- Do FICA taxes apply for a child under age 18 who works for his or her parent in a trade or business?
- Is income tax withholding applicable to employees who are under age 18?
- Are attorney fees deductible?
- When do you receive a Form 1099-B?
- What is a MEC? How is it taxed?
- Can I switch from an S Corp to a C Corp? How?
- How can I revoke S Corp election?
- Is there a penalty for failing to file 3520?
- Can severance pay be considered as earned income for FEIE?
- What is the new section 199A deduction? Does my rental income qualify for this deduction?
- Do American expats need to pay tax?
- What is FATCA?
- How do inheritance and estate tax waivers work?
- Is stolen money tax deductible?
- How does casualty deduction work?
- What is the IRS Form 8824?
- What exchanges are acceptable for Form 8824?
- What properties do not qualify as like-kind exchanges?
- Who needs to file Form 1065?
- What medical expenses are tax-deductible?
- What medical expenses are nondeductible?
- What Property Can Be Depreciated?
- Should I be filing Section 83?
- In the case of a divorced couple, can the non-custodial parent to claim the child as a dependent and claim the dependent care benefits while the custodial parent claims the EITC?
- Why do S-corps require to file Schedule M-2?
- What if an S-corp has no earnings and profits?
- I sold my business after my spouse died in 2018. The business was a schedule C in my spouse’s name. Can I use step-up in basis on the business? The sale is for the name of the business, list of clients and some office equipment and not the real estate itself.
- What does section 163(j) mean for your taxes?
- Which businesses qualify as an excepted trade or business?
- When does the IRS charge penalties?
- How do I know if I have to file quarterly individual estimated tax payments?
- Does a small company that operates as a sole proprietorship need an employer identification number (EIN)?
- Are there any benefits available for teachers?
- What happens if a company’s tax-exempt status is revoked?
- Why are the payments for the transactions I made after selling my old business included in Form 1099-K?
- What is the penalty for filing your tax returns late?
Do FICA taxes apply for a child under age 18 who works for his or her parent in a trade or business?
Ans: According to the IRS, such payments are not subject to social security and Medicare taxes, i.e. Federal Insurance Contribution Act (FICA), if the trade or business is a sole proprietorship or a partnership in which each partner is a parent of the child. Payments for the services of a child under age 17 who works for his or her parent in a trade or business are not subject to the Federal Unemployment Tax Act (FUTA) tax either.
Is income tax withholding applicable to employees who are under age 18?
Ans: Yes, payment for the services of an employee are subject to income tax withholding, regardless of age. So, even if the child is under 18-years-old, his earnings will be subject to income tax withholding.
Are attorney fees deductible?
Ans: The 2017 Act eliminates miscellaneous itemized deductions as part of individual tax reform. However, based on the claims that qualify for above the line deductions, clients can still deduct attorney’s fees. These claims are set forth in the Internal Revenue Code (IRC) Section 62 and are deducted against the taxpayer’s gross income to reach a lower AGI (Adjusted Gross Income).
When do you receive a Form 1099-B?
Ans: You only receive a Form 1099-B if you have sold stock units or investment securities that year. The Form 1099-B reports any capital gain or loss resulting from the transaction on your tax return.
What is a MEC? How is it taxed?
Ans: A modified endowment contract (MEC) is a life insurance contract. Unlike traditional life insurance policies, taxes on gains are regular income for MEC withdrawals under last-in, first-out (LIFO) accounting. However, the cost basis within the MEC and withdrawals is not subject to taxation.
Can I switch from an S Corp to a C Corp? How?
Ans: Yes, it is possible to switch your election between an S Corp to a C Corp. This requires you to complete the following steps:
- Draft a letter to the IRS Service Center stating that you want to withdraw your election to be taxed as an S Corporation.
- File Form 8832 – Entity Classification Election with the IRS as instructed.
How can I revoke S Corp election?
Ans: To revoke an S Corporation Election that was made on Form 2553, you need to submit a statement of revocation to the service center where you file your annual return. The statement should include specific points, such as:
- The corporation revokes the election made under Section 1362(a)
- Name and address of the shareholder(s)
- Taxpayer identification number of the shareholder(s)
Also, make sure that you file the statement of revocation before the specified due date.
Is there a penalty for failing to file 3520?
Ans: Failure to file Form 3520 on time or an incomplete or incorrect form on time is subject to a penalty. According to the IRS website, the initial penalty can be equal to the greater of $10,000, or as one of the following (whichever is applicable):
- 5% of the gross value of any property transferred to a foreign trust for failure by a U.S. transferor to report the creation of or transfer to a foreign trust in Part I.
- 35% of the gross value of the distributions received from a foreign trust for failure by a U.S. person to report receipt of the distribution in Part III.
