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Our articles cover a variety of tax topics that are currently trending. While these cannot be relied upon to provide financial or tax advice, they can be used to understand these topics If you have any questions or would like additional information about any of the topics covered in these articles, please do not hesitate to contact us.
An S corporation is a corporation that is treated, for federal tax purposes, as a pass-through entity through an election made with the Internal Revenue Service (IRS) to be considered an S corporation.
Here is a checklist highlighting advantages and disadvantages of the S corporation form. This form is very popular among small businesses and is the most common form of doing business except for the unincorporated sole proprietorship.
Please note that the above Information provided in this chart is general in nature. It cannot be used to accurately assess a specific business or situation. For more detailed analysis of your situation consult your tax advisor.
Ami Shah CPA can provide expert guidance on choice of entity that suits your business model. We have years of expertise in new-entity formation consultation, incorporation, accounting and tax return preparation services. This means that you have more time to focus on your business rather than worry about the compliance or accounting aspects of your company.
Cost Segregation is the practice of identifying assets and their costs and classifying those assets for federal tax purposes. In a cost segregation study (CSS), certain assets previously classified with a 39-year depreciable life, can instead be classified as personal property or land improvements, with a 5, 7, or 15-year rate of depreciation using accelerated methods. An “engineering-based” study allows a building owner to depreciate a new or existing structure in the shortest amount of time permissible under current tax laws.
Due to recent legislative changes, real property owners now have even more reason to engage in a CSS. The new law includes cost recovery provisions that open new tax planning and savings opportunities for taxpayers owning or operating real estate. There is now a 100% bonus depreciation for qualifying property acquired and placed in service after September 27, 2017, and an expansion of the definition of qualifying property to include used property. Under the old provisions, there was an original use requirement to qualify for bonus depreciation. Taxpayers can use cost segregation when constructing a building, buying an existing one, or, in certain circumstances, years after disposing of one so long as the year of disposition still is open under the statute of limitations
The Act benefits property owners not only by allowing 100% bonus depreciation for qualifying reclassified property, but also by extending bonus depreciation to qualifying used property. Taxpayers planning on building or acquiring commercial or residential real property should consult with us to ensure they are maximizing their tax benefits under the new legislation. We work with various professional consultants who have great engineering expertise and are pioneers in providing CSS. Our team will be in constant touch with the consultants to make sure to represent your interests in the study and get maximum benefit. We will also handle the tax compliance part after the CSS such as filing a form 3115 - Automatic Change in Accounting in lieu of an amended return. This saves a lot of time and money instead of filing an amended return to fix depreciation for prior years.
Taxpayers who have typically performed CSS are sometimes subject to IRS scrutiny. By engaging the expertise of Ami Shah CPA, property owners can be assured that their study will stand up to the strictest scrutiny of IRS auditors.
The IRS recently announced an end date to the Offshore Voluntary Disclosure Program (OVDP). The program officially ends on September 28, 2018.
To recap, OVDP was an amnesty program introduced by the IRS to encourage taxpayers to voluntarily come forward and report foreign assets and financial accounts.
Since the OVDP’s initial launch in 2009, more than 56,000 taxpayers have used one of the programs to comply voluntarily. All told, those taxpayers paid a total of $11.1 billion in back taxes, interest and penalties. The planned end of the current OVDP also reflects advances in third-party reporting and increased awareness of U.S. taxpayers of their offshore tax and reporting obligations. Though the IRS is closing this program, they note that seeking out and prosecuting tax noncompliance will continue to be one of their main concerns.
A separate program, the Streamlined Filing Compliance Procedures (“SDOP”) , for taxpayers who might not have been aware of their filing obligations, has helped about 65,000 additional taxpayers come into compliance. The Streamlined Filing Compliance Procedures will remain in place and available to eligible taxpayers. As with OVDP, the IRS has said it may end the Streamlined Filing Compliance Procedures at some point. The Streamlined Filing Procedures are available to taxpayers who did not know they had a filing obligation, and the related penalties are significantly less than the amounts imposed by the OVDP. To utilize the Streamlined Filing Procedures, expats must file three years of delinquent tax returns and six years of delinquent Foreign Bank Account Reports (FBARs).
At Ami Shah CPA, we have brought in hundreds of clients under compliance by filing under the above programs. If you have foreign financial accounts and foreign assets that haven’t been disclosed in your US Tax returns, then reach out to our team right now. We have multiple years of experience in dealing with these cases including working with the assigned IRS agent to get a smooth closure for the case. We review your situation and suggest the best possible program suited for your case. Reach out to us today and schedule a consultation.
Virtual currencies/ cryptocurrencies are becoming a fad investment since the past year due to their extraordinary surge in their values. Almost everyone seems to be talking about and many investors have made a fortune selling them for cash. However, there is also a lot of uncertainty about the taxation of cryptocurrency. Hence to help navigate this uncertainty we have compiled a list of most frequently asked questions from investors on Bitcoin or other cryptocurrencies.
