Topic: Selling a Sole Proprietorhip
Q: I want to sell my business. It's a sole proprietorship. What's involved in the process?
Q: What are the tax aspects of selling my sole proprietorship?
Topic: Bonus depreciation vs first-year expensing (the Section 179 deduction)
Q: What is first-year expensing and what's the difference between bonus depreciation and first-year expensing?
How do I calculate bonus depreciation and what tax form is it claimed on?
Topic: Credit card charges for business
Q: I'm a sole proprietor. Can I deduct the interest on my personal credit card if I use it to charge business expenses?
Topic: Deducing S corporation health insurance premiums
Q: How does an S corporation deduct health insurance premiums paid on behalf of shareholder/employees?
Q: How do 2% shareholder/employees of an S corporation deduct health insurance premiums?
Topic: IRA Losses
Q: I own various stocks in my IRA and have taken a beating. Can I deduct these losses?
Topic: EIN for Sole Proprietor
Q: I'm a sole proprietor with no employees. Although I don't need a separate federal employer identification number, is it a good idea to get one anyway?
Topic: Single-Member LLC and EIN
Q: I'm the sole owner of an LLC. Do I need a federal employment identification number (EIN)?
Topic: Unfiled Taxes
Q: I haven't filed my taxes in several years. What should I do?
Don't overlook these!
You should make every attempt to file your return before August 2013 if you missed the April 15 deadline and did not file an extension on or before the deadline.
You will pay a 5% failure-to-file penalty for each month or part of a month you fail to file beginning April 16. By August, this penalty will accumulate to 25%. So, if you end up owing $2,000 for example, the failure-to-file penalty will be $500 by August (5% x 5 months x $2,000).
There is also a failure-to-pay penalty of 1/2 of 1% (.005) per month or part of a month up to 25%.
If both the 5 percent failure-to-file penalty and the ½ percent failure-to-pay penalty apply in any month, the maximum penalty that you’ll pay for both is 5 percent. If you file your return more than 60 days after the due date or extended due date (if you filed an extenstion), the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.
As if the penalties weren't enough, the government will also zap you for interest on the unpaid balance.
You will not have to pay a late-filing or late-payment penalty if you can show reasonable cause for not filing or paying on time. However, interest must be paid on any unpaid balance.
So get moving, time is money!
If you're self-employed, you may claim a deduction for medical, dental or long-term care insurance premiums you pay for yourself, your spouse, and your dependents. The insurance can also cover your child who was under age 27 at the end of 2012, even if the child was not your dependent.
Keep in mind, this is above-the-line deduction which means, even if you dont' itemize your deductions you may claim this deduction. You simply enter the total health insurance prememiums you paid on Form 1040, line 29, "Self-employed health insurance deduction". So, if you paid $2,000 for health insurance premiums and you're in the 20% tax bracket, that's a $400 savings in taxes (20% x $2,000).
You may be able to take this deduction if one of the following applies to you:
Follow these guidelines to make sure the plan qualifies:
About 60 percent of taxpayers will use tax professionals this year to prepare their tax returns. Most return preparers provide honest service to their clients. But, some unscrupulous preparers prey on unsuspecting taxpayers, and the result can be refund fraud or identity theft.
The IRS is reminding taxpayers that they should only use preparers who sign the returns they prepare and enter their IRS Preparer Tax Identification Numbers (PTINs).
The Internal Revenue Service stated it is providing late-payment penalty relief to individuals and businesses requesting a tax-filing extension because they are attaching to their returns any of the forms that couldn’t be filed until after January. This relief applies to any of the forms delayed until February or March, primarily due to the January enactment of the American Taxpayer Relief Act.
The relief applies to the late-payment penalty, normally 0.5 percent per month, charged on tax payments made after the regular April 15 filing deadline.
Forms to claim a tax benefit, such as depreciation deductions and a variety of business credits qualify for this relief. A complete list of eligible forms can be found in Notice 2013-24, posted today on IRS.gov (IR-2013-31 March 20, 2013).