- 5% of the gross value of the portion of the foreign trust’s assets treated as owned by a U.S. person under the grantor trust rules (sections 671 through 679) for failure by the U.S. person to report the U.S. owner information in Part II.
Can severance pay be considered as earned income for FEIE?
Ans: Yes. While claiming Foreign Earned Income Exclusion (FEIE), severance pay, as well as sick leave and vacation pay, may be included as earned income.
What is the new section 199A deduction? Does my rental income qualify for this deduction?
Ans: The section 199A of the Internal Revenue Code provides a deduction to qualified business income for pass-through entities such as sole-proprietorships, partnerships, S-corporations, trusts, or estates. The new section 199A deduction allows for up to a 20% deduction of qualified business income if you qualify as a trade or business run directly or indirectly through a pass-through entity.
Rental income has always been an area of concern for a lot of taxpayers, however, under the new regulations, Revenue Procedure 2019-7, the IRS has offered more simple ways to determine what is a rental activity. For instance, your business needs to be active with some regularity. So, if your rental activity meets these conditions and qualifies as a business for tax purposes, you may be eligible for section 199A deduction.
Do American expats need to pay tax?
Ans: Yes. If you are an American citizen or green card holder who works in a foreign country, you are required to file taxes and report your income in the U.S. You can do this by filing the appropriate forms with the IRS. Although there are a lot of things that you may need to consider in order to be well-informed about your taxes, as an expat, you are eligible for certain benefits and deduction like the Foreign Earned Tax Exclusion (FETE).Ans: Yes. If you are an American citizen or green card holder who works in a foreign country, you are required to file taxes and report your income in the U.S. You can do this by filing the appropriate forms with the IRS. Although there are a lot of things that you may need to consider in order to be well-informed about your taxes, as an expat, you are eligible for certain benefits and deduction like the Foreign Earned Tax Exclusion (FETE).
What is FATCA?
Ans: FATCA, or the Foreign Account Tax Compliance Act is an act that helps the U.S. prevent offshore tax evasion. This requires foreign banks to share information with the U.S. by providing a W-9 form with which your foreign bank can follow FATCA rules.
How do inheritance and estate tax waivers work?
Ans: If you inherit property from someone after their death, you may be liable for federal and state taxes based on the value of the estate which might put you in an inconvenient situation. These taxes are due approximately nine months after the decedent’s date of death. Also, keep in mind that these taxes must be paid before assets are distributed to the beneficiaries.
An inheritance or estate tax waiver can release the heir from the right to claim assets at the event of another person’s death. However, the way the waiver works depends on the state’s requirements.
Is stolen money tax deductible?
Ans: According to IRS, theft is “the taking and removing of money or property with the intent to deprive the owner of it. The taking of property must be illegal under the law of the state where it occurred and it must have been done with criminal intent.” If you have had your money stolen during the tax year then you can deduct the amount of money that was stolen on your federal income tax return. However, according to new regulations in 2018, you can only claim this deduction if the crime has occurred due to a presidential disaster area declaration.
How does casualty deduction work?
Ans: A casualty can be defined as the loss of property due to unprecedented events like earthquakes, floods, accidents, or vandalism. Prior to regulation changes in 2018, casualty and theft deduction can only be claimed if it occurs due to an event that has been declared by the U.S. president.
The following losses are not tax-deductible:
- Accidental damage of assets
- Pet-related accidents
- Arson by or on behalf of a taxpayer
- Progressive deterioration like termite infestations that take an excessive amount of time to cause damage
- Willful or willfully negligent car accidents that are caused by or on behalf of the taxpayer
What is the IRS Form 8824?
Ans: Normally, you have a capital gain when you sell a property for more than what you paid to get it and a capital loss when you sell it for less than what you paid. Both of these can affect your taxes. However, when you buy a similar property immediately in order to replace the one you sold, it is termed as “like-kind exchange”.
The like-kind exchange allows you to delay some or all tax effects. The IRS, in this case, will require you to file Form 8824.
What exchanges are acceptable for Form 8824?
Ans: Like-kind exchanges can be carried out by both individuals and businesses given that the property involved is used for business or investment. Starting from 2018, only real properties qualify as real property. For instance, a rental home.
According to the Internal Revenue Service (IRS), like-kind exchanges don’t have to be exact replacements, for example, a warehouse for a warehouse. However, the nature, character or class of the properties need to be the same.
What properties do not qualify as like-kind exchanges?
Ans: According to the IRS, the following property does not qualify for a like-kind exchange:
Stocks, bonds and other securities
Ownership interest in a partnership business
Certificates of trust or an interest in a trust as a beneficiary
Rights to sue
Please keep in mind that the exchange property needs to be real property, like a rental home, in order to qualify as a like-kind exchange. Like-kind exchanges also carry limits on how long you have to identify and acquire the replacement property. The law states the following limits:
45 days from the date you sell to identify the potential replacement property and notify the seller of the replacement property or your intermediary
180 days after the sale to complete the acquisition of the replacement property
Failing to meet these deadlines may disqualify the property as a like-kind exchange causing the sale of the property to be recognized in the current tax year.