Virtual currency, as generally defined, is a digital representation of value that functions in the same manner as a country’s traditional currency. There are currently more than 1,500 known virtual currencies. Bitcoin is the most famous among them but there are many others like Ripple, Ethereum and LiteCoin that are gaining popularity. These are usually generated through a process known as mining.
Virtual currency transactions are taxable by law just like transactions in any other property. The IRS has issued guidance in IRS Notice 2014-21 for use by taxpayers and their return preparers that addresses transactions in virtual currency. This notice states that virtual currency is to be treated as a property rather than currency for tax purposes. This means that is not treated as currency that could generate foreign currency gain or loss.
When a person successfully mines virtual currency, the fair market value of the virtual currency generated as of the date of receipt is includable in gross income. If mining is your trade or business, then the net earnings (gross income less allowable deductions) resulting from this constitute self-employment income and are subject to the self-employment tax
The most common taxable event is short-term capital gains. Cryptocurrency capital gains occur when you hold a cryptocurrency for less than a year and sell the cryptocurrency at more than basis. This means that they must be disclosed on your returns just like you would disclose any other stock trades you do.
Another common transaction that investors indulge are converting one Crypto into another. The IRS treats this as a taxable event. For example, you purchase a Bitcoin for $1,000. Shortly afterward the price appreciates to $1,500, and you trade it for $1,500 worth of LiteCoin. The trade triggered a taxable event, and you’re now liable for $500 of taxable income even if you didn’t get any cash as a result of this transaction.
Because transactions in virtual currencies can be difficult to trace and have an inherently pseudo-anonymous aspect, some taxpayers may be tempted to hide taxable income from the IRS. But the IRS has time and again reminded taxpayers to report these transactions on your tax returns. The IRS has also indicated that taxpayers who do not properly report the income tax consequences of virtual currency transactions can be audited for those transactions and, when appropriate, can be liable for penalties and interest. In more extreme situations, taxpayers could be subject to criminal prosecution for failing to properly report the income tax consequences of virtual currency transactions. Criminal charges could include tax evasion and filing a false tax return. Anyone convicted of tax evasion is subject to a prison term of up to five years and a fine of up to $250,000. Anyone convicted of filing a false return is subject to a prison term of up to three years and a fine of up to $250,000.
At Ami Shah CPA, we have helped various current clients to disclose their transactions the right way on their tax returns. If you have dealt in Cryptos and not disclosed them on your tax returns, contact us to get compliant. We can put up a income tax compliance plan including preparing and filing US Tax Returns or Amending Tax Returns and an appropriate disclosure program
There are various credits that a company can obtain, and it can be very valuable in either reducing the taxable income or tax in general. Here are few of them:
R&D stands for research and development. It is work directed to the innovation, introduction, and improvement of products and processes. The Economic Recovery Tax Act (ERTA) was passed in 1981 and acted as an economic stimulus. The tax credit ultimately acted as an incentive to encourage investment within the United States.
Research and Development (R&D) is a unique tax credit. It is a dollar for dollar offset for state and federal income taxes that has been around for 30 years and is highly underutilized. Often times, it is confused for a deduction. However, it is an actual credit against taxes owed or taxes paid. Every small business that spends money for R&D for new products should be aware of the IRS tax credit that could substantially reduce their tax liability.
In recent years, there have been aggressive legislative changes constructed around the small to mid-cap businesses.
There are various benefits of R&D Tax Credit:
New businesses or start-up companies may be eligible to apply the R&D tax credit against their payroll tax for up to five years. The R&D credit was permanently extended as part of the Protecting Americans from Tax Hikes (PATH) Act of 2015. It includes some enhancements starting in 2016, including offsets to alternative minimum tax and payroll tax for eligible businesses. The credit is still based on credit-eligible R&D expenses, but offsets apply to only those costs incurred beginning in 2016. The new payroll tax offset allows companies to receive a benefit for their research activities regardless of whether they are profitable.
The new payroll tax offset is available only to companies that have:
The American Jobs Creation Act of 2004 (“AJCA”) enacted Section 199, which created a tax deduction related to domestic production activities.
The special tax deduction is available only to manufacturing and production activities within the United States and can potentially reduce a company’s effective federal tax rate from 35% to 31.85%. The deduction is applied at the partner/ shareholder level. Each owner will take into account his/her distributive or proportional share of items that are allocated to the pass-through entity’s qualified production activities in determining the actual deduction allowed.
The following activities qualify for a DPAD deduction:
The companies which are eligible are manufacturing and production activities pertain to entities operating in various industries and professions including software, construction, engineering, architecture, film production, electric, gas and water as well as certain handlers of agricultural products. The deduction applies to corporations (C corporations and S corporations), partnerships and limited liability companies.
Captive Insurance Companies (referred to as Captives) also known as Closely Held Insurance Companies (CHIC), have become a commonplace form of alternative risk transfer and can provide companies with significant insurance program flexibility and cost savings. Captives provide an additional layer of asset protection for the business that the commercial insurance market often cannot provide. In addition, when structured properly, insurance coverages that a business may purchase from a Captive can allow an operating business to take a current year income tax deduction for the amounts paid to the Captive that are used to pay future insurance claims.