Individuals and businesses qualify for this relief if they properly request an extension to file their 2012 returns.
If you had HR Block prepare your return between Feb. 14 and Feb. 22, 2013, and you filed Form 8863, Education Credits, your refund may be delayed. It is estimated that up to 600,000 returns filed by HR Block (about 10% of the 6 million-plus returns files by them) will experience delays in receivng a refund.
Here's what caused the problem:
Part III of Form 8863 asks a variety of questions which require a checkmark to be placed in the "Yes" or "No" box. If the answer was "yes", HR Block placed a checkmark in the "Yes" box. But if the answer was "no", HR Block left the "No" box blank instead of entering a checkmark. Block said, in prior years it was allowed to leave the "No" box blank.
As a result of the absence of a checkmark in the "No" box, the IRS has placed the affected returns under review, delaying refunds for thousands of HR Block clients. The delay may be as much as 6 to 8 weeks. However, HR Block said they are working with the IRS to shorten this time.
TurboTax filers have not had this problem.
If your lender cancelled or forgave your mortgage debt, you generally have to pay tax on that amount. But there are exceptions to this rule for some homeowners who had mortgage debt forgiven in 2012.
Here are 10 key facts from the IRS about mortgage debt forgiveness:
You won't get a reminder letter anymore form the IRS to repay the First-Time Homebuyer Credit. So, to help taxpayers who must repay the credit, the IRS website has a user-friendly look-up tool.
Four reminders about repaying the credit and using the tool:
1. Who Needs to Repay the First-Time Homebuyer Credit?
If you bought a home in 2008 and claimed the First-Time Homebuyer Credit, the credit is similar to a no-interest loan. You normally must repay the credit in 15 equal annual installments. You should have started to repay the credit with your 2010 tax return.
You are usually not required to pay back the credit for a main home you bought after 2008. However, you may have to repay the entire credit if you sold the home or stopped using it as your main home within 36 months from the date of purchase. This rule also applies to homes bought in 2008.
2. How to Use the Look-up Tool:
You can find the First-Time Homebuyer Credit Lookup tool at IRS.gov under the ‘Tools’ menu. You will need your Social Security number, date of birth and complete address to use the tool. If you claimed the credit on a joint return, each spouse should use the tool to get their share of the account information. That’s because the law treats each spouse as having claimed half of the credit for repayment purposes.
3. What the Look-up Tool Does:
This tool provides important account information to help you report the credit repayment on your tax return. It shows the original amount of the credit, annual repayment amounts, total amount paid and the remaining balance. You can print your account page to share with your tax preparer and to keep for your records.
4. How to Repay the First-Time Homebuyer Credit:
To repay the First-Time Homebuyer Credit, add the amount you have to repay to any other tax you owe on your federal tax return. This could result in additional tax owed or a reduced refund. You report the repayment on line 59b on Form 1040.
If you are repaying the credit because the home stopped being your main home, you must attach Form 5405, Repayment of the First-Time Homebuyer Credit, to your tax return.Homebuyer Credit, to your tax return.
The Internal Revenue Service is reminding taxpayers who converted amounts to a Roth IRA or designated Roth account in 2010 that in most cases they must report half of the resulting taxable income on their 2012 returns.
Normally, Roth conversions are taxable in the year the conversion occurs. For example, the taxable amount from a 2012 conversion must be included in full on a 2012 return. But under a special rule that applied only to 2010 conversions, taxpayers generally include half the taxable amount in their income for 2011 and half for 2012, unless they chose to include all of it in income on their 2010 return.
Roth conversions in 2010 from traditional IRAs are shown on 2012 Form 1040, Line 15b, or Form 1040A, Line 11b. Conversions from workplace retirement plans, including in-plan rollovers to designated Roth accounts, are reported on Form 1040, Line 16b, or Form 1040A, Line 12b.
Taxpayers who also received Roth distributions in either 2010 or 2011 may be able to report a smaller taxable amount for 2012. See worksheets and examples in Publication 590 for Roth IRA conversions and Publication 575 for conversions to designated Roth accounts.
Taxpayers who made Roth conversions in 2012 or are planning to do so in 2013 or later years must file Form 8606 to report the conversion. As in 2010 and 2011, income limits no longer apply to Roth IRA conversions.
The Mortgage Forgiveness Debt Relief Act (Act), which was passed in 2007, was extended through December 31, 2013. This relief was originally set to expire in 2009. In 2008 it was extended through 2012. This time around, in an attempt to avoid the "fiscal cliff", it was extended once again.
The Act waives forgiveness of mortgage debt from being counted as taxable income, with certain limits and so long as the taxpayer qualifies under the Act. Normally, forgiveness of mortgage debt is included in the taxpayer's income via Form 1099, which is issued to the taxpayer by the lender.
The maximum amount that can be treated as qualified principal mortgage debt under the act is $2 million ($1 million if married filing separately). Second mortgages are eligible if they were used for home improvements.
This relief applies mainly to short sales of homes or lender-approved sales for less than the principal mortgage balance. This means, if you owe $120,000 on your mortgage and you short sell your home for $100,000, you won't have to include the $20,000 deficiency in your taxable income.
This relief will also help to keep you from moving into a higher tax bracket, which could trigger additional taxes, such as the 3.8% Medicare surtax on unearned net investment income (discussed later on this page).
The deduction for mortage insurance premiums applies to mortgages issued or refinanced in 2007 through 2013. The deduction has been extended through 2013 and made retroactive to cover 2012. It covers private mortgage insurance and mortgage insurance provided by the Federal Housing Administration, the Veterans Affairs and the Rural Housing Service.
If you paid mortgage insurance premiums in 2012 and your adjusted gross income (AGI) is less the $100,000 ($50,000 if married filing separately), you may deduct 100% of the premiums you paid on your 2012 return. If your AGI was more than $100,000, your deduction is phased out (you lose 10% of the deduction for each $1,000 over $100,000).
Enter the deduction on Schedule A, line 13.
You may claim a 10% credit for energy improvements to existing homes in 2012 and 2013. This credit originally expired in 2011. However, the "fiscal cliff" bill has extended the credit through 2013 and made it retroactive to cover 2012.
Common energy-efficient improvements include such things as, a furnace, central air conditioning, traditional water heaters, windows, exterior doors, insulation, and a roof.
There is also a one-time federal tax credit of 30% of the cost (including installation costs) of qualifying geothermal heat pumps, solar water heaters, solar panels, small wind turbines, or fuel cells placed in service for an existing or newly constructed home through December 31, 2016. This tax credit is tied to the Energy Star specification that is in effect at the date of installation. Ask your Contractor about this credit before completing any improvement to make sure you are eligible for the tax credits.
The $500,000 first-year expensing deduction limit has been extended through 2012 and 2013. The first-year expensing deduction applies to new and pre-owned eligible property purchased and placed in service for business use.
The $2,000,000 purchasing limitation for eligible property for which the first-year expensing deduction is claimed has been extended through 2012 and 2013. The first-year expensing deduction is reduced dollar-for-dollar for each dollar spent over $2,000,000.
The bonus depreciation rate has been reduced from 100% in 2011 to 50% for 2012 and 2013. Bonus depreciation only applies to new eligible property placed in service for business use.
The 15-year straight-line recovery period has been extended through 2013 and made retroactive to cover 2012.
This notice includes the 2013 Percentage Method Tables for Income Tax Withholding. Employers should implement the 2013 withholding tables as soon as possible, but not later than February 15, 2013. Use the 2012 withholding tables until you implement the 2013 withholding tables.
Employers should implement the 6.2% employee social security tax rate as soon as possible, but not later than February 15, 2013. After implementing the new 6.2% rate, employers should make an adjustment in a subsequent pay period to correct any underwithholding of social security tax as soon as possible, but not later than March 31, 2013.
The new 2012 reporting requirement for employers to report the cost of health care for employees in Box 12 of Form W-2 is for the employee's information only. The reporting is intended to inform them of the cost of their health care coverage and does not cause excludable employer-provided health care coverage to become taxable.
However, if you filed fewer than 250 W-2s in 2011, then under the transition relief in IRS Notice 2012-9, you will not be required to report the cost of coverage for your employees on 2012 Form W-2.
Keep in mind, this reporting requirement does not apply to 2% S corporation shareholder/employees. These taxpayers must report payment or reimbursement of their health care premiums as wages in Box 1 of Form W-2.
The Patient Protection and Affordable Care Act ("PPACA") imposes a 2.3% excise tax on the sale of certain medical devices in the United States. The tax went into effect as of January 1, 2013. The tax is codified in Section 4191 of the Internal Revenue Code. It applies to U.S. sales of "taxable medical devices" by their manufacturer, importer, or producer after December 31, 2012.
According to the legislation, the roster of "taxable medical devices" does not include "eyeglasses, contact lenses, hearing aids, and any other medical device determined to be of a type that is generally purchased by the general pubic at retail for individual use."
Under Sec. 4191(b)(1), a taxable medical device is a device, as defined in Section 201(h) of the Federal Food, Drug, and Cosmetic Act (FFDCA) (21 U.S.C. §321(h)), that is intended for humans.
A "device" is defined as an "instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent, or other similar or related article" - including "any component, part, or accessory" - that meets certain requirements. For example it must be recognized in the officail National Formulary, or the United States Pharmacopeia, or any supplement to them.
The IRS and Department of Treasury issued final regulations on December 5, 2012 providing guidance on the tax.
A 3.8% "surtax", which is part of Obama's health care law, goes into effect Jan. 1, 2013. The tax is intended to help fund health care. It applies to married couples filing jointly with adjusted gross income (AGI) of more than $250,000 and single filers with more than $200,000 AGI. The tax applies to "unearned" net investment income. (AGI appears at the bottom of Form 1040 on line 37.)
The surtax tax applies to: Dividends; rents; royalties; interest (except municipal-bond interest); short-term and long-term capital gains; the taxable portion of annuity payments; income from the sale of a principal home above the $250,000/$500,000 exclusion; a net gain from the sale of a second home; and passive income from real estate and investments in which a taxpayer doesn't materially participate, such as a partnership."
Example of how the surtax works if you sell a house:
In 2013 a married couple has wage income of $225,000. They also sell their San Francisco home in 2013 for $700,000. They paid $150,000 for the home 20 years ago. After subtracting their cost of $150,000 PLUS their $500,000 exclusion (allowed for married couples) from the $700,000, their taxable gain is $50,000 ($700,000 minus $650,000).
The $50,000 is their investment income. Their adjusted gross income is $275,000 (wages: $225,000 plus the $50,000 taxable gain).
The surtax tax applies to $25,000, the amount by which their investment income of $50,000 exceeds the $250,000 threshold for married couples filing jointly:
AGI $275,000 MINUS $250,000 threshold for married couple filing jointly Equals $25,000 (investment income subject to the surtax).
Tax computation: Their additional tax is $950 (3.8% x $25,000).
The top capital gain tax rate has been permanently increased to 20% (up from 15%) for single filers with incomes over $400,000 and married couples filing jointly with incomes over $450,000.
In addition, the new 3.8% Medicare surtax on net investment income increases the capital gains rate for taxpayers with income exceeding $450,000 ($400,000 for single filers) to an overall rate of 23.8% (20% plus 3.8%).
The previous Federal capital gain tax rate of 15% remains for investors below these threshold income amounts.
Incomes over $450,000:
For households earning over $450,000 per year, the dividend tax rate for 2013 is 20% (up from 15% in 2012). In addition to the 20% rate, these taxpayers will pay an additional 3.8% surcharege for Obamacare, bringing the total tax on dividends 23.8%.
