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5 Reasons Cost Segregation is Important

By | Cost Segregation, Real Estate, Tax, Tax Incentives | No Comments

Higher profitability, lower tax liability, and increased cash flow are the three primary factors which make cost segregation so important. In addition, lower taxes and increased cash flow mean plans for the business can be crystallized and implemented more easily. Cost segregation is, therefore, part of the bedrock of success for real estate investors and developers.

Cost Segregation in Practice

Constructing, renovating, remodeling, and acquiring real estate for commercial use typically result in depreciating those assets over a 27.5- or a 39-year period. The timescale depends on whether they are residential (apartment blocks, single family homes, etc.) or commercial (shopping malls, hotels, warehouses, etc.)

By identifying specific, and IRS-approved, components that can be segregated from the rest of the real estate they can be allocated to accelerated depreciation categories. The three primary categories are land improvements, specific additions to the building’s core structure, and personal property. Those components may then be written off in 5, 7, or 15 years.

It is possible, therefore, to reduce income tax liability by up to $70,000 for each $1,000,000 of building cost basis owned. Specific savings are based on a detailed cost segregation analysis applying IRS-approved standards.

Making Use of Cost Segregation in Business

1. Simple Depreciation Acceleration

When a piece of real estate is constructed or acquired, there is usually a minimum time span before its value will increase enough for it to be sold at a profit. Maintaining the property generates costs; those costs should obviously be less than the corresponding income. Property and income taxes become payable. The amount of tax due is usually reduced by the 27.5- or 39-year depreciation write-off approach.

Cost segregation enables tax liability to be reduced. By shifting depreciation of approved components from 27.5 or 39 to 5, 7, or 15 years, that accelerated depreciation reduces each year’s tax liability. By reducing tax payments, cash for running costs, and capital for further investment is automatically generated. It does not have to be borrowed, attracted by exchanging company stock for new investment, or for corporate plans to be delayed.

2. Partial Asset Disposition

If the property is being renovated, then some components will be removed and replaced with new and improved components. The old and the new components will be depreciated. Unless partial asset disposition (PAD.) is taken, double depreciation of those old and new assets accumulates. This will impact recapture tax calculated at ultimate sale. By having previously segregated components into different asset classes, the recapture tax is reduced.

3. More Availability Means Greater Benefit

Cost segregation was once used, primarily, by major corporations. Today, properties with a cost basis in the hundreds of thousands as opposed to the tens of millions of dollars now qualify for accelerated depreciation. This, on its own, makes the principle both viable and important for the smaller investor or developer.

4. The Time Value of Money

A simple advantage of applying a cost segregation strategy is that money available today is worth more than ultimate profit made available at eventual disposition. By accelerating depreciation, even by a small amount on lower-value properties, cash flow improves. That cash becomes available for both running costs and for growth. When used for growth by investing in additional properties, components in those new properties can also be subject to accelerate depreciation, thus magnifying the benefit.

5. Cost Segregation and 1031

Relinquishing and acquiring real estate benefits from capital gains tax deferrals when managed via a 1031 Exchange. The increased profit generated by segregating costs is not, therefore, necessarily subject to immediate taxation payable on sale. All the tax can be deferred.

Personal as well as corporate investors can, by making use of The Tax and Jobs Act legislation, eventually avoid paying that tax if, when they move out of active property ownership, they reinvest in approved development zones. After an amount of time, the deferred tax is forgiven. The benefits of cost segregation can, therefore, be “held” indefinitely, and the benefits of recent legislation are increased.

The Takeaway

Cost segregation is important. It enables a business’s profit to increase and cash flow to improve by accelerating the depreciation on real estate components. The immediate and long-term benefits make it a crucially important strategy for real estate investors and developers. Completing cost segregation analyses correctly and to IRS standards demands competence in specific areas of real estate, and experience in tax law. To discuss how you can make use of this strategy, please click here to contact us.

metal fabrication and machine shops r&d tax credit

R&D Tax Credit for Fabrication and Machine Shops

By | Tax, Tax Credits | No Comments

The R&D tax credit is one of the most beneficial tax incentives available. Businesses can leverage this benefit to recover costs associated with research and development. Fabrication and machine shops, in particular, can also offset expenses related to developing new parts or designing a new fabrication process from new materials.

The business activities you engage in that require research and development of new products or processes are eligible for the R&D Tax credit. The tax incentive can enable you to become more successful and increase profit margins.

Benefits of the R&D Tax Credit

The R&D Tax credit is the largest credit for companies in the United States. It enables companies to save money, reinvest, and stay competitive.

Businesses have been able to continue with operations even in times of uncertainty, like in the period after the 2008 financial crisis. The credit has also led to growth in profit margins, increased high-paying technical jobs, and a high employment rate in the U.S.

It has the potential to help your business stay competitive and drive the economy in the right direction.

History of the R&D Tax Credit

The R&D Tax credit was introduced in 1981 to encourage businesses to invest more in innovation and increase technical jobs. This allowed companies to develop new products, improve, design, or process products, and even software to claim the R&D Tax Credit.

The credit act was introduced due to the growing concern that businesses’ research spending had declined and negatively impacted the economy. Low growth rate and lack of competitiveness led to this decline.

This was evident when the American automotive industry was overtaken by Japan. The R&D tax credit was introduced as a stimulant to encourage automakers in America to reinvest and recover their competitiveness.

Increased Eligibility for R&D Tax Credit

The tax incentive continued to evolve over the years. In 2003, new regulations were passed that marked a significant turning point for businesses in the U.S. The “Discovery Rule” was eliminated. This rule required research activities to be “new to the world” as a qualifying criterion unachievable for most businesses.

With the elimination of the rule, business activities only have to be new before you can claim the tax credit. Whether your business has iterative steps necessary to improve the production process or update software, the activities will enhance business operations. These will still help in keeping your business competitive.

R&D Tax Credit Qualifying Activities in California

Companies can qualify activities from the development of a concept to the completion stage where the product or process or even formula is ready to be released into the market. You can benefit from the R&D tax credit, depending on your state’s qualifying criteria.

Many states offer the tax incentive which follows specific federal regulations and the IRS guidelines. The rules and guidelines will help you to know what constitutes QREs (Qualified Research Expenditures).

California business owners benefited from the R&D tax credit for over 30 years and use the criteria for developing a new or improved product, processes, or software. Your processes or production have to be technological in nature, eliminate uncertainty, and be a process of experimentation.

Many businesses are not aware of the R&D tax credit, or business owners do not know how to go through the process. To be successful and remain profitable, you can use this incentive to offset costs, reinvest, and stay competitive. Businesses can consult experienced tax experts on how to leverage the tax benefit. Contact us and find out how you can utilize the R&D tax credit.

hiring manager explores WOTC

Does My Business Qualify for the Work Opportunity Tax Credit?

By | Tax, Tax Credits, Uncategorized | No Comments

The Work Opportunity Tax Credit (WOTC) is a federal tax credit designed to benefit businesses that hire individuals who are in “targeted groups” that have historically found it difficult to obtain employment. The WOTC benefits both employers and employees as it helps people in difficult circumstances find jobs. As an employer, you can hire as many qualified employees as you want. The IRS and Department of Labor have complete information about the WOTC.

Obtaining Certification For a Work Opportunity Tax Credit

Pre-Screening

Before you can claim this tax credit, you must obtain certification that the person you’ve hired is a member of one of the targeted groups listed below. The first step is to file Form 8850, a pre-screening form within 28 days of the eligible employee starting work.

Limitations on Credits

The amount of the credit is limited to business income tax liability or the amount of social security tax owed.

Claiming the Credit

Depending on your status as a taxable employer, tax-exempt employer, or tax-exempt organization, you may need to fill out Form 5884 as well as Form 3800, which is for General Business Credit.

What are the Targeted Groups?

The Internal Revenue Service provides guidelines regarding who qualified as a member of a targeted group. For you to be eligible for this tax credit, you’ll have to hire people from one or more of these groups.

Long-Term Unemployed

A qualified long-term unemployment recipient is someone who has been unemployed for at least 27 consecutive weeks. To qualify, they must have received unemployment benefits for at least part of this period.

Ex-Felon

A qualified ex-felon is someone who is hired within a year of being convicted of a felony or released from prison after serving time for a felony.

Recipient of Long-Term Family Assistance

A long-term family assistance recipient is a member of a family who fits into one of several categories. They must have received assistance under an IV-A program for at least the last 18 months; for 18 months beginning after 8/5/97, or they are no longer eligible for this assistance because a state or federal law limited the maximum time they could receive these payments. For the latter, cessation of payments must have been within the last 2 years.

Designated Community Resident

A Designated Community Resident (DCR) must be between the ages of 18 and 40, reside in an empowerment community, an enterprise community, or a renewal community. These are all federally designated locations with high levels of poverty and economic distress. They must remain in one of these areas after being hired.

Supplemental Security Income Recipient

A qualified Supplemental Security Income (SSI) Recipient is someone who has received SSI benefits within 60 days of being hired.

Vocational Rehabilitation Referral

To qualify as a vocational rehabilitation referral, someone must have a physical or mental disability and presently or previously receiving services from a Department of Veteran’s Affairs program, an Employment Network Plan under the Ticket to Work program or a state plan approved under the Rehabilitation Act of 1973.

Supplemental Nutrition Assistance Program (SNAP) Recipient

Qualified SNAP recipients are between the ages of 18 and 39. They or a member of their family must have received SNAP benefits for 6 months or for a minimum of 3 of the last 5 months.

Summer Youth Employee

A qualified summer youth employee must be at least 16 and under 18, employed only between May 1 and September 15. They must also reside in an Empowerment Zone, Renewal Community, or a Renewal Community.

The WOTC Can Help Your Business Save on Taxes

The WOTC can help businesses save money on taxes while also providing jobs to people in targeted groups. If you want to claim this credit, make sure you hire employees who qualify. If you need help understanding the WOTC or any other tax credits that could benefit your business, you may want to consult with a professional.

The tax credit experts at Incentax help businesses take advantage of all possible tax credits. To learn more about our services, contact us.

tech company research and development

Does Your Business Qualify for R&D Tax Credits?

By | Research and Development Tax Credit, Tax, Tax Credits | No Comments

The topic of Research and Development (R&D) is often associated with images of scientists gathered around a table to discuss complex formulas and space-age discoveries. But did you know that if your company’s staff employs personnel such as software developers, engineers, and machinists, your R&D expenses could qualify for tax credits

Many companies fail to take advantage of this tax credit, unaware that they have qualifying R&D expenses that are approved by the IRS. These do not have to be pioneering inventions or innovative undertakings. Rather, this credit is available to companies that create or improve products and trade processes.  

IRS Criteria for R&D Credits

The federal R&D tax statute provides a credit of up to 10% of qualifying expenses. However, many states also have this credit which can bring the total percentage to as high as 20%. Rules for determining what qualifies as R&D expenses are listed under Internal Revenue Service Code section 41. 

The IRS has a predefined set of criteria that determines what activities satisfy the requirements of qualifying R&D expenses. These are as follows:

  • The activity must have a purpose such as improvements in function, performance, reliability, or quality. Projects related to the appearance of a product do not qualify. 

  • Technical uncertainty related to the capability, methodology, or design of the business. The uncertainty must be attempted to be resolved with experimentation. This does not include any economic uncertainties.
     
  • The project must rely on hard science such as engineering, physical/biological sciences, or computer science. 

Once all the above criteria are met, then related expenses in wages, supplies, and contract research that were incurred during the project can be considered qualified R&D expenses. 

Technology R&D Expenses

According to Accounting Today, here are some of the most commonly overlooked technology expenses that can qualify as R&D expenses: 

  1. Cloud-Computing Costs
    Many companies have harnessed the power of cloud computing which provides an efficient way of storing, processing, and analyzing data. The server, platform, and Software as a Service (SaaS) technology costs included in cloud computing may fall under qualified research expenses (QREs) for both federal and state R&D credits. Development platforms and beta-testing of software are also included in this classification.  

  2. Migration Of System Platforms 
    The complex project of migrating systems to the cloud often involves technical uncertainty and failure, qualifying it as an R&D expense. 

  3. Replacement Of Obsolete Parts
    Should a part from a product become obsolete, redesigning and testing are necessary for a replacement. This process involves technical uncertainty and failures which can be considered R&D expenses. Expenses can include wages of engineers and other associates involved in the redesigning process so long as their contributions are clearly demonstrated. 

  4. Automation Expenses
    Technology that is developed to improve the efficiency of the manufacturing process is considered a QRE. Robotic components are a good example of this as uncertainty exists as to where to place them and what they will do. The cost of the robot itself cannot be included, but the research into where and how they will fit into the process as well as the testing are qualified expenses. 

  5. Artificial Intelligence and Machine Learning
    Artificial intelligence and machine learning are used to improve manufacturing efficiencies. As a result, the research expenses involved in these aspects would also qualify as QREs. 

Other Industries Eligible For R&D Credits

There are many other industries and applications where qualifying R&D expenses can be claimed. The CPA Journal lists several of these in various areas.

Restaurants, for example, may have qualifying expenses such as ways to improve nutrition, safety, and preservation of food. The construction industry involves designing new heating and air conditioning systems as well as new construction techniques. Agriculture involves researching and designing new irrigation systems, harvesting improvements, and new feeding techniques for livestock.

Many taxpaying companies can benefit tremendously from the R&D tax credit. However, millions of dollars go unclaimed yearly since businesses fail to recognize exactly what qualifies for this credit. 

Incentax can help identify and maximize qualifying R&D expenses for your business. Contact us for more information on how you can take advantage of these tax credits.  

sb 1447 hiring employees covid

What California Business Owners Should Know About SB 1447

By | Tax, Tax Credits, Uncategorized | No Comments

Those of you with a business in California know all too well about COVID-19 wreaking havoc on keeping things afloat. There’s good news, though: if you still have not experienced a turnaround in your business due to the virus, some tax credits are now available to help you.

One bill passed in California this fall is SB 1447, or a $100 million hiring tax credit for small businesses. A lot of business owners are already taking advantage of this to help them get back on track, including those who had to let employees go.

What do you need to know about this new tax credit? Take a look at the details and how to use it to your advantage to avoid further crisis.

SB 1447 Explained

SB 1447 is defined as a small business hiring credit to give tax credits if employers hire more employees throughout 2020. It applies to the tax year beginning this year and going through January 1, 2021.

For businesses like yours, it helps save you exponential money if you need more employees to keep your business operating optimally. You might have held off hiring more employees since spring out of fear of the future tax burdens.

Three California Democrats put this bill in motion: Sen. Steven Bradford, Sen. Anna Caballero, and Assemblymember Sabrina Cervantes. It was just one part of California’s recent laws put in place to help the business community bounce back after COVID-19 hardships.

These legislators noted a sobering fact before getting the bill passed: Small businesses suffered a 21.5% loss of jobs earlier in the year. This new bill brings major relief, even if you need to know a few more things to qualify.

Are You a Qualified Small Business Owner?

To qualify for this tax break, you need to fall under two guidelines:

  • You’ve employed fewer than 100 employees since December 31, 2019.
  • You had a 50% reduction in gross receipts between April 1, 2020 and June 30, 2020.

Keep in mind the credit is capped at $100,000 per qualified small business owner. When you hire new people, the new employees need to be paid qualified wages and not paid through the Personal Income Tax law or the Corporation Tax law.

These provisions are just the basics. Calculating your tax credits has specific rules you need to look at more carefully. One thing to note is any new hires working full-time can not work for you more than 167 hours per month.

Calculating Your Tax Breaks

To figure the tax break you get back, know you receive $1,000 for each net increase in qualified employees. You have to compare your average number of employees for the 2nd quarter of this year with the average number you had between July 1 and November 30.

Another great thing to consider with this new bill: You can apply your credit against qualified sales and use taxes. If you are a retailer, this is a major benefit when you have a lot of other tax burdens annually.

The aggregate amount of credit available will also have a cap at $100 million, if covering the majority of California’s hurting small businesses.

What will the tax benefits really be, though? Will it lead to a brighter future for California’s small businesses? On a national scale, many small businesses likely wish for the same.

Bringing New Lifeblood to the Small Business Community

When California Governor Gavin Newsom signed the bill back in September, he said: “This is really about the lifeblood of California’s economy, it’s about a sense of pride and spirit that we all have. This is about the California dream.”

Now available as a tax credit for the next five years, you can bring your business back from the brink. This tax bill joins an exclusion of federal Paycheck Protection Program loans from gross income tax filings, giving Californian businesses further breaks.

Contact us at Incentax LLC so we can help educate you on the many tax breaks available to businesses today.

net operating losses farmer concept

What You Need to Know About Net Operating Losses (NOLs)

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Net operating losses (NOLs) are not always detrimental to your business. The government has created ways for businesses to offset these losses. There are flexible options available for carrying tax assets forward into future tax years, or back depending on your businesses current cash flow needs.

NOLs Explained

Net operating losses are realized when businesses are expensing more than they take in. According to the IRS, “If your deductions for the year are more than your income for the year, you may have a net operating loss.” This is particularly relevant to businesses with annual incomes that were affected by the recent novel coronavirus restrictions. 

Net operating losses in a farm context are easily visualized. A farmer who has a crop failure in his first of three years in the farming industry will have incurred a net operating loss. This loss will be counted as an asset against the hoped-for income of the next year. This asset is carried forward to the second year and applied to that year’s income. The deduction of up to 80% of the previous year’s loss is then applied in farming year 2.

Carrying forward the loss works in the farmer’s favor if farming year 2 is a bumper crop. His high income of the second year is tempered by the deduction of year 1’s loss, thus reducing his taxable income accordingly and saving him money spent in income tax. The remaining 20% of the NOL can be applied to farming year 3’s bumper crop reducing that year’s taxable income slightly. Losses incurred would be counted and discounted against future farming years until the losses were accounted for.

The disadvantages of being allowed to carry forward a loss rather than carryback are two-fold. First, if the loss is carried backward it can be applied to a previous tax year that had a higher rate and it could provide the company with a tax refund. Second, because of the time value of money, it is better to have cash now rather than in the future.

The TCJA (Tax Cuts and Jobs Act) caused a lot of changes to occur with regard to taxation in 2017. One of the changes made was a disallowance of carryback for excessive losses. This affected most taxpayers carrying large losses disadvantageously.

A two-year carryback period had been an option previously, but was no longer viable from 2018. Farmers were allowed a carryback period of up to 5 years. The option for most taxpayers carrying a large loss was for them to carry forward the loss indefinitely. The recent CARES (Coronavirus Aid, Relief, and Economic Security) Act made changes to the implementation of some aspects of the TCJA in regard to NOLs.

NOLs and the CARES Act

The CARES Act put a temporary suspension on the implementation of TCJA section 172 by allowing to carryback losses to 5 years. This effectively puts a hold on the elimination of the two-year carryback limitation present in the TCJA. The CARES Act makes it possible for businesses to carryback losses incurred in tax years 2018 through 2020. 

It is important for businesses to have proper documentation of NOLs. This is then disclosed in notes with the financial statements of the company when income taxes are filed. Between the changes that the TCJA made to the Internal Revenue Code (IRC) and the amendments that the CARES Act made to the TCJA, this year will be a doozy for business owners and their tax advisors. Tax strategies are available to take advantage of NOLs. Contact us to find out how your NOL can be a boon instead of a burden to your business this year.

research and development tax credit

R&D Tax Credits: An Added Benefit to the Next Relief Package?

By | Research and Development Tax Credit, Tax, Tax Credits | No Comments

A frequently overlooked tax deduction for businesses big and small is R&D tax credits. R&D stands for “Research & Development” for any business that managed such activities in the last year or prior years.

For some major business tax benefits, this is still one of the most significant. However, some changes to R&D taxes began in 2017. Through the Tax Cuts and Jobs Act, companies could no longer deduct R&D costs in the same taxable year.