The business owner pays premium for the insurance coverage on an annual basis based upon an actuarial review of the unique risks of the business.
The Captive is established as a cell captive which is a separate legal entity established by the business owner to meet the insurance, risk management, and asset protection needs of the business. The Captive will be taxed as a C Corporation and files a United States tax return under the captive insurance taxation regulations.
The typical profile of a business that owns a Captive is an operating business with annual sales of $2,000,000 or more a year, and employees other than the owners of the business. Passive businesses such as real estate holding companies, limited partner oil well partnerships and income from royalties do not typically have sufficient risk for a Captive.
The following business owners are also ideal for captives:
Monetized installment sales are allowed under Section 453 of the Internal Revenue Code, and can be used for the disposition of various capital assets, including but not limited to: real estate, the stock and assets of a business, a business itself such as a partnership or LLC, contract rights or franchise agreements, a professional practice such as a doctor’s office selling to a clinic, and art collections. This is a unique tax deferral strategy that allows the seller of “property” to defer capital gains taxes for 30+ years while receiving sale proceeds today.
The seller sells the asset to an intermediary on an “installment contract,” a 30-year contract in which the intermediary puts no money down and uses a non-amortizing, interest-only loan. Simultaneously, the intermediary resells the asset to a new buyer—typically for cash.
The deed, or other instrument of transfer, goes around the intermediary and to the final buyer. The intermediary never goes into title. The intermediary contracts to acquire and to resell, so the deed can be transferred directly from the buyer to seller. The representations and warranties also go around the intermediary, directly from the buyer to seller.
The intermediary will usually have a lender that’s familiar with monetized installment sales. The lender will lend the original seller an amount of money that is equal to 95% of what the cash buyer paid the intermediary for the asset. This is another no-money-down, non-amortizing, interest-only loan. In other words, the terms of the loan the intermediary uses to purchase the asset from the seller will match the terms of the loan the seller gets from the lender. So, the amount the intermediary pays the seller over the 30-year installment contract matches the amount the seller pays the lender over the same 30-year period.
The seller then walks away with 95% of the sales prices in his pocket (in the form of a loan) without any capital gain tax paid to the IRS. The 5% discount goes to the intermediary for facilitating the transaction.
Per the terms of a standard installment sale loan agreement, the seller must initially use the loan proceeds for any investment or business purpose. The seller could buy another piece of real estate, pay business debt, or just put the money in an interest-bearing bank account. After the loan proceeds been initially invested for a business purpose, this fulfills the business purpose requirement and any future proceeds of that investment are considered unrestricted funds and can be used at the seller’s discretion.
There are a few reasons why a monetized installment sale is advantageous. Here are some of them:
It is not unusual for such serial entrepreneurs to create a multiple business entity structure to hold multiple and varied business endeavors. Doing so is commonplace and provides certain limitation of legal liability for the serial entrepreneur. Such business entities may include a Limited Liability Company (LLC), C or S Corporation, and/or Partnership. Each in its own way protects the entrepreneur’s personal assets from potential risks such as lawsuits and other claims against the business. In recent years, the practice of forming layered, multiple business entities has gained increased interest among entrepreneurs desiring to start a new businesses.
The layered, multiple entity structure strategy would look something like this:
In simple terms, the enterprise assets are separated from the potential liabilities in the same business enterprise by placing them in two (or more) separate business entities. Such multiple business entity layering necessitates careful drafting of legal agreements between the various entities involving items such as leases, licensing agreements, management agreements, etc.
While creating multiple business entities may afford the entrepreneur an opportunity to separate liability exposure in his business from his personal assets and the assets of his other business endeavors, certain tax consequences can and will follow. LLC’s, Partnerships and S Corporations offer pass-through taxation treatment. The C Corporation is taxed at the entity level as well as the personal level when dividends are paid to the individual shareholders. All tax consequences should be considered carefully when choosing the form of business entity, regardless of the number of entities formed by the entrepreneur.
Layering multiple entity structures may include one of the following entity combinations:
Considerations to be made while opting for multiple entity:
Essentially, this rule converts passive income into non-passive income. A passive activity is any activity that involves the conduct of any trade or business in which the taxpayer does not materially participate. All rental activities are generally passive.
As an example, Let's assume that a taxpayer has ownership of an operating company and also owns a separate entity that owns the real estate that is leased to the operating company. The taxpayer materially participates in the operating company. In this situation, the rental income received from the operating company which would normally be treated as passive income becomes recharacterized as non-passive.
The rule was implemented to prevent a taxpayer with passive activity losses from various other entities from artificially creating passive activity income to absorb such losses.
There are several different strategies and options for succession planning. The following five general steps for developing a plan provide a good road map for the process:
We usually think of a business owner simply handing over the reins to a new owner or principal when we think of succession planning. But there are several different financial options for business owners who would like their organization to survive beyond their own tenure. Below are six such strategies for succession planning: