, businesses are responsible for reporting and remitting collected sales tax to the state. The same rules apply in collecting & remitting use tax. Here is an example to illustrate a use tax transaction:

Yoona’s Jewelry is a boutique online retailer of jewelry and other trinkets. Yoona uses a resale certificate to purchase inventory, nontaxed, from out-of-state suppliers. Her suppliers send inventory to her business based out of her home in Irvine, CA. On occasion, she takes some of this inventory and gives it away as promotional items to online influencers or to her friends that reside in the area.

 

Use tax applies to the inventory she gave away to friends and influencers because it wasn’t sold at retail (sales tax), but instead was “used” by the influencers and friends that she gave her products. When Yoona files her business sales & use tax return, she will report the value of the given-away inventory and the use tax rate will apply to those goods.

Rate of Use

In California, the applicable use tax rate on a taxable item is the same as the area’s sales tax rate. Going back to the previous example, the use tax rate on Yoona’s jewelry she gave to her friends visiting her home would be the same as the applicable sales tax rate for the city of Irvine, 7.75%.

Out of State & Beyond

California Use Tax transactions can also occur in some inter-state sales when CA sales tax does not occur. For example, a business receiving furniture to use in California from a non-sales tax state like Oregon. However, with the ascent of online marketplaces and the South Dakota v Wayfair decision, sales & use tax regulations in states have tightened considerably.

The internet has made interstate transactions commonplace. Business owners often have enough on their plate working to grow the business. Minding the possibility of use tax transactions, especially in the context of an audit, opens new avenues of concerns. Luckily, business owners can rely on the help of trained and knowledgeable tax accountants, such as us here at MiklosCPA, to work with them on identifying any foreseeable tax issues. Want to know how we can help your business? Let’s chat. In the meantime, check out our social media accounts and look forward to future articles and other “good to know” tax tidbits.

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