Further, the new law now demands companies write down these expenditures over the next five years. Now manufacturers, in particular, look to Congress’s relief bills to see if R&D credits become restored.

How Did a Business Qualify for R&D Tax Deductions?

To qualify for R&D tax deductions prior to the 2017 law, a company had to develop new products and processes, enhance those products, or improve their prototypes. Manufacturers clearly fall under this category, making them one of the most important sectors to benefit from R&D tax deductions.

Now with the new tax laws, they may begin to hurt exponentially. Prior, manufacturers and all who qualified could prove various records to qualify for this tax credit.

It usually involved presenting payroll records, expense detail, notes on all projects being developed, plus any employee testimony. While this probably sounds a bit cumbersome, it was more than worth it.

Besides, many small businesses could also claim the credit against their Alternative Minimum Tax. As the economy falters, though, analysts wonder what the R&D tax reductions mean for manufacturers and small businesses.

The Hope for R&D Tax Relief in a Relief Bill

U.S. Congress is still going through the process of passing a relief bill to help businesses struggling through COVID-19 closures. Many business analysts contend that R&D tax relief in a relief bill is a must to help manufacturers survive in volatile times.

Congress clearly did not see COVID-19 coming when they enacted the 2017 tax law changes. Now the need to carefully document their expenditures over the next five years is sure to create some big problems for manufacturers in an age of economic uncertainty.

As Bloomberg Tax points out, competitiveness in manufacturing could become affected by 2022, leading to those same manufacturers going overseas to find relief. Over in Europe, R&D tax credits continue without any cuts, making it a more attractive place to base operations.

Still, Congress might fix the R&D tax issue here since one particular bill is on the table. The problem is convincing Congress to include it in the relief bill everyone hopes becomes a reality.

A Proposed R&D Tax Bill

A rare bipartisan bill is out there waiting for passage related to R&D tax relief. Back in 2019, Reps. John Larson (D-Conn.) and Ron Estes (R-Kan.) created a bill asking for the restoration of the original R&D tax law.

This bill seems to have become lost in the shuffle recently with various lobbyists pushing to include it in a future relief bill package. One major lobbying group is Intel. Sharon Heck, Intel’s CTO and Treasurer (and head of the R&D Coalition) is at the helm of getting this bill passed.

Last spring, Heck and the entire R&D Coalition sent a letter to Congressional leaders asking them to take action. Without some kind of passage soon, it could end up cutting 23,400 R&D jobs through 2022, leading to numerous ripple effects in the U.S. economy.

As with everything else, this is up in the air, though we continue to look in on it to update you with the latest tax information.

Contact us here at Incentax LLC to learn more about today’s most pressing tax issues.

startup tax tips credits advice

How to Calculate Your Startup Business Taxes

By | Tax, Tax Credits | No Comments

All tech startups face one common issue: paying taxes to the IRS. You are still trying to find your footing in the business world, and just when you think you couldn’t spend more money, the government steps in to remind you that you have a statutory obligation to pay taxes.

Keeping up with your tax obligations can be tedious, but any misstep can result in huge tax bills.  Here are the most common taxes you should always keep in mind.

Are Tech Companies Tax Exempt?

No. Tech companies are required to pay federal tax. For a company to be tax-exempt, the founders shouldn’t make any profits from it. These companies generally fall under religion, public social benefits, culture & arts, human services, or health organizations.

Even though tax-exempt companies don’t have to pay federal tax, they are still liable for local income & state tax, and all donations made to them are tax-deductible.

Which Types of Taxes Should Tech Companies Calculate?

The type of taxes you pay are mainly dependent on your business structure and not the industry. Tax obligations often change on an annual basis, so it’s important to keep yourself regularly informed.

As a business owner, you must start planning for the following taxes.

1.   Employment tax

If your startup already has employees, you will have to file employment taxes to the federal government.

These taxes include income taxes that you withhold from the employees and submit it to the IRS on their behalf, including; Federal Insurance Contribution Act (FICA) taxes, Additional Medicare Tax, Federal income tax, and Federal Unemployment Tax Act (FUTA) taxes.