Incomes over $250,000 (or $200,000 for single filers):
For those fililng jointly with incomes over $250,000 ($200,000 for single filers) the dividend tax rate is 15% plus the 3.8% Obamacare surcharge, bringing the total tax rate on dividends to 18.8% for this group of taxpayers.
The 3.8% Obamacare surcharge is actually a new Medicare Tax on "unearned" net investment income imposed on higher income taxpayers starting in 2013.
On January 11, 2013, the Internal Revenue Service announced annual inflation adjustments for tax year 2013, including the tax rate schedules, and other tax changes from the recently passed American Taxpayer Relief Act of 2012.
Beginning 2013 a new tax rate of 39.6 percent has been added for individuals whose income exceeds $400,000 ($450,000 for married taxpayers filing a joint return). This new rate will apply to tax returns filed in the 2014 tax season. The other marginal rates — 10, 15, 25, 28, 33 and 35 percent — remain the same as in prior years.
The Social security tax rate for employees increases to 6.2% for 2013 (up from 4.2%). The employer's share of the tax remains 6.2%.
The 2013 social security wage base limit increases to $113,700 (up $3,600 from the 2012 taxable wage base of $110,100).
Beginning in 2013, high income earners will be hit with an extra .9% (.009) Medicare tax. The additional .9% kicks in when income thresholds reach the following:
These thresholds will not be adjusted for inflation.
Self-employed people pay the additional .9% via their self-employment tax. Unfortunately, the additional .9 percent won't qualify for a deduction on Form 1040 (the above-the-line deduction for self-employment tax). The additional .9 percent Medicare tax must be taken into account for estimated tax purposes.
The regular Medicare tax rate for lower income taxpayers remains 2.9% (1.45% for the employer's share and 1.45% for the employee's share. Self-employed persons pay the entire 2.9% via the self-employment tax computed on Schedule SE)
The estate tax exemption, lifetime gift tax exemption and generation skipping transfer tax exemption will each be $5.25 million for 2013 and indexed for inflation in later years, and the tax rate will be 40%.
Keep in mind, the lifetime gift tax exclusion and the estate tax exclusion are expressed as a total amount, which is $5,250,000 per person (sometimes called the “unified credit”). If you exceed the limit, you (or your heirs) will owe tax of up to 40%.
Interest on Vehicle Loan:
Don't forget, if you're self-employed and used your vehicle for business during 2012, and paid interest on a loan for that vehicle during 2012, the interest is deductible on Schedule C.
If you used your vehicle for both business and personal use, then you must allocate the interest according to your business-use percentage. For example, if you drove your car 40,000 in 2012 and 32,000 miles were for business use, your business-use percentage would be 80% (32,000/40,000) for business and 20% for personal use. You may deduct 80% of the annual interest on the car loan on Schedule C. The remaining 20% is not deductible.
Sorry, if you're an employee, you're not eligible for the interest deduction on your car loan even if you used your car 100% for your job.
Commuting Mileage Loophole:
If you're self-employed and operate your business from a facility away from your home, such as a restaurant or retail store, the cost of traveling from your home to your place of business and back home is not deductible. The IRS classifies travel between your home and your place of business as commuting mileage, which is a nondeductible personal expense.
However, if you're self-employed there's a loophole that allows you to convert those commuting miles to deductible business miles. Learn how.
Download your Federal Employer Identification Number (EIN) and keep the printout for your records. Here's the link: Online application for EIN.
You need an EIN if any of the following apply:
TIP: If you're self-employed, you may want to get an EIN even if you're not required have one.
If you're self-employed and hire any independent contractors to perform a service for your business, you will have to issue a Form 1099-MISC to any contractor you paid $600 or more by January 31 of the year following the year you paid such contractor.
Instead of entering your social security number on Form 1099-MISC in the payers box and risking misuse of it, you can use your EIN.
Copyright © 2008-2013 Larry Villano. All rights reserved.