Who needs to file Form 1065?
Ans: You must file Form 1065: U.S. Return of Partnership Income if you are in a domestic partnership. This includes limited liability corporations (LLCs) classified as domestic partnerships and headquartered in the U.S. According to the IRS, a partnership is defined as two or more individuals who carry on a trade or business together where each person contributes money, skill, labour, or property with the expectation that all partners will reap the economic benefits as well as the losses.
Keep in mind that Form 1065 does not determine how much tax a partnership owes. Also, foreign partnerships with income in the U.S. must file Form 1065. However, as of 2018, if foreign partnerships earn less than $20,000 in the country or if the partnerships receive less than 1% of their income in the U.S., then they may not have to file.
What medical expenses are tax-deductible?
Ans: The following is a list of deductible medical expenses:
Equipment and supplies: Any expenses relating to back supports, crutches, and wheelchairs, to name a few items, are deductible. Artificial limbs and eyes, hearing aids for the ears, as well as wigs advised by a doctor may be deducted.
Dental services: Preventive health measures such as dental x-rays, teeth cleanings, pulling teeth and applying crowns can be deducted. More serious dental services like braces, oral surgery, and even dentures are also deductible.
Professional services: Professional services covers the costs of specialists such as dermatologists, neurologists, OB/GYNs, as well as chiropractors and licensed psychologists and psychiatrists.
Medical treatments and laboratory tests: Childbirth and prenatal medical treatments, including childbirth classes are deductible. Lab tests, such as blood and metabolism tests and urine analysis, can also be deducted.
Nursing services: Nursing services, though deductible, can be a bit tricky. Any nursing services you’re not reimbursed for can be deducted, and the service doesn’t have to be provided by a licensed nurse. For instance, if you hire someone who performs nursing services – licensed or not – you may deduct those wages as a medical expense.
Hospital services: Besides general hospital services, including meals if you’re receiving inpatient care, you can deduct other services, such as services for anaesthetist or the operating room fee.
Insurance premiums: Paying your own insurance qualifies you for deductions on any premiums you pay. You can also deduct any premiums for Medicare A – if Social Security doesn’t pay for it – and Medicare Part B and D.
Home renovation: You may be eligible to deduct the costs of construction, installation or maintenance if you renovate your home because of a medical condition or disease.
Travel and lodging: Mileage for travelling to see a doctor or specialist is deductible. For instance, you may be able to deduct airfare if required to see a doctor outside of your area. You may also be eligible to deduct any registration fees for a medical conference you attend that is associated with you or a dependant. Accommodation fees while receiving outpatient medical treatment are also deductible if the primary reason for the visit is for medical care.
What medical expenses are nondeductible?
Ans: The following expenses are not tax-deductible:
Certain expenses for children: Certain requirements need to be met to be eligible for certain expenses for children. For instance, if your baby is perfectly healthy, you can’t deduct babysitting fees. Maternity clothes are also not deductible. Dance or swim lessons for yourself and your baby, even though it may be to improve overall mental and physical well-being is not deductible.
Cosmetic surgery and services: Any procedure that is deemed cosmetic is not deductible. This includes breast augmentations, liposuctions and “tummy tucks.”
Memberships: Memberships and dues to gyms, health clubs and other health programs are not deductible.
What Property Can Be Depreciated?
Ans: You can depreciate most types of tangible property (except land), such as buildings, machinery, vehicles, and equipment. Certain intangible property can also be depreciated, such as patents and copyrights.
To be depreciable, the property must meet the following requirements.
It must be a property you own.
It must be used in your business.
It must have a determinable useful life.
It must be expected to last for more than one year.
Should I be filing Section 83?
Ans: If you are a founder or employee who receives stock that is subject to vesting, i.e. stock that individuals get rights to overtime, then you are required to file Section 83. For instance, if you have signed a restricted stock purchase agreement, or if you have agreed to a stock option plan, you may use your options prior to vesting, however, you will be subject to a restricted stock agreement. You will thus need to file Section 83.
In the case of a divorced couple, can the non-custodial parent to claim the child as a dependent and claim the dependent care benefits while the custodial parent claims the EITC?
Ans: Generally, only one parent can claim the child for dependent care benefits and the Earned Income Tax Credit (EITC). Usually, the parent with whom the child spends most of his time in a year gets to claim these benefits. However, there is a special rule in place for separated parents or parents who live apart for the last 6 months of the calendar year. If the noncustodial parent is able to satisfy these requirements then the child may be treated like a dependant for dependency exemption and child tax credit purposes while the custodial parent qualifies for the remaining child-related tax benefits.
Why do S-corps require to file Schedule M-2?