2.   Income tax

These are taxes imposed by the government on individuals and businesses based on their income. According to the law, income taxes should be filed annually, so that one is able to determine their tax obligations.

Income taxes are calculated based on the structure of your business (sole proprietorship, partnership, corporations). If your tech startup is a partnership, you won’t have to pay income taxes but will be required to file an information return.

3.   Excise tax

Excise tax is not mandatory for all businesses. It is only imposed on businesses that deal with manufacturing-specific goods (fuel, tobacco, alcohol, etc.) or those that use certain facilities and equipment or businesses. Most often, the excise tax translates as increased prices for the consumer. If you also sell tech products, find out if they are liable for excise tax and the forms you have to file.

4.   Self-Employment tax

For employees, the employer withholds a certain amount of money from their paychecks for Medicare taxes and social security. As an entrepreneur, however, you have to pay these taxes on your own via self-employment taxes.

Only 92.35% of your net income is subjected to this tax, and to calculate this, you deduct all your expenses from your gross earnings. There are exemptions to this tax, but generally, all earnings from self-employment above $400 should be taxed.

The Schedule SE on Form 1040 can be used to calculate this tax.

5.   Estimated taxes

This tax is imposed on income that is not subject to withholding, including interest, alimony, rent, dividends, etc. If you have additional income from other sources, it is advisable to conduct a paycheck checkup regularly, to avoid being hit with hefty bills at the end of the year. 

Let Incentax Help You Stay On Top of Your Taxes

Understanding the complex rules and requirements for tax incentives can be difficult and you may need a professional tax incentives advisor to help you navigate these murky waters. We are here to guide you on how you can get the most out of your tax credits and incentives.

Contact us today for a consultation on how you can effectively use your startup’s tax credits!

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The 5 Most Overlooked Tax Credits

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According to the Internal Revenue Service (IRS), taxpayers who claimed deductions on their returns received a total of 747 billion dollars in write-offs. However, many Americans miss out on the opportunity to take home more money in the form of tax credits because they are not familiar with how they work. For instance, one in five people who qualified for Earned Income Tax Credit failed to claim it on their tax returns. 

For you to maximize your earnings, you must know which tax breaks and deductions you qualify for. Here we highlight the top five tax credits that are often overlooked. 

Earned Income Tax Credit

Earned Income Tax Credit (EITC) is a tax credit that is available to people who fall within a specified income threshold. Specifically, it is meant to supplement wages for low and moderate-income workers. It is also provided for people who have lost their jobs, worked fewer hours, or took a pay cut. Even if you previously did not qualify, you are eligible for a break if you meet all the qualifications. 

Basically, the EITC you receive depends on three main factors: your family size, income, and marital status. Worth noting here is that to receive this deduction, you have to file a tax return whether or not you owe taxes. Moreover, you can claim a refund going back three tax years if you were eligible all along but did not apply for it. 

Child and dependent care tax credit

Many Americans miss out on the child and dependent care tax credit due to a lack of knowledge on how it works. Typically, you can legally run up to 5000 dollars in a reimbursement account, which is exempted from normal taxes. However, if you spend more than this amount in a year, you are eligible for a tax credit of an extra 1000 dollars. This means that using the minimum 20 percent of the expenses, you can save at least 200 dollars in taxes.  

Student loan interest  

Student loans can be adjusted according to your income. Thus, if your income falls within a certain range, you do not have to pay a fixed amount every period. What is more, student loan deductions do not require an itemized deduction for you to claim them. 

There are basically three types of deduction you can claim in regard to student loan interests. First is The American Tax Opportunity Tax Credit, which is a tax deduction for college expenses for the first four years of education. The maximum annual credit here is 2,500 dollars a year. 

The second is The Lifetime Learning Credit, which is worth 2,000 per return, applies to individuals who are/were enrolled in an eligible institution. Lastly, The Tuition and Fees Deduction allows taxpayers to deduct up to 4,000 dollars from their income. Being aware of these tax break opportunities can save you a good amount in taxes. 