Ans: This is something that all S-corps need to know. If distributions taken exceed the shareholders’ basis in the corp, individually determining each shareholder, then the shareholders may need to recognize a gain on the distributions. However, negative AAA may implicate that perhaps the shareholders’ basis has been reduced to nothing also, even though not necessarily. This may be the reason the IRS requires you to file the M-2 if you are an S-corp.
I sold my business after my spouse died in 2018. The business was a schedule C in my spouse’s name. Can I use step-up in basis on the business? The sale is for the name of the business, list of clients and some office equipment and not the real estate itself.
Ans: Since it’s a schedule C, and if the business was sold after death, it should go on 1041, as it is part of the estate. There should be a step up but you would need to get a business valuation done for that.
However, if the business was sold within six months after the spouse’s death, this is an alternative valuation other than the FMV at the date of death. If the surviving spouse inherited the business, then there is no need for 1041. Regarding step up, however, it depends on the state and how the business is owned by the spouses. We would suggest you consult an expert to make sure it is done right.
What does section 163(j) mean for your taxes?
Ans: Applying section 163(j) means that the amount of deductible business interest expense in a taxable year will not be able to exceed the sum of:
the taxpayer’s business interest income for the year;
30% of the taxpayer’s adjusted taxable income (ATI) for the year; and
the taxpayer’s floor plan financing interest expense for the year.
Which businesses qualify as an excepted trade or business?
Ans: The following are considered excepted trades or businesses:
Businesses that provide services as an employee;
Certain real property trades or businesses that elect to be excepted;
Certain farming businesses that elect to be excepted; and
Certain regulated utility trades or businesses.
When does the IRS charge penalties?
Ans: Some common penalties issued by the IRS include:
Failure to file: When you don’t file your tax return by the return due date, April 15, or extended due date if an extension to file is requested and approved;
Failure to pay: When you don’t pay the taxes reported on your return in full by the due date, April 15. An extension to file doesn’t extend the time to pay;
Failure to pay properly estimated tax: When you don’t pay enough taxes due for the year with your quarterly estimated tax payments, or through withholding, when required; and
Dishonoured check: When your bank doesn’t honour your check or another form of payment.
How do I know if I have to file quarterly individual estimated tax payments?
Ans: Estimated tax payments must be made for the current tax year if both of the following apply:
You expect to owe at least $1,000 in tax for the current tax year after subtracting your withholding and refundable credits
You expect your withholding and refundable credits to be less than the smaller of:
90% of the tax to be shown on your current year’s tax return; or
100% of the tax shown on your prior year’s tax return
There are special rules for:
Farmers and fishermen
Certain household employers
Certain higher-income taxpayers
Does a small company that operates as a sole proprietorship need an employer identification number (EIN)?
Ans: A sole proprietor without employees and who doesn’t file excise or pension plan tax returns doesn’t require an EIN. The sole proprietor, in this case, uses his or her social security number (SSN) instead of an EIN as the taxpayer identification number. However, if the sole proprietor hires an employee or needs to file an excise or pension plan tax returns, the sole proprietor will need an EIN for the business.
Also, keep in mind that you need to get a separate EIN for the Limited Liability Company to file employment taxes even if you have an existing EIN as a sole proprietor and become a sole owner of an LLC that has employees.
Are there any benefits available for teachers?
Ans: If a teacher or educator is eligible for a deduction, then they can deduct above-the-line up to $250 of any unreimbursed business expenses for classroom materials, such as books and stationaries. The materials may also include computers including related software and services or any other material a teacher might use in the classroom.
What happens if a company’s tax-exempt status is revoked?
Ans: IRS cannot undo a proper automatic revocation of a company’s tax exemption status and does not provide for an appeal process according to regulations set by the law. Such companies need to apply to have their status reinstated which can be done in the following four ways:
Streamlined retroactive reinstatement
Retroactive reinstatement Process (Within 15 months)
Retroactive reinstatement (After 15 months)
Post-mark date reinstatement
Why are the payments for the transactions I made after selling my old business included in Form 1099-K?
Ans: Usually, your Form 1099-K may include the payments for transactions made after you sold your business when you fail to update the tax identification number and business name associated with a credit card terminal with the new owner’s information. In this case, a corrected Form 1099-K can be requested from the PSE/Filer listed on the form.
What is the penalty for filing your tax returns late?
Ans: The penalty for late filing begins at 5% for each month or part of a month that your tax return is late. This penalty can accumulate up to a maximum of 25%. The penalty begins at your tax deadline and accrues until you file all of your returns.
However, it is recommended that you clear your tax returns as soon as you can before the penalties get worse. Failure to file within 60 days of the due date or your extended due date (if you filed for an extension) means you’ll need to pay at least $210 as of 2019 or pay a penalty equal to 100 per cent of the tax you own, whichever is less.