State sales tax  

Several states in the US have no income tax. They include Alaska, Tennessee, North Dakota, Washington, New Hampshire, Nevada, Wyoming, Texas, and Florida. If you live in one of these taxes, you are eligible for state sales tax. This law allows you to deduct expenditures such as house renovation costs, purchase of cars, boats, and planes, among others. To know what is deductible, you can use the IRS tables or keep a record of all your sales tax in a year and use it to claim these benefits. 

Reinvested dividends   

This is a subtraction that taxpayers miss and one that can end up saving them a lot of money in taxes: Essentially, if you have mutual funds dividend invested in shares, your tax basis increases, thus reducing the amount of capital gain when you decide to sell your shares. Failure to include the reinvested dividends means paying more taxes than you should.  

Being aware of how tax deductions and credits work can go a long way in saving you a substantial amount of money. This is even more true for business owners and startup founders. Incentax LLC can work with you to help you take advantage of the available federal and state tax credits for your business. Contact us to begin enjoying maximum returns with minimum inconveniences!  

tax mistakes new business

5 Common Tax Mistakes Businesses Make

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Filing your taxes is an obligation that, as a business owner, you have to keep to be on the safe side of the law. Having said this, many business owners tend to make mistakes that lead to tax overpayments, penalties, or even audits from the Internal Revenue Service (IRS). Even worse, deliberate or intentional mistakes can compromise your business and your life as well.  

Getting your taxes under control can save you the trouble that results from the avoidable errors people make during the tax season. For a more in-depth insight, here are some common mistakes businesses need to be aware of vis-à-vis taxes. 

Incorrectly reporting income

Over-reporting or under-reporting your income can have negative consequences on your business. Sadly, this is a common mistake that mostly happens when balancing invoices and business payments. For instance, you may receive payments from clients and fail to record them in that pay period, which may cause a tax overlap. 

Although small errors are largely inevitable, it is advisable to keep records of your tax documents and every transaction you conduct. More importantly, keep your financial records updated at all times so that you have evidence in case there are discrepancies in the IRS records.  

Not separating your expenses   

More often, business owners fail to draw a line between business and pleasure expenditures. This usually leads to a failure to make correct deductions when filing taxes. For example, you can make deductions on fuel money spent while delivering a package to a customer. However, you cannot deduct the money used for activities that are not attached to your business. 

To avoid this common mistake, always ensure that you demarcate between business and personal spending. You can do this by keeping a record of both types of expenditures. Failure to do so can attract unnecessary attention from the IRS. 

Bending or breaking deduction rules

The concept of tax deductions is oftentimes confusing due to the technicalities involved. To minimize mistakes, the IRS has outlined how business owners should make deductions; specifically, it provides actual figures and limits to guide people when filing and submitting their taxes. 

Further, deductions vary based on multiple factors, such as whether your business is a startup, the size, and the nature of the activity (say insurance costs and medical fees). Being up to date with deduction rules is crucial in ensuring you make your tax deductions accordingly. 

Misclassifying employees and independent contractors

As a business owner with employees, you can be liable to penalties for failing to classify your employees. The IRS has issued clear tips to differentiate between permanent employees and contractors; for example, an individual becomes an employee if you dictate when, where, and how the person does a task while one becomes a contractor if they work under a different schedule, use their own tools, and are not eligible for defined benefits. 

Your business should also give every employee a W-2 form while contractors who get paid more than 600 dollars should receive a Form 1099-Misc. If you run a business as a self-employed individual, you should also learn how your taxes apply to avoid penalties. 

Filing your taxes late 

Although this common mistake is quite avoidable, many business owners find themselves locked out of the tax season because they failed to do their taxes on time. Failing to file your taxes within the window period provided can earn you penalty fees, which could put your business on the spot. Having a payment arrangement can save you from being penalized. You can even make quarterly payments to make your work less stressful.

As part of business financial management, minimizing room for tax errors can see you save a lot of money in the end. As long as you emphasize accuracy and accountability, you can be sure to avoid these and other mistakes many businesses make. 

At Incentax, we strive to help businesses maximize their tax credits for maximum returns. Please contact us for more on how we can help you maneuver.